Wage Distortion: Meaning
Quick answer
Wage distortion is the effect of a wage increase that erases the pay gaps between job levels inside a company. When a law or wage order raises the pay of the lowest-paid workers, the workers one level higher may end up earning almost the same. Article 124 of the Labor Code calls this a wage distortion and sets how the employer and the workers must correct it.
Also called: Distortion of the wage structure
How does the Labor Code define wage distortion?
The definition is in Article 124, as amended by Republic Act No. 6727, the Wage Rationalization Act:
As used herein, a wage distortion shall mean a situation where an increase in prescribed wage rates results in the elimination or severe contraction of intentional quantitative differences in wage or salary rates between and among employee groups in an establishment as to effectively obliterate the distinctions embodied in such wage structure based on skills, length of service, or other logical bases of differentiation.
In plain words: the company had deliberate pay differences between groups, based on skill, length of service or another logical basis, and a mandated wage increase wiped them out or squeezed them so much that they no longer mean anything.
What are the four elements?
In Prubankers Association v. Prudential Bank (1999), the Supreme Court listed four elements:
- An existing hierarchy of positions with corresponding salary rates.
- A significant change in the salary rate of a lower pay class without a matching increase for a higher one.
- The elimination of the distinction between the two levels.
- The distortion exists in the same region of the country.
The Court held that paying employees in one region more because of a regional wage order, while their counterparts in other regions do not get it, does not in itself result in wage distortion.
Does any pay gap problem count?
No. The distortion must come from an increase in prescribed wage rates, meaning a law or a wage order. In Bankard Employees Union v. NLRC (2004), new hires were given higher starting pay by the company's own decision. The Court held that the employer could not be obliged to correct the alleged distortion, because the increase was not due to a law or wage order.
How is a wage distortion corrected?
Article 124 sets two paths:
Where the application of any prescribed wage increase by virtue of a law or wage order issued by any Regional Board results in distortions of the wage structure within an establishment, the employer and the union shall negotiate to correct the distortions. Any dispute arising from wage distortions shall be resolved through the grievance procedure under their collective bargaining agreement and, if it remains unresolved, through voluntary arbitration.
- With a union and a collective bargaining agreement: negotiation, then the grievance procedure, then voluntary arbitration. Unless the parties agree otherwise in writing, the dispute is decided within ten calendar days from its referral to voluntary arbitration.
- Without a union or agreement: the employer and the workers try to correct the distortion themselves. A dispute goes to the National Conciliation and Mediation Board and, if still unresolved after ten calendar days of conciliation, to the NLRC, which must decide it within twenty calendar days.
In both cases, the pending dispute does not delay the wage increase itself.
Example
Made-up illustration: In a factory in one region, helpers earn the minimum wage and machine operators earn a fixed amount more because of their skill. A new regional wage order raises the helpers' pay, and now helpers and operators earn almost the same. The four elements of Prubankers may be present, so the employer and the union negotiate a correction for the operators. If they cannot agree, the dispute goes through the grievance procedure and then voluntary arbitration.
This page gives no wage amounts. Regional minimum wages are set by the Regional Tripartite Wages and Productivity Boards under Article 99. For more, see wage distortion: what it is and how it is fixed.
Which provisions use this term?
Which Supreme Court rulings are relevant?
Frequently asked questions
What is wage distortion in simple words?
It is what happens when a wage increase required by law or a wage order raises the pay of lower-paid workers so much that the pay gap between them and the next higher level disappears or becomes very small.
Where is wage distortion defined?
In Article 124 of the Labor Code, as amended by Republic Act No. 6727, the Wage Rationalization Act.
What are the four elements of wage distortion?
In Prubankers Association v. Prudential Bank (1999), the Supreme Court listed them: an existing hierarchy of positions with matching salary rates; a significant change in the salary of a lower pay class without a matching increase for a higher one; the elimination of the distinction between the two levels; and the distortion existing in the same region.
Is there wage distortion if new hires get a higher salary?
Not under Article 124. In Bankard Employees Union v. NLRC (2004), the Court said the employer could not be obliged to correct an alleged distortion because the higher pay of new hires did not come from a law or wage order.
Does a wage distortion dispute delay the wage increase?
No. Article 124 says a pending wage distortion dispute does not delay the applicability of any increase in prescribed wage rates under a law or wage order.
General information, not legal advice. For your case, ask a lawyer, the Public Attorney's Office (PAO) or the agency.
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