Petitioner

Osmalik S. Bustamante, Paulino A. Bantayan, Fernando L. Bustamante, Mario D. Sumonod, and Sabu J. Lamaran

Respondent

National Labor Relations Commission, Fifth Division and Evergreen Farms, Inc.

Ponente

Padilla, J.

Docket Number and Date of Decision

G.R. No. 111651, November 28, 1996

Significance of the Case

In this landmark case, the Supreme Court (SC) ruled that backwages due an employee on account of his illegal dismissal should not be diminished or reduced by the earnings derived by him elsewhere during the period of his illegal dismissal.

This case finally abandoned the “Mercury Drug” rule and “deduction of earnings elsewhere” rule then prevailing at that time.

Historical Backdrop

Prior to the present case, SC had applied different methods in the computation of backwages.

Backwages under RA 875. Under RA 875, the Court of Industrial Relations (CIR) was given wide discretion to grant or disallow payment of backpay (backwages) to an employee, it also had the implied power of reducing the backpay where backpay was allowed. In the exercise of its jurisdiction, the CIR can increase or diminish the award of backpay, depending on several circumstances, among them, the good faith of the employer, the employee’s employment in other establishments during the period of illegal dismissal, or the probability that the employee could have realized net earnings from outside employment if he had exercised due diligence to search for outside employment.

This method caused undue delay in the disposition of illegal dismissal cases. Cases are usually held up in the determination of whether or not the computation of the award of backwages is correct.

Mercury Drug Rule . In order prevent undue delay in the disposition of illegal dismissal cases, the SC found occasion in the case of Mercury Drug Co vs. CIR, 1974, to rule that a fixed amount of backwages without further qualifications should be awarded to an illegally dismissed employee.

In subsequent cases (adopting the proposal of Justice Teehankee), backwages equivalent to three years (unless the case is not terminated sooner) was made the base figure for such awards without deduction, subject to deduction where there are mitigating circumstances in favor of the employer but subject to increase by way of exemplary damages where there are aggravating circumstances (e.g. oppression or dilatory appeals) on the employer’s part.

On 1 November 1974, the Labor Code of the Philippines took effect. Article 279 of the said code provides:

“[…] An employee who is unjustly dismissed from work shall be entitled to reinstatement without loss of seniority rights and to his back wages computed from the time his compensation was was withheld from him up to the time of his reinstatement.”

The above provision nothwithstanding, the rule generally applied by the Court after the promulgation of the Mercury Drug case, and during the effectivity of P.D. No. 442 was still the Mercury Drug rule. In effect, this qualified the provision under P.D. No. 442 by limiting the award of backwages to 3 years.

“Deduction of Earnings Elsewhere” Rule. When RA 6715 took effect on 21 March 1989, the pertinent portion of Article 279 of the Labor Code was amended to read as follows:

“[…] An employee who unjustly dismissed from work shall be entitled to reinstatement without loss of seniority rights and other privileges and to his full backwages, inclusive of allowances, and to his other benefits or their monetary equivalent computed from the time his compensation was withheld from him up to the time of his actual reinstatement.”

In accordance with the above provision, an illegally dismissed employee is entitled to his full backwages from the time of his illegal dismissal up to the time of his actual reinstatement.

Despite the amendment, however, in a subsequent case, Pines City Educational Center vs. NLRC, 1993, the Court returned to the rule prior to the Mercury Drug rule that the total amount derived from employment elsewhere by the employee from the date of dismissal up to the date of reinstatement, if any, should be deducted from backwages.

The rationale for such ruling was that, the earning derived elsewhere by the dismissed employee while litigating the legality of his dismissal, should be deducted from the full amount of backwages which the law grants him upon reinstatement, so as not to unduly or unjustly enrich the employee at the expense of the employer.

Issue

Whether or not the income derived by the employee elsewhere during the period of his illegal dismissal should be deducted from the award of backwages.

Ruling

Conformably with the evident legislative intent of RA 6715, backwages to be awarded to an illegally dismissed employee, should not, as a general rule, be diminished or reduced by the earnings derived by him elsewhere during the period of his illegal dismissal.

The underlying reason for this ruling is that the employee, while litigating the legality (illegality) of his dismissal, must still earn a living to support himself and family, while full backwages have to be paid by the employer as part of the price or penalty he has to pay for illegally dismissing his employee.

The clear legislative intent of the amendment in RA 6715 is to give more benefits to workers than was previously given them under the Mercury Drug rule or the “deduction of earnings elsewhere” rule.

Thus, a closer adherence to the legislative policy behind RA 6715 points to “full backwages” as meaning exactly that, i.e., without deducting from backwages the earnings derived elsewhere by the concerned employee during the period of his illegal dismissal. In other words, the provision calling for “full backwages” to illegally dismissed employees is clear, plain and free from ambiguity and, therefore, must be applied without attempted or strained interpretation. Index animi sermo est (literally “speech is the index of intention”).

Last Edited: Sunday, March 20, 2011

Caveat: Subsequent court and administrative rulings, or changes to, or repeal of, laws, rules and regulations may have rendered the whole or part of this article inaccurate or obsolete.
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