A practical legal guide for private-sector employers and employees

I. Two different creatures: merit increases vs wage order adjustments

Merit (or performance-based) increases are employer-granted pay raises tied to individual factors—e.g., performance ratings, skill scarcity, promotion, or market corrections. They spring from management prerogative, company policy, or a collective bargaining agreement (CBA).

Wage order adjustments are government-mandated increases in the minimum wage issued by the Regional Tripartite Wages and Productivity Boards (RTWPBs) under the National Wages and Productivity Commission (NWPC) pursuant to the Wage Rationalization Act (R.A. 6727) and the Labor Code (as renumbered). These set the floor, not the ceiling, of allowable wages by region and industry/category.

Key rule: A wage order compels employers to pay at least the new statutory minimum to covered workers in the region. Merit increases are on top of that floor unless a wage order expressly allows limited crediting (explained below).

II. Coverage and exclusions

Covered workers. Most rank-and-file private-sector employees paid by time, task, piece, or commission. Piece-rate workers must still receive pay at least equivalent to the minimum for normal hours worked.
Common exclusions or special regimes.
- Barangay Micro Business Enterprises (BMBEs) registered under R.A. 9178 are exempt from the minimum wage but must observe labor standards on benefits not tied to the minimum wage (e.g., 13th-month pay if applicable to the category of worker).
- Domestic workers (kasambahay) are governed by R.A. 10361, with separate regional minimums set by RTWPBs.
- Apprentices/learners/handicapped workers may be subject to special rates only when all statutory conditions and DOLE approvals are strictly met.
- Public-sector employees follow the Salary Standardization Law; wage orders do not apply to them.

Always check the specific wage order and implementing rules for your region and sector.

III. How wage orders work

Regional setting. Each RTWPB issues a Wage Order after hearings and studies, considering cost of living, productivity, employment effects, and the needs of workers and their families.
Effectivity. Wage orders take effect 15 days after publication in a newspaper of general circulation in the region, unless the order states another effectivity rule.
Components. A wage order may:
- Raise the basic wage;
- Grant or integrate a Cost-of-Living Allowance (COLA) (either as a separate allowance or by integrating it into the basic wage);
- Define credited wage increases (if any) and coverage/exemptions;
- Provide rules on wage distortion correction;
- Set penalties and compliance directives.

IV. Crediting employer-granted increases: may a merit raise offset a wage order?

General principle: Wage orders set minimum standards. Employer-granted increases (including merit raises) do not usually count as compliance with a new wage order—unless the wage order expressly provides that certain wage increases granted within a specified look-back period (e.g., 3 months prior to effectivity) may be credited toward compliance.

If your region’s wage order has a creditability clause, read it carefully. It might allow crediting general wage increases (e.g., across-the-board market corrections) but exclude increases that are conditional, individualized, or contingent (e.g., merit/performance raises or those tied to promotions).
If the wage order is silent, do not offset the mandated increase with prior merit raises. Pay the full mandated increase (or bring the basic to the new minimum), then keep merit raises as separate increments.

Tip for employers: Keep clear documentation differentiating statutory adjustments from merit-based increases (salary notices, effective dates, memos). Use distinct payroll codes.

V. Wage distortion: what it is and how to fix it

Wage distortion arises when a wage order’s increase compresses pay gaps between different pay grades or levels, thereby eroding intentional distinctions in the salary structure (e.g., a senior worker now earns almost the same as a junior after the minimum wage goes up).

Legal treatment and process (from R.A. 6727 and the Labor Code, as renumbered):

Organized establishments (with CBA): Correct the distortion through the CBA grievance machinery; if unresolved, proceed to voluntary arbitration.
Unorganized establishments: Address through conciliation-mediation with the National Conciliation and Mediation Board (NCMB). If unresolved, the matter may be elevated consistent with law and rules; the existence of a wage distortion is not a valid ground to delay compliance with the wage order.

Approaches to correction (best practices):

Restore previous differentials (peso or percentage-based) between grades;
Implement tiered “catch-up” adjustments for affected higher grades;
Combine merit pools with structural adjustments to re-open gaps rationally;
Document the rationale (skills, responsibility, supervision, hazards) sustaining differentials.

VI. Non-diminution of benefits

The non-diminution rule (a jurisprudential doctrine) prohibits employers from unilaterally cutting down long-established, consistent, and deliberate benefits. If merit increases have crystallized into a company practice (e.g., an annual guaranteed percentage regardless of performance), withdrawing or reducing them may violate this rule. Where merit increases are discretionary and performance-contingent per written policy, they remain subject to good-faith management prerogative—provided the policy is followed fairly and uniformly.

VII. Interplay with other pay elements

Overtime, premium pay, night shift differential, and holiday pay are computed as a percentage of the regular wage. If a wage order or COLA integrates into basic pay, your computation base changes on the effectivity date.
13th-month pay (P.D. 851). Any wage order or merit increase that raises basic salary will proportionally affect 13th-month pay (which is at least 1/12 of basic salary earned within the calendar year).
Service incentive leave (SIL), SSS/PhilHealth/HDMF contributions, and retirement pay (R.A. 7641) computations may also be affected where the basic wage increases.
Tax implications. A worker who ceases to be a minimum wage earner after adjustments may lose certain income tax exemptions tied to MWE status. Merit increases are generally taxable compensation.

VIII. Promotions, market adjustments, and merit pay

Promotions (change in rank/position) should be distinguished from merit increases (raise without change in position). Promotions aren’t governed by wage orders but must still respect anti-discrimination / equal work, equal pay principles.
Market adjustments (to meet external salary benchmarks) are typically across-the-board or job-family-specific and may be partly creditable only if your wage order says so and the timing fits the look-back window.
Merit matrices. Many employers set a merit matrix tying performance ratings to suggested increase percentages by compa-ratio (position of salary within the range). This supports defensibility and internal equity.

IX. Exemptions, deferments, and appeals

Some wage orders allow limited exemptions (e.g., distressed establishments, small retail/service with not more than a specified number of workers, new business enterprises in certain zones) subject to strict proof and timelines. Others do not. When allowed:

Apply within the period stated in the order/IRR;
Expect audits of financial statements, payroll, and headcount;
If granted, follow the terms (partial exemption, deferment, or time-bound relief). Employers and labor groups may appeal wage orders to the NWPC under statutory procedures, but appeals don’t suspend the order unless a stay is expressly granted.

X. Compliance steps for HR and payroll

Map coverage. Identify regions, business units, and worker classes subject to the wage order.
Read the specific wage order. Confirm effectivity date, rates, COLA integration, creditability clause (if any), and exemptions.
Gap analysis. For each employee, compare current basic vs the new minimum for the applicable category (non-agri/agri; smaller retail/service where applicable).
Adjust basics. Bring any sub-minimum rate up to the new floor on effectivity; do not wait to resolve distortion first.
Correct distortions. Use structural adjustments or temporary allowances; engage the union and NCMB/VA as required.
Separate codes. Track statutory adjustments distinctly from merit or promotion increases.
Revise pay-linked computations. Update OT, premiums, NSD, holiday pay, 13th-month, leave conversions, retirement accruals, and government contributions.
Notices. Issue written salary notices to employees stating nature (statutory vs merit), amount, and effective date.
Record-keeping. Keep payroll registers, payslips, RTWPB/NWPC issuances, exemption filings, and CBA/VA records organized for DOLE inspection.
Policy alignment. Review merit-increase policies to avoid automatic offsetting against future wage orders unless legally allowed.

XI. Frequently encountered issues (and principled answers)

Q: We granted a 5% merit increase last month; can we credit it to the new wage order? A: Only if the specific wage order for your region expressly allows crediting employer-granted increases within a look-back period, and your increase fits the conditions. If silent or excludes merit raises, no.
Q: Our senior operator now earns almost the same as a newly compliant junior. Can we delay compliance until we fix the structure? A: No. Comply now with the new minimum, then correct wage distortion through the legally prescribed processes.
Q: Can we withdraw our annual merit program to fund wage-order compliance? A: You may redesign future programs prospectively, but beware of non-diminution if a clear company practice has formed. Implement changes with notice and in good faith.
Q: Does a COLA integration change overtime computations? A: If COLA is integrated into basic, the regular wage used for OT and premium computations increases from the effectivity date.

XII. Sample computations

Scenario A: Sub-minimum employee

Before: ₱590 basic/day (NCR, non-agri example)
New wage order: ₱645 basic/day
Action: Raise basic to ₱645 effective on the wage order’s effectivity date. If you gave a ₱20 merit raise last month, you still raise to ₱645 unless crediting is allowed.

Scenario B: Above-minimum employee & COLA integration

Before: ₱700 basic + ₱30 COLA
Wage order: +₱30 increase, integrated (COLA becomes part of basic)
Action: New basic is ₱760 (₱700 + ₱30 old COLA + ₱30 new increase). Recalculate OT, premiums, and NSD using ₱760 as base.

Scenario C: Wage distortion correction

Grade 1 (entry) moved from ₱590 to ₱645; Grade 2 was ₱660.
Old gap: ₱70. New gap: ₱15.
Action: Restore structure by granting ₱55 catch-up to Grade 2 (or an agreed percentage), following CBA/VA or NCMB conciliation.

XIII. Documentation essentials

Wage Order file (full text + IRR) for your region(s)
Board advisories/bulletins interpreting creditability, exemptions, and coverage
Payroll change logs (statutory vs merit)
Distortion worksheets and agreement minutes (CBA or NCMB)
Updated pay policies (merit matrices, promotion guidelines, market adjustments)

XIV. Enforcement and penalties

Failure to comply with a wage order can lead to DOLE inspection findings, assessments, payment of deficiencies, and penal sanctions under the Labor Code and wage law issuances. Good-faith errors may mitigate, but do not excuse, underpayment. Keep timely and accurate records.

XV. Practical policy language (for handbooks/CBA)

“Statutory wage adjustments under government wage orders shall be implemented on their effectivity date. Unless a wage order expressly provides otherwise, employer-granted increases—whether merit-based, promotional, or market—shall be separate from and not credited to compliance with statutory minimum wages. The Company will address any wage distortion through consultation with employees/union and, where applicable, the grievance and voluntary arbitration procedures.”

XVI. Takeaways

Treat wage orders as non-negotiable minimums.
Keep merit programs distinct, transparent, and anchored on performance and market data.
Do not offset merit increases against wage orders unless your region’s order clearly permits it.
Correct wage distortion promptly through the proper legal channels.
Update all pay-linked computations and tax treatment after any adjustment.
Document everything.

Disclaimer

This guide provides general information for the Philippine private sector. Particular wage orders differ by region and time. For high-stakes decisions (creditability, exemptions, appeals), review the actual regional wage order and consult counsel or a certified payroll professional.