Introduction

In the Philippines, workers often receive pay adjustments from two different sources: (1) government-mandated wage increases, especially those issued by the Regional Tripartite Wages and Productivity Board (RTWPB) for the National Capital Region (NCR), and (2) employer-initiated merit increases based on performance, tenure, or company policy.

These two adjustments may look similar on a payslip, but they arise from different legal bases and follow different rules. The biggest practical question for both employees and employers is:

When a new NCR wage order takes effect, can your employer treat an earlier or upcoming merit increase as compliance with that wage order?

This article explains the governing laws, rules, and real-world outcomes.

1. Legal Foundations

1.1. Wage Orders and Statutory Wage Increases

Wage orders are issued under Republic Act No. 6727 (the Wage Rationalization Act), which amended the Labor Code. Wage orders:

set or increase the regional minimum wage,
are mandatory and non-waivable, and
apply to private-sector employees in the covered region, subject to exemptions.

In NCR, the RTWPB-NCR issues wage orders specifying:

the new daily minimum wage,
the amount of increase,
implementation date,
coverage, and
any sector-specific rules.

Once effective, the wage order becomes part of the labor standards that employers must obey.

1.2. Merit Increases

A merit increase is a voluntary salary adjustment granted by the employer, usually tied to:

performance ratings,
promotions,
skills or certification gains,
market alignment, or
retention policies.

Merit increases are governed mainly by:

the employment contract,
company policy or CBA (if unionized),
general principles of management prerogative, and
the rule that wages cannot fall below legal minimums.

Unlike wage orders, merit increases are not automatically required by law unless promised in a binding policy or agreement.

2. Key Difference in Nature

Aspect	NCR Wage Increase	Merit Increase
Source	Government mandate (RTWPB wage order)	Employer discretion/policy
Coverage	Minimum wage earners in NCR, unless exempt	Any employee the employer chooses
Legal Character	Compulsory, non-waivable labor standard	Voluntary benefit unless contractual
Timing	Fixed effective date in wage order	Employer-determined schedule
Purpose	Improve purchasing power / wage floor	Reward performance / retention / market competitiveness

Because of this difference, a merit increase is not automatically a substitute for a wage order increase.

3. Who Is Covered by NCR Wage Orders?

3.1. Minimum Wage Earners (MWE)

Wage orders apply primarily to minimum wage earners in NCR. An MWE is someone whose daily pay rate is at or below the legal minimum wage.

If your salary is already above the minimum wage, you are a non-minimum wage earner, and wage orders do not automatically increase your pay—unless wage distortion rules require adjustments (discussed later).

3.2. Exemptions

Some employers may be exempted or granted a temporary exemption by the RTWPB, commonly including:

distressed establishments,
new business enterprises (for a limited period),
small retail/service establishments below certain employee thresholds (depending on the order), and
establishments affected by calamities.

Exemptions are not automatic—they require application and approval.

4. The Core Rule: Can Merit Increase Count as Compliance?

4.1. General Rule: No, Not If It Was Granted for a Different Reason

A merit increase given before a wage order cannot be automatically credited as compliance unless it was clearly intended as an advance compliance and the employee still receives at least the mandated increase.

The usual legal reasoning is:

Wage order increases are statutory obligations.
Merit increases are management decisions.
An employer cannot retroactively re-label a voluntary raise to avoid a later legal obligation.

4.2. Exception: If the Merit Increase Was Explicitly Granted “In Anticipation of the Wage Order”

If an employer gives an increase explicitly stating it is in anticipation of or as advance compliance with a forthcoming wage order, it may be credited. But:

The documentation must be clear (policy memo, payslip notation, written notice).
The credited amount must be at least equal to what the wage order later requires.
Any shortfall must still be paid upon effectivity.

Absent clear proof, the increase is treated as merit-based, not statutory compliance.

5. Timing Scenarios and Outcomes

Scenario A: Merit Increase Given Before the Wage Order

Employee is minimum wage earner at the time of the wage order’s effectivity.
Merit raise was for performance/regular cycle.

Outcome: Employer must still grant the full wage order increase on top of the merit raise, because the merit raise is a separate benefit.

Scenario B: Merit Increase Given On or After Effectivity

Employer tries to say: “Your merit raise already includes the wage hike.”

Outcome: Allowed only if the employee receives at least the wage order increase and the employer can show that the wage component was included. If not clearly separated, DOLE typically presumes wage order compliance must still be met.

Scenario C: Employer Freezes Merit Increases Because of Wage Order

Employer says budget is tight, so merit increases are suspended.

Outcome: This is generally lawful. Merit increases are voluntary unless contractually promised. But the wage order increase must still be implemented for covered MWEs.

Scenario D: Employee Is Above Minimum Wage

Employee gets merit increase.
Wage order comes later.

Outcome: The wage order does not automatically increase the salary—unless it causes wage distortion.

6. Wage Distortion: The Bridge Between Minimum and Merit Increases

6.1. What Is Wage Distortion?

Wage distortion happens when a wage order increase:

removes or severely narrows pay gaps between levels of employees,
such that differences in skill, length of service, or rank are erased or illogically reduced.

Example: A senior employee paid ₱50/day more than a junior suddenly ends up only ₱5/day higher after the junior gets a statutory increase.

6.2. Duty to Correct Distortion

Under the Labor Code and wage rationalization rules:

Employers must correct distortions in wage structures within the establishment.
The mechanism depends on whether workers are unionized.

If unionized (with a CBA):

Employer and union negotiate correction.
If unresolved, grievance machinery applies.
Then voluntary arbitration.

If non-unionized:

Employer and employees negotiate.
If unresolved, the dispute goes to the National Conciliation and Mediation Board (NCMB), then to the NLRC if needed.

6.3. Merit Increase vs. Distortion Correction

Distortion correction is not the same as merit increase:

Distortion correction = restoring logical wage gaps after a law-mandated hike.
Merit increase = rewarding individual performance.

However, employers sometimes fulfill distortion correction by adjusting higher tiers, which may look like merit raises. Legally, they are treated as compliance with distortion rules, not as discretionary merit benefits.

7. Interaction With Allowances and Benefits

7.1. Basic Pay vs. Allowances

Wage orders require an increase in:

basic wage (the fixed pay for work).

Employers cannot usually offset the mandated increase by reducing:

COLA (unless wage order says COLA is integrated),
regular allowances treated as wage,
or benefits that have become company practice.

7.2. “Facilities” vs. “Supplements”

Only facilities (items primarily for employee subsistence and documented as part of wage) may be partly credited against wage.

Supplements (benefits primarily for employer convenience or productivity) cannot be deducted to meet the minimum wage.

So, an employer generally cannot say:

“We won’t increase your basic pay because you already get a transport allowance.”

8. Special Notes for Monthly-Paid Employees

Many NCR workers are monthly-paid. Wage orders are often stated in daily rates, so employers convert them to monthly equivalents.

Important:

The daily minimum wage applies regardless of being monthly-paid.
Monthly rate must be at least daily minimum × 313 days / 12 months (standard conversion used in labor standards).
If the converted monthly pay is below compliance after a wage order, the employer must adjust.

9. Common Employer Practices—and Their Legal Risks

Practice 1: “We already gave you a raise earlier; that counts.”

Risk: Non-compliance unless clearly documented as advance statutory compliance.

Practice 2: “Merit increases this year will be smaller because of wage order.”

Risk: Usually none, provided wage order increases are still fully implemented for MWEs.

Practice 3: “We restructured pay; your old allowance is now in your wage.”

Risk: Permitted only if total take-home pay doesn’t go below legal minimum and no benefit is unlawfully diminished.

Practice 4: “Only minimum wage earners get increases; others don’t.”

Risk: Legal unless wage distortion occurs, in which case higher tiers must be adjusted.

10. Remedies for Employees

If you believe your employer failed to implement a wage order properly:

Check your status
- Are you an MWE under NCR minimum wage?
- Was your wage below the new floor on effectivity?
Request clarification in writing
- Ask HR for the breakdown of merit vs. wage order components.
File a labor standards complaint with DOLE-NCR
- DOLE handles underpayment / non-compliance.
If distortion is the issue, pursue correction through:
- CBA grievance machinery/VA (if unionized), or
- NCMB/NLRC (if not).

Retaliation for asserting labor standards rights is unlawful.

11. Practical Takeaways

For Employees

If you’re an NCR minimum wage earner, you are entitled to wage order increases even if you already received a merit raise—unless that raise was clearly an advance compliance.
If you’re above minimum wage, wage orders may still affect you through wage distortion correction, not automatic hikes.
Merit increases remain a separate track unless your company policy merges them transparently.

For Employers

Treat wage order compliance as distinct from merit programs unless explicitly integrated.
Put any “advance compliance” increases in clear written form.
Monitor internal wage gaps to avoid distortions and legal disputes.
Avoid offsetting mandated increases through benefit deductions unless legally allowed.

Conclusion

NCR wage increases and merit increases operate on different legal planes. Wage orders set the non-negotiable floor; merit increases sit above it as a discretionary (or policy-based) reward system.

When a wage order takes effect, an employee’s right to the statutory increase cannot be erased by a prior merit raise unless the employer can prove it was given as advance compliance. And even for non-minimum wage earners, wage orders can ripple upward through wage distortion rules.

Understanding the separation—and interaction—between these two adjustments is key to protecting both fair pay and lawful payroll practices.