New Contract Salary Increase — Legality Under Philippine Law

Last updated : 17 July 2025 (This article is for general information only and is not a substitute for legal advice.)

1. Why “new contracts” are used to grant raises

Employers in the Philippines usually increase wages by:

Method	Typical purpose	Key legal checkpoints
Simple salary adjustment letter	Merit increase, CPI catch-up, compliance with a Wage Order	No new contract needed; confirm payslip reflects raise and contributions are recomputed
Promotion or re-designation agreement	Higher rank, broader duties	Must state new duties and salary; cannot reduce tenure or existing benefits
Entirely new employment contract	Conversion from project-based to regular, renewal of fixed-term, transfer between entities, or a corporate re-organization	Must not be used to waive security of tenure, reset years-of-service, or evade statutory benefits

A “new contract” is therefore legal only if it preserves the employee’s vested rights and meets mandatory labor standards.

2. Foundational legal sources

Constitution, Art. XIII, §3 – mandates “just and humane conditions of work” and full protection to labor.
Labor Code of the Philippines (PD 442, as amended)
- Art. 94–96 – holiday pay and service incentive leave, which increase in cost whenever basic wage rises.
- Art. 100 – the non-diminution rule: no employer may eliminate or lower benefits already enjoyed.
- Art. 279 (now 294) – security of tenure: dismissal or reduction in rank/salary only for just or authorized cause with due process.
RA 6727, the Wage Rationalization Act & Wage Orders issued by each Regional Tripartite Wages and Productivity Board (RTWPB).
RA 11058 (Occupational Safety) & allied issuances – salary increases cannot be offset against allowances earmarked for OSH compliance.
Jurisprudence
- Brent School v. Zamora (G.R. L-48494) – limits on fixed-term renewals.
- Philippine Journalists, Inc. v. CIR (G.R. L-91587) – non-diminution covers both wage and wage-related benefits.
- Sevilla Trading v. Semana (G.R. 128054) – “pactum de retro” resignation with rehiring violates labor security.
- Coca-Cola Bottlers v. RTWPB-VII (G.R. 163091) – wage distortion correction after a Wage Order.

3. Key legal principles triggered by a salary increase

Principle	Practical effect when drafting / signing a new contract
Statutory floor	New rate must meet or exceed the latest Wage Order upon effectivity. Failing this voids the wage clause and exposes employer to underpayment penalties.
Freedom to contract vs. labor standards	Parties may agree on any higher amount, payment schedule, or incentive scheme so long as it is better than statutory minima and CBA provisions.
Non-diminution of benefits (Art. 100)	A raise cannot be paired with the withdrawal of food allowance, COLA, or 13th-month pay to “fund” the increase. Any such trade-off is void.
Security of tenure	Signing a new contract must not force the employee to restart probation or surrender regular status. Jurisprudence treats such reset as constructive dismissal.
Equal work, equal pay (Art. 133 & 135, Labor Code; RA 11574 on Gender Equal Pay)	If only males, only non-union staff, or only foreign hires receive the raise without a defensible merit system, the employer may face discrimination claims.
Wage distortion	Large increases limited to lower ranks can compress the wage gap; employers must bargain or arbitrate an adjustment plan for higher ranks.
Taxation & contributions	Higher gross pay means higher: withholding tax (NIRC), SSS (RA 11199), PhilHealth, Pag-IBIG; payroll software and BIR Alphalist must be recalculated.

4. Legally compliant process checklist

Update the salary structure (HR & Finance)
- Revise pay grades, merit matrices, and budget approvals.
Draft the instrument
- For minor increases: a Salary Adjustment Memo acknowledged by the employee.
- For promotions or role changes: a short Employment Addendum or Notice of Promotion.
- Reserve a full new contract for fixed-term renewal or inter-company transfer, stating continuity of service.
Board or Management Resolution (if required by by-laws) authorizing new salary scale.
Employee acceptance – signature must be voluntary; no “take-it-or-leave-it” under threat of dismissal.
Submit/keep copies
- DOLE inspection readiness: employment records, payslips, Schedule of Employment & Wage.
- BIR submission: revised Alphalist if mid-year change.
- SSS R-3, PhilHealth RF-1, Pag-IBIG RF-1A reflecting new monthly salary credit (MSC).
Implement in payroll on the inclusive cut-off date; issue payslips with itemized deductions (Labor Code Art. 113).
Monitor for wage - related ripple effects – adjust service incentive leave conversion pay, retirement fund contributions, overtime base rate, and separation pay formula.

5. Common unlawful practices (and how to avoid them)

Unlawful practice	Why illegal	Safer alternative
“Sign this new six-month contract with higher pay; your tenure restarts.”	Violates security of tenure and Brent doctrine.	Issue a promotion letter stating continuity of original start date.
Increasing salary then converting part of it into allowances next cycle to keep net pay flat.	Results in indirect diminution; allowances are wage-related benefits.	Maintain basic pay; itemize genuine allowances separately.
Granting the raise only to one gender or nationality without objective metrics.	Violates equal-protection clauses and RA 11574.	Adopt a written merit matrix and publish criteria.
Paying below the new regional Wage Order on grounds that a prior contract set a lower rate.	Statutory floors override contracts (Art. 1700 Civil Code).	Implement wage-order adjustment immediately and treat shortfalls as wage arrears.
Requiring employee to “refund” the raise if they resign within a year.	Considered iniquitous or unconscionable penalty, void under Art. 1305 Civil Code and DOLE advisory on bonds.	Use retention incentives (e.g., stay bonus) rather than claw-backs.

6. Interaction with collective bargaining agreements (CBA)

Unionized companies must bargain in good faith; wage increases outside the normal CBA cycle (mid-term raises) need union consultation to avoid an unfair labor practice (ULP).
Wage Orders cannot be waived by a CBA; any CBA wage clause below a new Wage Order is deemed automatically modified upward.
Wage distortion arising from a Wage Order + CBA wages follows the procedure under Art. 123 (consultation → grievance machinery → NCMB conciliation → voluntary arbitration).

7. Fixed-term and project employment nuances

Fixed-term renewal – If a teacher, consultant, or athlete’s term is renewed yearly with a higher pay, each gapless renewal still counts toward total service length when computing retirement/separation pay (University of Santo Tomas v. Samahang Manggagawa ng UST, G.R. 223192).
Project employees – Salary increase upon every project re-engagement does not strip regular status if tasks are truly necessary and desirable to the business (D.M. Consunji v. Jamin, G.R. 192514).
Gig/independent contractors – A “new contract” labeled as consultancy but with fixed schedule and control is probative of employer-employee relationship, making statutory wages mandatory despite the nomenclature.

8. Effect on accrued benefits

Benefit	Effect of salary hike
13th-month pay (PD 851)	Compute pro rata: months at old rate + months at new rate.
Retirement/separation pay (Art. 302 / RA 7641)	“One-half month salary” is based on latest basic salary.
Overtime, night-shift differential, holiday pay	Use new hourly equivalent immediately upon effectivity.
Pag-IBIG, PhilHealth, SSS	Monthly Salary Credit brackets shift; employer must remit higher contributions starting the month of increase.
Tax brackets	Withholding must be recomputed; failure causes BIR penalties and employee short-withholdings at year-end.

9. Administrative, civil, and criminal liabilities for non-compliance

Violation	Possible penalties
Underpayment of wages	₱25,000–50,000 fine + double wage difference + closure order (Art. 305).
Falsifying payslips / payroll	Art. 171–172 RPC falsification; employer officers may face imprisonment.
Unfair labor practice (e.g., refusal to bargain wage distortion)	Back wages, damages, reinstatement, and criminal liability (Art. 258).
Discrimination in compensation	₱50,000–200,000 + 2–4 years imprisonment under RA 11574.
Tax evasion (under-withholding)	25–50 % surcharge + interest + criminal action under NIRC.

10. Best-practice drafting tips

Recitals – state purpose (“merit increase”, “regional wage compliance”, “promotion”) to clarify intent.
Continuity clause – “All prior years of continuous service shall be tacked to this Agreement for purposes of seniority and statutory benefits.”
Savings clause – “Nothing herein shall reduce or negate statutory or CBA-mandated benefits.”
Effective date vs. payroll cutoff – specify both to avoid pro-ration disputes.
Ratchet clause (optional) – promises non-reduction without employee consent, reinforcing Art. 100.
Signatories – include the employee and an authorized corporate officer (HR Manager or President).

11. Frequently asked questions (FAQ)

Question	Short answer
Can we make a raise conditional on hitting KPIs, then roll it back if KPIs drop?	No. Once granted, basic wage cannot be reduced; you may instead grant a variable performance bonus.
Is a notarized new contract required?	Notarization is optional; what matters is voluntary consent and compliance with labor standards.
Does the new salary need to be filed with DOLE?	There is no filing requirement, but accurate payroll and employment records must be ready for inspection.
Can we offset the cost of the raise by lowering the COLA?	No; that violates non-diminution unless the COLA was purely discretionary and not habitual.
If the employee refuses to sign the new contract, can we withhold the raise?	Increases are discretionary (unless mandated by law), but any ultimatum that forces waiver of rights is coercive and may amount to constructive dismissal.

12. Conclusion

Granting a salary increase through a “new contract” can be perfectly lawful—and even administratively tidy—provided it operates as a one-way ratchet (only upward), preserves all accrued rights, and meets every statutory and CBA standard. Employers should treat the new contract as a snapshot of improved terms, not as a reset button for tenure or benefits. Careful drafting, transparent communication, and meticulous payroll recalibration are the keys to a raise that is both generous and legally robust.

Need tailored guidance? Complex scenarios—multi-entity transfers, expatriate packages, group wage distortions—warrant a consultation with a Philippine labor-law specialist or a DOLE accredited counselor.