I. Overview
When the minimum wage goes up in the Philippines, a very common employer reaction is:
“We’ll increase your basic wage as required, but we’ll reduce or remove some of your allowances so that our total payroll doesn’t really increase.”
Employees often feel this is unfair and ask: Is that even legal?
The short answer is:
- As a rule, employers cannot lawfully reduce regular allowances or benefits just to “offset” the cost of a minimum wage increase.
- There are narrow exceptions (like when the law or wage order itself allows “integration” or “crediting” of certain benefits, or when the allowance is not a vested benefit).
- Whether it is legal will depend on the nature of the allowance, the wording of the wage order, and whether the change amounts to a prohibited diminution of benefits or an attempt to evade minimum wage law.
This article walks through the legal framework, the typical scenarios, and how they’re generally treated in Philippine labor law.
II. Legal Framework
1. Constitutional foundation
The Philippine Constitution mandates:
- Full protection to labor, and
- A living wage and just share in the fruits of production.
These principles guide how labor statutes and wage regulations are read: minimum wage laws and labor standards are interpreted in favor of labor when there is doubt, especially against evasion or circumvention.
2. Labor Code provisions
Key concepts from the Labor Code (as amended and renumbered, though many still use the “old” article numbers):
Minimum wage rules – Employers must pay at least the prescribed regional minimum wage for an eight-hour workday to covered workers. The minimum wage is a mandatory floor, not a ceiling.
Prohibition on elimination or diminution of benefits (non-diminution rule) – Commonly referred to as Article 100 (by old numbering):
- Employers cannot unilaterally reduce or eliminate benefits that employees have been regularly enjoying, when those benefits have ripened into a company practice, policy, or are provided by contract (e.g., in a CBA, employment contract, or handbook).
Wage distortion – When wage orders increase minimum wages, wage differentials between pay grades can be compressed or eliminated. The law provides procedures for correction (through negotiation and, if needed, dispute resolution), but distortion correction is different from allowance reduction.
3. Wage Orders (Regional Boards and NWPC)
Each region’s Regional Tripartite Wages and Productivity Board (RTWPB) issues Wage Orders setting the minimum wage in that region. These:
- Specify the new minimum wage rates;
- Often have rules on cost of living allowance (COLA) and whether it will be integrated into basic wage;
- Sometimes state what benefits can (or cannot) be credited against the wage increase.
If a Wage Order says, for example, that an existing COLA shall be integrated into the basic wage, employers may follow that. But unless the Wage Order expressly allows crediting or absorption of certain allowances, employers cannot assume they can reduce other allowances to “pay for” the wage increase.
III. What Counts as “Wage” and What Is an “Allowance”?
Understanding what forms part of “wage” is crucial.
1. Wage / basic wage
In Philippine labor law:
- Wage = the remuneration paid by the employer for work done, usually for an eight-hour day, under a contract of employment.
- Basic wage = compensation for work performed excluding certain allowances and benefits (unless specifically integrated or included by law or agreement).
Many labor standards (overtime, 13th month, holiday pay computation, etc.) use basic wage as the base, not including most allowances.
2. Types of allowances
Common allowances include:
- Cost of Living Allowance (COLA) – Sometimes mandated by law or Wage Order, sometimes given voluntarily.
- Transportation allowance
- Meal or food allowance
- Representation & Transportation Allowance (RATA)
- Housing allowance
- Uniform/clothing allowance
- Communication/phone allowance
- Other fixed allowances given regularly every pay period.
These allowances may be:
- Statutory (e.g., COLA under certain laws / wage orders);
- Contractual (provided in employment contracts or CBAs); or
- Voluntary / company practice (granted regularly over time without a specific contractual basis).
3. Facilities vs. supplements
Supreme Court jurisprudence distinguishes:
“Facilities” – Items necessary for the employee’s existence and subsistence (e.g., food, lodging) which may, under strict conditions, be considered part of wages, if:
- The employee knowingly accepts them as part of his/her wage; and
- They are appropriately valued and documented.
“Supplements” – Benefits or privileges given for the convenience of the employer (e.g., free meals to keep staff on premises, uniforms to maintain company image).
- Supplements are NOT part of wages and cannot be credited to meet the minimum wage.
Most allowances typically used in the Philippines (transport, meal allowances, etc.) are treated as wage-related benefits, and not automatically part of basic wage, unless specifically integrated or agreed upon.
IV. The Non-Diminution of Benefits Rule
This doctrine is central to the question.
1. What is non-diminution?
The principle (from Article 100 and jurisprudence):
- Employers cannot unilaterally reduce or eliminate benefits that employees regularly enjoy if those benefits have ripened into a company practice or contractual entitlement.
To be protected, a benefit generally must:
- Be voluntarily granted by the employer, not just mandated by law;
- Be given in a consistent and deliberate manner over a significant period;
- Not be due to an error in applying the law;
- Not be conditional on something that is no longer satisfied.
If an allowance meets these criteria (e.g., a fixed monthly transport allowance granted to all rank-and-file for years), it usually becomes a vested benefit that cannot be removed or reduced unilaterally.
2. Application to allowance reduction after wage increase
If an employer says:
“We are increasing your basic wage to comply with the new minimum wage, but removing your ₱1,500 transport allowance so that your total pay stays the same.”
then, if:
- The transport allowance has been regularly and consistently given; and
- There is no valid exception (legal integration/crediting allowed, or legitimate restructuring where total benefits are not diminished),
this is very likely a prohibited diminution of benefits and an attempt to evade the spirit of minimum wage law.
V. Can Employers Re-structure Pay Packages When Minimum Wage Increases?
Now to the heart of the issue: Is it legal to reduce allowances to cover minimum wage increases?
1. General rule: No, you cannot offset like that
As a general rule:
- Employers must grant the full wage increase required by law or wage order on the basic wage,
- On top of whatever regular allowances and benefits employees are already enjoying,
- Unless there is a specific legal, contractual, or Wage Order-based ground to credit or integrate those benefits.
So, simply reducing allowances to “compensate” for the increased basic wage is usually illegal because:
- It violates the non-diminution rule if those allowances are vested benefits;
- It undermines the purpose of minimum wage laws (to increase employees’ base pay, improving their purchasing power);
- It may not comply with the specific rules of the Wage Order, which often do not allow unilateral offsetting.
2. When might it be allowed?
There are narrow situations where some form of adjustment involving allowances could be lawful:
a. When the Wage Order expressly allows “integration” or “crediting”
Some Wage Orders explicitly say, for example:
- A particular COLA (cost of living allowance) shall be integrated into the basic wage.
- Or: Existing wage-related benefits may be credited as compliance subject to conditions.
In such cases, the employer may:
- Increase the basic wage;
- Integrate an existing COLA into the basic wage;
- Possibly stop paying COLA as a separate item, because it is now part of the basic wage.
This is not considered an illegal diminution if:
- The employee’s total monetary compensation does not decrease, and
- The adjustment is precisely what the Wage Order contemplates (e.g., “COLA shall be integrated into the basic wage effective X date”).
However, this does not give employers blanket authority to cut other allowances (e.g., transport, meal allowances not mentioned in the Wage Order) to “make up” the cost.
b. Reclassification of compensation without lowering total take-home pay
Some employers restructure the pay slip as follows:
Even if total cash remains the same, this setup is highly problematic:
- Minimum wage law intends to improve overall compensation and standard of living, not just rearrange the numbers.
- Non-diminution protects the separate allowances if they have ripened into a benefit.
- The fact that total compensation did not decrease does not automatically cure the diminution of a specific vested benefit.
Courts and DOLE often look at whether:
- A specific benefit or allowance was reduced or removed; and
- Whether the employer’s move is obviously meant to evade the wage increase.
Unless there is a clear legal basis (e.g., integration ordered by the Wage Order) or a valid mutual agreement (e.g., negotiated in a CBA with lawful consideration and no prejudice to labor standards), this kind of restructuring is very likely unlawful.
c. Allowances that are genuinely discretionary, conditional, or temporary
If an allowance is:
- Truly discretionary (e.g., “we may give a special monthly allowance subject to company profitability”); or
- Clearly temporary or tied to a project or specific condition (e.g., “site allowance while assigned to remote area X”); or
- Given only occasionally and not as a firm company practice,
then the employer may lawfully change or withdraw it prospectively—even if around the same time as a minimum wage increase—provided:
- The benefit has not yet ripened into a vested right;
- The employer is not violating any contractual undertaking or CBA; and
- It is not being used as a sham to evade the wage increase.
Even then, the optics and timing matter. If the removal is clearly part of a scheme to defeat the wage increase, it can still be questioned.
VI. Sample Scenarios and Likely Legal Outcome
Let’s look at some typical situations in Philippine workplaces.
Scenario 1: Cutting transport allowance to keep total pay the same
Before Wage Order:
- Basic wage: ₱570
- Transport allowance: ₱500
- Total: ₱1,070
After Wage Order:
- New minimum basic wage required: ₱610
- Employer raises basic wage to ₱610 but reduces transport allowance to ₱460, keeping total at ₱1,070.
If the transport allowance has been consistently and deliberately given for a long period, with no clear condition, this is likely:
- A diminution of a vested benefit (₱500 → ₱460), and
- An indirect way of avoiding the intended increase in overall compensation.
Likely view: Illegal. Employees can challenge this at DOLE or NLRC.
Scenario 2: Integrating COLA into basic wage as ordered by the Wage Order
Before Wage Order:
- Basic: ₱500
- COLA (by law): ₱20
- Total: ₱520
New Wage Order says:
- COLA of ₱20 to be integrated into basic wage, minimum now ₱520, and COLA as a separate item ceases.
Employer does:
- Basic: ₱520
- COLA: ₱0
- Total: ₱520
Here, integration is expressly allowed. Removing the separate COLA line while increasing the basic wage is precisely what the law requires.
Likely view: Legal, provided no other vested allowances are reduced.
Scenario 3: Removing a performance bonus at the same time as a wage hike
Company has a performance-based monthly bonus clearly tied to sales quotas, and the scheme is documented as management prerogative, subject to change.
Around the time of a minimum wage increase, the company:
- Adjusts the basic wage in compliance with the Wage Order; and
- Revises or removes the performance bonus scheme for valid business reasons (e.g., restructuring incentive programs, financial losses), documented properly.
If:
- The bonus never became a fixed, unconditional, and consistent benefit (i.e., it depends on performance or profitability); and
- The revision is not a blatant pretext to evade the wage increase,
then:
Likely view: May be legal, though employees can still question the timing and motive. The key is whether the bonus was a vested benefit or a conditional incentive.
Scenario 4: CBA-negotiated allowances and unilateral reduction
A unionized company has a CBA that provides:
- Basic wage above minimum; and
- Specific allowances (e.g., rice, transport, RATA) spelled out with amounts.
After a Wage Order, the employer:
- Complies with the minimum wage increase; but
- Unilaterally reduces or removes some CBA-provided allowances to keep costs down.
Because these allowances are contractual, embodied in the CBA:
- The employer cannot unilaterally change them before the CBA expires;
- Doing so is both a labor standards violation and a CBA violation (unfair labor practice).
Likely view: Clearly illegal.
VII. Other Related Concepts
1. Wage distortion vs. allowance reduction
Some employers confuse wage distortion correction with allowance reduction.
- Wage distortion occurs when a minimum wage increase compresses wage differentials between job grades or levels.
- The law provides a process for correcting this (negotiation, mediation, arbitration), but the correction is usually about adjusting other wage rates upward, not about cutting allowances to pay for the minimum wage increase.
Reducing allowances does not cure wage distortion and may create additional legal issues.
2. Company practice and how it forms
Philippine jurisprudence has repeatedly held that:
- Benefits granted consistently and deliberately over a significant period can become a company practice even without a written policy.
- Once a benefit becomes a company practice, it cannot be withdrawn unilaterally.
Thus, even if an allowance is not written into a contract, years of consistent granting (same amount, same frequency, without clear reservation) can make it legally protected.
VIII. Practical Guidance
For employers
Do not simply “swap” allowances for minimum wage increases.
- If you increase the basic wage because of a Wage Order, treat regular allowances as separate obligations unless the law or Wage Order says otherwise.
Study the specific Wage Order and its implementing rules.
- Check if it allows any integration or crediting of COLA or other wage-related benefits.
- Follow only what is expressly allowed.
Document the nature of your allowances clearly.
- If a benefit is conditional, discretionary, or temporary, state that clearly in policies and contracts to avoid it ripening into a vested right unintentionally.
If restructuring compensation, avoid diminution.
- If you must restructure (e.g., for tax efficiency or transparency), do it in a way that does not reduce the value of vested benefits.
- Ideally, consult counsel and, where applicable, negotiate with unions.
Be transparent with employees.
- Sudden unexplained cuts look like bad faith and are more vulnerable to legal challenge.
For employees
Keep records.
- Payslips, company memos, handbooks, and emails showing the allowance and its consistency are crucial if you challenge a reduction.
Ask HR for written explanation.
- Request a written breakdown of changes when your basic wage is increased and allowances are altered.
Check if the allowance is a long-standing practice.
- If you’ve been receiving it for years in the same amount, with no conditions, you likely have a vested benefit.
Seek advice and file complaints when necessary.
IX. Key Takeaways
- Minimum wage increases are meant to improve workers’ compensation, not just reshuffle numbers on the payslip.
- Regular allowances and benefits that have become vested cannot usually be reduced or removed just to “offset” the cost of a wage increase.
- Employers may integrate or credit certain benefits only if the Wage Order or law expressly allows it, and even then must avoid net diminution of benefits.
- The legality of reducing an allowance depends on its nature: vested benefit vs. conditional/discretionary incentive, and on compliance with non-diminution and contractual rules.
- Unilateral allowance cuts tied to wage hikes are, in many real-world cases, likely to be illegal and challengeable.
This is a complex area where specific facts matter a lot—the exact Wage Order, the history and nature of the allowance, and the way the employer implemented the change. For concrete situations, it’s wise to consult a Philippine labor lawyer or DOLE officer, bringing actual payslips, contracts, and company communications for review.