Salary Increases in GOCCs: Understanding the Legal Boundaries After Small Business Corporation v. COA

The Supreme Court has settled an important question for government-owned and controlled corporations (GOCCs) and government financial institutions (GFIs): when does a salary increase run afoul of the law, and who must return the money if it does? In Small Business Corporation v. Commission on Audit (G.R. No. 251178, April 27, 2021), the Court affirmed that the moratorium on salary increases under Executive Order No. 7 applies to the actual grant of increased pay, not just the approval of a salary structure. The decision also clarified the liability of officers and employees who received disallowed amounts.

The Case: A Moratorium Ignored

Small Business Corporation (SBC), a government financial institution, approved a revised salary structure in 2009, which the Department of Trade and Industry Secretary confirmed in February 2010. However, on September 8, 2010, President Benigno Aquino III issued Executive Order No. 7, imposing a moratorium on increases in salary rates and the grant of new increases in allowances, incentives, and other benefits for GOCCs and GFIs, unless specifically authorized by the President.

Despite the moratorium, SBC issued implementing guidelines in October 2011 and granted step increments and merit increases to its personnel from September 2012 to September 2014, totaling over P4.4 million. The Commission on Audit (COA) disallowed these payments for violating EO No. 7. SBC argued that its salary structure was approved before the moratorium and that it had the power to fix its own salaries under its charter.

The Issue: What Does the Moratorium Prohibit?

The central question was whether EO No. 7 prohibited only the approval of new salary structures or also the actual implementation of increases under a previously approved structure. SBC argued that applying the moratorium to its case gave EO No. 7 retroactive effect.

The Ruling: The Date of Actual Grant Matters

The Supreme Court dismissed SBC's petition and affirmed the COA's disallowances. The Court held that the moratorium applies to the actual giving of increased salary rates, regardless of when the GOCC's salary structure was approved. As the Court explained, EO No. 7 did not merely prohibit increases in corporate salary structures; it also intended to halt the actual giving of increased salary rates.

The Court also noted that even though SBC's salary structure was approved before EO No. 7, the increases were only implemented, approved, and actually granted during the moratorium's effectivity. The Court further clarified that the power of GOCCs to fix their own salaries remains subject to the President's ultimate authority under Republic Act No. 10149 (the GOCC Governance Act of 2011), which authorizes the Governance Commission for GOCCs to fix compensation frameworks.

Who Must Return the Money?

Applying the rules from Madera v. COA and Abellanosa v. COA, the Court distinguished between two groups:

Approving and certifying officers. These officers were held solidarity liable to return the disallowed amounts because they acted with gross negligence. The Court found that EO No. 7 clearly prohibited the increases, and the officers proceeded anyway. Under Sections 38 and 43 of the Administrative Code of 1987, officers who act with bad faith, malice, or gross negligence are solidarily liable.

Payee-recipients. The employees who received the increases were held individually liable to return what they received, based on the principle of solutio indebiti (payment by mistake). The Court noted that good faith is not a defense for recipients. The exceptions under the Madera rules did not apply because the payments lacked proper legal basis and were not disallowed merely due to procedural irregularities.

Practical Takeaways

• The moratorium's timing matters. For GOCCs and GFIs, the critical date is when the salary increase is actually granted, not when the salary structure was approved. Even a pre-existing structure cannot justify increases paid during a moratorium.
• Presidential approval is required. GOCCs and GFIs cannot rely solely on their charters to fix salaries. Under RA 10149, the President, through the GCG, has authority over compensation frameworks.
• Good faith is not a shield for recipients. Employees who receive disallowed amounts may be required to return them, regardless of whether they acted in good faith.
• Approving officers face serious risk. Officers who approve or certify payments in violation of a clear moratorium may be held solidarity liable for the full disallowed amount.
• Exceptions are narrow. The Madera exceptions apply only where the benefit has a proper legal basis and was disallowed due to mere procedural defects, or in highly exceptional circumstances.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.