Separation Pay Calculations in Government Agencies: Insights from a Recent Supreme Court Ruling

The Supreme Court recently settled important questions on how separation pay should be computed for employees of government-owned and controlled corporations (GOCCs), and who bears liability when such payments are disallowed by the Commission on Audit (COA). The ruling in National Transmission Corporation v. Commission on Audit (G.R. No. 246173, June 22, 2021) clarifies that the "rounding-off" method—treating six months or more of service as one whole year—has no legal basis in the government sector, even if it is allowed for private employees. The case also provides guidance on when approving and certifying officers may be excused from refunding disallowed amounts.

Background of the Case

The National Transmission Corporation (TransCo) was created under Republic Act No. 9136, the Electric Power Industry Reform Act of 2001 (EPIRA), to handle the country's electrical transmission functions. When TransCo's operations were privatized through a concession agreement with the National Grid Corporation of the Philippines (NGCP), many TransCo employees were separated from service effective June 30, 2009.

To address the separation, TransCo's Board of Directors issued resolutions granting separation pay computed using this formula: Basic Salary x Length of Service x 1.5. The board also adopted a rule that a fraction of one year—equivalent to six months or more—would be considered one whole year of service.

The COA Disallowance

When the COA audited the disbursements, it issued several Notices of Disallowance totaling about P51.99 million. The disallowances covered two categories: (1) payments to contractual employees whose service agreements stated they were not entitled to government separation benefits, and (2) excess payments resulting from the rounding-off of the length of service, amounting to about P1.49 million.

The COA Proper affirmed the disallowances but modified the liability. It held that payees who received the amounts in good faith need not refund them. However, it ordered the approving and certifying officers to solidarily refund the excess payments arising from the rounding-off method.

The Issue Before the Supreme Court

TransCo raised two main issues before the Supreme Court. First, whether the rounding-off of service length was a valid exercise of the board's power to grant additional benefits. Second, whether the approving and certifying officers should be held solidarily liable for the disallowed excess amounts.

The Ruling: Rounding-Off Is Invalid in Government Service

The Supreme Court ruled that the rounding-off scheme was properly disallowed. The Court relied on its earlier rulings in related TransCo cases to emphasize that the power to grant additional benefits is not unlimited.

Under the applicable provisions of RA No. 9511 and the EPIRA, TransCo employees are entitled to separation benefits under Section 63 of the EPIRA, which provides for a separation plan of one and one-half month salary for every year of service in the government. The law also allows the TransCo Board to determine additional benefits. However, the Court emphasized that this power is not absolute.

Section 64 of the EPIRA imposes a crucial limitation: any increase in salaries, emoluments, and benefits of TransCo personnel must be approved by the President of the Philippines. Since TransCo failed to prove that the rounding-off scheme had presidential approval, the Court held that the scheme effectively increased separation benefits without legal authority.

The Court also rejected TransCo's reliance on Article 302 of the Labor Code, which allows rounding-off for retirement pay in the private sector. That provision applies only to retirement pay, not separation pay, and GOCC employees are governed by Civil Service Law and their specific charters, not the Labor Code.

Liability of Approving and Certifying Officers

On the second issue, the Court ruled in favor of the officers. Under the Administrative Code of 1987, public officers are not civilly liable for acts done in good faith in the performance of their duties. Liability attaches only upon a clear showing of bad faith, malice, or gross negligence.

Here, the Court found that the approving and certifying officers acted in good faith. They merely implemented board resolutions that were valid on their face. At the time of the disbursements in 2009 and 2010, there was no controlling jurisprudence declaring the rounding-off method illegal. The Court only settled this question in 2018. The officers had no reason to question the board's policy, especially since the board had expressly directed the TransCo President to implement it.

Practical Takeaways

• Rounding-off is a private-sector concept. The practice of counting six months or more as one whole year of service applies to retirement pay under the Labor Code, but it does not automatically apply to separation pay in government agencies or GOCCs.
• Check the governing law and charter. For GOCCs, separation benefits are governed by the specific law creating the agency, its charter, and Civil Service rules—not the Labor Code.
• Presidential approval may be required. If a GOCC board wants to grant benefits beyond what the law provides, it must check whether the enabling law requires presidential approval for any increase in emoluments or benefits.
• Good faith protects officers from refund liability. Approving and certifying officers who rely on board resolutions and existing legal opinions may be excused from refunding disallowed amounts if they acted without bad faith, malice, or gross negligence.
• The COA's role is to enforce lawful expenditures. Government funds may only be spent in accordance with law. Any disbursement lacking statutory authority may be disallowed, regardless of the good intentions behind it.

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