Wage Distortion and Formula for Correction

On the new daily minimum wage, the company should implement by:

1. Increasing the daily wages of affected workers to make them at least on the minimum amount
2. Correct if there is any wage distortion

Wage distortion means the disappearance or virtual disappearance of pay differentials between lower and higher positions in an enterprise because of compliance.

Wage distortion involves four elements:

1. An existing hierarchy of positions with corresponding salary rates
2. A significant change in the salary rate of a lower pay class without a concomitant increase in the salary rate of a higher one
3. The elimination of the distinction between the two levels
4. The existence of the distortion in the same region of the country

As defined, there are two possible effects in the increase in the wage rates:

1. Elimination or
2. Severe contraction of intentional quantitative differences in wage or salary rates

There is elimination if the difference in salary between the employees mentioned in the definition is removed. While there is severe contraction of intentional quantitative difference when the former gap in salary between affected employees is severely reduced.

It is severely reduced if the gap shrinks by more than 50%.

Is the employer obliged to correct wage distortion regardless of its cause?

No. It is clear in Article 124 of the Labor Code that it is only when the “prescribed wage increase by virtue of a law or wage order issued by the Regional Board results in distortions” that the correction is in order.

Further, the employee claiming that his salary was distorted has the burden of proving the existence of wage distortion. However, even if the employee does not claim wage distortion if the resulting wage eliminates or renders the previous salary gaps really small, it could cause demotivation among workers. This is especially so if they know each other’s salary.

There is no specific formula mandated to correct any wage distortion.

In fact, the NWPC provides only the suggested formulas for correcting the effects of the implementation of wage orders.

As to the formula to use to correct the same, it depends upon the choice agreed upon by the management and employees. Thus, closer scrutiny of the suggested formula below is highly recommended.

The Pineda Formula was authored by Mr. Marcelino Pineda, an HR Manager of Nestle Philippines. He is the former member of the RTWPB-IV or the CALABARZON area.

His method provides pay increases for higher-paid employees at a decreasing rate.

Wage Distortion Adjustment = Previous Minimum Wage / Wage of Employee

Mandated x Wage Increase

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