Supreme Court strikes down ‘unfair’ settlements with employees

November 14, 2024 | 8:00pm

MANILA, Philippines — The Supreme Court has ruled that compromise agreements and settlements between employers and employees that are “not reasonable” due to excessively low amounts are invalid.

In a 12-page decision promulgated on May 29, 2024, the high court’s second division invalidated the compromise agreements executed by San Roque Metals Inc. (SRMI) and Prudential Customs Brokerage Services Inc. (PCBSI) with a group of illegally dismissed employees.

The case

The case involves 12 of the original 35 employees whom the Supreme Court previously declared to have been unlawfully terminated by PCBSI and SRMI. The companies had been ordered to pay the workers back wages and separation pay as compensation.

The petitioners, however, later signed separate compromise agreements, accepting settlement amounts ranging from just 5.20% to 23.42% of what they were legally entitled to. 

The Executive Labor Arbiter noted in each agreement that the settlements would not affect the final determination of the back wages and separation pay owed.

The two firms argued that the petitioners forfeited their right to claim the remaining amounts after accepting the settlements. 

However, the ELA, ruled that the amounts paid under the agreements should be treated as advances on the total compensation owed and not as full settlements.

When SRMI appealed this ruling, the National Labor Relations Commission (NLRC) upheld the ELA’s decision, deeming the agreements invalid due to the unreasonably low amounts offered. This prompted the firms to elevate their petition to the Court of Appeals.

The appellate court, however, sided with the employers, declaring the agreements valid because the employees had voluntarily signed them. The workers then resolved to approach the Supreme Court with a renewed petition. 

Supreme Court ruling

The Supreme Court ruled on the side of the employees, thus affirming the NLRC’s earlier ruling.

In its decision, the high court ordered SRMI and PCBSI to pay the petitioners the full amounts owed from the illegal dismissal case, less any amount they had already paid.

The court also imposed a 6% annual legal interest on the unpaid balance, effective from the date of its decision until full payment is made.

According to the high court, the following are the requirements for a quitclaim to be valid:

(1) it must be signed by the employee voluntarily; (2) there is no fraud or deceit on the part of the parties; (3) the amount stated in the quitclaim is credible and reasonable; and (4) it is not contrary to law, public order, public policy, morals or good customs.

The high court found the settlements, representing only 5.20% to 23.42% of the petitioners’ entitlements, to be grossly inadequate and unreasonable. 

The Supreme Court emphasized that while there is no fixed standard for determining reasonableness, the amounts in this case were far below acceptable levels.

“There is no exact percentage that determines the reasonableness of a monetary consideration in quitclaims and compromise agreements. In several cases, the Court has deemed settlement amounts of varying percentages to be unreasonable, which shows that the reasonableness of a settlement amount is determined on a case-to-case basis rather than through a mathematical precision,” the court’s decision read.