Petitioner

Osmalik S. Bustamante, Paulino A. Bantayan, Fernando L. Bustamante, Mario D. Sumonod,

and Sabu J. Lamaran
Respondent
National Labor Relations Commission, Fifth Division and Evergreen Farms, Inc.
Ponente
Padilla, J.
Docket Number and Date of Decision
G.R. No. 111651, November 28, 1996
Significance of the Case
In this landmark case, the Supreme Court (SC) ruled that backwages due an employee on
account of his illegal dismissal should not be diminished or reduced by the earnings derived
by him elsewhere during the period of his illegal dismissal.
This case finally abandoned the Mercury Drug rule and deduction of earnings elsewhere
rule then prevailing at that time.
Historical Backdrop
Prior to the present case, SC had applied different methods in the computation of
backwages.
Backwages under RA 875. Under RA 875, the Court of Industrial Relations (CIR) was given
wide discretion to grant or disallow payment of backpay (backwages) to an employee, it also
had the implied power of reducing the backpay where backpay was allowed. In the exercise
of its jurisdiction, the CIR can increase or diminish the award of backpay, depending on
several circumstances, among them, the good faith of the employer, the employees
employment in other establishments during the period of illegal dismissal, or the probability
that the employee could have realized net earnings from outside employment if he had
exercised due diligence to search for outside employment.
This method caused undue delay in the disposition of illegal dismissal cases. Cases are
usually held up in the determination of whether or not the computation of the award of
backwages is correct.
Mercury Drug Rule . In order prevent undue delay in the disposition of illegal dismissal cases,
the SC found occasion in the case of Mercury Drug Co vs. CIR, 1974, to rule that a fixed
amount of backwages without further qualifications should be awarded to an illegally
dismissed employee.
In subsequent cases (adopting the proposal of Justice Teehankee), backwages equivalent to
three years (unless the case is not terminated sooner) was made the base figure for such
awards without deduction, subject to deduction where there are mitigating circumstances in
favor of the employer but subject to increase by way of exemplary damages where there are
aggravating circumstances (e.g. oppression or dilatory appeals) on the employers part.

On 1 November 1974, the Labor Code of the Philippines took effect. Article 279 of the said
code provides:
[] An employee who is unjustly dismissed from work shall be entitled to reinstatement
without loss of seniority rights and to his back wages computed from the time his
compensation was was withheld from him up to the time of his reinstatement.
The above provision nothwithstanding, the rule generally applied by the Court after the
promulgation of theMercury Drug case, and during the effectivity of P.D. No. 442 was still
the Mercury Drug rule. In effect, this qualified the provision under P.D. No. 442 by limiting
the award of backwages to 3 years.
Deduction of Earnings Elsewhere Rule. When RA 6715 took effect on 21 March 1989, the
pertinent portion of Article 279 of the Labor Code was amended to read as follows:
[] An employee who unjustly dismissed from work shall be entitled to reinstatement
without loss of seniority rights and other privileges and to his full backwages, inclusive of
allowances, and to his other benefits or their monetary equivalent computed from the time
his compensation was withheld from him up to the time of his actual reinstatement.
In accordance with the above provision, an illegally dismissed employee is entitled to his full
backwages from the time of his illegal dismissal up to the time of his actual reinstatement.
Despite the amendment, however, in a subsequent case, Pines City Educational Center vs.
NLRC, 1993, the Court returned to the rule prior to the Mercury Drug rule that the total
amount derived from employment elsewhere by the employee from the date of dismissal up
to the date of reinstatement, if any, should be deducted from backwages.
The rationale for such ruling was that, the earning derived elsewhere by the dismissed
employee while litigating the legality of his dismissal, should be deducted from the full
amount of backwages which the law grants him upon reinstatement, so as not to unduly or
unjustly enrich the employee at the expense of the employer.
Issue
Whether or not the income derived by the employee elsewhere during the period of his
illegal dismissal should be deducted from the award of backwages.
Ruling
Conformably with the evident legislative intent of RA 6715, backwages to be awarded to an
illegally dismissed employee, should not, as a general rule, be diminished or reduced by the
earnings derived by him elsewhere during the period of his illegal dismissal.
The underlying reason for this ruling is that the employee, while litigating the legality
(illegality) of his dismissal, must still earn a living to support himself and family, while full
backwages have to be paid by the employer as part of the price or penalty he has to pay for
illegally dismissing his employee.
The clear legislative intent of the amendment in RA 6715 is to give more benefits to workers
than was previously given them under the Mercury Drug rule or the deduction of earnings
elsewhere rule.

Thus, a closer adherence to the legislative policy behind RA 6715 points to full backwages
as meaning exactly that, i.e., without deducting from backwages the earnings derived
elsewhere by the concerned employee during the period of his illegal dismissal. In other
words, the provision calling for full backwages to illegally dismissed employees is clear,
plain and free from ambiguity and, therefore, must be applied without attempted or strained
interpretation. Index animi sermo est (literally speech is the index of intention).