The Supreme Court has ruled that compromise agreements between employers and employees offering unreasonably low settlement amounts are invalid.

In a decision penned by Associate Justice Antonio T. Kho, Jr., the Court’s Second Division nullified the compromise agreements between San Roque Metals, Inc. (SRMI) and Prudential Customs Brokerage Services, Inc. (PCBSI) and a group of illegally dismissed employees.

The case involves 12 of the original 35 employees whom the Supreme Court previously declared to have been unlawfully dismissed by SRMI and PCBSI. Both companies had been ordered to compensate the employees with backwages and separation pay.

However, the employees later entered into separate compromise agreements to receive settlements from SRMI and PCBSI, representing only 5.20% to 23.42% of the backwages and separation pay they were owed.

The Executive Labor Arbiter (ELA) clarified in each agreement that the settlements would not affect the ongoing proceedings to determine the full backwages and separation pay due to the employees.

SRMI and PCBSI argued that the settlements constituted full payment, precluding the employees from claiming the remaining amounts. The ELA, however, deemed these settlement amounts as partial advances on the owed compensation.

SRMI then sought extraordinary remedies with the National Labor Relations Commission (NLRC), which upheld the ELA’s decision, finding the compromise agreements invalid due to the unreasonably low settlement amounts.

On appeal, the Court of Appeals ruled in favor of SRMI and PCBSI, holding that the agreements were valid as the employees voluntarily signed them. This prompted the employees to elevate the case to the Supreme Court.

Agreeing with the NLRC, the Supreme Court declared the agreements invalid, noting that settlement agreements or “quitclaims” — legal documents employees sign to waive their rights — must meet specific criteria to be valid. These include voluntary consent, absence of fraud or deceit, a credible and reasonable amount, and compliance with law, public policy, and good morals.

The Court found that the settlements, amounting to only 5.20% to 23.42% of the total owed, were unreasonably low. While there is no strict percentage for determining reasonableness, this case-by-case assessment showed that the amounts did not fairly compensate the employees.

The Court ordered SRMI and PCBSI to pay the full amounts owed to the employees, deducting any prior payments, with an additional 6% annual legal interest from the date of the decision until full payment is made.