1) Concept and purpose

Backwages are the monetary relief awarded to an employee who was illegally dismissed (or unlawfully deprived of work) to restore, as closely as possible, the income and benefits the employee should have received had the employer not committed the illegal act. In Philippine labor law, backwages are primarily restitutive (to make the employee whole), not a penalty—though they also deter wrongful dismissals.

Backwages are distinct from:

Separation pay (a substitute for reinstatement or a statutory/contractual benefit in authorized causes),
Wage differentials (shortfalls in pay while still employed),
Damages (moral/exemplary), and
Attorney’s fees (when warranted).

2) Main legal basis

The core statutory anchor is the Labor Code provision on illegal dismissal relief (now Article 294 [formerly Article 279]), which provides that an employee who is unjustly dismissed is entitled to:

Reinstatement (without loss of seniority rights and other privileges), and
Full backwages, inclusive of allowances and other benefits or their monetary equivalent, computed from the time compensation was withheld up to actual reinstatement.

A major doctrinal shift (commonly traced to the 1989 amendments and subsequent Supreme Court rulings such as Bustamante v. NLRC) is that backwages in illegal dismissal are generally “full”—meaning:

No more three-year cap, and
No deduction of earnings the employee may have obtained elsewhere during the period (the older “deduct earnings” approach is, as a rule, no longer applied to illegal dismissal backwages under the “full backwages” regime).

3) When backwages are awarded

Backwages most commonly arise in these scenarios:

A. Illegal dismissal (including constructive dismissal)

If dismissal is void for lack of just/authorized cause or due process, backwages are awarded as a matter of course, together with reinstatement or separation pay in lieu of reinstatement (depending on feasibility).

B. Illegal suspension / illegal preventive suspension / unlawful withholding of work

Where the employee is improperly barred from working, tribunals may award backwages for the period the employee was unlawfully prevented from working, even if the employment relationship later continues.

C. Reinstatement pending appeal (labor arbiter decision)

Under the Labor Code rule on immediate executory reinstatement of a labor arbiter’s reinstatement order, the employer must reinstate the employee even while appealing, either:

Actually (return to work), or
In the payroll (pay wages without requiring work).

If the case is later reversed, jurisprudence has developed a strong tendency toward the “no refund” rule for amounts paid by reason of mandatory reinstatement pending appeal: wages paid under a legally compelled reinstatement order are generally treated as payments made by force of law, not recoverable from the employee.

4) What “backwages” includes

The statutory phrase “inclusive of allowances and other benefits or their monetary equivalent” is broad, but not limitless. The controlling idea is: include what the employee would have regularly received as part of compensation and legally/contractually assured benefits, had the employee not been illegally dismissed.

Typically included (subject to proof and classification)

Basic salary (daily/monthly rate) for the covered period
Legally mandated wage increases that took effect during the period (e.g., minimum wage orders, wage distortions/adjustments)
COLA (cost of living allowance), when applicable
Regular allowances that are part of compensation (e.g., fixed monthly allowances treated as wage, or allowances integrated into wage by policy/practice)
13th month pay, proportionate per year covered
Holiday pay (if the employee is entitled to it under the rules applicable to their category)
Service incentive leave (SIL) pay, typically in its monetary equivalent (commonly 5 days/year) if the employee would have accrued it and is not excluded by law
Premium pay (e.g., rest day or special day premiums) if the employee’s work pattern and entitlement are established (not assumed)
Commissions and incentives that are integral to wage and reasonably determinable (e.g., sales commissions with historical basis)

Sometimes included, depending on the evidence

Bonuses: If a bonus is shown to be regular, contractual, or company-practice-based such that it has become demandable (not purely discretionary), it may be included or awarded as part of monetary equivalent of benefits.
Guaranteed profit share / fixed benefit: If contractually promised and not contingent in a way that makes it speculative.

Commonly excluded (or carefully scrutinized)

Purely discretionary bonuses (those clearly dependent on management prerogative and not shown to have become demandable by consistent practice)
Speculative or uncertain incentives without a reliable basis for computation
Reimbursements (e.g., meal/transport reimbursements that merely repay expenses and are not part of wage)
Fringe benefits not shown to be part of wage or demandable benefit, or benefits whose grant depends on conditions not proven to have been met
Overtime pay not proven by work records/pattern (overtime is not presumed)

Practical note on proof: Even if a benefit is legally cognizable, labor tribunals generally require a factual basis to compute it (pay slips, company policy, CBA, employment contract, established practice, sales records for commissions, etc.). Benefits that cannot be computed with reasonable certainty are often denied or limited.

5) The time period covered: start and end points

A. Start: when compensation was withheld

Backwages typically start on the date of dismissal (or the date the employee was effectively deprived of work/compensation, as in constructive dismissal).

B. End: depends on the relief and events in the case

If reinstatement is actually implemented: Backwages run up to actual reinstatement (the day the employee returns to work and is again paid as an employee).
If payroll reinstatement is implemented (pending appeal or after finality): Backwages generally stop once the employee is placed on payroll and receives wages for the period, because compensation is no longer “withheld” for that period.
If reinstatement is ordered but becomes impossible or is no longer viable, and separation pay is awarded in lieu: A common approach is:

Backwages up to finality of the decision ordering separation pay in lieu of reinstatement (because reinstatement—hence the endpoint “actual reinstatement”—will never occur), and
Separation pay computed separately (see Section 8).

If the employee dies during litigation: Awards may still be computed up to the legally appropriate endpoint, then become part of the employee’s estate/succession claims, subject to rules on survivability of claims and substitution.
If the employee is validly terminated later for a different cause (rare in illegal dismissal posture): End date may be adjusted if a supervening legitimate termination event is established.

6) General computation method (step-by-step)

The standard computation is best understood as:

Backwages = (Basic wage for period) + (wage-related statutory adjustments) + (monetary equivalent of benefits and allowances due for period)

Step 1: Fix the covered period

Identify the start date (dismissal/withholding) and the end date (actual reinstatement, payroll reinstatement start, or finality if separation pay in lieu is awarded, depending on the case).

Step 2: Determine the applicable wage rate(s)

Use the employee’s latest wage rate at dismissal, then apply:
- Statutory wage increases during the period, and/or
- Proven contractual/company-wide increases that the employee would have received.

If the employee was paid daily, compute by workdays (or by the accepted divisor in the workplace), and incorporate legal holiday rules only if applicable. If monthly, compute by months covered.

Step 3: Compute basic pay component

Daily-paid: daily rate × number of payable days in the period
Monthly-paid: monthly salary × number of months (and fraction of month)

Step 4: Add wage-linked items

Depending on the employee’s entitlement and proof:

COLA: COLA rate × covered days/months
Regular allowances treated as part of wage: add per month/day as applicable.

Step 5: Add 13th month pay (pro-rated per year)

Common formula:

For each calendar year covered: 13th month due = (total basic salary earned in that year) ÷ 12 If partial year, base it on that year’s basic salary that would have been earned during the covered portion.

Step 6: Add SIL pay (if applicable)

Commonly:

SIL pay per year = daily rate × 5 days Pro-rate if the covered period is less than a year, unless the workplace policy grants more.

Step 7: Add other benefits proven

Holiday pay, premium pay, commissions, CBA benefits, regular bonus, etc., as warranted.

Step 8: Consider lawful offsets (limited)

Under the “full backwages” doctrine in illegal dismissal, earnings elsewhere are generally not deducted. Also, if the employer already paid certain amounts during the covered period (e.g., through payroll reinstatement), those payments are not “deducted” as mitigation; they simply mean wages were not withheld for that period.

7) Worked examples (simplified)

Example 1: Monthly-paid employee, reinstated

Monthly salary at dismissal: ₱30,000
Dismissed: January 15, 2024
Reinstated: July 14, 2024
No proven wage increases; no special allowances
Include 13th month pay proportionate

Covered period: 6 months (approx.) Basic pay: ₱30,000 × 6 = ₱180,000

13th month (for 2024 covered basic salary): Total basic salary for the covered months = ₱180,000 13th month = ₱180,000 ÷ 12 = ₱15,000

Backwages (simplified): ₱180,000 + ₱15,000 = ₱195,000 (Still subject to additions if SIL/allowances/other benefits are proven and applicable.)

Example 2: Daily-paid employee with wage increase mid-period

Daily rate at dismissal: ₱610
Wage order raised it to ₱645 effective March 1, 2024
Dismissed: February 1, 2024
Reinstated: May 31, 2024
Assume 26 workdays/month for simplicity (actual computation may differ by workplace practice and rules)

Covered days: Feb: 26 days × ₱610 = ₱15,860 Mar–May: 26×3 = 78 days × ₱645 = ₱50,310 Basic pay subtotal = ₱66,170

13th month (basic salary earned ÷ 12): ₱66,170 ÷ 12 = ₱5,514.17

Backwages (simplified): ₱71,684.17 (Plus SIL, holiday pay, COLA, etc., if applicable and proven.)

8) Backwages vs. separation pay in lieu of reinstatement

When reinstatement is not feasible (strained relations in appropriate cases, closure, redundancy of position, supervening circumstances), tribunals may award separation pay in lieu of reinstatement. This is separate from backwages.

Typical separation pay computation (general labor standards reference)

Often expressed as:

One month pay per year of service (or a fraction thereof, usually ≥6 months counted as 1 year), though the exact rate can vary depending on whether it is statutory separation pay for authorized causes, equitable separation pay, or CBA/contract terms.

Key point:

Backwages compensate for the period the employee should have been paid but was not due to illegal dismissal.
Separation pay in lieu of reinstatement compensates for the loss of employment when returning to work is no longer ordered/possible.

9) Special situation: Overseas Filipino Workers (OFWs)

For OFWs illegally dismissed before contract completion, the monetary relief is often framed as salaries for the unexpired portion of the contract (and related statutory remedies), rather than “backwages” in the domestic Article 294 sense—though functionally it serves a similar restorative purpose. Supreme Court rulings over time have shaped whether limitations (like fixed-month caps) apply; the prevailing doctrine has generally moved toward allowing recovery tied to the unexpired portion, subject to the governing statute and the contract and the specific timing of the case.

10) Interest, attorney’s fees, and execution considerations

A. Legal interest

Monetary awards in labor cases may earn legal interest, typically running from finality (or from the time the amount becomes due and demandable, depending on the nature of the award and prevailing rules on interest in judgments). Computation practices can differ based on the exact characterization of the obligation and the ruling’s directives.

B. Attorney’s fees

Attorney’s fees (often up to 10%) may be awarded when the employee was compelled to litigate to recover wages/benefits, but they are not automatic; they must be justified by the decision.

C. Reinstatement pending appeal: payroll vs actual reinstatement

If the employer chooses payroll reinstatement, the payroll amounts paid are not “backwages”; they are current wages paid by legal compulsion during appeal. If later reversed, jurisprudence generally disfavors requiring employees to refund them.

11) Tax and deductions (high-level)

Backwages are typically treated as compensation income in character, while moral and exemplary damages are generally treated differently from compensation. The tax treatment can depend on how the award is itemized (e.g., backwages vs damages vs separation pay) and on prevailing tax rules and exemptions. In practice, parties often seek clarity during execution or settlement to properly allocate and document amounts.

12) Common disputes in computation (what parties fight about)

Endpoint: actual reinstatement vs finality vs payroll reinstatement date
Coverage of salary increases: whether increases were mandatory/proven to apply
Inclusion of benefits: whether bonuses/allowances are demandable and quantifiable
Work pattern items: overtime, holiday pay, premium pay—often denied if not proven
Employee classification: monthly-paid vs daily-paid, field personnel exclusions, managerial exclusions affecting certain benefits
Net vs gross: withholding/tax handling and proper itemization

13) Practical checklist for computing backwages (Philippine setting)

To compute credibly, gather:

Employment contract and latest pay slips (to fix wage rate and allowances)
Company policies, CBA provisions, bonus/incentive rules
Proof of statutory wage adjustments applicable to the location/industry
Payroll records showing typical workdays and pay structure
Sales/commission records (if applicable)
A timeline: dismissal date, decisions’ dates, reinstatement/payroll reinstatement dates, finality date, execution milestones

Then compute in layers:

Basic pay for the covered period
Statutory/contractual increases during the period
Allowances integrated into wage
13th month (and other legally due benefits)
SIL (and other leave conversions, if applicable)
Add proven, demandable variable pay (commissions, etc.)
Apply interest and attorney’s fees only as ordered

Backwages in Philippine labor law are “full” and benefit-inclusive in concept, but still evidence-driven in execution: the broader the claim (bonuses, commissions, premiums), the more the outcome depends on what can be shown to be demandable and computable under law, contract, and established practice.