Bank Right of Set-Off Against Payroll Accounts in the Philippines

(A comprehensive legal-practitioner’s note)

1. The Setting: What Exactly Is a “Payroll Account”?

Operational description.
- A payroll account is an account opened primarily for the receipt of wages, salaries, 13-month pay and other monetary benefits from one identified employer.
- In practice the employer signs a “payroll services agreement” with a bank; individual employees sign a depository (and usually ATM) agreement with the same bank.
- Because employees—not the employer—become the depositors, the account is legally the employee’s personal deposit once funds are credited, not a trust fund held for the employer.
Regulatory tags.
- Bangko Sentral ng Pilipinas (BSP) classifies them as “Basic Deposit Accounts” if they meet the ≤ ₱5-k maintaining balance rule (BSP Circular No. 992, 06 Feb 2018) or as “Regular Demand Deposits (Individual)” under the Manual of Accounts.
- Nothing in current BSP rules expressly immunizes payroll accounts from set-off. Protection, if any, must therefore be found elsewhere.

2. Two Sources of a Bank’s Power to Set-Off

Source	Text	Essential requisites
Legal compensation (Civil Code arts. 1278–1290)	“When two persons are mutually creditor and debtor of each other, their obligations are extinguished to the concurrent amount.”	(a) both debts due and demandable; (b) sums of money or fungibles; (c) same capacity; (d) not subject to retention/controversy; (e) neither arises from deposit or commodatum (art. 1287)
Contractual offset (deposit contract + bank’s terms & conditions)	Standard clause: “The Bank may, without prior notice, set-off or apply the balance of any account against any obligation owing to the Bank.”	Valid so long as: (a) not contrary to law/morals/public policy; (b) clearly accepted by depositor; (c) exercised in good faith; (d) deposits not exempt under special law

Effect of article 1287 (“no compensation with deposit”): A bank deposit is a simple loan (Supreme Court, Gamboa v. PCGG, G.R. No. 12111, 23 Apr 2014; Consolidated Bank v. CA, G.R. No. 138569, 21 Feb 2003). Ownership passes to the bank, so the Civil Code treats the relationship as debtor–creditor, not “deposit” in the strict sense. Hence art. 1287 does not bar set-off of ordinary bank deposits.

3. Special Statutes Touching Payroll Funds

Statute / Rule	Key provision	Relevance to set-off
Labor Code (Art. 113, “Deductions from Wages”)	Employer may deduct wages only for enumerated items and with employee consent.	Governs employer, not bank; once credited, funds are employee’s property, outside Art. 113.
Wage Protection Rule (Labor Code Art. 1708; jurisprudence: Odango v. NGCP)	Wages “shall be exempt from execution” except for debts incurred for food, shelter, clothing & medical attendance.	Covers judicial execution, not bank self-help set-off.
General Banking Law of 2000 (RA 8791 §29)	Allows banks to “charge to any deposit” money “due and payable” to the bank, unless prohibited by law or agreement.	Provides statutory backbone for contractual offset clauses.
BSP Circular No. 760 (2012), §2(j)	Requires 30-day notice to depositor before imposing new fees on payroll accounts.	By analogy, good-faith notice of impending set-off is a best practice, though not mandatory.
Data Privacy Act of 2012	Releasing payroll-related personal data requires employee consent.	No obstacle to set-off itself, but banks must avoid over-disclosure in notices.

4. Philippine Case Law on Bank Set-Off (Selected)

Case	G.R. No. / Date	Doctrine elaborated
Consolidated Bank & Trust Co. v. CA	138569 / 21 Feb 2003	Bank may unilaterally set-off matured loan against depositor’s account even without prior demand, because the very act of offset is a form of payment.
Bank of the Phil. Islands v. Spouses Reyes	166223 / 14 Oct 2015	Set-off clause is valid; bank liable only if it offsets contested or future obligations.
Equitable PCI Bank v. Encila	167942 / 14 Dec 2009	Depositor may recover if the loan is not yet due, or amount offset is greater than debt.
DBP v. Pueblo de Oro Dev. Corp.	194851 / 24 Jan 2018	Mutuality must exist: bank cannot offset corporate debt against officers’ personal deposits.

Observation: None of the reported decisions involved a pure “payroll account”; the Court treated all individual deposits alike. This absence of carve-out implies that payroll character alone is not a shield.

5. Are Payroll Accounts “Exempt” Deposits?

They are not trusts or escrow funds.
- Once salary is credited, title transfers to the employee–depositor; the funds are commingled with the bank’s assets.
They are not like statutory accounts protected by law.
- Compare with SSS pension deposits, which enjoy limited protection under the Social Security Act. No similar clause exists for salaries.
Policy-based argument (unsettled).
- Employee wages enjoy constitutional preference (Art. III, sec. 18 and Art. XIII, sec. 3). A creative litigant may argue that offset undermines social justice, but no case yet accepts that view.

6. Practical Compliance Guide for Banks

Step	Good-practice action	Why it matters
1	Verify maturity of the employee’s loan or credit-card account.	Set-off limited to “due and demandable” debts.
2	Give prior written notice (e-mail/SMS + statement annotation).	Not strictly required by §29, RA 8791, but minimizes litigation.
3	Exclude amounts clearly identified as Government-mandated benefits (e.g., SSS, PhilHealth, Pag-IBIG refunds) if contract so provides.	Many payroll MOAs already designate these as “non-offsettable.”
4	Record the debit as “offset” and reference the loan account.	Ensures traceability for BSP on-site exam.
5	Maintain 24-hour “undo” window where erroneous offset can be reversed without clearing delays.	Mitigates operational and reputational risk.

7. Remedies Available to Employees

Civil action for sum of money (RTC or MTC depending on amount) plus damages under Civil Code arts. 1170 & 1176.
Complaint with BSP-Financial Consumer Protection Department (if the issue is abusive or misleading practice).
Labor-standards money claim against employer only if the employer directed the bank offset or colluded.
Punitive relief under Art. 32, Constitution for deprivation of property without due process—rarely successful because set-off is contractual.

8. Comparative Sidebar (Quick Look)

Jurisdiction	Payroll bank-account offset rule
U.S. (Regulation E)	Set-off allowed but cannot leave account negative >60 days if deposit is federal benefit.
Singapore	MAS Guidelines treat salary accounts like any other unless tagged Trust.
Japan	Labor Standards Act art. 24 requires wage payment in full, but once deposited banks may offset under teishi agreements.

Philippine approach aligns with Singapore/Japan: no statutory bar, contractual freedom prevails.

9. Compliance Checklist (One-Pager)

□ Loan is matured, liquidated, demandable.
□ Account holder and debtor are the same juridical entity.
□ No express contractual exemption (“no offset” clause in payroll MOA).
□ Offset amount ≤ outstanding debt.
□ Prior notice (at least 3 banking days) sent or waiver of notice in T&Cs.
□ Post-debit balance respects minimum maintaining balance (if BDA).
□ Transaction captured in core-banking audit trail.

10. Key Take-Aways

Philippine law recognizes a bank’s right of set-off and does not carve out payroll accounts from that power.
Art. 1287’s “deposit” exemption is unavailable because bank deposits are loans, not true deposits.
The only reliable shields are:
1. A contractual exclusion (either in the employer-bank payroll services agreement or the employee’s account terms).
2. Employee’s insolvency or bankruptcy proceedings where a court issues a stay.
For now, the policy debate rests on social-justice arguments; until Congress or the Supreme Court speaks explicitly, practitioners should presume that payroll deposits are fair game for set-off—subject to good-faith, transparency and proportionality.

Disclaimer: This article is for informational purposes only and does not constitute legal advice. For specific situations, consult qualified Philippine counsel.