Can Employers Charge Employees for Interest and Penalties Due to Work Errors in the Philippines

I. The Principle of Wage Protection: The Starting Point

In Philippine labor law, the protection of wages is a constitutional and statutory imperative. Article XIII, Section 3 of the 1987 Constitution mandates the State to afford full protection to labor and to regulate the relations between employers and employees on the basis of social justice. This constitutional policy is concretized in the Labor Code, particularly in the following provisions:

• Article 113 – No employer shall make any deduction from the wages of employees except in cases provided by law.
• Article 116 – Withholding of wages and kickbacks are prohibited.
• Article 117 – Deductions to ensure employment (e.g., training bonds used as de facto fines) are illegal.

The Supreme Court has repeatedly declared that wages are “sacred” and enjoy preferential protection. Any deduction not expressly authorized by law is presumptively illegal and constitutes criminal withholding of wages under Article 116, punishable by imprisonment and/or fine under Article 288 (now Article 302 of the Revised Penal Code as amended).

II. What Deductions Are Expressly Allowed by Law?

The Labor Code and its Implementing Rules enumerate an exhaustive list of permissible wage deductions:

1. SSS, PhilHealth, Pag-IBIG contributions
2. Withholding tax
3. Union dues (with individual written authorization)
4. Insurance premiums (with employee consent)
5. Debts owed to the employer where the employee is a member of a cooperative or association operated by the employer (with consent)
6. Salary loans or advances under a written agreement complying with Article 113 and DOLE guidelines
7. Court-ordered garnishments (support, debts under execution)
8. Deposits for loss or damage to tools, materials, or equipment supplied by the employer (Article 114), but only when the employee has custody and the deposit is reasonable
9. Deductions authorized by the Secretary of Labor in collective bargaining agreements or in cases of agency shop clauses

Noticeably absent from the list: any general authority to deduct for “work errors,” “negligence,” “penalties,” or “interest” on alleged damages.

III. Deductions for Actual Loss or Damage Caused by Employee Fault: The Narrow Exception

Despite the general prohibition, the Supreme Court and DOLE have recognized a limited, jurisprudence-based exception for deductions covering actual loss or damage (not penalties or interest) when all of the following requisites are concurrently present (SHS Perforated Materials, Inc. v. Diaz, G.R. No. 185814, October 13, 2010; Wesleyan University-Philippines v. Reyes, G.R. No. 208321, July 30, 2014; DOLE Handbook on Workers’ Statutory Monetary Benefits):

1. The employee must be holding a position of trust or be clearly charged with the custody and safekeeping of the employer’s money or property (e.g., cashier, warehouseman, driver issued company vehicle, collector).
2. There must be a clear showing that the loss or damage was caused by the employee’s fault or negligence (simple negligence is sufficient; gross negligence is not required for the deduction itself).
3. The employee was given written notice and a reasonable opportunity to show cause why the deduction should not be made (due process).
4. The amount deducted must correspond exactly to the actual, proven loss or damage — no more.
5. The deduction must be reasonable in amount and made in installments that do not exceed 20% of the employee’s weekly or semi-monthly salary (DOLE practice, though not expressly in the Labor Code).

If even one of these requisites is absent, the deduction is illegal.

IV. Penalties, Fines, and Disciplinary Monetary Sanctions: Absolutely Prohibited

Philippine jurisprudence is unanimous: monetary fines or penalties imposed as discipline are illegal.

• Bluer Than Blue Joint Ventures Co. v. Esteban, G.R. No. 192582, April 7, 2014 – Deductions for tardiness or absences as “penalty” were declared illegal.
• Nina Jewelry Manufacturing v. Montecillo, G.R. No. 188169, November 28, 2011 – Policy of deducting P50–P200 for infractions was struck down.
• Milan v. NLRC, G.R. No. 202961, February 4, 2015 – Deductions for uniform violations and other infractions were invalidated.

The Supreme Court has consistently held that company rules imposing monetary penalties contravene Article 113 and are void for being contrary to public policy. Discipline must be corrective, not punitive in a monetary sense. Allowed disciplinary measures are verbal warning, written reprimand, suspension, and termination — never fines.

Therefore, an employer who imposes a “penalty” on top of actual damage (e.g., “P10,000 damage + P5,000 penalty”) commits two violations: (1) illegal deduction for the penalty portion, and (2) potentially illegal deduction even for the damage portion if the requisites above are not met.

V. Interest on Damages Caused by Employee Error: Not Allowed

Charging interest on the amount of damage allegedly caused by an employee has no basis in Philippine labor law.

• Interest is allowed only in loans or forbearance of money (Article 1956, Civil Code), and even then, the rate must comply with BSP regulations and the parties must have agreed in writing.
• A damage caused by negligence is a tort or quasi-delict (Article 2176, Civil Code), not a loan. The remedy is recovery of actual damages plus, in proper cases, legal interest of 6% per annum from judicial demand (Nacar v. Gallery Frames, G.R. No. 189871, August 13, 2013).
• But that legal interest can only be awarded by a court in a civil case — never unilaterally by the employer through payroll deduction.

Thus, an employer who deducts “damage + 2% monthly interest” is committing illegal deduction and possibly usury.

VI. Common Scenarios and How the Law Treats Them

Scenario	Legality of Deduction for Actual Damage	Legality of Penalty/Interest
Cashier shortage due to negligence	Allowed if all five requisites met	Never allowed
Driver damages company vehicle (ordinary negligence)	Allowed only if driver signed accountability agreement and requisites met	Never allowed
Accountant’s error causes BIR late-payment penalty	Generally not deductible (accountant not usually “cashier-type” position); employer bears the penalty	Never allowed
Sales agent fails to collect receivable, causing loss	Not deductible (no custody of money/property)	Never allowed
Employee signs promissory note for damage + 5% monthly interest	Promissory note is void insofar as it authorizes wage deduction for interest/penalty; only actual damage portion may be valid if requisites met	Interest/penalty portion void
Company policy: “Any error = actual loss + 50% penalty + 3% monthly interest”	Entire policy void ab initio	Void

VII. Remedies Available to Employers (The Legal Alternatives)

Since unilateral deduction of penalties and interest is prohibited, employers must use lawful means to recover losses:

1. Require reasonable cash bonds or accountability agreements (allowed under Article 114 for positions involving custody).
2. Obtain third-party fidelity bonds or insurance (highly recommended for cash-handling positions).
3. File a civil action for damages under Articles 2176–2194 of the Civil Code (quasi-delict). Legal interest of 6% may be awarded from finality of judgment (or 12% if the obligation becomes a loan after demand).
4. File criminal charges if the act constitutes estafa through negligence or abuse of confidence (Article 315[1][b], Revised Penal Code).
5. Impose administrative sanctions, including termination for gross and habitual negligence (Article 297[b], Labor Code).
6. With employee consent, enter into a salary deduction agreement for actual damages only, in reasonable installments (DOLE Explanatory Bulletin on Deductions for Loss/Damage, 1998).

VIII. Remedies for Employees Subjected to Illegal Deductions

1. File a complaint for illegal deduction/money claims with the DOLE Regional Office (within 3 years).
2. If the amount exceeds P5,000 or involves reinstatement, file with the NLRC Labor Arbiter.
3. Criminal complaint for violation of Article 116 (withholding of wages) and/or Article 291 (money claims).
4. Claim moral and exemplary damages plus 10% attorney’s fees if bad faith is shown.

The employer will be ordered to refund the illegal deductions with legal interest of 6% per annum from date of deduction until fully paid.

IX. Conclusion

Under Philippine law, employers cannot charge employees interest or penalties for work errors, whether by payroll deduction or any other means. They may recover only the actual, proven loss or damage, and only when the employee holds a position of trust, due process is observed, and the other strict requisites laid down by the Supreme Court are satisfied. Any company policy or practice that imposes monetary penalties, fines, or interest on employee errors is void and exposes the employer to labor claims, criminal prosecution, and civil damages.

The law prioritizes the employee’s right to full wages while still giving employers reasonable protection through bonds, insurance, and judicial remedies. Attempting to shortcut the process by imposing penalties or interest is not only ineffective — it is illegal.