Due Process, Wage Deductions, and “Company Charges” Under Labor, Civil, and Criminal Rules

Inventory discrepancies—shortages, overages, spoilage variances, missing items, unexplained shrinkage, cash-versus-stock gaps—are a recurring issue in retail, warehousing, food and beverage, logistics, and manufacturing. Employers often respond by charging employees, deducting amounts from wages, withholding final pay, or imposing discipline up to dismissal. In Philippine law, what the company suspects is not the same as what it can lawfully collect, and the method used matters as much as the outcome.

This article covers the legal framework and practical rules on (1) when an employee may be held liable for inventory discrepancies, (2) what due process must be observed, and (3) when wage deductions and “company charges” are lawful.

1) The Basic Legal Principle: Losses Are Usually Business Risks—Unless Fault Is Proven

Inventory loss is, by default, part of business risk. Philippine labor policy strongly protects wages and requires fairness in discipline. An employer may hold an employee liable for inventory shortages only when the employer can show a lawful basis—typically:

The employee’s fault or participation (dishonesty, negligence, or violation of established procedures), and
A reliable factual link between the employee and the loss (not mere assumption based on position or shift).

Collective liability (“all cashiers pay,” “everyone on shift shares,” “the store team shoulders shrinkage”) is legally vulnerable unless it can be justified under a lawful wage deduction mechanism and supported by proof and employee authorization. The safer legal posture is always individualized accountability based on evidence.

2) Distinguish the Employer’s Options: Discipline vs. Collection

When an inventory discrepancy happens, employers typically try one (or several) of these:

Administrative discipline (warning, suspension, dismissal)
Wage deduction / offset (deduct from salary, 13th month, incentives, commissions, or final pay)
Requiring a deposit (cash bond or revolving fund for possible losses)
Civil collection (demand letter; filing a civil case for damages or sum of money)
Criminal complaint (e.g., theft-related offenses, if facts support)

Each has different requirements. A practice that might support discipline may still be insufficient to justify wage deductions, and vice versa.

3) Due Process in Internal Investigations: What “Fair Procedure” Requires

A. For disciplinary action (especially suspension/dismissal)

Philippine labor law expects procedural due process in termination and serious discipline. The commonly applied standard is the two-notice rule plus a meaningful chance to be heard:

First written notice (Notice to Explain / Charge Sheet)
- States the specific acts/omissions complained of
- Identifies the relevant rules/policies violated
- Provides sufficient details (date, time, place, amounts, items, incident references)
- Gives a reasonable period to submit a written explanation
Opportunity to be heard
- This can be a conference, hearing, or meeting where the employee can respond, present evidence, and clarify facts
- The process must be real, not perfunctory
Second written notice (Notice of Decision)
- Explains the findings and basis for discipline
- States the penalty and effectivity

Key point: Even if the employer’s evidence is strong, skipping due process can expose the employer to liability for procedural defects and weaken the enforceability of consequences like deductions.

B. Standard of proof in workplace admin cases

In labor disputes, findings are commonly assessed under substantial evidence (relevant evidence a reasonable mind might accept). That said, where consequences are severe (dismissal, large monetary charges), employers are expected to show a coherent chain of evidence, not speculation.

4) When Can an Employer Deduct from Wages for Inventory Shortages?

A. The wage protection rule

Wages are protected. As a rule, an employer cannot unilaterally deduct amounts from an employee’s wages to answer for losses.

Philippine labor rules recognize deductions only in limited situations, commonly including:

Deductions required by law (tax, SSS, PhilHealth, Pag-IBIG, etc.)
Deductions authorized in writing by the employee for a lawful purpose
Deductions under a valid CBA or similar agreement consistent with labor standards
Other deductions recognized by labor regulations, subject to conditions

Inventory shortage deductions generally fall under “employee-authorized” deductions or special regulated arrangements (like deposits), and they require strict handling.

B. Written authorization is the usual cornerstone

For inventory discrepancy charges, the legally safer approach is:

A specific written authorization from the employee (not just a general clause buried in a handbook), and
Authorization given freely and after the employee is informed of:
- the amount,
- the factual basis,
- the computation,
- the deduction schedule.

A blanket policy like “cashiers agree to shoulder shortages” may be attacked as:

not a true informed consent,
potentially coercive,
and inconsistent with wage protection principles—especially if imposed as a condition of employment without real choice.

C. The deduction must be fair and limited to actual, proven loss

Even with authorization, deductions should be:

No more than the actual loss attributable to the employee’s fault
Based on verifiable records (audit trail, stock movement logs, POS reports, receiving documents, CCTV where relevant, witness statements)
Reasonable in timing and amount, and not structured to effectively penalize or impoverish the employee

D. Deductions cannot be used as penalties disguised as “charges”

Employers sometimes add “administrative fees,” “handling fees,” “interest,” “audit costs,” or “penalty charges.” These are risky. Wage deductions should generally correspond to actual loss or lawful obligations, not punitive add-ons, unless a separate lawful basis exists and the employee’s consent is clear and voluntary.

E. Minimum wage and non-diminution considerations

Even where deductions are allowed, employers must avoid arrangements that:

effectively bring pay below mandated labor standards in a manner inconsistent with wage protection rules, or
violate non-diminution of benefits principles (e.g., arbitrarily converting guaranteed compensation into a loss-sharing scheme)

5) “Deposits” or Cash Bonds for Losses: Highly Regulated and Often Misused

Some employers require employees (cashiers, warehouse custodians, property custodians) to post a cash bond/deposit to answer for possible losses or breakage. Philippine labor rules allow deposits only under narrow conditions and with safeguards. As a practical matter, deposits are frequently challenged when:

required from employees who are not truly in roles where it is customary/necessary,
withheld or forfeited without due process,
used to cover generalized shrinkage rather than specific, proven losses,
or imposed in amounts/terms that are unreasonable.

If a deposit system is used, a legally defensible setup includes:

clear written policy disclosed at hiring,
role-based justification,
proper accounting (separate ledger, not mixed with company funds),
conditions for forfeiture that require investigation and employee participation,
prompt return upon separation if no proven accountable loss exists.

6) Final Pay, Clearance, and “Offsetting”: Common Flashpoint

A. Withholding final pay to force payment

Employers sometimes refuse to release final pay, 13th month, or last salary unless the employee signs a promissory note or agrees to shoulder shortages. This is legally risky because wages are protected and releases/quitclaims signed under pressure can be attacked as involuntary.

B. Unilateral set-off is hazardous

Even if the employee owes money, offsetting against wages/final pay without a lawful deduction basis (law, regulation, or valid written authorization) can lead to claims for illegal withholding/deduction.

Best practice (legally):

If the employer wants to recover money, secure a voluntary written agreement after due process, with clear computation and installment terms.
If the employee disputes liability, the employer’s more defensible route is civil collection, not unilateral withholding.

7) Inventory Discrepancies and Dismissal: When Shortages Become Just Cause

Inventory issues can justify dismissal when they fall under recognized just causes, such as:

A. Serious misconduct / fraud / dishonesty

Examples: theft, pilferage, falsification of inventory documents, tampering with POS records, fake receiving, collusion with suppliers, “void” schemes, markdown abuse, diversion of stock.

B. Gross and habitual neglect of duty

Examples: repeated failure to follow inventory control procedures despite warnings; negligence that predictably causes losses (e.g., leaving stock unsecured, ignoring custody protocols).

C. Loss of trust and confidence (for positions of trust)

Cashiers, auditors, warehouse custodians, supervisors, and employees handling company property may be treated as positions of trust. But “loss of trust” cannot be based on mere suspicion; it must rest on:

clearly established facts, and
a showing that the act is work-related and renders continued employment untenable.

Important distinction: An employer may be able to dismiss based on proven dishonesty/negligence, yet still be unable to lawfully deduct wages unless deduction requirements are satisfied.

8) Civil Liability: When the Employer Can Sue for Damages

If wage deduction is not legally available (or the employee refuses to authorize), an employer may pursue civil remedies, typically requiring proof of:

existence of loss,
fault or breach attributable to the employee,
causation,
and the amount of damages.

However, civil suits have cost, time, and evidentiary burdens. For routine shrinkage, companies often choose internal controls and discipline rather than litigation—yet civil collection is the cleaner legal channel than forcing wage offsets.

9) Criminal Liability: When Inventory Loss Becomes a Crime

When facts support unlawful taking or misappropriation, employers sometimes file criminal complaints. This requires caution:

Criminal cases demand proof beyond reasonable doubt.
Filing as leverage for payment (without solid factual basis) can backfire and expose the employer to counterclaims or administrative trouble.

A responsible approach is to file criminal complaints only when there is credible evidence of criminal conduct (e.g., CCTV, admissions, documentary trail, witness testimony, audit logs showing falsification).

10) Evidence That Usually Matters in Inventory Discrepancy Cases

Whether the issue becomes an HR case, a labor dispute, or a court case, credible documentation often determines outcomes. Stronger cases typically include:

Inventory count sheets with signatures and clear cut-off times
Receiving reports (DR/SI), transfer slips, return-to-vendor docs
POS reports (voids, refunds, discounts, no-sale openings)
Stock cards / perpetual inventory logs
Access logs (keys, cage access, warehouse entry)
CCTV clips tied to the time window of loss
Chain-of-custody documentation for counted items
Prior written warnings and policy acknowledgments
A clear reconciliation method explaining how the “shortage” was computed

Weak cases often rely on:

“shortage happened during your shift” without more,
collective apportionment,
unexplained adjustments,
inconsistent audit practices,
or missing inventory controls.

11) Drafting and Implementing Company Policy Without Violating Wage Protections

A legally resilient policy framework generally separates:

A. Accountability rules (discipline-focused)

clear custody assignments,
required procedures (counting, sealing, turnover),
escalation steps,
sanctions for violations.

B. Recovery rules (money-focused)

clear definition of recoverable losses,
requirement of investigation and due process,
computation methodology,
voluntary authorization templates,
installment options,
and an explicit statement that no wage deduction will be made absent lawful basis.

Policies should avoid:

automatic salary deductions,
blanket “assumption of liability,”
penalty add-ons,
forced promissory notes,
or withholding wages as leverage.

12) Practical Compliance Blueprint (Employer-Side)

A process that is both workable and legally defensible often looks like:

Detect & contain: immediate variance report, secure area, preserve CCTV and logs
Reconcile properly: verify cut-off, check receiving/returns/transfers, rule out counting errors
Identify custody chain: who had access, keys, passwords, sign-offs
Issue written charge: specific shortage, basis, rule violated, required response
Conduct conference: allow explanation, review evidence, document proceedings
Decide discipline: written decision with findings
For recovery:
- compute actual attributable loss,
- present computation,
- obtain voluntary written authorization for deductions or pursue civil recovery if disputed,
- implement reasonable installment deductions consistent with wage protections.

13) Employee Rights and Lawful Pushback (Employee-Side)

An employee confronted with “company charges” for inventory discrepancies generally has the right to:

receive a written explanation of the accusation and computation,
examine or at least be informed of the basis (audit method, supporting records),
submit an explanation and evidence,
have a meaningful chance to be heard,
refuse to sign blank/unclear authorizations,
contest unlawful deductions or withholding of wages/final pay through appropriate labor remedies.

Signing documents matters. Vague statements like “I agree to pay any shortages” can be used to justify deductions, even if later challenged—so clarity and voluntariness are crucial.

14) Key Takeaways

Inventory discrepancies do not automatically equal employee liability. The employer must show a factual and fault-based link.
Due process is essential for discipline and strongly relevant to any forfeiture or recovery scheme.
Wage deductions for shortages are not freely allowed. They usually require a lawful basis—most commonly informed, voluntary written authorization tied to a proven, properly computed loss.
“Company charges” that operate as penalties, collective shrinkage sharing, or leverage through withholding wages are legally exposed.
When deductions are not lawful or are disputed, the cleaner route is civil recovery, not unilateral offset against wages.