Legality of Holding Salary and Commissions During a Fraud Investigation

(Philippine Jurisdiction)

Quick take-away: As a rule, wages—whether fixed salary or sales-based commissions that have already been earned—may not be withheld while an employer investigates alleged fraud. The Labor Code allows only narrowly defined deductions, and “preventive suspension” must be with pay beyond 30 calendar days. Any longer or broader holding back of pay risks money claims, moral damages, and even criminal liability for illegal withholding of wages.

1. Statutory Framework

Source	Key Provisions Relevant to Withholding
Labor Code of the Philippines (Presidential Decree 442, as amended)	Art. 102–103 – wages must be paid in legal tender not less than once every two weeks or twice a month. Art. 113 (now renumbered Art. 117) – only three kinds of deductions are allowed: 1. Taxes, SSS, PhilHealth, Pag-IBIG, etc. required by law; 2. Employee-authorized deductions (in writing, for the employee’s benefit); 3. Deductions with DOLE authorization. Art. 116 (now Art. 121) – Unlawful Withholding of Wages is a criminal offense.
Wage Rationalization Act (RA 6727) & DOLE Wage Orders	Fix the frequency and manner of wage payment for each region.
Implementing Rules of the Labor Code (Book III, Rule VIII)	Clarifies that “commission” forms part of wage when it is a predetermined percentage of sales that the employee has already generated.
DOLE Department Order No. 147-15, Series of 2015	Affirms that preventive suspension is a management prerogative only to protect company property or records, maximum 30 calendar days; if the investigation is still unfinished after 30 days, the employee must be placed on paid suspension or reinstated.

2. What Counts as “Wages”?

Basic salary – fixed amount per day/week/month.
Commissions – treated as wages if and when they become determinable and due (i.e., the sale has been closed and any conditions precedent are satisfied).
Incentive bonuses – generally discretionary unless promised in a CBA, company policy, or individual contract.

Jurisprudence:

Gopala v. Five Star Marketing (G.R. No. 207979, 5 Feb 2020) – sales commissions already earned form part of wage and cannot be unilaterally withheld.
Macasio v. Rural Bank of Montevista (G.R. No. 169218, 2 Apr 2014) – commissions are protected wage items once the employee’s right thereto becomes vested.

3. Employer Options in a Suspected Fraud Scenario

Action	Legal Limits	Practical Tips
a. Preventive Suspension	Max 30 days unpaid. Beyond that, the employee must be reinstated or paid. Purpose must be to prevent tampering with evidence, intimidation of witnesses, or further loss.	Issue a written suspension memo stating: (1) specific acts complained of; (2) basis for the 30-day limit; (3) assurance of pay if extended.
b. Payroll Deductions/Withholding	Only allowed if: • Express, voluntary written authorization by employee and deduction is for the employee’s benefit; OR • Mandated/allowed by law (tax, SSS, etc.); OR • Authorized by DOLE. No other ground exists.	Even conditional withholding pending investigation is risky. Better to pay and later seek restitution through civil suit if fraud is proven.
c. Offsetting Company Losses	Employer cannot set-off unliquidated claims against wages. Recourse is to file a civil action for damages or estafa.	Secure a quitclaim only after investigation and with DOLE concurrence to minimize future claims.

4. Procedural Due Process

Twin-Notice Rule (from King of Kings Transport & Agabon line of cases):

Notice of Charges – detailed narration, given reasonable time to answer (commonly 5 days).
Notice of Decision – states findings and penalty imposed.

Failure to observe due process does not validate holding any part of the employee’s pay—even if there is clear evidence of fraud. At most, it affects the legality of dismissal and entitles the employee to nominal damages.

5. Liability for Illegal Withholding

Back Wages & 10% Simple Interest – Art. 121.
Attorney’s Fees – usually 10% of monetary award.
Moral & Exemplary Damages – when withholding is oppressive or in bad faith (see Goodyear v. Marina Cabangon, G.R. No. 185449, 21 Jan 2015).
Criminal Penalty – fine of ₱1,000–₱10,000, and/or 3 months–3 years imprisonment under Art. 303 of the Labor Code.

6. Common Employer Missteps

Misstep	Why It Fails	Safer Alternative
“Place on indefinite unpaid suspension during the audit.”	Exceeds 30-day limit; violates Art. 102–103.	Place on paid “leave” after 30 days if needed.
“Hold last-pay and clearance until case is done.”	Last pay is still earned wage. Clearance policies cannot override law.	Release uncontested wages; retain only items expressly allowed (e.g., unreturned tools via written authorization).
“Deduct the missing amount outright from commissions.”	No prior written consent or court judgment.	File estafa or civil action; negotiate settlement.

7. Checklist for Compliance

Review employment contract & commission plan – confirm when commissions are “earned.”
Issue twin notices promptly – detail evidence, allow written explanation, conduct hearing.
Limit preventive suspension – 30 days calendar maximum, then convert to paid leave or reinstate.
Pay wages on schedule – even during investigation; keep disputed amount in a separate ledger, not from payroll.
Document everything – memos, investigation reports, accounting entries, written employee consents.
Seek DOLE advice if unsure – especially before offsetting any loss against pay.

8. Practical Guidance for Employees

Keep copies of pay slips and sales reports; these prove that commissions were earned.
If salary or commissions are withheld, send a written demand first; this is often enough to persuade the employer.
File a complaint for money claims and/or illegal suspension with the NLRC within three (3) years from cause of action.
Criminal estafa by the employee does not justify automatic wage deduction—you cannot be “fined” by the employer without court process.

9. Practical Guidance for Employers

Draft a clear commission scheme: specify that amounts are “earned” only upon full payment by the customer and absence of fraud.
Incorporate a reimbursement clause in the contract, but remember you still need a final judgment or employee consent to deduct.
Keep an internal fraud-response SOP: involve HR, Legal, and Finance to ensure time limits and due process are tracked.
Consider fidelity bonds or employee-crime insurance instead of risking illegal withholding.

10. Conclusion

The impulse to “freeze” an employee’s compensation during a fraud probe is understandable, but Philippine labor law strongly protects the timely payment of all earned wages—including commissions. Preventive suspension is a narrowly crafted tool and never authorizes indefinite or uncompensated withholding. Employers should therefore (1) pay what is due on schedule, (2) exhaust administrative due process, and (3) recover losses, if any, through proper judicial channels instead of payroll deductions.

This article is for informational purposes only and does not constitute legal advice. For specific situations, consult qualified counsel or the Department of Labor and Employment (DOLE).