This article explains when and how an employer in the Philippines may deduct from an employee’s wages because of misconduct, loss, or damage, and the limits that apply. It is general information, not legal advice.

1) Core rule: wage deductions are the exception, not the norm

The Labor Code’s starting point is a prohibition on wage deductions. An employer may deduct from wages only if the deduction is:

Required by law (e.g., tax, SSS, PhilHealth, Pag-IBIG), or
Expressly authorized by the employee in writing for a lawful purpose and with the employee’s free and voluntary consent, or
Specifically allowed by regulations of the Department of Labor and Employment (DOLE).

When the basis is employee misconduct (e.g., negligence causing loss or damage), the only generally accepted route is the “loss or damage” deduction under DOLE’s Implementing Rules—and it comes with strict conditions and a hard cap (explained below).

Monetary fines and penalties taken directly from pay are not generally permitted unless they fall under an authorized deduction route. Even then, they must still comply with due process and the caps.

2) Deductions tied to misconduct: the “loss or damage” pathway

When it can apply

A deduction to cover loss of, or damage to, the employer’s property may be made only if all of the following are met:

Clear responsibility: The employee is clearly shown to be responsible for the loss or damage (e.g., cash shortage for a cashier, broken company tool due to proven negligence).
Due process: The employee is given notice and an opportunity to be heard (written notice of the facts/charge, a chance to explain/defend, and a reasoned decision).
Actual loss only: The amount to be deducted does not exceed the actual and provable loss or damage.
Fairness & reasonableness: The deduction is fair and reasonable under the circumstances.
Installment cap: In no case may the deduction exceed 20% of the employee’s wages in a week (i.e., per payroll week). This is the key maximum that typically governs deductions for misconduct-based losses.

Practical effect of the 20% cap Even if the proven loss is large, the employer may only deduct up to 20% of the employee’s weekly wages each payroll period until the amount is fully satisfied (unless a different, valid arrangement is made that does not violate the cap or other rules).

Burden of proof

The employer bears the burden to establish:

The fact and amount of the loss,
The employee’s fault or negligence, and
That due process was observed.

If proof is weak or due process is skipped, the deduction is legally vulnerable.

3) What doesn’t count as a “disciplinary deduction”

Not every reduction in take-home pay is a “disciplinary deduction.” The following are typically lawful pay computations (not penalties), provided they are done correctly:

No work, no pay: If an employee is absent or tardy, the hours not worked need not be paid. This is not a misconduct deduction—it’s simply computation of unworked time.
Statutory deductions: Withholding tax, SSS/PhilHealth/Pag-IBIG contributions, court-ordered wage garnishments (e.g., child support), etc.
Authorized non-disciplinary deductions with specific written authorization (e.g., employee-requested salary loan repayment to a bank or cooperative). These must still be lawful, voluntary, and specific (no blanket or open-ended consent), and must not reduce pay below any wage law minimums.

4) Monetary fines for misconduct vs. loss-recovery deductions

Fines/penalties (e.g., “₱1,000 fine for infraction X”) deducted from wages are generally disallowed unless they fit within a legally authorized deduction category. Most employers therefore avoid payroll fines and instead use non-monetary discipline (verbal/written warning, suspension, dismissal) or the loss/damage route where applicable.
Loss/damage deductions are not “fines”—they are restitution for a provable loss, tightly regulated and capped at 20% of weekly wages per installment.

5) Due process, documentation, and consent—what to put on file

To withstand DOLE scrutiny:

Incident records: Photos, CCTV extracts (if any), inventory reports, witness statements, and a computation sheet showing how you arrived at the actual loss.
Notices:
- Notice to explain (facts, rule violated, potential liability/deduction).
- Employee answer and/or hearing minutes.
- Decision notice (findings, amount of loss, how the deduction will be applied and capped).
Payroll application:
- Reflect the deduction as “Loss/Damage Recovery—[case ref]” with the installment amount.
- Respect the 20% weekly cap.
Written authorization?
- For loss/damage deductions made under the DOLE rules, written authorization is not a substitute for due process and does not remove the 20% cap.
- For other deductions (e.g., employee loans), use separate, specific written authorizations.

6) Special scenarios

A) Cash shortages / “cash bond” schemes

Deductions for cashier shortages are treated as loss/damage—the 20% weekly cap applies and due process is required.
Requiring deposits/bonds from employees to answer for future loss or damage is restricted by the Labor Code and DOLE regulations; employers should avoid security-deposit practices unless there is a specific legal or regulatory basis for the role/industry and DOLE compliance is ensured.

B) Uniforms, tools, equipment

Charging employees for uniforms or tools is not a misconduct deduction and raises separate “facilities vs. supplements” issues. As a rule of thumb, items primarily for the employer’s benefit (e.g., corporate uniform) are not chargeable; if ever allowed, it requires free consent, fair valuation, and must not cut into minimum wage or violate DOLE rules.

C) Overpayments and payroll corrections

True overpayments may be corrected by offsetting in subsequent payrolls, ideally with the employee’s written acknowledgment and in reasonable installments to avoid undue hardship; if the overpayment arose from employee fault causing loss, the 20% weekly cap logic likewise guides how recovery is scheduled.

D) Gross misconduct warranting dismissal

Where misconduct is serious and proven (e.g., theft, willful breach), the primary remedies are disciplinary (suspension/dismissal) and/or civil/criminal action. Payroll deduction for the value of the loss is still limited by the 20% weekly cap, and any balance is pursued outside payroll.

7) Interaction with minimum wage, OT pay, and service charges

Deductions may not reduce pay in a way that defeats minimum wage laws for hours actually worked.
Allowances, overtime pay, night shift differential, and service charges follow their own legal rules; employers must ensure any deduction does not unlawfully undercut these statutory/contractual entitlements.

8) The “20% of weekly wages” cap—how to compute

The cap attaches to the employee’s wages for a week (or the relevant payroll period treated as “a week”).
If the company pays semi-monthly or bi-weekly, many employers still compute an equivalent weekly wage to observe the per-week 20% limit, then apply the corresponding per-payout installment (e.g., two weekly caps within a bi-weekly payroll).
If the employee’s earnings fluctuate (overtime, commissions), the cap changes with earnings. In practice, employers often state the installment as “up to 20% of wages for each week/pay period” to avoid over-deduction.

Illustration

Weekly wage = ₱10,000; proven loss = ₱60,000
Max per week deduction = 20% × ₱10,000 = ₱2,000
Number of weeks to fully recover = ₱60,000 / ₱2,000 = 30 weeks (If wages rise or fall, the installment adjusts so that the deduction never exceeds 20% of that week’s wages.)

9) Common pitfalls (and how to avoid them)

Skipping due process: Even with a signed acknowledgment, DOLE may still disallow the deduction if the employee wasn’t heard.
Flat “penalty” schedules: A fixed “fine” per infraction deducted from pay is risky if it isn’t an authorized deduction and if it ignores actual loss and the 20% cap.
Blanket authorizations: Catch-all consents (“I authorize any deductions for any purpose…”) are weak and often unenforceable.
Lumping multiple items: Keep misconduct-based loss recovery separate from voluntary deductions and statutory deductions for transparency and audit.
Cutting into minimum wage or mandatory pays: Ensure computations preserve compliance.

10) Employer policy checklist (ready-to-use)

Statement of principle: The company does not deduct from wages except as permitted by law and DOLE rules.
Loss/damage rule: When loss or damage is alleged, the company will:
- Investigate, notify, and hear the employee;
- Determine actual loss and responsibility;
- Recover only the actual loss, in installments not exceeding 20% of weekly wages; and
- Document every step.
No payroll fines: Discipline is progressive (warning → suspension → dismissal). No monetary fines will be deducted from wages unless legally authorized.
Transparency: Payslips will itemize any loss/damage deduction with case reference and running balance.
Voluntary deductions: Separate written authorizations that are specific as to amount, purpose, and duration.
Protection against retaliation: Employees who contest deductions will not be retaliated against; disputes may be elevated to HR/DOLE.

11) Quick Q&A

Q: Can we deduct the full amount of a proven loss in one payout? A: Only if that single deduction is ≤ 20% of the employee’s wages for that week. Otherwise, use installments.
Q: We have a CBA/company rule imposing a monetary penalty for certain infractions. Can we deduct it? A: Treat with caution. Unless the deduction fits within a legally recognized category (e.g., loss/damage after due process) and respects the 20% cap, payroll fines are generally unsafe.
Q: Is a signed “I agree to pay for any losses” form enough? A: No. You still need to prove responsibility, show actual loss, observe due process, and respect the cap.
Q: Can we require a “cash bond” to cover future losses? A: Security deposits from employees are restricted; do not implement without a clear legal basis and DOLE compliance.

12) Bottom line

For misconduct-related payroll deductions in the Philippines, the legally safe path is loss/damage recovery—after due process, limited to actual loss, and capped at 20% of weekly wages per installment. When in doubt, discipline with non-monetary measures and pursue large claims outside payroll, rather than risking unlawful deductions.