Permissible Deductions from Back Pay in the Philippines
(Statutory foundations, jurisprudence, and practical guidance as of 29 April 2025)
Back pay (also called final pay or back wages) is the total monetary amount an employer must release to an employee upon separation or after a finding of illegal dismissal. In both settings, the sum is gross compensation. It becomes net pay only after legitimate deductions have been taken. Everything not expressly allowed by law or jurisprudence is prohibited.
1. Core Legal Sources
| Instrument | Key points on deductions | Notes |
|---|---|---|
| Labor Code of the Philippines (Pres. Decree 442, as renumbered by R.A. 10395) | Art. 113 (now 117): lists deductions allowed from wages. Art. 116 (now 120): declares unlawful the withholding of wages except as permitted. Art. 118 (now 122): forbids retaliation for wage complaints. | Applies in toto to back wages because they are still “wages” under Art. 97(f). |
| Tax Code (NIRC), BIR Regs. | Back wages and regular allowances are taxable compensation income; separation pay due to involuntary causes (e.g., redundancy, closure, sickness) is tax-exempt under §32(B)(6)(b). | Revenue Regs. 10-2008, 8-2018, 13-2020 refine the withholding rules. |
| Social Legislation (SSS Law, PhilHealth Law, Pag-IBIG Fund Law) | Mandates employer and employee contributions while there is an employer-employee relationship. For illegally-dismissed workers, SC treats back-wage period as continuous employment, so statutory contribution shares must be recomputed and withheld from the award. | |
| Civil Code (Arts. 1278-1290, 1706) | Legal compensation (offsetting) is not allowed against wages unless “for advances made on the same” or “as authorized by law.” | |
| 2018 DOLE–BIR–SSS–PhilHealth–Pag-IBIG Joint Circular on Final Pay* | Requires release of final pay within 30 days and enumerates the only legitimate deductions. | |
| NLRC, CA & Supreme Court jurisprudence | Develop the finer rules—e.g., Austria v. NLRC, Arriola v. Pilipino Star, PNCC v. NLRC, Clark Development Corp. v. Leviste, Seagull Maritime v. Dee, NPC v. Angas, Soriano v. NLRC, Metro Transit v. NLRC, Santos v. Servier. |
2. The General Rule
No deduction may be made from back pay unless the law, a valid regulation, a final judgment, or the employee’s written, informed and uncoerced authorization allows it. The burden of proof rests on the employer.
3. Enumerated Permissible Deductions
Withholding Tax on Compensation (WTC).
- Basis: NIRC § 79; BIR RR 8-2018.
- Mechanics: Tax on back wages is recomputed year-by-year as though the employee had received the pay when originally due. Use the graduated rates in force for those years (i.e., TRAIN 2018, CREATE 2021, etc.).
- Common pitfall: Over-withholding a single lump-sum tax → refund or credit is required.
Employee’s Share in Government Contributions.
- SSS, Pag-IBIG, PhilHealth, plus ECC where applicable.
- Contribution tables prevailing during each covered month/year govern the computation.
- For employees separated for a valid cause without illegal-dismissal finding, contributions stop on the actual date of separation; hence, no further deduction.
Salary Loans or Legitimate Cash Advances Owed to the Employer.
- Pre-conditions:
- a documented loan agreement or voucher;
- written authorization (Art. 113 [a]);
- the deduction must not exceed the outstanding principal and agreed interest;
- the net take-home pay must not fall below the applicable daily-wage floor for each period recreated.
- Case law: NPC v. Angas allowed offsetting of a motor-vehicle loan where the employee had expressly consented in writing.
- Pre-conditions:
Union Dues and Agency Fees (if the employee belongs to the bargaining unit and the CBA so provides).
- Legal anchor: Art. 113 [b].
- Pro-rate the dues per month of back wages.
Employee-Authorized Payments to a Third Party.
- Examples: insurance premiums, cooperative amortizations, private loan payments.
- Must be covered by current (not revoked) written authorizations dated before or during the back-wage period.
Court-Awarded Attorney’s Fees or Judgment Liens.
- Labor tribunals typically award 10 % of the monetary judgment to counsel.
- The fee is deducted after tax and mandatory contributions, unless the decision specifies otherwise.
Valid Disciplinary Fines or Restitution of Losses proven in a separate proceeding with observance of due process and expressly authorized for wage deduction by the NLRC, DOLE, or a CBA.
- Example: an NLRC decision ordering refund of unliquidated cash advances, or a CBA clause on shortage fines for cashiers.
4. What Cannot Be Deducted
| Prohibited Item | Why it is disallowed |
|---|---|
| Unliquidated “estimates” of damages or shortages | Violates Art. 116; lacks due-process determination. |
| Company-property losses attributed to negligence without an NLRC/DOLE or court finding | Same reason; see PNB v. Velasco (SC). |
| Charges for training costs or bonds absent a prior written undertaking specifying liquidated damages | SC treats them as in terrorem clauses if not reasonably related to actual loss. |
| Penalties or fines imposed after the dismissal | Back wages look backward; only infractions during employment matter. |
| Employer’s share of SSS, PhilHealth, Pag-IBIG | Statutorily the employer’s burden. |
| Any deduction that pushes net take-home pay below SMW for the recreated periods | Art. 113 last paragraph. |
| Set-off of unrelated business debts (e.g., credit-card bills with a sister company) | Not “advances made”; no nexus to employment. |
5. Special Topics & Nuances
5.1 Separation Pay vs. Back Wages
- Separation pay (Art. 298-299) is tax-exempt when the separation is due to authorized causes (redundancy, retrenchment, etc.). Therefore, do not deduct taxes or contributions from separation pay; only voluntary deductions with prior written authority are possible.
- Back wages are taxable; the employee’s share of SSS/Pag-IBIG/PhilHealth applies.
5.2 Illegal Dismissal Awards Issued Net-of-Deductions
The NLRC or the courts sometimes state that the award is “less legal deductions.” This authorizes only the items in Section 3 above—nothing more—unless the decision lists them.
5.3 Wage-Order Increases during the Back-Wage Period
Compute back wages year-by-year using the wage rates and COLA in effect during each period. The same timeline governs tax brackets and contribution tables; therefore the deductions follow suit.
5.4 Interest on Monetary Awards
Interest (currently 6 % per annum, simple) runs on the net amount after deductibles, per Nacar v. Gallery Frames and numerous labor cases.
5.5 Quitclaim Scenario
When parties execute a quitclaim, it commonly details which deductions were applied. The quitclaim does not legalize otherwise unlawful deductions; but it creates a presumption of voluntariness that the employee must overcome with vitiated consent evidence.
6. Step-by-Step Computation Guide
- Determine gross back pay (and, separately, separation or retirement pay if any).
- Reconstruct the monthly compensation schedule covering the back-pay period.
- For each month (or payroll period):
- Compute WTC using the tax table valid that month.
- Compute SSS, Pag-IBIG, PhilHealth employee shares.
- Factor in union dues or other authorized deductions.
- Add statutory interest, if awarded, on the decreasing balance.
- Apply attorney’s fees (usually 10 %) on the net-of-tax, net-of-contribution subtotal, unless the decision says “total award.”
- Prepare a detailed pay slip / computation sheet for transparency.
7. Employer Compliance Checklist
- Collect documentary evidence of every proposed deduction.
- Secure fresh written authorizations if originals are missing.
- Use correct historical tax and contribution tables (TRAIN, CREATE, etc.).
- Issue BIR Form 2316 covering recomputed taxable years; file amended Alpha Lists if needed.
- Remit government contributions with retroactive premium payments and penalties (SSS R-5, PhilHealth RF-1, Pag-IBIG M1-1).
- Release net pay within 30 days of finality of judgment or separation date, per Joint Circular.
- Provide an itemized statement to the employee.
8. Penalties for Illegal Deductions
- Labor Code Art. 302 (penal provisions): fine of ₱1,000-₱10,000 and/or imprisonment of 3 months-3 years.
- Moral and exemplary damages may be awarded if deductions were in bad faith.
- Administrative liability for corporate officers under DOLE Visitorial powers.
9. Frequently-Asked Questions
Q 1: Can the employer offset the cost of a laptop lost by the employee during the back-wage period?
A: Only if (a) loss occurred before dismissal, (b) a proper investigation established fault, and (c) deduction is expressly authorized by the NLRC or by the employee in writing.
Q 2: Are 13th-month pay and service incentive leave conversions subject to the same deductions?
A: Yes. They are part of “wage-related benefits,” hence taxable and subject to government contributions where thresholds are met.
Q 3: Must the employer still pay its own share of SSS, etc. for the back-wage period?
A: Absolutely. The employer must remit both shares plus surcharges; only the employee’s share is deductible from back pay.
Q 4: If the employee already paid the loan after dismissal, can the employer still deduct it?
A: No. There is nothing to offset; doing so would be an unlawful deduction and a form of unjust enrichment.
Final Word
The permissible deductions from back pay in the Philippines boil down to a simple formula: tax, statutory contributions, debts expressly authorized by law or the employee, and court-awarded fees or liens—nothing else. Deviations expose the employer to criminal, civil, and administrative sanctions. As computations can become intricate (especially across multiple tax regimes), both employers and employees should keep meticulous records and, when necessary, obtain professional legal or tax assistance.