Separation Pay Claims Amidst Company Bankruptcy

(Philippine legal perspective — updated to June 2025)

Quick take-away: Even when an employer is broke, separation pay is not automatically wiped out. Employees remain “preferred creditors,” but they must timely file money-claims in the proper forum and prove entitlement under the Labor Code. Below is a one-stop guide that pulls together the statutes, rules, case law, and practical steps you need to know.

1. Sources of Law

Category	Key Provisions
Constitution	Art. II § 18 & Art. XIII § 3 — State must protect labor and their “just share” in company assets.
Labor Code (Pres. Decree 442, as amended)	• Art. 298 (former 283) & Art. 299 (former 284): grounds & amounts of separation pay. • Art. 110: workers’ claims enjoy “first preference” in case of bankruptcy or liquidation.
Civil Code	Arts. 2241–2244: preference and concurrence of credits.
Financial Rehabilitation and Insolvency Act of 2010 (FRIA, R.A. 10142)	Governs corporate rehabilitation (§§ 13-29) and liquidation (§§ 113-131). Employees are a separate class of “preferred creditors” (FRIA § 109).
DOLE D.O. 147-15	Rules on termination due to authorized causes (implements Art. 298–299).
Rules of Court / NLRC Rules	Venue & procedure for money claims (NLRC), and Rule 101 (insolvency).

2. When Separation Pay Becomes Due

Ground for Termination	Statute	Amount
Installation of labor-saving devices, redundancy, retrenchment, closure not due to serious losses	Labor Code Art. 298	Either 1 mo. pay or ½ mo. pay per year of service (whichever is higher).
Disease	Art. 299	½ mo. pay per year of service.
Closure due to serious financial losses	Art. 298, 1st ¶, final clause	No separation pay required except if a CBA or company policy says otherwise. Proof of losses is crucial.
Bankruptcy / judicial liquidation	No special rate; same rules above govern. What changes is how you collect: see §§ 4-7 below.

Tip: Compute a fraction of a year ≥ 6 months as one full year (“≥ 6-month rule”) unless the CBA sets a better formula.

3. Bankruptcy, Insolvency & Rehabilitation — A 3-Minute Crash Course

Scenario	Statute	Forum	Who runs the company?
Out-of-court shutdown (just stops operating)	Art. 298	NLRC / DOLE	Owner/management until dissolution with SEC.
Court-supervised Corporate Rehabilitation	FRIA §§ 13-29	Special Commercial Court (SCC)	Receiver; goal is revival, not liquidation.
Liquidation (assets sold to pay debts)	FRIA §§ 113-131	SCC (if initiated), or SEC (voluntary)	Liquidator; company dies.

Employees can file parallel NLRC money-claims and lodge Proofs of Claim before the receiver/liquidator. A stay order under FRIA does not bar NLRC proceedings on money-claims; it merely suspends execution against company assets (see Air Philippines v. Bourgoin, G.R. No. 215748, 27 Jan 2021).

4. Preference & Priority of Employee Claims

Constitution & Art. 110. Wages (includes separation pay per PCL Shipping v. NLRC, G.R. No. 123366, 28 June 2000) rank first among unsecured claims.
Secured creditors with chattel / real-estate mortgages still trump workers as to the specific encumbered asset (Development Bank v. Secretary of Labor, G.R. No. 79351, 28 Jan 1991).

Inside liquidation, the Liquidator must:

Step 1 – sell mortgaged asset ⇒ pay secured creditor  
Step 2 – put any surplus into the general asset pool  
Step 3 – pay workers’ claims in full (up to surplus)  
Step 4 – distribute remainder pro rata to other creditors

If assets are insufficient, employees share pro rata. Personal liability of corporate officers applies only when there is proof of bad faith or fraud (A.C. Ransom v. NLRC, G.R. No. 70609, 13 Oct 1989, but see the narrowing in Aliling v. FEL Transit, G.R. No. 214218, 22 Jan 2020).

5. How to Assert Your Claim

Stage	What to File	Where	Deadline
Pre-rehab / ordinary closure	SENA request (optional) → NLRC Complaint	DOLE (SENA) / NLRC RAB	3 years from separation (Art. 306).
Rehab/Liquidation under FRIA	Verified Proof of Claim (Form FRIA-2)	Receiver/Liquidator; copy-furnish SCC	Within 30 days from notice of Commencement or Liquidation Order.
Execution	Motion for Writ of Execution; or participate in Liquidator’s distribution plan	NLRC Sheriff or SCC, depending on stage	Within 5 years from finality of decision.

Pointers: • Attach employment contract, payslips, company ID, SSS records, termination notice, and a Sworn Computation of separation pay. • Identify yourself as a “preferred employee-creditor under Art. 110, Labor Code.”

6. Jurisprudence to Remember

Case	G.R. No. / Date	Doctrine
National Labor Union v. Insular La Suerte	106492 • 6 Mar 1998	Closure due to bankruptcy ≠ automatic exemption from separation pay unless serious financial losses are proven.
PCL Shipping v. NLRC	123366 • 28 Jun 2000	Separation pay is treated as “wages” for Art. 110 preference.
Somerville v. NLRC	124888 • 10 Oct 2002	Employees may sue in NLRC even during SEC-administered rehabilitation; execution waits for SCC.
Air Philippines v. Bourgoin	215748 • 27 Jan 2021	NLRC jurisdiction over money claims is concurrent; stay order stops execution only.
Aliling v. FEL Transit	214218 • 22 Jan 2020	Personal liability of corporate officers hinges on evidence of bad faith.

7. Computation Cheat-Sheet

Monthly salary (basic + fixed allowances)    ₱30,000
Years of service                            12 yrs 4 mos
Ground: Redundancy   →   rate: 1 month/year

Step 1: Round service (≥ 6 mos) ⇒ 13 years  
Step 2: Separation Pay = 13 × ₱30,000 = ₱390,000

Add legal interest (6 % p.a. from judicial or extrajudicial demand until satisfaction), per Nacar v. Gallery Frames, G.R. No. 189871, 13 Aug 2013.

8. Tax & Deductions

Tax-free if separation pay is due to redundancy, retrenchment, or disease (NIRC § 32[B][6][b]).
Subject to SSS loan offsets, company advances duly documented, and statutory withholding for unresolved shortages.

9. Collective Bargaining Agreements & Company Plans

A CBA or retirement plan may prescribe better separation or retirement benefits. Under Art. 297 (Labor Code’s non-diminution rule), such superior benefits may not be unilaterally withdrawn, even in bankruptcy, unless validly renegotiated in rehab. Claims under a CBA enjoy the same Art. 110 preference.

10. Practical Guide for Employees

Gather evidence early — financial statements, closure notice, and proof of employment.
Elect a representative or form an ad-hoc committee of employees; file a collective claim to save costs.
Monitor the SCC docket for rehab/liquidation orders; all deadlines run from the publication date.
Attend the Liquidator’s meetings — you can contest asset valuations and push for prompt distribution.
Settle if feasible — partial payments through quitclaims approved by the SCC are common in rehab plans.

11. Employer & HR Checklist

To-Do	Why
File for rehab/liquidation promptly if insolvent.	Delayed filings expose directors to corporate tort liability.
Send written termination notices at least 30 days before effectivity.	Statutory due process; missing notice ≠ forfeiture of the right to close but may incur nominal damages (₱50k – ₱100k).
Prepare a Separation Pay Schedule and Proof of Serious Losses (audited FS).	Needed to reduce or eliminate liability.
Reserve for separation claims before paying ordinary creditors.	Violating Art. 110 invites personal liability.

12. Timelines & Prescription

Money claims: 3 years (Art. 306).
Unfair labor practice arising from mass retrenchment: 1 year.
Enforcement of final judgment: 5 years (NLRC Rules).

Prescription pauses during rehabilitation stay orders (BF Corp. v. Lapanday, G.R. No. 208136, 25 Nov 2015).

13. Special Situations

GOCCs/Local water districts: Government Corporate Counsel and Commission on Audit rules apply; separation benefits may require Congressional appropriation.
Export-processing zone enterprises: PEZA has no jurisdiction over money-claims; still NLRC + SCC.
Pandemic-triggered shutdowns: DOLE Labor Advisory 17-20 recognized COVID-19 as a fortuitous event, but separation pay rules remain. Employers may, however, avail of DOLE’s cash assistance programs to fund payments.

14. Frequently Asked Questions

Question	Short Answer
Can we garnish the owner’s personal bank account?	Only upon proof of bad faith / fraud, or if the business is a sole proprietorship.
Does “first preference” mean we get paid ahead of BIR taxes?	Yes. Taxes fall under Civil Code Art. 2241(1) only on specific property. General tax claims rank after workers.
Is separation pay the same as back wages?	No. Back wages compensate illegal dismissal; separation pay compensates authorized cause dismissal or impossibility of reinstatement.
Can the company pay in installments?	Only with employee consent or under a court-approved rehab plan. Otherwise, full payment upon effectivity.

15. Checklist for Liquidators & Receivers

Issue Notice to File Claims within 5 days of appointment (FRIA § 118).
Publish in a newspaper of general circulation once a week for 2 weeks.
Accept/deny Proofs of Claim within 30 days of bar date; decisions appealable to SCC in 20 days.
Prepare a Project of Distribution prioritizing employees after secured creditors.
Submit quarterly reports to SCC; final report concludes liquidation.

Conclusion

Even in insolvency, labor is not left empty-handed. Philippine law elevates separation pay (treated as wages) ahead of most creditors, but employees must assert, prove, and monitor their claims within strict timelines. For employers, failing to respect this preference risks personal liability for directors and officers. Rehabilitation may delay, but rarely defeats, legitimate separation-pay obligations.

Disclaimer: This material is for general information only and is not a substitute for specific legal advice. Consult a qualified Philippine labor or insolvency practitioner for concrete cases.