Under the Department of Labor and Employment (“DOLE”) Labor Advisory No. 6, series of 2020 or the Guidelines on the Payment of Final Pay and Issuance of Certificate of Employment, the general rule is that employers must release the final pay within thirty (30) days from the date of separation or termination of employment, unless there is a more favorable company policy, individual or collective agreement thereto.
However, it is standard among employers to institute clearance procedures for employees whose employment has been severed, whether voluntarily or involuntarily. The clearance procedures ensure the turnover of accounts, return of company properties, and settlement of outstanding obligations before the employee's departure. In balancing the management prerogative on one hand and the rights of the employees on the other, the Supreme Court of the Philippines has already sanctioned the imposition of clearance procedures and its completion before an employer releases the employee's final pay.1
Nevertheless, it is common scenario for employers that an employee resigns with pending monetary accountabilities. How, then, can the employers ensure the settlement of these kinds of accountabilities? Can they offset the final pay with the employee's existing debts with the Company? Do they need the employee's written consent before offsetting the amount due? Does the 30-day period for releasing the final pay begin only after offsetting?
The answers to these questions lie on the nature of the employer's money claim against the employee. This is because offsetting or legal compensation only applies when both credits arise from the employment relationship.
The Applicability of Legal Compensation is Determined by the Nature of the Employer's Claim
The employee's entitlement to its final pay certainly emanates from the employer-employee relations, thus, the only matter that must be determined is the nature of the debt being claimed by the employer.
Under Article 1278 of the Civil Code, legal compensation shall take place when two persons, in their own right, are creditors and debtors of each other. Compensation takes effect by operation of law, and extinguishes both debts to the concurrent amount, even though the creditors and debtors are not aware of the compensation.2 The object of compensation is the prevention of unnecessary suits and payments thru the mutual extinction by operation of law of concurring debts.3
However, in Portillo vs. Lietz, Inc., the Supreme Court held that the difference in nature of debts prevents their automatic offsetting. In that case, the employee claimed for unpaid salaries while the employer raised the defense of legal compensation with the liquidated damages for breach of non-compete clause. In ruling against the employer's position, the Supreme Court said:
“It is clear, therefore, that while Portillo's claim for unpaid salaries is a money claim that arises out of or in connection with an employer-employee relationship, Lietz, Inc.'s claim against Portillo for violation of the goodwill clause is a money claim based on an act done after the cessation of the employment relationship. And, while the jurisdiction over Portillo's claim is vested in the labor arbiter, the jurisdiction over Lietz, Inc.'s claim rests on the regular courts.
x x x
In the case at bar, the difference in the nature of the credits that one has against the other, conversely, the nature of the debt one owes another, which difference in turn results in the difference of the forum where the different credits can be enforced, prevents the application of compensation.”
The next question would be when is a money claim deemed to arise out of or in connection with an employer-employee relationship? The Supreme Court interpreted this to mean that without the employment relationship, such money claim would have not arisen. Thus, in San Miguel Corporation vs. National Labor Relations Commission,4it was held:
“We note that petitioner's Innovation Program is an employee incentive scheme offered and open only to employees of petitioner Corporation, more specifically to employees below the rank of manager. Without the existing employer-employee relationship between the parties here, there would have been no occasion to consider the petitioner's Innovation Program or the submission by Mr. Vega of his proposal concerning beer grande; without that relationship, private respondent Vega's suit against petitioner Corporation would never have arisen. The money claim of private respondent Vega in this case, therefore, arose out of or in connection with his employment relationship with petitioner.”
Conversely, when the employer's money claim against the employee arises from sources other than the employment relationship, the final pay cannot and should not be subjected to legal compensation. As explained above, such claims fall outside the jurisdiction of labor tribunals and the employer's recourse is with the regular courts where their money claims may be appropriately lodged. Verily, it was ruled in PLDT vs.Estrañero:5
“The Court further agrees with the labor tribunals that the petitioners cannot offset the outstanding balance of the respondent's loan obligation with his redundancy pay because the balance on the loan does not come within the scope of jurisdiction of the LA. The demand for payment of the said loans is not a labor, but a civil dispute. It involves debtor-creditor relations, rather than employee-employer relations. Evidently, the respondent's unpaid balance on his loans cannot be offset against the redundancy pay due to him.”
Nevertheless, the employers may still resort to offsetting if such is expressly authorized by the employee in writing. Under Article 113 of the Labor Code, no employer, in his own behalf or in behalf of any person, shall make any deduction from the wages of his employees. However, the general rule admits an exception when the deductions are with written authorization of the employees for payment to the employer or a third person and the employer agrees to do so, provided that the latter does not receive any pecuniary benefit, directly or indirectly, from the transaction.6
Another exception is when deductions are authorized by law7 such as in the case of legal compensation when both debts arise from employment relationship. Interestingly, the requirement of written authorization is not necessary in such case.
Final Pay Can Be Offset With Claims Arising From Employment Relationship
When the employer's monetary claim against the employee springs from employment relationship, no written authorization is required since offsetting applies by operation of law. In fact, legal compensation operates even against the will of the interested parties and even without their consent. Such compensation takes place ipso jure; its effects arise on the very day on which all requisites concur.8 Under Article 1279, in order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.
In a number of cases, the Supreme Court upheld the applicability of legal compensation of employers' monetary claims against the employees' receivables.
In Logwin Air+Ocean Philippines, Inc. v. Taki,9 when the employee questioned his dismissal and claimed monetary benefits, the employer argued that there is no separation pay to settle with the employee since after offsetting loans and cash advances, it is actually the employee who still has an unpaid balance. The Court ruled in favor of the employer ratiocinating that offsetting the employee's unsettled obligations from his salary shall take place because the parties are creditors and debtors of each other in their own right.
In Cebu People's Multi-Purpose Cooperative v. Carbonilla, Jr.,10 the employer also raised as a defense against the employee's money claims the latter's unsettled obligations in the form of loans, insurance policy premiums, and cash advances. In upholding the applicability of offsetting, the Supreme Court ruled:
“On a final point, the Court notes that Carbonilla, Jr.'s award of unpaid salaries and 13th month pay were validly offset by his accountabilities to CPMPC in the amount of P129,455.00. Pursuant to Article 1278 in relation to Article 1706 of the Civil Code and Article 113 (c) of the Labor Code, compensation can take place between two persons who are creditors and debtors of each other. Considering that Carbonilla, Jr. had existing debts to CPMPC which were incurred during the existence of the employer-employee relationship, the amount which may be due him in wages was correctly deducted therefrom.” [Citations omitted. Emphasis supplied.]
In any case, employers are reminded that the total amount of the final pay must be determined first before the monetary obligations may be deducted. Under the DOLE Labor Advisory No. 6, series of 2020, the final pay, or “last pay,” or “back pay,” refers to the totality of all the wages or monetary benefits due the employee regardless of the cause of the termination of employment, including but not limited to:
(a) Unpaid earned salary of the employee;
(b) Cash conversion of unused Service Incentive Leave (SIL) pursuant to Article 95 of the Labor Code;
(c) Cash conversions of remaining unused vacation, sick or other leaves pursuant to a company policy, or individual or collective agreement, if applicable;
(d) Pro-rated 13th month pay pursuant to Presidential Decree No. 851 (PD 851);
(e) Separation pay pursuant to Articles 298-299 of the Labor Code, as renumbered, company policy, or individual or collective agreement, if applicable;
(f) Retirement pay pursuant to Article 302 of the Labor Code, as renumbered, if applicable;
(g) Income tax claim for the excess of taxes withheld, if applicable;
(h) Other types of compensation stipulated in an individual or collective agreement, if any; and
(i) Cash Bond/s or any kind of deposit/s due for return to the employee, if any.
In case there is deficiency after deducting the monetary claims from the final pay, the employer may demand from the employee the unsettled balance. If unheeded, a request for assistance may be instituted with the DOLE through the Single-Entry Approach (SEnA). The SEnA covers money claims, regardless of amount, arising from employer-employee relationship.11
In fine, subjecting the employee's final pay to legal compensation is only permissible by laws and jurisprudence when the employer's money claims arise from the employment relationship. If the money claims are derived from other sources, the employer's recourse is either enforcing the same through the regular courts or having the employee sign a written authorization for deductions.
Footnotes
1. Milan v. National Labor Relations Commission, 750 SCRA 1 (2015).
2. Article 1290, Civil Code
3.Nadela v. Engineering and Construction Corp. of Asia, G.R. No. 145259, 25 October 2005.
4. G.R. No. 80774, 31 May 1988.
5. 738 SCRA 437 (2015).
6. Section 10(b), Rule VIII of the Implementing Rules and Regulations of Book III of the Labor Code, as amended by DOLE Department Order No. 195, series of 2018.
7. Id. at Section 10(a).
8. Spouses Nisce vs. Equitable PCI Bank, Inc., G.R. No. 167434, 19 February 2007
9. G.R. No. 252259 (Notice), 26 August 2020.
10. G.R. No. 212070, 27 January 2016.
11. Section 3(b) and 3(i) in relation to Section 2(e), The Rules of Procedure of the Single Entry Approach.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
