Backwages constitute a central monetary relief in Philippine labor law, awarded to an employee who has been illegally dismissed. Conceptually, they represent the salaries and other monetary benefits the employee would have earned from the date of illegal termination up to the date of actual reinstatement, whether ordered to be executed pending appeal or as a final judgment. The Supreme Court has defined backwages as “compensation for lost earnings due to illegal dismissal,” intended to restore the employee, as much as possible, to the position they would have been in had the wrongful act not been committed. This relief is rooted in the constitutional mandate to afford full protection to labor and the statutory provisions under the Labor Code of the Philippines.
The primary statutory anchor for the award of backwages is found in Article 279 [now 294] of the Labor Code, which states: “An employee who is unjustly dismissed from work shall be entitled to reinstatement without loss of seniority rights and other privileges and to his full backwages, inclusive of allowances, and to his other benefits or their monetary equivalent computed from the time his compensation was withheld from him up to the time of his actual reinstatement.”
The twin remedies of reinstatement and backwages are integral; the latter is a necessary consequence of the former. The purpose is not punitive but restorative. The doctrine of “full backwages” aims to make the employee whole by compensating for income lost during the period of unlawful separation, thereby deterring employers from capriciously terminating employment.
It is crucial to distinguish backwages from separation pay, as they are mutually exclusive remedies under specific circumstances. Backwages are awarded in cases of illegal dismissal where reinstatement is viable and appropriate. Separation pay, in lieu of reinstatement, is granted: (1) when reinstatement is no longer feasible due to strained relations, closure of the establishment, or the position no longer exists; or (2) in cases of legal dismissal but where separation pay is mandated by law (e.g., retrenchment, disease). The Court, in Serrano v. National Labor Relations Commission (G.R. No. 117040, January 27, 2000), crystallized the rule that an illegally dismissed employee is entitled to both reinstatement and full backwages, or if reinstatement is not possible, to separation pay in lieu of reinstatement plus full backwages computed from dismissal until finality of the decision awarding separation pay.
The computation period for full backwages has evolved through jurisprudential history.
Start Date:* Date of illegal dismissal.
End Date:*
a. If reinstatement is ordered and executed (whether pending appeal or as a final judgment), backwages are computed until the date of actual reinstatement.
b. If reinstatement is no longer viable and separation pay is awarded in lieu thereof, backwages are computed from dismissal until the finality of the decision awarding separation pay. This was affirmed in Javellana v. Belen (G.R. No. 187222, January 15, 2014).
“Full backwages” encompasses all compensation that the employee should have received had they not been illegally dismissed. This includes:
A cornerstone in the computation of backwages is the “no-deduction, no-contribution rule.” As held in Maranaw, the award of full backwages means that the employee shall be paid the total amount of salaries, plus all other benefits, without deducting any income the employee may have earned from other employment during the period of illegal dismissal. Furthermore, the employer cannot require the employee to pay, from the backwages awarded, the employer’s share of contributions to the Social Security System (SSS), Philippine Health Insurance Corporation (PhilHealth), and Home Development Mutual Fund (Pag-IBIG). The employer remains solely liable for these contributions corresponding to the backwages period.
When the monetary award (including backwages) becomes final and executory, it begins to earn legal interest. The current rule, established in Nacar v. Gallery Frames (G.R. No. 189871, August 13, 2013), mandates that a monetary judgment in labor cases shall earn legal interest at the rate of six percent (6%) per annum from finality of judgment until full satisfaction. This interest compensates for the delay in the payment of the award from the time it was adjudged due.
The tax treatment of backwages is governed by the National Internal Revenue Code (NIRC) and relevant rulings. Backwages received as a consequence of illegal dismissal are generally considered compensatory in nature and are treated as “back pay” under Section 32(B)(6)(c) of the NIRC. As such, they may be excluded from gross income, and consequently from income tax, up to a certain limit, following the provisions of Republic Act No. 9504. However, any amount exceeding the statutory exclusion is subject to applicable income tax. The employer is responsible for the correct withholding.
The immediate enforcement of reinstatement pending appeal under Article 223 [now 229] of the Labor Code significantly impacts backwages computation. If the Labor Arbiter orders reinstatement and the employer exercises the option to reinstate the employee actually or on payroll, the accrual of backwages stops upon such reinstatement. If the employer fails to exercise either option, the employee remains entitled to backwages throughout the appeal period until the decision becomes final. The “immediate reinstatement” provision underscores the provisional and executory nature of a reinstatement order, making the accrual of backwages a continuing obligation during the appeal if the employer does not comply.
The concept of backwages in Philippine labor law is a comprehensive, restorative remedy designed to fully indemnify an illegally dismissed employee for lost earnings. Its computation, governed by the “full backwages” rule from Maranaw, requires the inclusion of all salaries, allowances, and benefits from dismissal until actual reinstatement or the finality of a separation pay award, without deduction for outside earnings. Adherence to the “no-deduction, no-contribution rule” and the imposition of legal interest upon finality ensure the relief is meaningful and effective. This legal framework gives life to the constitutional principle of social justice, placing the worker in the position they would have occupied absent the employer’s unlawful act.
