Case Digest: Republic v. Peralta, G.R. No. L-56568 May 20, 1987

Labor Code Art. 110 | Separation Pay

  • In the voluntary insolvency proceedings of Quality Tobacco Corporation, various creditors filed claims, including the USTC Association of Employees and Workers Union-PTGWO USTC and the Federacion de la Industria Tabaquera y Otros Trabajadores de Filipinas ("FOITAF") for separation pay awarded by the National Labor Relations Commission.
  • CFI-Manila: Ruled in favor of the Unions' claims for separation pay, giving preference to these claims over the claims of the Bureau of Internal Revenue for tobacco inspection fees and the Bureau of Customs for customs duties and taxes. The trial court based its decision on Article 110 of the Labor Code, which prioritizes workers' claims for wages in cases of bankruptcy or liquidation of an employer's business.
  • Solicitor General: Contested this ruling, arguing that separation pay is not included within the definition of "wages" but a form of "penalty of damage" against the employer and should not enjoy priority over tax claims.
WoN the term "wages," in the Article 110 of the Labor Code, include the separation pay.  YES 

In the case of Philippine Commercial and Industrial Bank (PCIB) vs. National Mines and Allied Workers Union, separation pay was considered part of "wages" under Article 110 of the Labor Code.

The court held that for the specific purposes of Article 110, separation pay is reasonably regarded as forming part of the remuneration or other money benefits accruing to employees or workers by reason of their having previously rendered services to their employer. 

The court categorizes credits in insolvency into three general categories: special preferred credits, ordinary preferred credits, and common credits.

  • Special preferred credits, listed in Articles 2241 and 2242 of the Civil Code, include taxes, duties, and fees due to the State or any subdivision thereof, and enjoy the highest priority.
  • Ordinary preferred credits, listed in Article 2244, include claims for unpaid wages not covered by special preferred credits. These claims are subordinate to taxes and other special preferred credits.

The court clarifies that claims for unpaid wages, including separation pay, do not constitute liens on the employer's property but are considered ordinary preferred credits under Article 2244.

Article 110 of the Labor Code modified the order of preference established in Article 2244 (2). Specifically, it removed the one-year limitation on claims for unpaid wages and giving first priority to claims for unpaid wages of laborers or workers of the insolvent employer.

The court directs the trial court to determine whether the insolvent has inventories of processed or manufactured tobacco products. If so, these inventories must first satisfy the claim of the Bureau of Internal Revenue for unpaid tobacco inspection fees, and the remaining value will be subject to the claims of the Unions for separation pay. If no inventories exist, the Unions' claims will be paid out of the insolvent's "free property" as modified by Article 110 of the Labor Code.


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