Your Employer Went Bankrupt: What Happens to Unpaid Wages?
Quick answer
When an employer's business goes through bankruptcy or liquidation, Article 110 of the Labor Code puts the workers' unpaid wages and other money claims first in line among the ordinary creditors. But the Supreme Court reads the rule narrowly. It applies only inside bankruptcy or judicial liquidation proceedings, and it does not beat a bank's mortgage over a specific property. It decides the order of payment; it does not promise that the money will be there.
What does Article 110 say?
Article 110 keeps the same number after the 2015 renumbering. Its current wording comes from Section 1 of Republic Act No. 6715 (1989). It opens:
In the event of bankruptcy or liquidation of an employer’s business, his workers shall enjoy first preference
As printed in Republic Act No. 6715 on the Supreme Court E-Library, the preference covers "their unpaid wages and other monetary claims, any provision of law to the contrary notwithstanding," and these claims "shall be paid in full before the claims of the Government and other creditors may be paid."
Does that mean workers are always paid first?
No. In Barayoga v. Asset Privatization Trust (2005), the Supreme Court explained how Article 110 fits the Civil Code rules on preferred credits:
- A mortgage credit is a special preferred credit under Articles 2241 and 2242 of the Civil Code. It has preference over a specific property of the debtor, such as the mortgaged building.
- The workers' preference under Article 110 is an ordinary preferred credit. It raises their claims to first priority in the order of preference under Article 2244 of the Civil Code, but "the claim has no preference over special preferred credits."
The Court also repeated that the workers' first preference "does not constitute a lien on the property of the insolvent debtor in favor of workers. It is but a preference of credit in their favor, a preference in application."
In plain words: if a bank has a mortgage on the factory, the bank is paid from the factory first. The workers come first among the claims that share what is left of the employer's other assets.
Does Article 110 apply when a business just closes down?
Not by itself. The Court said in Barayoga that workers' claims for unpaid wages and monetary benefits "cannot be paid outside of a bankruptcy or judicial liquidation proceedings against the employer," and that Article 110 "is contingent upon the institution of those proceedings, during which all creditors are convened, their claims ascertained and inventoried, and their preferences determined."
So when a company closes without such a case in court, workers claim their unpaid wages in the usual way: a labor complaint, starting with conciliation at DOLE. See how to file a labor complaint and late or unpaid salary.
This page does not cover later laws on corporate rehabilitation and insolvency, or rulings after 2005.
What about separation pay when the company closes?
That is a different rule. [Article 298 [283]](/law/labor-code/article-298) allows an employer to close its business and end employment, with a written notice to the workers and DOLE at least one month before. It gives separation pay for a closure, except when the closure is due to serious business losses or financial reverses. See retrenchment and closure: when is it legal? and the guide on final pay and separation pay.
How long do workers have to file?
Money claims arising from employment must be filed within three years from the time the cause of action accrued, under [Article 306 [291]](/law/labor-code/article-306). See labor money claims: how long do you have?
How does this work in real life?
These are made-up examples to show how the rules work. They are not advice for any real case.
Mila's employer, a garment factory, is placed under judicial liquidation by a court. She has three months of unpaid wages. Under Article 110, her claim is among those with first preference in the liquidation. A bank that holds a mortgage over the factory building is paid from that building first, as Barayoga explains.
Ramon's employer closes its shop and stops answering calls. No bankruptcy or liquidation case is filed. Article 110 is not yet in play. Ramon can file a claim for his unpaid wages through the usual labor process.
Liza and forty co-workers have claims in a liquidation, but the company has few assets left that are not mortgaged. Article 110 puts their claims first among ordinary creditors, but they share what is left. The preference cannot create money that is not there.
When do you need a lawyer?
Bankruptcy and liquidation cases involve courts, many creditors and strict procedures for filing claims. If your employer is in such a case, or has closed while owing wages, talk to a lawyer, your union or the Public Attorney's Office about where and how to file. Keep payslips, payroll records and any written computation of what you are owed. If you cannot afford a lawyer, see Free legal help in the Philippines.
Which provisions does this answer rest on?
Frequently asked questions
Do workers get paid first if the company goes bankrupt?
Article 110 of the Labor Code gives workers first preference for their unpaid wages and other monetary claims in the bankruptcy or liquidation of the employer's business. The Supreme Court reads this as a preference among the ordinary creditors, not a right over every asset.
Does a bank with a mortgage get paid before the workers?
Over the mortgaged property, yes. In Barayoga v. Asset Privatization Trust (2005), the Supreme Court said a mortgage credit is a special preferred credit over a specific property, while the workers' preference under Article 110 is an ordinary preferred credit with no preference over special preferred credits.
Does Article 110 apply if the company simply closes?
The Court said in Barayoga that Article 110 applies only when bankruptcy or judicial liquidation proceedings have been started against the employer. Outside those proceedings, unpaid wages are claimed through the usual labor process.
Will I be paid in full?
There is no guarantee. Article 110 decides the order in which creditors are paid. What each worker receives depends on the assets left after special preferred credits over specific properties, and on how many claims share them.
Am I entitled to separation pay if the company closes because of losses?
Article 298 [283] of the Labor Code gives separation pay for closure, but not when the closure is due to serious business losses or financial reverses. Whether the losses were serious is a question of proof.
How long do I have to file my wage claim?
Money claims arising from employment must be filed within three years from the time the cause of action accrued, under Article 306 [291] of the Labor Code.
General information, not legal advice. For your case, ask a lawyer, the Public Attorney's Office (PAO) or the agency.
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