RULE OF THUMB:

The Court will not interfere with Management Prerogative provided that the ff. are met:
1. Exercised in good faith
2. Communicated to the employees
3. Legitimate business reasons

IMPORTANT PRINCIPLES:
“EQUAL PAY FOR EQUAL WORK”
- Covers equal protection clause
- Different salary for same position may be valid because of “performance evaluation” and based on
substantial grounds.
“NO WORK, NO PAY”
GR: An employee who does not go to work is not entitled to receive salary.
XPN: When the laborer is able, willing and ready to work, but was prevented by the management, illegally
locked out, suspended or dismissed.

TITLE I
RECRUITMENT AND PLACEMENT OF WORKERS
TERMS:
Private Recruitment and Placement Agency/ Private Employment Agency – Individual, partnership,
corporation or entity engaged in the recruitment and placement of persons for local emloyment.
Limitations:
1. Non-transferable
2. Valid nationwide
3. Valid for 2 years
4. Posting of cash/surety bond
Fees/Charges/Expenses:
1. Placement Fee – shall not exceed 20% of worker’s first month’s basic salary.
No payment of placement fee shall be made until:
a. Commencement of the employment or
b. Perfected Contract of employment
XPN: Domestic Workers, no share shall be charged against the domestic worker by the
private employment agency/ 3rd party.
2. Compulsory Insurance Coverage – premium must be shouldered by the agency.
3. Service fee – shall not exceed 20% of the annual salary of the worker. It is charged against
the employer.
4. Transportation expenses – from place of origin to the place of work shall be charged against
the employer

DARVIN v. CA
Darvin allegedly convinced Toledo that by giving her P150,000.00, the latter can immediately leave for
the United States without any appearance before the U.S. embassy. Toledo gave Darvin the said amount as
evidenced by a receipt stating that the amount of P150,000.00 was for U.S. Visa and Air fare. After receiving
the money, Darvin assured Toledo that she can leave within one week. However, when after a week, there
was no word from Darvin. Toledo filed a complaint for simple illegal recruitment against Imelda Darvin.
(POEA) stated that Imelda Darvin is neither licensed nor authorized to recruit workers for overseas
employment.

HELD:
To uphold the conviction of accused-appellant, two elements need to be shown: (1) the person
charged with the crime must have undertaken recruitment activities; and (2) the said person does not have a
license or authority to do so.
In the case of People v. Goce, to prove that accused-appellant was engaged in recruitment activities
as to commit the crime of illegal recruitment, it must be shown that the accused appellant gave private
respondent the distinct impression that she had the power or ability to send the private respondent abroad
for work such that the latter was convinced to part with her money in order to be so employed.
In this case, we find no sufficient evidence to prove that accused-appellant offered a job to private
respondent. It is not clear that accused gave the impression that she was capable of providing the private
respondent work abroad. What is established, however, is that the private respondent gave accused-
appellant P150,000.00. The claim of the accused that the P150,000.00 was for payment of private
respondents air fare and US visa and other expenses cannot be ignored because the receipt for the
P150,000.00, stated that it was for Air Fare and Visa to USA. Had the amount been for something else in
addition to air fare and visa expenses, such as work placement abroad, the receipt should have so stated.
By themselves, procuring a passport, airline tickets and foreign visa for another individual, without more, can
hardly qualify as recruitment activities. Aside from the testimony of private respondent, there is nothing to
show that accused-appellant engaged in recruitment activities. This Court can hardly rely on the bare
allegations of private respondent that she was offered by accused-appellant employment abroad, nor on
mere presumptions and conjectures, to convict the latter.

Functions of POEA:
1. Formulation, implementation and monitoring of policies and programs on overseas employment of
Filipino workers.
2. Deplyment of Filipino workers through government-to-government hiring.
3. Performs administrarive, regulatory and enforcement and limited adjudicatory functions.

Jurisdiction of POEA:
1. Administrative cases involving violations of rules and regulations relating to licensing and
registration of recruitment and employment agencies.
2. Disciplinary action cases and other special cases which are administrative in character, involving
employers, principals, contracting partners and Filipino migrant workers.

 Decisions of POEA is appealable to Secretary of Labor.

 Prescription:
o Money Claims – 3 years
o Illegal recruitment – 5 or 20 years (RTC)

MCKENZIE v. CUI
Aguedo, a seaman filed with RTC a complaint for recovery of sum of money with damages against the
Administrative Manager and master of M.V. Carbay pursuant to Art. 2180 of Civil Code. Defendants moved
to dismiss the complaint arguing that the court has no jurisdiction over cases in connection with the
employment of Filipino seamen on board vessels engaged in overseas trade.

HELD:
The RTC has jurisdiction over the case and not POEA. Aguendo’s complaint reveals his intention to
seek claim protection under the Civil Code and not under the Labor Code. The items demanded are not
labor benefits but are items claimed as natural consequences of such dismissal. His complaint is
denominated as “damages” as consequence of his alleged summary dismissal.

Ban on Direct Hiring

GR: Direct hiring by foreign employer is not allowed.
XPN:
1. Diplomatic Corps
2. Name hirees
3. International Organization

CHAPTER II
REGULATION OF RECRUITMENT AND PLACEMENT OF ACTIVITIES

Disqualified Persons to Recruit:

1. Travel agencies and sales agencies
2. Those convicted for illegal recruitment or crimes involving moral turpitude
3. Official or employee of DOLE, POEA, OWWA, DFA and other government agencies directly
involved in the implementation of RA 8042 or any of their relatives within the 4 th degree

Requirements (Local):
1. Filipino Citizens (single proprietorship) at least 75% of Authorized Capital Stock is owned and
controlled by Filipino (Partnership/ Corporations)
2. 1M Minimum net worth (single proprietorship) 1M Capital (Corporation)
Requirements (Overseas):
1. Filipino Citizens (single proprietorship) at least 75% of Authorized Capital Stock is owned and
controlled by Filipino (Partnership/ Corporations)
2. 5M Minimum net worth (single proprietorship) 5M minimum paid up capital (Corporation)
Escrow Deposit – to secure the liability of Private Employment Agency to the OFWs (and not its private
liability)
Repatriation – responsibility of the agency and/or OWWA.

Validity of license – 4 years

Repatriation – responsibility of the agency and/or OWWA.

Non-transferability of License/Authority
PEOPLE V. BULI-E
Complainants went to appellant Buli-e in Baguio City upon learning that she was recruiting workers for
overseas employment. Buli-e confirmed to complainants that she was, in fact, recruiting contract workers for
Taiwan. Buli-e accompanied complainants, on separate occasions, in Manila to purportedly to introduce
them to her boss. Complainants were assured that they were licensed to recruit overseas contract workers
and that they can deploy workers within two to three months. After months of waiting and despite compliance
with all the requirements, complainants were not deployed abroad as promised by appellants. Complainants
found out that appellants had no license to recruit in Baguio City or any part of the Cordillera Administrative
Region (CAR). On the same day, complainants filed their complaints with the POEA-CAR and the
Prosecutors Office of Baguio City.

HELD:
Art. 29. Non-transferability of license or authority No license or authority shall be used directly or
indirectly by any person other than the one in whose favor it was issued or at any place other than that
stated in the license or authority, nor may such license or authority be transferred, conveyed or assigned to
any other person or entity. Any transfer of business address, appointment or designation of any agent or
representative including the establishment of additional offices anywhere shall be subject to the prior
approval of the Secretary of Labor.
Josefina, who claims to have authority to recruit applicants for overseas employment in behalf of RSI,
should have known that licensed agencies are prohibited from conducting any provincial recruitment, job
fairs or recruitment activities of any form outside of the address stated in the license, acknowledged branch
or extension office, without securing prior authority from the POEA.
Pursuant to the POEA rules and regulations, Josefina could recruit applicants for overseas
employment and process their applications only at the RSI office in Mandaluyong, Metro Manila since there
was no showing that RSI had an acknowledged branch or extension office in Baguio City or that the prior
approval of the POEA for provincial recruitment or recruitment activities outside the RSI office was obtained.

Bonds
Upon approval of the application for license, the applicant shall:
1. Submit Escrow Agreement, with confirmation of escrow deposit.
Escrow Deposit – to secure the liability of Private Employment Agency to the OFWs (and not its
private liability)
2. Post a surety bond
CAPRICORN INT’L TRAVEL v. CA
The sole issue in this petition to review the decision of the Court of Appeals is whether or not the cash
bond posted by a recruitment agency in the (POEA) may be garnished by a judgment creditor of the agency.

HELD:
(a) that the cash bond is a requisite for the issuance and renewal of a license or authority to engage in the
business of recruitment and overseas placement;
(b) that the cash bond is to answer for the liabilities of the agency arising from violations of the conditions for
the grant or use of the license or authority or the contracts of employment, the Labor Code, the POEA rules
and Labor Department issuances and all liabilities that the POEA may impose;
(c) that the amount of the cash bond must be maintained during the lifetime of the license or authority; and
(d) that the amount of the cash bond shall be returned to the agency only when it surrenders its license or
authority, and only upon posting of a surety bond of the same amount valid for three (3) years.
It must also be added that the requirement for the posting of a cash bond is also an indispensable adjunct to
the requirement that the agency undertakes to assume joint and solidary liability with the employer for all
claims and liabilities which may arise in connection with the implementation of the contract of overseas
employment and to guarantee compliance with existing labor and social legislation of the Philippines and the
country of employment [POEA Rules and Regulations, Book II, Rule II secs. l(d), (3) and (4)].

FINMAN GENERAL ASSURANCE v. INNOCENCIO

 The contention of Finman is that its liability under its own bond must be determined and enforced by
Insurance Commission or regular courts (not POEA nor Secreatary of Labor)

HELD:
Art. 31 of the Labor Code provides that applicants for license or authority shall post such cash and
surety bonds shall be determined by the Secretary of Labor to guarantee compliance with prescribed
recruitment procedures, rules and regulations, and terms and conditions of employement as may be
appropriate.
There is nothing special to restrict the determinatino of surety’s liability under its bond to the office of
Insurance Commissioner or regular courts. To do so would collide with the public policy which requires
prompt resolution of claims against private recruitment and placement agencies.

GR: Agency is only liable for illegal recruitment.

XPN: When the Employer or principal actively participated in the recruitment.

SUN ACE INT’L v. NLRC

TITLE II
EMPLOYMENT OF NON-RESIDENT ALIEN

Requirements:
1. Non-resident alien must obtain employment Alien Employment Permit from DOLE
Exemptions:
a. members of diplomatic services
b. member of international organizations
c. elected members of Governing Board
d. all those granted exemption by law
e. representatives of foreign principlas
f. teachers/professors
g. resident foreign nationals
2. Employer must show the non-availability of the person in the Philippines who is competent, able
and willing at the time of application

Prohibitions:
1. Not transfer to another job without prior approval of Secretary of Labor
2. Any violation shall be subject to deportation after service of sentence

VISA Immigration Rules:

9G – Alien Employment Permit (Pre-arranged employment)
9A VISA – given to aliens who come to Philippines for pleasure
13A VISA – Permanent Resident Working VISA (Whose spouse is a Filipino)

Special Working Permit – issued if stay is not more than 6 months.

Alien Employment Permit – issued for gainful occupation and more than 6 months.
Alien Employment Registration Certificate – issued for resident aliens

BOOK TWO
CHAPTER II
LEARNERS AND APPRENTICES

Learners Apprentices
Trains in a semi-skilled job/ industrial occupations Highly skilled job/ highly technical industry
Training for less than 3 months Exceeds 3 months
Required to hire the trainee after the training period Not required

CHAPTER III
HANDICAPPED WORKERS

RA 7277 – Magna Carta for Disabled Person

 LABOR STANDARDS
Employee
 Is a person employed by the employer for a compensation to render services under the supervision
and control of the employer not only on the ends but also on the means and methods of work to be
done.
 Art. 286 that defines employees (usually necessary and desirable to the business of the employer)
should not be used as a yardstick to know whether a person is an employee. It is only used to
classify employees.
 When an employee or employer severed with each other, does not mean that employee-employer
relationship no longer exist. (ex. If employee resigns)
o XPN: If there is a quitclaim.
 XPN to the XPN: If the quitclaim was obtained by undue influence.
INSULAR BANK

GREAT PACIFIC LIFE

TONGKO v. MANULIFE

Principle of Necessitus Person

Where the employee is still employed in an employment despite injustices in the employment.
(Constructive dismissal). The employee may continue to work while the employer shall be held liable for
constructive dismissal.

LABOR ONLY CONTRACTING and JOB CONTRACTING

TABAS

LABOR ONLY CONTRACTING JOB CONTRACTING

Supply of Manpower Supply of Services
No Substantial Capital Have Substantial Capital
Free from control of the Principal except as to results
Have independent business
Contractor is the employer Contractor is the agent of the Principal

D.O. 174 (new) D.O. 18-A (old)

Non-permissible form of contracting
Does not apply to cooperatives
Bond that the contractor needs to furnish
Substantial Capital must be 5M paid up capital
Outsourcing – not allowed
Legal to contract workers subject to regulation
Does apply to cooperatives
Bond furnished by the contractor and Principal to
guarantee service of contractor
3M
Allowed – when done in good faith and justified in
exigencies of the business

OUTSOURCING
QUINTANAR v. COCA COLA

D.O. 174 (new D.O. 18-A (old)

Mere expiration of agreement of employees and There should be same terms of agreement between
principal does not mean termination of contract with principal and contractor towards the employees
contractor
There is a 3 month wait and see period; after which
separation pay may be given

Conclusions:
 1. Mere rehash of old rule
2. Outsourcing of regular function is technically not allowed
3. Terms of service/ agreement is not co-extensive with contract of employees and contractor
4. Legality of engagement by the employer of project, seasonal and fixed term is in accordance with
law and jurisprudence.

MARAGUINOT v. CA

ALCATEL v. RELOS

 Failure to register as contractor gives a disputable presumption that the contractor is engaged in
Labor Only Contracting; but registration does not mean that the contractor is a legitimate Job
Contractor.

CONDITIONS OF EMPLOYMENT

Elements of Field Personnel

1. People who are away in work premises
2. Hours of work cannot be determined with reasonable certainty

PEOPLE v. VIVAR

AUTOBUS

CHAPTER II
MINIMUM WAGE RATES

CHAPTER III
PAYMENT OF WAGES

Non-diminution of benefits
Q: From rank and file to supervisor, where overtime pay is removed, is there diminution of benefit?
A: None. Because such is incidental to being promoted/ change in job classification.

CORRECTION OF WAGE DISTORTION

UNIONIZED NON-UNIONIZED
1. Grievance machinery (non-registration of 1. NCMB
CBA, is not a bar to another petition for 2. SENA
certificate election) 3. NLRC (mandatory preliminary conference
2. Voluntary Arbitration ( called as Master first.
Procedure – because there is a greater
chance of compliance since they agreed to
it, rather than compulsory arbitration)
3. Rule 43 (CA) to question the decision in
Voluntary Arbitration

Commission may motu proprio review the minimum wage.

SERVICE INCENTIVE LEAVE

Applies to:
- Employee who has rendered at least 1 year of service
- Shall be entitled to 5 days leave with pay
 - Part-time workers
- Contract workers
- Piece-rate workers

SIL shall not apply to:

- Those who are already enjoying vacation leave with pay of at least 5 days
- Those employed in establishments regularly employing less than 10 employees (1-9)

MATERNITY LEAVE
Expanded Maternity Leave Act
- Female workers in government/ private sector
- Regardless of civil status/ legitimacy of child
- Grant of 120 days leave with pay
- With an option to extend for additional 30 days without pay
- For solo parent – grant of 150 days leave with pay
- Shall be granted in every instance of pregnancy or miscarriage regardless of frequency

PATERNITY LEAVE
- 7 days leave with pay
- To all married male employees in public/private sector
- Only for first 4 deliveries of legitimate spouse
- For childbirth, miscarriage or abortion

PARENTAL LEAVE FOR SOLO PARENTS

Solo Parents’ Welfare Act
- 7 day parental leave which is non-cumulative

SPECIAL LEAVE
Magna Carta of Women
- 60 day special leave
- Battered Woman Leave
- Surgical Leave

SPECIAL GROUPS OF EMPLOYEES

WOMEN
Discrimination

EMPLOYEE’S COMPENSATION – COVERAGE AND WHEN COMPENSABLE

Workmen’s compensation
- term applied to those laws providing for compensation for loss resulting from the injury,
disablement or death of workmen through industrial accident, casualty or disease.
- The purpose of workmen’s compensation act is to provide compensation for disability or death
resulting from occupational injuries or disease or accidentalinjury to or death of employees.
- Right to compensation is given for all injuries incident to the employment

Proces:
1. Work related injury or disease
2. Within 5 days, employee must notify the employer
3. Employer must enter the notice in a logbook
4. Within 5 days after making the entry, employer reports to SSS/ GSIS of the sickness, injury or
death
5. Employer, in effect decides initially whether the injury or sickness is work-related or not
6. SSS/GSIS shall decide on the claim
7. SSS/GSIS form 2 systems - they serve as administering agencies of the Employees’
Compensation Commission (ECC) is also the appeal body within 30 days.
8. If the decision of ECC is favorable to the employee, it shall be final and executory
9. If the decision is otherwise, appeal to CA
Grounds for the injury and resulting disability or death to be compensable:
1. Injured at the place where his work requires him to be;
2. Performing his official functions; and
3. If the injury is sustained elsewhere, the employee must have been executing an order for the
employer

Injury – Any harmful change in the human organism from any accident arising out of and in the course of
the employment
Arising out of – refer to the origin or cause of the accident
In the course of – refer to the time, place and circumstances under which the accident takes place.

DBP v. NLRC
On February 13, 1987, herein private respondents filed a complaint with the Department of Labor against
PSC for nonpayment of salaries, 13th month pay, incentive leave pay and separation pay. On February 20,
1987, the complaint was amended to include DBP as party respondent.
DBP filed its position paper on September 7, 1987, invoking the absence of employer-employee relationship
between private respondents and DBP and submitting that when DBP foreclosed the assets of PSC, it did
so as a foreclosing creditor.

ISSUE: whether DBP, as foreclosing creditor, could be held liable for the unpaid wages, 13th month pay,
incentive leave pay and separation pay of the employees of PSC.

HELD: We rule in the negative.

During the dates material to the foregoing proceedings, Article 110 of the Labor Code read:
Art. 110. Worker preference in case of bankruptcy. — In the event of bankruptcy or liquidation of an
employer's business, his workers shall enjoy first preference as regards wages due them for services
rendered during the period prior to the bankruptcy or liquidation, any provision of law to the contrary
notwithstanding. Unpaid wages shall be paid in full before other creditors may establish any claim to a share
in the assets of the employer.
In conjunction therewith, Section 10, Rule VIII, Book III of the Implementing Rules and Regulations of the
Labor Code provided:
Sec. 10. Payment of wages in mm of bankruptcy.-Unpaid wages earned by the employees before the
declaration of bankruptcy or judicial liquidation of the employer's business shall be given first preference and
shall be paid in full before other creditors may establish any claim to a share in the assets of the employer.

Interpreting the above provisions, this Court, in Development Bank of the Philippines vs. Hon. Labor Arbiter
Ariel C. Santos, et al., 6 explicated as follows:
It is quite clear from the provisions that a declaration of bankruptcy or a judicial liquidation must be
present before the worker's preference may be enforced.

A liquidation or 'other equivalent general liquidation must also necessarily be a proceeding in rem
so that all interested persons whether known to the parties or not may be bound by such
proceeding. In the case at bar, although the lower court found that 'there were no known creditors other
than the plaintiff and the defendant herein,' this cannot be conclusive. It will not bar other creditors in the
event they show up and present their claim against the petitioner bank, claiming that they also have
preferred liens against the property involved.

Consequently, Transfer Certificate of Title No. 101864 issued in favor of the bank, which is supposed to be
indefeasible, would remain constantly unstable and questionable. Such could not have been the intention of
Article 2243 of the Civil Code although it considers claims and credits under Article 2242 as statutory fines.
Neither does the De Barreto case ...
The claims of all creditors whether preferred or non- preferred, the Identification of the preferred ones and
the totality of the employer's asset should be brought into the picture. There can then be an authoritative,
fair, and binding adjudication instead of the piece meal settlement which would result from the questioned
decision in this case.
Republic Act No. 6715, which took effect on March 21, 1989, amended Article 110 of the Labor Code to read
as follows:
Art. 110. Worker preference in case of bankruptcy. — In the event of bankruptcy or liquidation of an
employer's business, his workers shall enjoy first preference as regards their unpaid wages and other
monetary claims, any provision of law to the contrary notwithstanding. Such unpaid wages and monetary
claims shall be paid in full before the claims of the Government and other creditors may be paid.
As a consequence, Section 1 0, Rule VIII, Book III of the Implementing Rules and Regulations of the Labor
Code was likewise amended, to wit:
Sec. 10. Payment of wages and other monetary claims in case of bankruptcy. — In case of bankruptcy or
liquidation of the employer's business, the unpaid wages and other monetary claims of the employees shall
be given first preference and shall be paid in full before the claims of government and other creditors may be
paid.

Despite said amendments, however, the same interpretation of Article 110 as applied in the aforesaid case
of Development Bank of the Philippines vs. Hon. Labor Arbiter Ariel C. Santos, et al., supra, was
adopted by this Court in the recent case of Development Bank of the Philippines vs. National Labor
Relations Commission, et. al., 7 For facility of reference, especially the rationalization for the conclusions
reached therein, we reproduce the salient portions of the decision in this later case.
Notably, the terms "declaration" of bankruptcy or "judicial" liquidation have been eliminated. Does
this means then that liquidation proceedings have been done away with?

We opine in the negative, upon the following considerations:

1. Because of its impact on the entire system of credit, Article 110 of the Labor Code cannot be
viewed in isolation but must be read in relation to the Civil Code scheme on classification and
preference of credits.
Article 110 of the Labor Code, in determining the reach of its terms, cannot be viewed in isolation. Rather,
Article 110 must be read in relation to the provisions of the Civil Code concerning the classification,
concurrence and preference of credits which provisions find particular application in insolvency proceedings
where the claims of all creditors, preferred or non-preferred, may be adjudicated in a binding manner ...
(Republic vs. Peralta (G.R. No. L-56568, May 20, 1987, 150 SCRA 37).
2. In the same way that the Civil Code provisions on classification of credits and the Insolvency Law have
been brought into harmony, so also must the kindred provisions of the Labor Law be made to harmonize
with those laws.
3. In the event of insolvency, a principal objective should be to effect an equitable distribution of the
insolvent's property among his creditors. To accomplish this there must first be some proceeding where
notice to all of the insolvent's creditors may be given and where the claims of preferred creditors may be
bindingly adjudicated. The rationale therefor has been expressed in the recent case of DBP vs. Secretary of
Labor (G.R. No. 79351, 28 November 1989), which we quote:

A preference of credit bestows upon the preferred creditor an advantage of having his credit satisfied
first ahead of other claims which may be established against the debtor. Logically, it becomes material
only when the properties and assets of the debtors are insufficient to pay his debts in full; Indubitably, the
preferential right of credit attains significance only after the properties of the debtor have been inventoried
and liquidated, and the claims held by his various creditors have been established.

4. A distinction should be made between a preference of credit and a lien. A preference applies only to
claims which do not attach to specific properties. A lien creates a charge on a particular property.

The right of first preference as regards unpaid wages recognize by Article 110 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.

It is a method adopted to determine and specify the order in which credits should be paid in the final
distribution of the proceeds of the insolvent's assets- It is a right to a first preference in the discharge of the
funds of the judgment debtor. in the words of Republic vs. Peralta, supra:
Article 110 of the Labor Code does not purport to create a lien in favor of workers or employees for
unpaid wages either upon all of the properties or upon any particular property owned by their
employer. Claims for unpaid wages do not therefore fall at all within the category of specially preferred
claims established under Articles 2241 and 2242 of the Civil Code, except to the extent that such claims for
unpaid wages are already covered by Article 2241, number 6: 'claims for laborers' wages, on the goods
manufactured or the work done; or by Article 2242, number 3: 'claims of laborers and other workers
engaged in the construction, reconstruction or repair of buildings, canals and other works, upon said
buildings, canals or other works.' To the extent that claims for unpaid wages fall outside the scope of
Article 2241, number 6 and Article 2242, number 3, they would come within the ambit of the category
of ordinary preferred credits under Article 2244.'
5. The DBP anchors its claim on a mortgage credit. A mortgage directly and immediately subjects the
property upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for
whose security it was constituted (Article 2176, Civil Code). It creates a real right which is enforceable
against the whole world. It is a lien on an Identified immovable property, which a preference is not. A
recorded mortgage credit is a special preferred credit under Article 2242 (5) of the Civil Code on
classification of credits. The preference given by Article 110, when not falling within Article 2241 (6) and
Article 2242 (3) of the Civil Code and not attached to any specific property, is an ordinary preferred credit
although its impact is to move it from second priority to first priority in the order of preference established by
Article 2244 of the Civil Code (Republic vs. Peralta, supra).
In fact, under the Insolvency Law (Section 29) a creditor holding a mortgage or hen of any kind as security is
not permitted to vote in the election of the assignee in insolvency proceedings unless the value of his
security is first fixed or he surrenders all such property to the receiver of the insolvent's estate.
6. Even if Article 110 and its Implementing Rule, as amended, should be interpreted to mean 'absolute
preference,' the same should be given only prospective effect in line with the cardinal rule that laws shall
have no retroactive effect, unless the contrary is provided (Article 4, Civil Code). Thereby, any infringement
on the constitutional guarantee on non-impairment of obligation of contracts (Section 10, Article III, 1987
Constitution) is also avoided. In point of fact, DBP's mortgage credit antedated by several years the
amendatory law, RA No. 6715. To give Article 110 retroactive effect would be to wipe out the mortgage in
DBPs favor and expose it to a risk which it sought to protect itself against by requiring a collateral in the form
of real property.
In fine, the right to preference given to workers under Article 110 of the Labor Code cannot exist in any
effective way prior to the time of its presentation in distribution proceedings. It will find application when, in
proceedings such as insolvency, such unpaid wages shall be paid in full before the 'claims of the
Government and other creditors' may be paid. But, for an orderly settlement of a debtor's assets, all
creditors must be convened, their claims ascertained and inventoried, and thereafter the preference
determined in the course of judicial proceedings which have for their object the subjection of the property of
the debtor to the payment of his debts or other lawful obligations. Thereby, an orderly determination of
preference of creditors' claims is assured (Philippine Savings Bank vs. Lantin, No. L-33929, September 2,
1983, 124 SCRA 476); the adjudication made will be binding on all parties-in-interest, since those
proceedings are proceedings in rem; and the legal scheme of classification, concurrence and preference of
credits in the Civil Code, the Insolvency Law, and the Labor Code is preserved in harmony.
On the foregoing considerations and it appearing that an involuntary insolvency proceeding has been
instituted against PSC, private respondents should properly assert their respective claims in said
proceeding. .