Dear Attorney,

I work for a company where our salaries reported to the Social Security System (SSS) are lower than what we actually receive. What are the potential legal implications for both the employer and the employees, and what steps should we take to address this issue?

Sincerely,
Concerned Employee

Insights

Underdeclared Salaries and Legal Consequences in the Philippines

In the Philippines, labor and social welfare laws, particularly the Social Security Act of 2018 (Republic Act No. 11199) and other labor-related statutes, mandate that employers report and remit accurate contributions to the Social Security System (SSS) based on the true compensation of their employees. Underreporting or underdeclaring salaries constitutes a violation of these laws and can have serious legal consequences for both the employer and, in some cases, the employees.

Legal Framework Governing Employee Salaries and SSS Contributions

Social Security Act of 2018 (Republic Act No. 11199): This law governs the SSS, which provides for mandatory contributions from both employers and employees based on the latter’s "monthly salary credit." The employer is obligated to declare the actual and correct salaries of employees to calculate the right amount of contributions.
Labor Code of the Philippines: The Labor Code emphasizes the protection of workers' rights, including the correct payment of wages and benefits. Employers who underreport salaries in SSS are indirectly violating the provision of the Labor Code that ensures fair wages and proper benefits.
Employee Compensation Program (ECP): The underdeclaration of salaries can also affect the Employee Compensation Program, which provides compensation in the event of work-related injuries, sickness, or death. Benefits from these programs are based on declared salaries, so any underreporting would reduce the benefits employees can claim.

Legal Implications of Underdeclaring Salaries

Employer Liability:
- Administrative and Criminal Sanctions: Employers who underreport salaries face administrative penalties and possible criminal prosecution. The SSS has the power to audit employers, and discrepancies between declared and actual salaries can result in fines or imprisonment under Republic Act No. 11199. Criminal charges may include violations of the Anti-Graft and Corrupt Practices Act if the employer is found to be committing fraud or misrepresenting contributions.
- Liability for Unpaid Contributions: Employers will be liable to pay the difference between the actual salary and the declared salary in terms of contributions. This includes not only their share but also the underpaid employee’s share, along with interest and penalties.
- Reputational Damage: Companies found guilty of underdeclaring salaries may suffer reputational harm, affecting business relationships and employee trust.
Employee Risks:
- Reduced Benefits: Employees whose salaries are underdeclared receive lower benefits from SSS, such as retirement pensions, sickness benefits, maternity benefits, and even disability or death benefits. The amount of these benefits is directly tied to the employee’s monthly salary credit, which should reflect the actual salary.
- Tax Liabilities: Employees may also be underreporting their income to the Bureau of Internal Revenue (BIR) if their salaries are underdeclared. In some instances, the employee may be held responsible for unpaid taxes, which could lead to penalties and interest.
- Legal Recourse: While employees are not the primary violators, they could be implicated if there is any indication of collusion. However, in most cases, employees are encouraged to report such practices through proper legal channels to avoid personal liability.

Remedies and Enforcement Actions

Filing a Complaint with the Department of Labor and Employment (DOLE): Employees can report cases of underdeclared salaries to DOLE, which oversees the enforcement of labor laws. DOLE can initiate an investigation into the employer’s practices and may refer the case to the SSS or the BIR for further action.
Filing a Case with the SSS: Employees or concerned parties can also directly file complaints with the SSS. The SSS can conduct an audit and, upon finding underdeclared contributions, can compel the employer to pay the correct amount. SSS may also impose penalties on employers for late or insufficient contributions.
Whistleblower Protection: Employees reporting such irregularities can seek protection under Philippine labor laws. Although there is no formal whistleblower protection statute in labor cases, the Labor Code provides that employees cannot be dismissed or discriminated against for filing a complaint or for assisting in the enforcement of labor laws.
Pursuing Legal Action: If necessary, employees can file civil cases against employers for damages resulting from the underdeclaration of salaries. The courts can order the employer to pay the correct contributions and any associated penalties.

Steps Employers Should Take to Comply

Accurate Reporting: Employers must ensure that they accurately report the salaries of all employees to SSS and the BIR. Employers should review their payroll systems to prevent any discrepancies between actual compensation and declared figures.
Payroll Audits: Regular audits should be conducted by employers to verify the accuracy of their payroll records and compliance with applicable labor laws.
Legal Counsel: Employers should seek legal counsel to ensure compliance with the Social Security Act and labor regulations. Consulting with a labor lawyer can help employers understand their obligations and avoid legal pitfalls.

Conclusion

In the Philippines, underreporting salaries to SSS is a serious violation of both social security and labor laws. Employers found guilty of underdeclaring salaries can face administrative and criminal penalties, including hefty fines, imprisonment, and reputational damage. Employees, while not typically held liable, are also negatively affected by reduced benefits and potential tax liabilities. It is crucial for both employees and employers to be aware of the legal consequences of underdeclared salaries, and to take appropriate steps to ensure compliance with all labor and social welfare laws.