Closure or Cessation of Operation: Authorized Cause in Employment Termination

The first sentence of Article 298 (formerly 283) of the Labor Code provides that “[t]he employer may also terminate the employment of any employee due to . . . retrenchment to prevent losses or the closing or cessation of operation of the establishment or undertaking.” At first glance, there may be an erroneous impression that the closure of the business must be predicated on business loses. This is discussed below, together with the requisites for a valid termination due to closure of business or cessation of operation.

Closure of Business as Authorized Cause for Employment Termination Philippines
Just causes:
* 1. Serious misconduct
* 2. Willful disobedience or insubordination
* 3. Gross and habitual neglect of duties
* 4. Fraud or willful breach of trust
* 5. Loss of trust and confidence
* 6. Commission of a crime or offense
* 7. Analogous causes 
Authorized causes:
* 1. Installation of labor-saving devices
* 2. Redundancy
* 3. Retrenchment or downsizing
* 4. Closure or Cessation of Operation
* 5. Disease 

Also: Due process in termination cases

SUMMARY OF THE RULES

The Supreme Court summarized that rules on closure of business, correlating it with a related ground for termination — retrenchment:

  • 1. Closure or cessation of operations of establishment or undertaking may either be partial or total.
  • 2. Closure or cessation of operations of establishment or undertaking may or may not be due to serious business losses or financial reverses. However, in both instances, proof must be shown that: (1) it was done in good faith to advance the employer’s interest and not for the purpose of defeating or circumventing the rights of employees under the law or a valid agreement; and (2) a written notice on the affected employees and the DOLE is served at least one month before the intended date of termination of employment.
  • 3. The employer can lawfully close shop even if not due to serious business losses or financial reverses but separation pay, which is equivalent to at least one month pay as provided for by Article 298 (formerly 283) of the Labor Code, as amended, must be given to all the affected employees.
  • 4. If the closure or cessation of operations of establishment or undertaking is due to serious business losses or financial reverses, the employer must prove such allegation in order to avoid the payment of separation pay. Otherwise, the affected employees are entitled to separation pay.
  • 5. The burden of proving compliance with all the above-stated falls upon the employer.

For any bona fide reason, an employer can lawfully close shop anytime. Just as no law forces anyone to go into business, no law can compel anybody to continue the same. It would be stretching the intent and spirit of the law if a court interferes with management’s prerogative to close or cease its business operations just because the business is not suffering from any loss or because of the desire to provide the workers continued employment.

Management’s exercise of its prerogative to close a section, branch, department, plant or shop will be upheld as long as it is done in good faith to advance the employer’s interest and not for the purpose of defeating or circumventing the rights of employees under the law or a valid agreement

REQUISITES FOR VALID CLOSURE

Closure or cessation of operation is an authorized cause for termination of employment. DOLE Department Order No. 147-15 provides that to be a valid ground for termination, the following must be present:

  • (1) There must be a decision to close or cease operation of the enterprise by management;
  • (2) The decision was made in good faith; and
  • (3) There is no other option available to the employer except to close or cease operations.

As to the third requirement, jurisprudence is clear that the business owner may, for any bona fide reasons in addition to business losses, decide to close the business or any portion thereof. seems to run counter to the Supreme Court ruling, discussed above, that a closure of business may be done for legitimate reasons, and need not be because of serious business losses. In other words, the owner may decide to close a business even if there are ways to save it, provided that it is done in good faith and the company pays separation pay. In such case, pursuant to jurisprudence, three requirements are necessary for a valid cessation of business operations: 

  • (a) service of a written notice to the employees and to the DOLE at least one month before the intended date thereof; 
  • (b) the cessation of business must be bona fide in character; and 
  • (c) payment to the employees of termination pay amounting to one month pay or at least one-half month pay for every year of service, whichever is higher.

If the closure or cessation of operations of establishment or undertaking is due to serious business losses or financial reverses, such that the employer is legally excused from paying separation pay, the employer must also prove such serious business losses or financial reverses by substantial evidence.

As in the case of redundancy, the employer has the burden of proving the existence of all these requisites. The absence of any requisite renders the dismissal illegal. 

DISTINGUISHED FROM RETRENCHMENT

Retrenchment is the reduction of personnel for the purpose of cutting down on costs of operations in terms of salaries and wages resorted to by an employer because of losses in operation of a business occasioned by lack of work and considerable reduction in the volume of business.

Closure of a business or undertaking due to business losses is the reversal of fortune of the employer whereby there is a complete cessation of business operations to prevent further financial drain upon an employer who cannot pay anymore his employees since business has already stopped.

One of the prerogatives of management is the decision to close the entire establishment or to close or abolish a department or section thereof for economic reasons, such as to minimize expenses and reduce capitalization.

SEPARATION PAY

An employee terminated by reason of downsizing or closure/cessation of business operations is generally entitled to separation pay. In particular, when the closure is not due to serious business losses, the employee is entitled to separation pay equivalent to 1 month pay, or at least 1/2 month pay for every year of service, whichever is higher.

When the closure is due to serious business losses, it is only logical that the employee receives no separation pay. While the Labor Code provides for the payment of separation package in case of retrenchment to prevent losses, it does not obligate the employer for the payment thereof if there is closure of business due to serious losses. [See Separation Pay in Employment Termination Proceedings]

[Source/Quote: [MPCEU FUR-TUCP vs. Manila Polo Club, Inc., G.R. No. 172846, 24 July 2013]

Atty.Fred

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