Closure or cessation of business

Summary

▪ 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.

▪ Closure may be in whole or in part such as a department.

▪ To be valid, the authorized cause of closure or cessation of operation should comply with prescribed standards.

▪ Separation pay is not due if the closure is due to serious business losses or reverses.

▪ Burden of proof is on the employer to establish that the closure is bona fide or valid.

1. Concept

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. (Manila Polo Club Employees’ Union [MPCEU] FUR-TUCP v. Manila Polo Club, Inc., G.R. No. 172846, 24 July 2013)

Closure of business may be considered as a reversal of an employer’s fortune whereby there is a complete cessation of business operations and/or an actual locking-up of the doors of the establishment, usually due to financial losses. (Benson Industries Employees Union-ALU-TUCP v. Benson Industries, Inc., G.R. No. 200746, 06 August 2014)

a. Legal basis

1) Labor Code

2) Omnibus Rules Implementing the Labor Code

3) DOLE Department Order No. 147, Series of 2015

DOLE Department Order No. 147, Series of 2015, reiterates closure or cessation of operations as an authorized for separating an employee under Section 5.4(d), Rule I-A.

b. Management prerogative

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. (Manila Polo Club Employees’ Union [MPCEU] FUR-TUCP v. Manila Polo Club, Inc., supra.)

In fine, 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. (Ibid.)

The decision to close one’s business is a management prerogative that courts cannot interfere with. Employers can “lawfully close shop at anytime,” even for reasons of their own. “Just as no law forces anyone to go into business, no law can compel anybody to continue in it.” (G.J.T. Rebuilders Machine Shop v. Ambos, G.R. No. 174184, 28 January 2015)

c. Authorized cause

Article 283 of the Labor Code allows an employer to dismiss an employee due to the cessation of operation or closure of its establishment or undertaking. (Ibid.)

Under the Labor Code, closure of business is treated as an authorized cause for termination, aimed at preventing further financial drain upon an employer who cannot anymore pay its employees since business has already stopped. As a form of recompense, the employer is required to pay its employees separation benefits, except when the closure is due to serious business losses under. Article 297 (formerly Article 283) of the Labor Code, as amended. (Benson Industries Employees Union-ALU-TUCP v. Benson Industries, Inc., supra.)

d. In whole in in part

To be precise, closure or cessation of an employer’s business operations, whether in whole or in part, is governed by Article 283 of the Labor Code, as amended. (Manila Polo Club Employees’ Union [MPCEU] FUR-TUCP v. Manila Polo Club, Inc., supra.)

A reading of the [Article 283 of the Labor Code) shows that a partial or total closure or cessation of operations of establishment or undertaking may either be due to serious business losses or financial reverses or otherwise. Under the first kind, the employer must sufficiently and convincingly prove its allegation of substantial losses, while under the second kind, the employer can lawfully close shop anytime as long as cessation of or withdrawal from business operations was bona fide in character and not impelled by a motive to defeat or circumvent the tenurial rights of employees, and as long as he pays his employees their termination pay in the amount corresponding to their length of service. 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. (Manila Polo Club Employees’ Union [MPCEU] FUR-TUCP v. Manila Polo Club, Inc., supra.)

The closure of operation of an establishment or undertaking not due to serious business losses or financial reverses includes both the complete cessation of operations and the cessation of only part of a company’s activities. (Ibid.)

2. Requisites

In sum, under Article 283 of the Labor Code, three requirements are necessary for a valid cessation of business operations:

1) Service of a written notice to the employees and to the DOLE at least one month before the intended date thereof;

2) The cessation of business must be bona fide in character; and,

3) 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. (Ibid.)

Jurisprudential Guidelines

The following are the guidelines laid down by the Supreme Court

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: (a) 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 (b) 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 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. (Manila Polo Club Employees’ Union [MPCEU] FUR-TUCP v. Manila Polo Club, Inc., supra.)

DOLE Standards

The standards are:

1) There must be a decision to close or cease operation of the enterprise by the 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. (DOLE Department Order No. 147, Series of 2015)

a) 30-day advance written notice to the employees and to the DOLE

The required written notice under Article 283 of the Labor Code is to inform the employees of the specific date of termination or closure of business operations, and must be served upon them at least one (1) month before the date of effectivity to give them sufficient time to make the necessary arrangements. The purpose of this requirement is to give employees time to prepare for the eventual loss of their jobs, as well as to give DOLE the opportunity to ascertain the veracity of the alleged cause of termination. (PNCC Skyway Corporation [PSC] v. The Secretary of Labor & Employment, G.R. No. 196110, 06 February 2017)

Notice of the eventual closure of establishment is a “personal right of the employee to be personally informed of his [or her] proposed dismissal as well as the reasons therefor.” The reason for this requirement is to “give the employee some time to prepare for the eventual loss of his [or her] job.” (G.J.T. Rebuilders Machine Shop v. Ambos, supra.)

1) Consequence for non-compliance with notice requirement

The failure to notify the respondents in writing of the closure of the company will not invalidate the termination of their employment, but the company has to pay them nominal damages for the violation of their right to procedural due process. (Navotas Shipyard Corporation v. Montallana, G.R. No. 190053, 24 March 2014)

The requirement “is not a mere technicality or formality which the employer may dispense with.” Should employers fail to properly notify their employees, they shall be liable for nominal damages even if they validly closed their businesses. (G.J.T. Rebuilders Machine Shop v. Ambos, supra.)

Generally, employers that validly closed their businesses but failed to comply with the notice requirement are liable in the amount of 50,000.00. This amount of nominal damages, however, may be reduced depending on “the sound discretion of the court.” (Ibid.)

In the determination of the amount of nominal damages which is addressed to the sound discretion of the court, several factors are taken into account:

1) The authorized cause invoked;

2) The number of employees to be awarded;

3) The capacity of the employers to satisfy the awards, taking into account their prevailing financial status as borne by the records;

4) The employer’s grant of other termination benefits in favor of the employees; and,

5) Whether there was bona fide attempt to comply with the notice requirements as opposed to giving no notice at all. (Sangwoo Philippines, Inc. v. Sangwoo Philippines, Inc. Employees Union-OLALIA, G.R. No. 173154, 09 December 2013)

2) Conferring with employees – not a notice

“Conferring with employees” is not the notice required under Article 283 of the Labor Code. The law requires a written notice of closure served on the affected employees. As to when the written notice should be served on the Department of Labor and Employment, the law requires that it be served at least one month before the intended date of closure. (Ibid.)

3) Payment of salaries, actual knowledge of possible reason for closure

The payment of employees’ salaries for the said one-month period or the employees’ alleged actual knowledge of the amendment of a contract resulting in the closure is sufficient to replace the formal and written notice required by the law. (PNCC Skyway Corporation [PSC] v. The Secretary of Labor & Employment, G.R. No. 196110, 06 February 2017)

b) Bona fide cessation of business

Article 298 of the Labor Code explicitly sanctions terminations due to the employer’s cessation of business or operations-as long as the cessation is bona fide or is not made “’for the purpose of circumventing the [employees’ right to security of tenure].” (Veterans Federation of the Philippines v. Montenejo, G.R. No. 184819, 29 November 2017)

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. (Alabang Country Club, Inc. v. NLRC, G.R. No. 157611, 09 August 2005)

c) Separation pay

1) When due

Despite this management prerogative, employers closing their businesses must pay the affected workers separation pay equivalent to one-month pay or to at least one-half-month pay for every year of service, whichever is higher. The reason is that an employee dismissed, even for an authorized cause, loses his or her means of livelihood. (G.J.T. Rebuilders Machine Shop v. Ambos, supra.)

Closure of business, as an authorized cause for termination of employment, aims to prevent further financial drain upon an employer who cannot pay anymore his employees since business has already stopped. In such a case, the employer is generally required to give separation benefits to its employees, unless the closure is due to serious business losses. (Zambrano v. Philippine Carpet Manufacturing Corporation, G.R. No. 224099, 21 June 2017)

2) When not due

The Labor Code does not obligate the employer for the payment thereof if there is closure of business due to serious losses. (Manila Polo Club Employees’ Union [MPCEU] FUR-TUCP v. Manila Polo Club, Inc., supra.)

The only time employers are not compelled to pay separation pay is when they closed their establishments or undertaking due to serious business losses or financial reverses. (G.J.T. Rebuilders Machine Shop v. Ambos, supra.)

Serious business losses are substantial losses, not de minimis. “Losses” means that the business must have operated at a loss for a period of time for the employer “to [have] perceived objectively and in good faith” that the business’ financial standing is unlikely to improve in the future. (Ibid.)

While serious business losses generally exempt the employer from paying separation benefits, it must be pointed that the exemption only pertains to the obligation of the employer under Article 297 of the Labor Code. This is because of the law’s express parameter that mandates payment of separation benefits “in case of closures or cessation of operations of establishment or undertaking not due to serious business losses or financial reverses.” The policy distinction underlying Article 297 – that is, the distinction between closures due to serious business losses and those which are not. (Benson Industries Employees Union-ALU-TUCP v. Benson Industries, Inc., supra.)

a) Unless otherwise stipulated

When the obligation to pay separation benefits, however, is not sourced from law (particularly, Article297 of the Labor Code), but from contract, such as an existing collective bargaining agreement between the employer and its employees, an examination of the latter’s provisions becomes necessary in order to determine the governing parameters for the said obligation. To reiterate, an employer which closes shop due to serious business losses is exempt from paying separation benefits under Article 297 of the Labor Code for the reason that the said provision explicitly requires the same only when the closure is not due to serious business losses; conversely, the obligation is maintained when the employer’s closure is not due to serious business losses. For a similar exemption to obtain against a contract, such as a CBA, the tenor of the parties’ agreement ought to be similar to the law’s tenor. When the parties, however, agree to deviate therefrom, and unqualifiedly covenant the payment of separation benefits irrespective of the employer’s financial position, then the obligatory force of that contract prevails and its terms should be carried out to its full effect. Verily, it is fundamental that obligations arising from contracts have the force of law between the contracting parties and thus should be complied with in good faith;24 and parties are bound by the stipulations, clauses, terms and conditions they have agreed to, the only limitation being that these stipulations, clauses, terms and conditions are not contrary to law, morals, public order or public policy. Hence, if the terms of a CBA are clear and there is no doubt as to the intention of the contracting parties, the literal meaning of its stipulations shall prevail. (Ibid.)

3. Burden of proof: on the employer

The burden of proving serious business losses is with the employer. The employer must show losses on the basis of financial statements covering a sufficient period of time. The period covered must be sufficient for the National Labor Relations Commission and this court to appreciate the nature and vagaries of the business. (G.J.T. Rebuilders Machine Shop v. Ambos, supra.)

References

⦁ 1987 Philippine Constitution

⦁ Book VI, Presidential Decree No. 442, a.k.a. Labor Code of the Philippines

⦁ DOLE Department Order No. 147, Series of 2015

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/Updated: January 4, 2023