What happens when a business closes or ceases?
When a business closes or ceases, there is a complete or partial cessation of the operations and/or shut-down of the establishment of the employer; it is carried out to either stave off the financial ruin or promote the business interest of the employer.[1]
Closure or cessation of business operations is one of the authorized causes which may be invoked by the employer in terminating the employment of its employees even without fault on the part of the latter. It is provided for in Article 298 of the Labor Code, along with the following grounds:
a. Installation of labor-saving devices;
b. Redundancy; and
c. Retrenchment.
What must be proved by the employer for closure or cessation of operations to be a valid ground for termination?
The employer must prove the following:
a. There must be a decision to close or cease operation of the enterprise by the management;
b. The decision was made in good faith; and
c. There is no other option available to the employer except to close or cease operations.[2]
What happens to the employees when a business closes or ceases?
There are 2 scenarios when a business closes depending on whether the closure is due to serious business losses or not:
First, an employee terminated due to closure or cessation of business operation NOT due to serious business losses shall be paid by the employer a separation pay equivalent to 1 month pay or at least 1/2 month pay for every year of service, whichever is higher, a fraction of 6 months service is considered as 1 whole year.[3]
Second, where closure is DUE TO serious business or financial reverses, no separation pay is required.[4] The SC held in a case that where the closure is due to business losses, the Labor Code does not impose any obligation upon the employer to pay separation benefits, for obvious reasons.[5]
Some important concepts to note:
In Manila Polo Club Employees' Union (MPCEU) FUR-TUCP v. Manila Polo Club, Inc.[6], the SC summarized important concepts taken from several previously decided cases, to wit:
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:
(i) 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
(ii) 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 [now 298] 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.
See related posts:
"Retrenchment - Laying off employees due to business losses"
[1] Manarpiis v. Texan Philippines, Inc., G.R. No. 197011, January 28, 2015. [2] Section 5.4 (d) - Standards on Authorized Causes, Department of Labor and Employment (DOLE) Department Order No. 147-15, Series of 2015, Amending the Implementing Rules and Regulations of Book VI of the Labor Code, as amended. Retrieved from https://www.dole.gov.ph/php_assets/uploads/2017/07/Dept-Order-No_-147-15.pdf [3] 5.5 - Payment of Separation Pay, Id. [4] Id. [5] North Davao Mining Corporation and Asset Privatization Trust v. National Labor Relations Commission, G.R. No. 112546, March 13, 1996. [6] G.R. No. 172846, July 24, 2013.