TERMINATION OF EMPLOYMENT LECTURE-

CHAPTER IV
Just Causes for Termination of Employee

Employee Discipline and Termination

Definition

Just causes for dismissal of employee may be defined as those lawful

or valid grounds for termination of employment which arise from
causes directly attributable to the fault or negligence of the erring
employee. Just causes are usually serious or grave in nature and
attended by willful or wrongful intent or they reflected adversely on
the moral character of the employees.

As opposed to authorized causes under Article 283 wherein the

termination of employment is dictated by necessity of the business,
the dismissal under just causes is imposed by the employer to the
erring employee as a punishment for the latter’s acts or omission.

Just Causes Under the Labor Code

Just causes for termination under the Labor Code is found in Article
282 and enumerated here as follows:

1. Serious misconduct. Serious misconduct is an improper

conduct willful in character and of such grave nature that
transgressed some established and definite rule of action in
relation to the employee’s work. Requisites: a) It must be
serious; b) It must relate to the performance of the
employee’s duties, and c) It must show that he has
become unfit to continue working for the employer. All the
above requisites must concur. Series of irregularities, when put
together, may constitute serious misconduct.
2. Willful disobedience to lawful orders. The employees are
bound to follow reasonable and lawful orders of the employer
which are in connection with their work. The reasonable and
lawful company rule, regulation or policy should have been made
known to the employee. Failure to do so may be a ground for
dismissal or other disciplinary action. The employee’s assailed
conduct must have been willful or intentional, the willfulness
being characterized by a wrongful and perverse attitude.
Synonymous with Insubordination. Example: Refusal to
undergo random drug testing constitutes both serious
misconduct and insubordination. Refusal to render overtime to
meet production deadline constitutes insubordination. Failure to
answer memo to explain constitutes willful disobedience but
another notice is required in case of termination on the ground
of failure to answer memo to explain.
 3. Gross and habitual neglect of duties. Gross negligence has
been defined as the want or absence of or failure to exercise
slight care or diligence, or the entire absence of care. It evinces
a thoughtless disregard of consequences without exerting any
effort to avoid them. As a general rule, negligence must be both
gross and habitual to be a valid ground to dismiss. Habitual
negligence implies repeated failure to perform one’s duties for a
period of time, depending upon the circumstances. Example:
Habitual tardiness or absenteeism.
4. Fraud or willful breach of trust / Loss of confidence. Fraud
is any act, omission, or concealment which involves a breach of
legal duty, trust, or confidence justly reposed and is injurious to
another. Requisites: a)The employee holds a position of
trust and confidence, b) loss must be founded on clearly
established facts or must not be simulated, not a mere
afterthought, c) act must be in relation to his function
which would render him unfit to perform; d) act must be
willful, done purposely, without justifiable excuse. Two
(2) classes of positions of trust: a) managerial employees
or those by the nature of their position, are entrusted
with confidential and delicate matters and from whom
greater deal to duty is correspondingly expected;
b)fiduciary rank and file employees includes cashiers,
auditors, property custodians or those in the normal
course of their duty, handles significant amounts of
employer’s money or property.
5. Commission of a crime or offense. Commission of a crime or
offense by the employee against his employer or any immediate
member of his family or his duly authorized representative, is a
just cause for termination of employment. Because of its
gravity, work-relation is not necessary. Not necessary to show
that the commission of the criminal act would render the
employee unfit to perform his work for the employer. Immediate
family members ( Art. 150 of the Family Code):a) between
husband and wife; b) between parents and children; c) among
other ascendants and descendants, d) among brothers and
sisters, whether of the full or half-blood.
6. Analogous causes. Other causes analogous to the above
grounds may also be a just cause for termination of
employment.

Examples of Analogous Causes

1. Abandonment. Abandonment of job is a form of neglect of

duty. There is abandonment when the employee leave his job or
position with a clear and deliberate intent to discontinue his
employment without any intention of returning back. Mere
absence is not enough to constitute abandonment. Employer has
the burden of proof to prove abandonment. Due process in
abandonment cases consists only of the service of two (2)
notices: a) First notice directing the employee to explain why he
 should not be declared as having abandoned his job; and b)
Second notice to inform him of employer’s decision to dismiss
him on the ground of abandonment. Notices must be sent to
employee’s last known address per record of the company. The
employer need not look for the employee’s current whereabouts.
Immediate filing of a complaint for illegal dismissal praying for
reinstatement negates abandonment. The employee has a 4-
year prescriptive period within which to institute his action for
illegal dismissal.
2. Gross inefficiency. Gross inefficiency is analogous to and
closely related to gross neglect for both involve acts or omissions
on the part of the employee resulting in damage to the employer
or to his business. (See Lim vs. NLRC, G.R. No. 118434, July 26,
1996.) Examples: Incompetency or ineptitude
3. Disloyalty/conflict of interest. Disloyalty exists when one
asserts an interest, or performs acts adverse to one’s employer,
such as secretly engaging in a business which renders him a
competitor and rival of his employer. It constitutes a breach of
an implied condition of the contract of employment. (See Elizalde
International vs. Court of Appeals, G.R. No. L40553 February 26,
1981.)
4. Dishonesty. Acts of dishonesty deemed to be patently inimical
to the employer is analogous to breach of trust and is a valid
cause for termination of employment. May also be theft of
property owned by a co-employee.
5. Failure to Attain Work Quota.
6. Failure to comply with weight standards of employer.
7. Violation of company rules and regulations
8. Attitude Problem which is analogous to loss of trust and
confidence.

No Separation Pay

An employee who is terminated from employment for a just

cause is not entitled to payment of separation benefits. Section 7, Rule
I, Book VI, of the Omnibus Rules Implementing the Labor Code
provides:

“Sec. 7. Termination of employment by employer. – The just

causes for terminating the services of an employee shall be those
provided in Article 282 of the Code. The separation from work of an
employee for a just cause does not entitle him to the termination pay
provided in Code, without prejudice, however, to whatever rights,
benefits and privileges he may have under the applicable individual or
collective bargaining agreement with the employer or voluntary
employer policy or practice.”

Serious Misconduct

Serious Misconduct concept

Serious misconduct is one of the just causes for termination of
employee under Article 282 of the Labor Code.

Misconduct has been defined as improper or wrong conduct. It is the

transgression of some established and definite rule of action, a
forbidden act, a dereliction of duty, willful in character, and implies
wrongful intent and not mere error in judgment. (Austria vs. NLRC,
G.R. No. 124382, August 16, 1999.)

Elements of Serious Misconduct

To be a valid ground for termination of employment, the following

elements must be present:

1. The misconduct must be serious;

2. It must relate to the performance of the employee’s duties; and,
3. Must show that the employee has become unfit to continue
working for the employer.

Mere Error in Judgment is not Misconduct

Misconduct is a transgression of some established and definite rule of

action, a forbidden act, a dereliction of duty, willful in character, and
implies wrongful intent and not mere error in judgment. (Colegio de
San Juan de Letran-Calamba vs. Villas, G.R. No. 137795, March 26,
2003)

Mere error in judgment cannot qualify as misconduct (much less a

serious one) because of lack wrongful intent. As held in NLRC vs.
Salgarino, G.R. No. 164376, July 31, 2006, it is not sufficient that the
act or conduct complained of has violated some established rules or
policies. It is equally important and required that the act or conduct
must have been performed with wrongful intent.

Misconduct must be Serious

The misconduct to be serious must be of such grave and aggravated

character and not merely trivial and unimportant.

Misconduct must be in Relation to Employee’s Work

Misconduct, however serious, must, nevertheless, be in connection

with the employee’s work to constitute just cause for his separation.

Cases

1. The employee’s (an accounting manager) act of willfully

understating the company’s profits or financial position,
committed as it was in order to “save” costs, which to her
warped mind, was supposed to benefit her employer, partakes
serious misconduct. It was not merely a violation of company
policy, but of the law itself, and put the employer at risk of being
 made legally liable. The dismissal in this case is warranted. An
employer cannot be compelled to retain in its employ someone
whose services is inimical to its interests. (Llamas vs. Ocean
Gateway, G.R. No. 179293, August 14, 2009.)
2. Two traffic operators who placed free long distance calls was
dismissed by PLDT. The dismissal was upheld as valid. The
dishonesty commited by the erring employee qualifies as serious
misconduct especially that it goes to the very heart and essence
of the company. Long distance call is the lifeblood of PLDT.
(PLDT vs. Montemayor, G.R. No. 88626, October 12, 1990.)
3. A ticket freight clerk was dismissed for dishonesty for charging
to his VISA credit card some plane tickets in spite of the cash
payment made by passengers. The dismissal was for a just
cause. (PAL vs. NLRC, G.R. No. 117038. September 25, 1997.)
4. The case involved toll guards assigned at the North Luzon
Tollway, Bulacan interchange, who were caught accepting bribe
in the form of cash and a dog from a motorist who was
suspected of illegally transporting dogs. The dismissal was
upheld as for just cause. Bribery constitutes serious misconduct.
(Phil. National Construction vs. NLRC, G.R. No. 128345, May 18,
1999.)

Gross Negligence Meaning.

Gross negligence is a just cause for termination of employment by

employer under Article 282 of the Labor Code of the Philippines.

Gross negligence has been defined as the want or absence of or failure

to exercise slight care or diligence, or the entire absence of care. It
evinces a thoughtless disregard of consequences without exerting any
effort to avoid them.

Negligence must be Habitual.

In order to constitute a just cause for the employee’s dismissal, the

neglect of duties must not only be gross but also habitual. Habitual
neglect implies repeated failure to perform one’s duties for a period of
time, depending upon the circumstances.

A single isolated acts of negligence do not constitute a just cause for

the dismissal of the employee.

However, in a number of cases, the SC upheld the validity of dismissal

on the ground of gross negligence even if the act complained of was
not habitual. Thus, a bank employee was found grossly negligent when
she delivered newly approved credit cards to a person she had not
even seen before and she did not even ask for receipts, thereby
enabling fictitious persons to use these cards, causing P740,000.00
loss to the bank. (See Citibank vs. Gatchalian, G.R. No. 111222,
January 18, 1995.)

Habitual Absenteeism and Tardiness.

Habitual absenteeism and tardiness constitute gross and habitual
neglect of duty. Repeated acts of absences without leave and frequent
tardiness reflect indifferent attitude to and lack of motivation in his
work. (Valiao vs. CA, G.R. No. 146621, July 30, 2004.)

Disobedience as Ground for Dismissal

Employee’s Duty of Obedience

The employees are bound to follow reasonable and lawful orders of the
employer which are in connection with their work. Failure to do so may
be a ground for dismissal or other disciplinary actions.

Under Article 282 of the Labor Code of the Philippines, willful

disobedience to lawful orders by the employee is one of the just
causes for termination of employment by employer.

Requirements of Willful Disobedience as a Ground for

Termination

The Court has set the guidelines for the dismissal based on
disobedience.

In Gold City Integrated Port Services, Inc. v. NLRC, G.R. No. 86000,
21 September 1990, the Court explained that willful disobedience of
the employer’s lawful orders, as a just cause for dismissal of an
employee, envisages the concurrence of at least two requisites:

1. the employee’s assailed conduct must have been willful or

intentional, the willfulness being characterized by a wrongful and
perverse attitude; and
2. the order violated must have been reasonable, lawful, made
known to the employee and must pertain to the duties which he
had been engaged to discharge.

In Mañebo v. NLRC, G.R. No. 107721, 10 January 1994, the court

reiterated that in order that an employer may terminate an employee
on the ground of willful disobedience to the employer’s orders,
regulations or instructions, it must be established that the said orders,
regulations or instructions are:

1. reasonable and lawful;

2. sufficiently known to the employee; and,
3. in connection with the duties which the employee has been
engaged to discharge. (See AHS/Philippines, Inc. vs. CA, G.R.
No. 111807, June 14, 1996.)

Policy must be Strictly Adhered to

In addition to the above requirements, in Permex, Inc. vs. NLRC, G.R.

No. 125031, January 24, 2000, the Court held that where a violation
of company policy or breach of company rules and regulations was
found to have been tolerated by management, then the same could
not serve as a basis for termination. (Citing Tide Water Associated Oil
Co. vs. Victory Employees and Laborers’ Association, 85 Phil. 166
[1949].)

In Conti vs. NLRC, G.R. No. 119253, April 10, 1997, it was ruled that
the dismissal of an employee due to an alleged violation of a company
policy, where it was found that the violation was acquiesced in by said
employee’s immediate superiors and the policy violated had not always
been adhered to by the management, is an act not amounting to a
breach of trust. Therefore, it is not a justification for said employee’s
dismissal.

Damage to Employer is not Important

Damage to employer is not important in dismissal based on willful

disobedience. (See Nuez vs. NLRC, infra.)

Disobedience Need not be Habitual

Habituality is not an element of willful disobedience. The law warrants

the dismissal of an employee without making any distinction between
a first offender and a habitual delinquent where the totality of the
evidence was sufficient to warrant his dismissal. In protecting the
rights of the laborer, the law authorizes neither oppression nor self-
destruction of the employer. (See Aparente vs. NLRC, G.R. No.
117652, April 27, 2000.)

Cases

1. The formal challenge brought by employee of the reasonableness

or the motives of a company’s policy is not an excuse for the
employee not to obey said policy. (GTE Directories Corp. vs.
Sanchez, May 27, 1991.)
2. Damage to employer is not important. Although there was no
damage to the employer, the dismissal of the driver for
insubordination was upheld. The lack of resulting damage is
unimportant when the heart of the charge is the crooked and
anarchic attitude of the employee towards his employer. (Nuez
vs. NLRC, G.R. No. 107574 December 28, 1994.)

Loss of Confidence

Employee Discipline and Termination 2010-02-04

Loss of confidence arising from fraud or willful breach of trust by

employee of the trust reposed in him by his employer or his duly
authorized representative is a just cause for termination of
employment under Article 282 of the Labor Code of the Philippines.

Fraud Meaning.
Fraud is any act, omission, or concealment which involves a breach of
legal duty, trust, or confidence justly reposed and is injurious to
another.

Breach of Trust Meaning.

Breach of trust refers to the violation by the employee of the trust and
confidence reposed in him by his employer or duly authorized
representative.

Elements of Loss of Confidence.

To determine whether the termination of employment based on loss of

confidence is justified, the following elements are generally
considered:

1. Whether the fraud or breach of trust is in connection to the

employee’s work; and
2. Whether the employee concerned is holding a position of trust
and confidence.

Fraud or Breach must be in Connection to Employee’s Work.

To constitute just cause, fraud or breach of trust must be committed in

connection with the employee’s work or related to the performance of
the employee’s functions.

Employee must Hold Position of Trust and Confidence.

The basic premise for dismissal on the ground of loss of confidence is

that the employee concerned holds a position of trust and confidence.
It is the breach of this trust that results in the employer’s loss of
confidence in the employee. (See Nat’l Sugar Refineries Corp. vs.
NLRC, G.R. No. 122277 February 24, 1998.)

Thus, loss of confidence ideally applies only to cases involving

employee occupying positions of trust and confidence, e.g., managerial
employees, and those situations where the employee is routinely
charged with the care and custody of the employer’s money or
property, e.g., cashiers, auditors, property custodian, etc.

Title not Conclusive Indicator of Trust and Confidence.

However, the title or appellation of the employee’s position is not a

conclusive indicator as to whether or not an employee holds a position
of trust and confidence. The determination should hinge on the
authority actually possessed by employee.

Breach of Trust must be Willful.

Ordinary breach will not suffice. It must be willful and without

justifiable excuse, there must be basis therefor, and it must be
supported by substantial evidence and not merely by the whims or
caprice of the employer. (See Falguera vs. Linsangan, G.R. No.
114848 December 14, 1995.)

Termination Process (Just Causes)

Employee Discipline and Termination

Procedural Due Process.

For termination of employment based on just causes, procedural due

process requires that the employee be given the benefit of the so-
called twin-notice and hearing, as follows:

1. First notice: Notice to Explain (NTE) or order to show cause. A

written notice served on the employee specifying the ground or
grounds for termination, and giving to said employee reasonable
opportunity within which to explain his side.
2. Hearing or formal investigation. A hearing or conference during
which the employee concerned, with the assistance of counsel if
the employee so desires, is given opportunity to respond to the
charge, present his evidence or rebut the evidence presented
against him.
3. Second notice: Notice of decision. A written notice of termination
served on the employee indicating that upon due consideration
of all the circumstances, grounds have been established to
justify his termination. (See Art. 277[b] and Sec 2, Rule I, Book
VI, IRR)

Service of Notices.

In case of termination, the employee must be personally served with

notices (notice to show cause and notice of termination). Ideally, this
should be done by personally handing a copy of the notice to the
employee concerned. However, if this is not possible, the notices may
be served on the employee’s last known address either by ordinary or
registered mail (from legal viewpoint, registered mail is preferred).

The mere posting of the notice on the bulletin board is not sufficient
compliance. (Shoppers Gain Supermart, 1996)

If the employee refused to receive notice, the employer must serve

the same by registered mail at his last known address. (See Nueva
Ecija Electric Coop case, 2005)

Opportunity to Respond.

The very purpose of requiring the employer to observe proper

termination process is to give the employee ample opportunity to
respond to the charges against him or to defend himself. What the law
require is ample opportunity.
Ample opportunity means every kind of assistance that management
must accord the employee to enable him to prepare adequately for his
defense including legal representation.

Requirements for First Notice (NTE).

The first notice informing the employee of the charges against him
should set out clearly what he is being held liable for. It should neither
be pro-forma nor vague. This is consistent with the requirement that
the employee should be afforded ample opportunity to be heard and
not mere opportunity.

Moreover, the dismissal, if necessary, must be based on the same

grounds cited in the NTE. If the dismissal is based on grounds other
than those specified in the notice, he is deemed to have been deprived
of due process. (Glaxo Wellcome vs. NEW-DFA, 2005.)

Effect of Refusal of Employee to Participate in Investigation.

By the refusal of employee to participate in the investigation, he is

deemed to have waived his right to defend himself. (Leonardo vs.
NLRC, 2000.)

Effects or Consequences of Termination.

1. If dismissal is for just cause and with prior notice and hearing,
the dismissal is valid.
2. If the dismissal is for just cause but without prior notice and
hearing, the dismissal is valid but the employer may be required
to pay nominal damages to the dismissed employee.
3. If there is no just cause for dismissal, whether or not there is
prior notice and hearing, the dismissal is illegal. The employee is
entitled to reinstatement, backwages and damages.

Cases

1. The employee refused to participate in the investigation being

conducted by the personnel management. The Court ruled that
by refusing to participate, he cannot claim that he was denied
due process. (Leonardo vs. NLRC, 2000.)
2. The employment contract contains stipulation that the
employment may be terminated by either party after “one month
notice” or “one month salary in lieu of notice.” The stipulation
was held to be illegal. The requirement of prior notice and
opportunity to be heard cannot be substituted by mere payment
of salary. (PNB vs. Cabansag, 2005.)

Authorized Causes for Dismissal of Employee

The two most commonly used grounds for termination of employee are
the Authorized Causes under Article 283 and 284 of the Labor Code,
and the Just Causes under Article 282. Below are the authorized
causes for termination of employment.

Definition

As maybe broadly defined, authorized causes for dismissal of

employee refer to those lawful grounds for termination which in
general do not arise from fault or negligence of the employee.
“Authorized causes” are distinguished from “just causes” under Article
282 in that the latter are always based on acts attributable to the
employee’s own fault or negligence.

Authorized causes

The authorized causes for termination of employee are enumerated

under Article 283 and 284 of the Labor Code, as follows:

1. Installation of labor-saving devices. The installation of labor-

saving devices contemplates the installation of machinery to
effect economy and efficiency in the method of production [1].
2. Redundancy. Redundancy exists where the services of an
employee are in excess of what is reasonably demanded by the
actual requirements of the enterprise. A position is redundant
where it superfluous, and superfluity of a position or positions
may be the outcome of a number of factors, such as over hiring
of workers, decreased of volume business, or dropping of a
particular product line or service activity previously
manufactured or undertaken by the enterprise[2].
3. Retrenchment to prevent losses. Retrenchment is an
economic ground to reduce the number of employees.
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 [3]. It is sometimes also
referred to as downsizing. It is aimed at saving a financially
ailing business establishment from eventually collapsing.
4. Closure or cessation of operation. The closure of a business
establishment is a ground for the termination of the services of
an employee unless the closing is for the purpose of
circumventing pertinent provisions of the Labor Code.
5. Disease. An employer may terminate the services of an
employee who has been found to be suffering from any disease
and whose continued employment is prohibited by law or is
prejudicial to his health as well as the health of his co-
employees.

It should be noted though that the above enumeration is not an

exhaustive list of authorized causes of termination of employment.
Valid application of union security clause, relocation of business,
among others, may also considered authorized causes of termination.
Footnotes

1. Edge Apparel, Inc. vs. NLRC, G.R. No. 121314, February 12,
1998.
2. Tierra International Construction Corporation vs. NLRC, G.R. No.
88912, July 3, 1992.
3. Alabang Country Club vs. NLRC, G.R. No. 157611, August 9,
2005.

Termination Process (Authorized Causes)

Employee Discipline and Termination 2010-02-05

Requirements of Procedural Due Processs.

For valid termination based on authorized causes such as installation

of labor-saving devices, redundancy, retrenchment to prevent losses,
and closure or cessation of operation, the employer must serve written
notice to the individual employee concerned and to the appropriate
Regional Office of DOLE at least 30 days before the effectivity of the
termination.

Also, the employer must observe the following requirements as part of

the process of termination:

1. Good faith in the termination of employee, i.e., the

implementation of the company program resulting to termination
of employees must be for a valid cause and not merely a tool to
circumvent the law on employee’s security of tenure;
2. The employer must adopt a fair and reasonable criteria in the
selection of employee to be dismissed; and,
3. The employee must be paid separation pay not less than the
amount fixed by law.

Criteria in Selection of Employee to be Dismissed.

In the selection of the employee to be dismissed, the employer must

adopt of a fair and reasonable criteria which must be applied in good
faith, such as:

1. Less preferred status of employee;

2. Efficiency rating; and
3. Seniority.

Payment of Separation Pay.

In termination of employment due to authorized causes, the employer

is required to give separation pay to the employee concerned. The
amount of separation pay depends on the specified cause of
termination.
 1. In case of termination due to the installation of labor-saving
devices or redundancy – at least one month pay or to at least
one month pay for every year of service, whichever is higher.
2. In case of (a) retrenchment to prevent losses and (b) closures
not due to serious financial reverses – one month pay or at least
one-half month pay for every year of service, whichever is
higher.
3. No separation pay for closure due to serious business losses.
4. No separation pay is required when the closure of business is
due to serious business losses or financial reverses. (North
Davao Mining, 1996.)
5. When closure of the business establishment is forced upon the
employer and ultimately for the benefit of the employees. The
closure contemplated under Article 283 of the Labor Code is a
unilateral and voluntary act on the part of the employer to close
the business establishment. (National Federation of Labor vs.
NLRC, 2000.)

Effects of Termination.

1. If the termination is for authorized cause and the employee is

given 30-day prior notice, the dismissal is valid.
2. If the termination is for authorized cause but the employee was
not given 30-day prior notice, the dismissal is valid but the
employer may be ordered to pay nominal damages to dismissed
employee. In Jaka Food Processing vs. Pacot, 2005, the amount
of nominal damages is P50,000.00.
3. If the dismissal is not for a valid authorized cause, the dismissal
is illegal, whether or not there is 30-day prior notice.
Consequently the employee shall be entitled to reinstatement
and backwages, and damages if warranted.

Closure or Cessation of Business Operations

Closure of Business Concept

Closure or cessation of operation of the establishment or undertaking

is another authorized cause for termination of employment under
Article 283 of the Labor Code. (See Authorized Causes for Dismissal of
Employee.)

Closure of business is the reversal of fortune of the employer whereby

there is a complete cessation of business operations and/or an actual
locking-up of the doors of establishment, usually due to financial
losses. 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. (See JAT General Services vs. NLRC, G.R. No. 148340,
January 26, 2004.)

Total or Partial Closure of Business

Closure or cessation of business may mean either total closure or
partial closure, as in the case of abolition of only a department or
section of the establishment or of only a part of company activities. In
either case, the right of the employer to terminate employee affected
by the closure has been recognized. (See Dangan vs. NLRC, G.R. No.
63127-28, February 20, 1984; Also, La Union Cement Workers’ Union
vs. NLRC, G.R. No. 174621, January 30, 2009.)

Closure of Business Distinguished from Retrenchment

While closure of business and retrenchment are often used

interchangeably and are interrelated, they are actually two separate
and independent authorized causes for termination of employment.
Termination of an employment may be predicated on one without need
of resorting to the other. (Read more about Retrenchment.)

Closure of business, on one hand, is the reversal of fortune of the

employer whereby there is a complete cessation of business operations
and/or an actual locking-up of the doors of establishment, usually due
to financial losses. 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. On the other hand, retrenchment is
reduction of personnel usually due to poor financial returns so as to
cut down on costs of operations in terms of salaries and wages to
prevent bankruptcy of the company. It is sometimes also referred to
as down-sizing. Retrenchment is an authorized cause for termination
of employment which the law accords an employer who is not making
good in its operations in order to cut back on expenses for salaries and
wages by laying off some employees. The purpose of retrenchment is
to save a financially ailing business establishment from eventually
collapsing. (See JAT General Services case.)

Cessation Strictly Management Prerogative

Cessation of business is strictly management prerogative. No law can

compel a company to continue operation. The management may
decide to cease operation for whatever reason it deems proper, as
long as it is done in good faith.

In Mac Adams Metal case, the court reiterated viz. “Just as no law
forces anyone to go into business, no law can compel anybody to
continue in it. It would indeed be stretching the intent and spirit of the
law if we were to unjustly interfere with the management’s prerogative
to close or cease its business operations just because said business
operation or undertaking is not suffering from any loss or simply to
provide the workers continued employment.

Cessation Need not be Due to Financial Losses

The reason for cessation need not be financial losses or drain, as long
as it is done in good faith and not for the purpose of defeating or
circumventing the rights of employees under the law or a valid
agreement. Article 283 of the Labor Code does not require that the
cessation be due to serious business reverses.

The cause of cessation, whether it is due to financial losses or not, is

material only in the determination of entitlement to separation pay.

In Maya Farms Employees Organization vs. NLRC, 1994, the Court

held that even if the employer is not suffering from business losses, it
can still resort to closure of business as long as the company’s
exercise of the same is done in good faith to advance its interest and
not for the purpose of defeating or circumventing the rights of
employees under the law or a valid agreement such exercise will be
upheld.

Separation Pay

In case of retrenchment and closures not due to serious financial

reverses, the employee shall be entitled to separation pay equivalent
to one month pay or at least one-half month pay for every year of
service, whichever is higher.

If the closure is due to business losses, there is no obligation on the

part of the employer to pay separation benefits to employees.

Cases

1. The company terminated its employees when its plant was

relocated from Makati to Batangas. The relocation was in view of
the expiration of the lease contract on the premises it occupied
in Makati and the refusal of the lessor to renew the same. The
termination was for authorized cause as there was cessation of
the company’s operations in Makati. (Cheniver Deco vs. NLRC,
G.R. No. 122876, February 17, 2000.)
2. The closure of business by the owner after she became sickly
and her health did not improve despite proper medical attention,
was affirmed as valid as it was done in good faith although the
business was not undergoing economic losses. (Mac Adams
Union vs. Mac Adams, G.R. No. 141615, October 24, 2003.)

Retrenchment to Prevent Losses

Retrenchment Concept

Retrenchment is an economic ground to reduce the number of

employees. It 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 (See Alabang Country Club vs. NLRC, G.R. No. 157611,
August 9, 2005 ).
Retrenchment is sometimes also referred to as downsizing. It is aimed
at saving a financially ailing business establishment from eventually
collapsing.

Basic Requisites of Valid Retrenchment

To justify retrenchment, the following requisites must be complied

with:

1. The retrenchment must be necessary to prevent business losses;

and
2. The business losses sought to be prevented are serious, actual
and real.

Meaning of “To Prevent Losses”

The phrase “to prevent losses” means that retrenchment is authorized

to be undertaken by the employer sometime before the losses
anticipated are actually sustained or realized. Actual losses need not
set in prior to retrenchment. (Lopez Sugar Corporation vs. Federation
of Free Workers, G.R. Nos. 75700-01, August 30, 1990.)

Meaning of “Serious, Actual and Real”

In order to be justified, the termination of employment by reason of

retrenchment must be due to business losses or reverses which are
serious, actual and real.

Not every loss incurred or expected to be incurred by the employer will

justify retrenchment, since, in the nature of things, the possibility of
incurring losses is constantly present, in greater or lesser degree, in
carrying on the business operations. (See Edge Apparel Inc. vs. NLRC,
G.R. No. 121314, February 12, 1998 .)

The following are the general standards to determine whether the

business losses sought to be prevented are serious, actual and real,
and sufficient to justify retrenchment of employees:

1. The losses expected should be substantial and not merely de

minimis in extent;
2. The losses apprehended must be reasonably imminent;
3. The alleged losses if already realized, and the expected
imminent losses sought to be forestalled, must be proven by
sufficient and convincing evidence. (See Lopez Sugar
Corporation case.)

Separation Pay

In case of retrenchment to prevent losses, the separation pay shall be

equivalent to one month pay or at least one-half month pay for every
year of service, whichever is higher. A fraction of at least six months
shall be considered one whole year. (Article 283, LC.)
Temporary Retrenchment or Lay-Off

Article 283 of the Labor Code of the Philippines speaks only of

permanent retrenchment or lay-off. There is no specific provision in
the Labor Code that governs temporary retrenchment, particularly the
requisites for its implementation and maximum duration.

To remedy this situation, the Court has applied by analogy Art. 286 to
set a specific period that employees may remain temporarily laid, or,
sometimes referred to as in floating status. (See Sebuguero vs. NLRC,
G.R. No. 115394 September 27, 1995.) Article 286 provides:

Article 286. When employment not deemed terminated. The bonafide

suspension of the operation of a business or undertaking for a period
not exceeding six months, or the fulfillment by the employee of a
military or civic duty shall not terminate employment. In all such
cases, the employer shall reinstate the employee to his former position
without loss of seniority rights if he indicates his desire to resume his
work not later than one month from the resumption of operations of
his employer or from his relief from the military or civic duty.

Applying the above provision in the case of temporary retrenchment,

an employee who has been temporarily laid-off should be recalled or
otherwise permanently retrenched after the lapse of six months.
Failing this would be tantamount to illegal dismissal.

Installation of Labor-Saving Devices

Installation of Labor-Saving Devices Concept

The law authorizes an employer to terminate the employment of any

employee due to the installation of labor saving devices. The
installation of these devices is a management prerogative, and the
courts will not interfere with its exercise in the absence of abuse of
discretion, arbitrariness, or maliciousness on the part of management.
(See Magnolia Dairy Products Corporation vs. NLRC, G.R. No. 114952,
January 29, 1996.)

The installation of labor-saving devices contemplates the installation of

machinery to effect economy and efficiency in the method of
production.

Distinguished from Retrenchment

The institution of “new methods or more efficient machinery, or of

automation” is technically a ground for termination of employment by
reason of installation of labor-saving devices but where the
introduction of these methods is resorted to not merely to effect
greater efficiency in the operations of the business but principally
because of serious business reverses and to avert further losses, the
device could then verily be considered one of retrenchment. (Edge
Apparel vs. NLRC, G.R. No. 121314, February 12, 1998; See also
Retrenchment.)

Separation Pay

In case of termination due to the installation of labor saving devices,

the worker affected thereby shall be entitled to a separation pay
equivalent to at least his one month pay or to at least one month pay
for every year of service, whichever is higher. (Article 283, Labor
Code.)

Case

1. An employee was terminated after the company instituted a

modernization program. Under said program, the operations of
the quality control unit, to which said employee was assigned,
were all automated. The dismissal was upheld as valid. (Agustilo
vs. Court of Appeals, G.R. No. 142875, September 7, 2001.)

Separation Pay

Employee Discipline and Termination 2009-10-01

Summary

 What is separation pay?

 What are the instances in which payment of separation pay is
sanctioned?
 Distinguished separation pay from retirement pay?

Separation Pay Meaning

Separation pay, as generally understood, refers to the amount due to

the employee who has been terminated from service for causes
authorized by law (not due to employees fault or wrong-doing) such as
installation of labor-saving devices, redundancy, retrenchment to
prevent losses or the closing or cessation of operation of the
establishment or undertaking.

Separation pay is intended to provide the employee with the

wherewithal during the period he is looking for another employment.
(See Gabuay v. Oversea Paper Supply, G.R. No. 148837, August 13,
2004.)

Five Instances when Separation Pay is due to Employee

There are at least five instances in which an employee is entitled to

payment of separation pay upon severance of employment:

1. When the termination of employment is due to causes

authorized by law, such as installation of labor-saving devices,
redundancy, retrenchment to prevent losses or the closing or
 cessation of operation of the establishment or undertaking. This
is provided under Art. 283, Labor Code of the Philippines. The
provision states, viz.:

Article 283. Closure of establishment and reduction of personnel.

The employer may also terminate the employment of any
employee due to the installation of labor-saving devices,
redundancy, retrenchment to prevent losses or the closing or
cessation of operation of the establishment or undertaking
unless the closing is for the purpose of circumventing the
provisions of this title, by serving a written notice on the workers
and the Department of Labor and Employment at least one (1)
month before the intended date thereof. In case of termination
due to the installation of labor-saving devices or redundancy, the
worker affected thereby shall be entitled to a separation pay
equivalent to at least one (1) month pay or to at least one (1)
month pay for every year of service, whichever is higher. In case
of retrenchment to prevent losses and in cases of closures or
cessation of operations of establishment or undertaking not due
to serious business losses or financial reverses, the separation
pay shall be equivalent to one (1) month pay or at least one-half
(1/2) month pay for every year of service, whichever is higher. A
fraction of at least six (6) months shall be considered one (1)
whole year.

2. When the severance of employment is cause by a disease,

particularly when the employee is found to be suffering from any
disease and whose continued employment is prohibited by law or
is prejudicial to his health as well as the health of his co-
employees. This is found in Art. 284, ibid., the full text states,
viz.:

Article 284. Disease as ground for termination. An employer may

terminate the services of an employee who has been found to be
suffering from any disease and whose continued employment is
prohibited by law or is prejudicial to his health as well as the
health of his co-employees: Provided, That he is paid separation
pay equivalent to at least one month salary or to one-half month
salary for every year of service, whichever is greater, a fraction
of at least six months being considered as one whole year.

3. When the termination from service of the employee has been

declared illegal, but his reinstatement to his former position is no
longer feasible for some valid reason, e.g., when reinstatement
is rendered impossible due to subsequent closure of business, or
when the relationship between employer and employee has
become strained (doctrine of strained relations). (See Gabuay v.
Oversea Paper Supply, G.R. No. 148837, August 13, 2004.)
4. In case of pre-termination of employment contract in job-
contracting arrangement. (See Department Order 18-02, Rules
Implementing Article 106 to 109 of the Labor Code.)
 5. In exceptional cases, where separation pay is awarded as a
measure of social or compassionate justice. Here, payment of
separation pay may be ordered by the court even if the dismissal
from service is found to have been for valid or just cause, i.e.,
even if the employee is found to have been at fault. (See PLDT
vs. NLRC, No. L-80609, August 23, 1988.)

Distinguished from Retirement Pay

Separation pay should not be confused with retirement pay.

Separation pay is the amount due to the employee where the
cessation of employment is due to causes authorized by law (or for
any of the other causes stated above). Retirement pay, on the other
hand, is the amount to be paid to the employee who has reached the
compulsory retirement age or who availed of voluntary retirement.

Termination of Employment for Health Reasons

(Disease)

Employee Discipline and Termination

An employer may terminate the services of an employee who has been

found to be suffering from any disease and whose continued
employment is prohibited by law or is prejudicial to his health as well
as the health of his co-employees. (Art. 284, LC)

Requisites for termination on the ground of disease.

1. The employee suffers from a disease;

2. His continued employment is prohibited by law or prejudicial to
his health or to the health of his co-employees; and
3. The disease is of such nature and at such a stage that it cannot
be cured within a period of six months even with proper medical
treatment. (Sec. 8, Title I, Bk. VI, IRR)

Certification from public health authority required

Certification by competent public health authority that the disease is of

such nature and of at such a stage that it cannot be cured within a
period of six months even with proper medical treatment.

Right to reinstatement if disease is curable with six months

If the disease or ailment can be cured within six months, the employer
shall not terminate the employee but shall ask the employee to take a
leave of absence.

The employee is entitled to be reinstated to his former position

immediately upon the restoration of his normal health. (ibid.)

Disability distinguished from Disease

Disability should not be confused with disease. Disability itself, even if
permanent, is not a ground for termination. The Magna Carta for
Disabled Persons prohibits the termination of a disabled employee
based on disability alone. This constitutes act of discrimination, a
criminal offense for which fine and/or imprisonment may be imposed.
(Magna Carta for Disabled Persons)

Cases

1. The requirement for a medical certificate under Article 284 of the

Labor Code cannot be dispensed with; otherwise, it would
sanction the unilateral and arbitrary determination by the
employer of the gravity or extent of the employee’s illness and
thus defeat the public policy in the protection of labor. (Sy vs.
Court of Appeals, G.R. No. 142293 February 27, 2003)