Philippines - Closure Of Business.

| Conventus Law

Legal News & Analysis - Asia Pacific - Philippines - Labour & Employment

2 July 2020

In Ababon vs. Court of Appeals (G.R. No. 16495, 25 January 2006), the Supreme Court held that “just as
no law forces anyone to get into business, no law can compel anybody to continue the same.”

The closure of business was already an option, pre- COVID19, however, the same carries a greater
significance to employers in these times of pandemic and resulting economic difficulties. While many
adopted the flexible work arrangements laid down by the Department of Labor and Employment
(“DOLE”) in Labor Advisory Nos. 09 and 11 series of 2020, not a few were left without any choice but to
resort to cessation of their businesses to prevent further financial drain.

Closure of business is one of the authorized causes in terminating employment of workers under the
Labor Code of the Philippines. It may either be partial, complete, grounded on serious business losses or
not. However, the right of employers to close their businesses is not absolute. The Labor Code, as
further interpreted by jurisprudence, mandates the concurrence of three (3) requirements in order to
safeguard the employees’ interests against the employers who may defeat the provisions on
termination of employment and renege on their responsibilities.

The three (3) requirements imperative for a valid cessation of business operations are the following: 1)
written notice to the employees and to the DOLE at least one (1) month before the intended date
thereof; (2) the cessation is bona fide in character; and (3) payment to the employees of separation pay
amounting to at least one-half (1/2) month pay salary for every year of service or one (1) month pay,
whichever is higher.
Anent the first and second requirements, Supreme Court in Business Services of the Future Today, Inc.
and Ramon Allado vs. Court of Appeals, et al. (G.R. No. 157133, 30 January 2006) and PNCC Skyway
Corporation vs. Secretary of Labor and Employment, et. al. (G.R. No. 196110, 06 February 2017) further
explained the rationale for the notice requirement. The notice is intended to apprise the employees of
the definite date of termination and allow them to make necessary arrangements. Likewise, the notice is
vital to afford the DOLE an opportunity to ascertain the veracity of the alleged cause of closure and
gauge employer’s good faith in its implementation. As such, the purpose of law for the closure of
business not to be an instrument in evading obligations is eradicated or at least minimized.
Nevertheless, notice is dispensable when the employees agreed to their termination by reason of
closure of business.

As to the third requirement, it has already been settled that if the closure is due to serious financial
reverses, payment of separation pay is not mandatory (Reahs Corporation, et. al. vs. National Labor
Relations Commission, et. al, G.R. No. 117473, 15 April 1997). However, the employer has the burden to
prove the losses by substantial evidence.

Notably, closure is a separate and distinct cause from retrenchment notwithstanding common end of
averting financial drought. Unlike in retrenchment wherein the actual and imminent financial losses
must be proven, closure does not necessarily depend on the evidence of actual and imminent reversal
of employer’s fortune as the latter may opt to close his or her business even not at loss. Further,
retrenchment entails payment of separation pay which is not always the case in closure of business on
reasons other than financial reverses.

It is worth reiterating that the Labor Code sanctions termination of employment due to business closure,
whatever may be the justifications for it, be it financial losses or pure business judgment. However,
while it is allowed as part of management prerogative, compliance with the legal processes is mandatory
for effective closure of business and avoidance of future illegal dismissal cases.

First published on The Daily Tribune.

For further information, please contact: