Closing or Cessation of Operation – An Authorized Cause for Separation
Closing or Cessation of Operation may be in whole or in part.
Closing or cessation of business may be limited to a business unit, department, or division. The entire business does not have to close to invoke this authorized cause. Further, the closing may be for whatever reason – and not necessarily due to serious financial losses or business reverses.
Closure or cessation of business is the 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.
Unlike retrenchment, closure or cessation of business, as an authorized cause of termination of employment, need not depend for validity on evidence of actual or imminent reversal of the employer’s fortune. Article 283 authorizes termination of employment due to business closure, regardless of the underlying reasons and motivations therefor, be it financial losses or not.
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…
In Industrial Timber Corporation v. Ababon, the Court explained the above-quoted provision in this wise:
A reading of the foregoing law 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 – FUR-TUCP v. Manila Polo Club, Inc., G.R. No. 172846, 24 July 2013)
The following discusses closing or cessation of operation as a ground for authorized cause separation.
Substantive Due Process: Standards for Closing or Cessation of Operation
In compliance with Due Process, the first aspect of due process is on: substantive due process. It is divided into two: just causes and authorized causes.
For our purposes, we will focus on authorized causes wherein the ground is categorized.
Rule I-A of DOLE D.O. 147-15 provides for the standards which have to be complied in order to be valid:
5.4. Standard on Authorized Causes. An employer may terminate an employee for any of the following grounds:
x x x
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.
x x x
In cases of installation of labor-saving devices, redundancy and retrenchment, the “Last-In, First-Out Rule” shall apply except when an employee volunteers to be separated from employment.
The above standards are the requirements to properly implement an authorized cause separation via installation of labor-saving devices.
Procedural Due Process
The second aspect of due process is on: procedural due process.
Rule I-A of DOLE D.O. 147-15 provides for the procedure to be complied:
5.3. Termination of Employment Based on Authorized Causes. As defined in Articles 298 and 299 of the Labor Code, as amended, the requirements of due process shall be deemed complied with upon service of a written notice to the employee and the appropriate Regional Office of the Department of Labor and Employment (DOLE) at least thirty days [sic] (30) before the effectivity of the termination, specifying the ground or grounds for termination.
Otherwise stated, to properly implement redundancy the following steps have to be followed:
Step 1: 30-Day Notice to the Employee
Step 2: 30-Day Notice to DOLE
Step 3: Separation Pay
The following explains each step.
Step 1: 30-Day Notice to the Employee. – The employee should be provided with a notice regarding his beings separated from employment due to an authorized cause – at least 30 days before the last day of employment.
The current regulation requires that that the notice specify two things: (a) effective date of termination, and (b) the ground/s for the termination.
In practice, it is recommended that a brief description or information regarding the circumstances for the authorized cause be provided to give the concerned employee an idea as to what happened. Further, whenever practicable, the amount of the separation pay should be indicated to communicate well to the employee that the amount will be paid accordingly in compliance with Labor Law.
The purpose of this 30-day notice is to give the employee ample opportunity to prepare. Within this period, the employee may already start considering what he will be doing after the last day – whether to rest for a while, find next gainful employment, do business, study for the time being, attend seminars, or perform any other similar activity.
Step 2: 30-Day Notice to DOLE. – The employer is required to advise DOLE of the separation due to an authorized cause. The current form being used is RKS Form 5 which asks for the relevant information regarding the separation.
The purpose of requiring this 30-day notice to DOLE is so that the regulator will have the opportunity to confirm or verify the existence of the authorized cause. In practice, the DOLE may call for a conference to hear both sides, the employer and the employee. Depending on circumstances, a DOLE personnel may conduct a visit on the establishment to verify the existence of the authorized cause. Whenever everything is good, the DOLE personnel will see to it that the separation pay is paid to the employee.
Step 3: Separation Pay. – Since a separation by authorized cause is not due to a violation by an employee, and in most cases the ground is due to business reasons, the Labor Code requires the employer to pay the employee separation pay. The amount varies depending on the ground.
Rule I-A of DOLE D.O. 147-15 provides for the formula for the separation pay:
5.5. Payment of Separation Pay. Separation pay shall be paid by the employer to an employee terminated due to installation of labor-saving devices, redundancy, retrenchment, closure or cessation of operations not due to serious business losses or financial reverses, and disease.
x x x
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 one (1) month pay or at least one-half (1/2) month pay for every year of service, whichever is higher, a fraction of six (6) months service is considered as one (1) whole year. Where closure is due to serious business losses or financial reverses, no separation pay is required.
For closure or cessation of business operation not due to serious business losses, separation pay is thus: (1) month pay or at least one-half (1/2) month pay for every year of service, whichever is higher. If there is a fraction of 6 months, it shall be counted as 1 year.
Whenever practicable, it is recommended that the separation pay be paid together with the Final Pay – after the employee is cleared of all accountabilities.
When the closing of the business is due to serious business losses or financial reverses, it will presumably have resulted in bankruptcy. Accordingly, this is the only exception to the payment of separation pay in authorized causes. However, if the closing does not result in such bankruptcy but was done for other reasons, then the employer is required to pay separation pay.
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