Separation pay for employees who have not returned to work since March 17, 2020 – ECQ after 6 months?

  • Article 301 (286) of the Labor Code allows for bona fide (good faith) suspension of business operations for a period not exceeding six (6) months. After 6 months, the employer has two (2) options: (a) recall or (b) permanently retrench employees.
  • Bona fide suspension of business operations is employer-initiated, voluntary, and for legitimate business reason. Thus, Government compulsion to close business to prevent the spread of Covid-19 is a force majeure (great force) that was imposed on employers making it non-voluntary when they closed their businesses.
  • Force majeure affects Article 301 of the Labor Code in that employers were forced by the Government at the pain of being penalized for non-compliance, to close and implement work suspension during the enhanced community quarantine  (ECQ), and minimize operation at 30% or 50% during the modified enhanced community quarantine (MECQ) and the general community quarantine (GCQ).

Last 17 March 2020, the Philippine Government through the Inter-Agency Task Form (IATF) imposed the Enhanced Community Quarantine (ECQ) in Metro Manila due to the spread and threat of Covid-19. This resulted in mandatory work suspension except for essential and frontline services, as well as those that may be done from a work from home arrangement. The non-exempt establishments were thus forced to temporarily close or cease their operations to comply with the orders of the Government.

Since then, there have been an easing of the community quarantine restrictions to Modified Enhanced Community Quarantine (MECQ) and subsequently to General Community Quarantine (GCQ), both of which allowed certain establishments to open at 30% to 50% operational capacity in compliance with the physical distancing preventive measure to avoid the further spread of Covid-19 in the workplace. Due to the limitation 30-50 limitation, some employees have not been able to return to work. This is by no means the fault of the employers who are complying with Government regulations.

As September is about to draw near, employees who have been unable to return to work since March 17 are nearing six (6) months of no work, and presumably, no pay.

The difficult question arises thus:

Are employees who have been on work suspension for six (6) months entitled to the benefit of separation pay in case of a bona fide suspension of business operations as provided for in Article 301 (formerly 286) the Labor Code?

The legal provision referred to is reproduced herein:

“ART. 301. [286] When Employment not Deemed Terminated. – The bona fide suspension of the operation of a business or undertaking for a period of not exceeding six (6) months… 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 (1)  month from the resumption of operations of his employer…”

The 6-month period referred to in the article is often referred to as “floating status”.

In the above provision, you may have noticed that there is no mention of separation pay. Well, it is indeed not found in the Labor Code since it such requirement is found in several jurisprudence or Supreme Court Decisions on labor and employment cases. For instance, in International Hardware, Inc v. Pedroso (G.R. No. 80770, 19 August 1989), it was categorically held that “when the bona fide suspension of the operation of a business or undertaking exceeds six (6) months then the employment of the employee shall be deemed terminated.”

Similarly, in Valdez v. NLRC, NELBUSCO, Inc. (G.R. No. 125028, 09 February 1998), it was explained clearly as follows: “Under Article 286 of the Labor Code, the bona fide suspension of the operation of a business or undertaking for a period not exceeding six months shall not terminate employment. Consequently, when the bona fide suspension of the operation of a business or undertaking exceeds six months, then the employment of the employee shall be deemed terminated. By the same token and applying said rule by analogy, if the employee was forced to remain without work or assignment for a period exceeding six months, then he is in effect constructively dismissed.”

In term of separation pay, the authorized cause applicable is that of closure or cessation of business operations under Article 298 (formerly 283) of the Labor Code, which requires the payment of 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.”

Going back to the question at hand, it is crucial first to explain the key concepts in the legal provision on bona fide (i.e. good faith)suspension of business operations to fully understand the answer.

1. Good faith suspension of business operations for 6 months only

The first requirement is that the suspension of business operations must be bona fide or in good faith.

Dire exigency, required

Dire exigency is crucial under Article 301 (formerly 286) of the Labor Code.

Thus, the Supreme Court held that “the paramount consideration should be the dire exigency of the business of the employer that compels it to put some of its employees temporarily out of work. This means that the employer should be able to prove that it is faced with a clear and compelling economic reason which reasonably forces it to temporarily shut down its business operations or a particular undertaking, incidentally resulting to the temporary lay-off of its employees.” (Lopez v. Irvine Construction Corp., G.R. No. 207253, 20 August 2014)

Simply, due to dire exigency, the employer resorted to temporary work suspension in the establishment as a last resort in order to address the serious problem. The following are examples in labor law cases.

a. For economic or financial reasons

In Innodata Knowledge Services, Inc. v. Inting, (G.R. No. 211892, 06 December 2017), it was held that “closure or suspension of operations for economic reasons is recognized as a valid exercise of management prerogative.”  In this case, the employer claimed that “its act of placing (complainants-employees) on forced leave after a decrease in work volume, subject to recall upon availability of work, was a valid exercise of its right to lay-off, as an essential component of its management prerogatives. The Court agrees with the (Labor Arbiter’s) pronouncement that requiring employees on forced leave is one of the cost-saving measures adopted by the management in order to prevent further losses. However, (the employer) failed to discharge the burden of proof vested upon it. Having the right should not be confused with the manner in which that right is exercised; the employer cannot use it as a subterfuge to run afoul of the employees’ guaranteed right to security of tenure. The records are bereft of any evidence of actual suspension of (the employer’s) business operations or even of the ACT Project alone. In fact, while (the employer) cited Article 301 to support the temporary lay-off of its employees, it never alleged that it had actually suspended the subject undertaking to justify such lay-off. It merely indicated changes in business conditions and client requirements and specifications as its basis for the implemented forced leave/lay-off.”

In Pasig Agricultural Development and Industrial Supply Corporation v. Nievarez (G.R. No. 197852, 19 October 2015), the employer alleged that it had resorted to bona fide suspension of business operations due to financial reasons. Unfortunately, the employer failed to show proof thereof. “The financial statements or documents could have established that the temporary lay-off from employment of (complainants-employees) is indeed bona fide in character, but the (employer) failed to present any. Pursuant to Article 286 (now Article 301), the suspension of the operation of business or undertaking in a temporary lay-off situation must not exceed six (6) months. Within this six-month period, the employee should either be recalled or permanently retrenched. Otherwise, the employee would be deemed to have been dismissed, and the employee held liable therefor.”

b. Breakdown of a necessary tool of trade or equipment

In Valdez v. NLRC, NELBUSCO, Inc. (supra.), “the reason for the stoppage of operation of the bus assigned to (the employee – bus driver) was the breakdown of the airconditioning unit, which is a valid reason for the suspension of its operation. However, such suspension regarding that particular bus should likewise last only for a reasonable period of time. The defect in the airconditioning unit could have been easily remedied by (the employer – bus company). The period of six months was more than enough for it to cause the repair thereof. Beyond that period, the stoppage of its operation was already legally unreasonable and economically prejudicial to herein petitioner who was not given a substitute vehicle to drive.”

As a result, in the above-mentioned case, the lapse of the six-month period entitled the employee – bus driver to separation pay as he has is considered dismissed. “The so-called ‘floating status’ of an employee should last only for a legally prescribed period of time. When that ‘floating status’ of an employee lasts for more than six months, he may be considered to have been illegally dismissed from the service. Thus, he is entitled to the corresponding benefits for his separation, and this would apply to the two types of work suspension heretofore noted, that is, either of the entire business or of a specific component thereof.”

c. Non-renewal of contracts with clients

Generally, non-renewal of contracts with clients may be the basis for the bona fide suspension of business operations. “In security services, this happens when there is a surplus of security guards over available assignments as when the clients that do not renew their contracts with the security agency are more than those clients that do and the new ones that the agency gets.” (Lopez v. Irvine Construction Corp., supra.)

However, it is still the employer’s burden of proof to show the causal relation.

In Airborne Maintenance and Allied Services, Inc. v. Egos (G.R. No. 222748, 03 April 2019), the employer alleged that the bona fide suspension was due to the termination of contract with a client – without showing any proof of the connection to the temporary work suspension. In that case, the Supreme Court held that the employer “failed to prove that after the termination of its contract with Meralco it was faced with a clear and compelling economic reason to temporarily shut down its operations or a particular undertaking. It also failed to show that there were no available posts to which (complainant-employee) could be assigned.”

No termination, but temporary displacement of employees

In the context of bona fide work suspension, “there is no termination of employment but only a temporary displacement of employees, albeit the displacement should not exceed six (6) months. The paramount consideration should be the dire exigency of the business of the employer that compels it to put some of its employees temporarily out of work.” (Pido v. NLRC, Cherubim Security  and General Services, G.R. No. 169812, 23 February 2007)

Management prerogative to close shop

“The decision to suspend operation ultimately lies with the employer, who in its desire to avert possible financial losses, declares, as here, suspension of operations.” (Manila Mining Corp. Employees Association – Federation of Free Workers Chapter v. Manila Mining Corp., G.R. Nos. 178222-23, 29 September 2010)

This is consistent with the business judgment rule or non-interference by courts of business or management decisions. “Considering that even labor laws discourage intrusion in the employers’ judgment concerning the conduct of their business, courts often decline to interfere in their legitimate business decisions, absent showing of illegality, bad faith or arbitrariness.” (Nippon Housing Phil. Inc. v. Leynes, G.R. No. 177816, 03 August 2011)

Burden of proof on the employer

The employer has the burden of proof to show that the suspension of business operations was in good faith due to dire exigency. (Lopez v. Irvine Construction Corp., supra.)

This is because the principle of no work, no pay will apply to the affected employees. “Due to the grim economic consequences to the employee, case law states that the employer should also bear the burden of proving that there are no posts available to which the employee temporarily out of work can be assigned.” (Lopez v. Irvine Construction Corp., supra.)

2. After 6-month period, recall or permanent retrenchment

The employer has only two (2) options on/before the end of the 6-month period: (a) recall the employees to return to work; or (b) permanently retrench the employees who will receive separation pay.

“Pursuant to Article 286 (now Article 301), the suspension of the operation of business or undertaking in a temporary lay-off situation must not exceed six (6) months. Within this six-month period, the employee should either be recalled or permanently retrenched. Otherwise, the employee would be deemed to have been dismissed, and the employee held liable therefor.” (Pasig Agricultural Development and Industrial Supply Corporation v. Nievarez, supra.).

If recall, return to work order

As provided in Article 301, the employer may “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 (1)  month from the resumption of operations of his employer.”

The employees will have the option to continue working for the employer or they may opt to resign.

Since employees are expressly allowed to find gainful employment elsewhere during the 6-month period, they may have found another employer with better pay or working conditions. Thus, if they wish to remain with their new employer, they have to resign with their previous employer to avoid being terminated for just cause due to absence without leave (AWOL) or insubordination for non-compliance with the return to work order. Resignation does not entitle an employee to separation pay.

If permanent retrenchment, separation pay is required

Separation pay is whichever is higher of: a) one month pay; or, b) one-half (1/2) month pay per year of service. The computation follows that of the authorized cause of closing or cessation of business operations.

“Without necessarily resulting to a termination of employment, an employer may at any rate, bona fide suspend the operation of its business for a period of not exceeding six months under Article 286 of the Labor Code. While the employer is, on the one hand, duty bound to reinstate his employees to their former positions without loss of seniority rights if the operation of the business is resumed within six months, employment is deemed terminated where the suspension exceeds said period. Not having resumed its operations within six months from the time it suspended its operations on 27 July 2001, it necessarily follows that petitioner is liable to pay respondents’ separation pay…” (Manila Mining Corporation v. Amor, G.R. No. 182800, 20 April 2015)

3. Employer-initiated, i.e. Voluntary

Up to this point, Nos. 1 and 2 should have given you a clear context of the 6-month work suspension and how it relates to our question:

Are employees who have been on work suspension for six (6) months entitled to the benefit of separation pay in case of a bona fide suspension of business operations as provided for in Article 301 (formerly 286) the Labor Code?

There is one more key concept before answering the question, and which may be unpopular or unwelcomed by many – particularly the affected employees.

Whether the bona fide suspension of business operations is due to economic or financial reasons, breakdown of a necessary tool of trade or equipment, or non-renewal of contracts with clients, and analogous reasons, the closure or temporary work suspension is a voluntary act on the part of the employer. Meaning, it is employer-initiated.

This is a crucial point.

A force majeure, compliance required

Government-mandated community quarantine restrictions, whether ECQ/MECQ/GCQ/MGC or LGU lockdowns, are force majeure. Force Majeure or fortuitous event is a legal provision found in the Civil Code under Article 1174, which reads: “Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when the nature of the obligation requires the assumption of risk, no person shall be responsible for those events which could not be foreseen, or which, though foreseen, were inevitable.” (Read for more info: Covid-19: Force Majeure, Temporary Work Suspension, Separation Pay, Retrenchment)

Employers did not voluntarily close their establishments during the ECQ. Neither did employers voluntarily reduce their operational capacity to 30% or 50%. Rather, the Government forced and thus compelled employers to comply with Covid-19 related regulations to avoid, if not prevent, the further spread of the virus that is causing a global pandemic.

Compliance was required from employers if they want to avoid penalties, from fines to imprisonment. Due to this great force or threat of liability for non-compliance, in a force majeure, obligations are suspended.

Thus, Article 301 of the Labor Code and its related jurisprudence which impose obligations on the employer to limit bona fide suspension of business operations to six (6) months and to pay separation pay to the employees who are not recalled to work after within the said period – is suspended for the time being while such force majeure is existing.

Conversely, if there are no longer any applicable community quarantine restrictions (no ECQ/MECQ/MGCQ or LGU lockdown) preventing or restricting the employer from 100% operational capacity, then Article 301 will be applicable. The counting of Day 1 will be on that day when there are is no longer any quarantine restriction.

Of course, the counting may be tolled or suspended whenever quarantine restrictions are re-imposed. However, the remaining balance of the 6-month suspension will be counted once the quarantine restrictions are lifted.

Force majeure is recognized by the Labor Code

Unknown to many, force majeure is recognized in the Labor Code.

In Article 103 of the Labor Code, it states: “Wages shall be paid at least once every two (2) weeks or twice a month at intervals not exceeding sixteen (16) days. If on account of force majeure or circumstances beyond the employer’s control, payment of wages on or within the time herein provided cannot be made, the employer shall pay the wages immediately after such force majeure or circumstances have ceased. No employer shall make payment with less frequency than once a month.”

In Article 105 of the Labor Code, it states: “Wages shall be paid directly to the workers to whom they are due, except: (a) In cases of force majeure rendering such payment impossible or under other special circumstances to be determined by the Secretary of Labor and Employment in appropriate regulations, in which case, the worker may be paid through another person under written authority given by the worker for the purpose.”

In Article 250 of the Labor Code, on the rights of members in labor organizations, it states: “The members shall determine by secret ballot, after due deliberation, any question of major policy affecting the entire membership of the organization, unless the nature of the organization or force majeure renders such secret ballot impractical, in which case, the board of directors of the organization may make the decision in behalf of the general membership.”

In all these situations, the Labor Code recognizes the effects of force majeure as an external force beyond the control of any person, whether the employer, employees, or labor organizations.

Government intervention, effects on closure of business

In National Federation of Labor v. NLRC, Patalon Coconut Estate (G.R. No. 127718, 02 March 2020), the issue was whether separation pay was due to employees if the employer was forced to close its business due to Government intervention. In this case, the employees were bona fide members of the National Federation of Labor (NFL). In line with the Comprehensive Agrarian Reform Law (a.ka. CARP Law), they formed and became co-owners of the Patalon Estate Agrarian Reform Association (PEARA), a cooperative accredited by the Department of Agrarian Reform (DAR). Subsequently, DAR awarded the Patalon Coconut Estate to PEARA. This prompted the employer to shut down the business and severe employment relations with the employees without giving them separation pay. The employees argue that they are entitled to separation pay under Article 283 of the Labor Code or on the provision on closure or cessation of business operations.

In that case, the Supreme Court held: “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 as may be gleaned from the wording of the said legal provision that ‘The employer may also terminate the employment of any employee due to…’ The use of the word ‘may,’ in a statute, denotes that it is directory in nature and generally permissive only.”

The decision explicitly stated: “In other words, Article 283 of the Labor Code does not contemplate a situation where the closure of the business establishment is forced upon the employer and ultimately for the benefit of the employees.”

Hence, due to the Government act or intervention which resulted in the closing of the business, the employees were not entitled to separation pay. “As earlier stated, the Patalon Coconut Estate was closed down because a large portion of the said estate was acquired by the DAR pursuant to the CARP. Hence, the closure of the Patalon Coconut Estate was not effected voluntarily by private respondents who even filed a petition to have said estate exempted from the coverage of RA 6657. Unfortunately, their petition was denied by the Department of Agrarian Reform. Since the closure was due to the act of the government to benefit the petitioners, as members of the Patalon Estate Agrarian Reform Association, by making them agrarian lot beneficiaries of said estate, the petitioners are not entitled to separation pay.”

The case ties with the discussions on Government intervention as an act of force majeure which limits or restricts the employer’s actions to comply with Covid-19 related regulations to avoid being penalized.

Legal limbo, DOLE already recognizes in probationary employees

The discussions so far created a legal limbo for affected employees. They would have wait until the lifting of all the community quarantine restrictions for their six (6) months to start counting in relation to Article 301 on bona fide suspension of business operations. Meanwhile, their status is in limbo. (To be precise, they are “under force majeure”.)

Curiously, that is also the case with probationary employees.

No less that the Department of Labor and Employment (DOLE) through Labor Advisories No. 14 and 14-A, series of 2020, suspended the counting of the 6-month probationary period if due to enhanced community quarantine or general community quarantine, (1) the establishment has temporarily ceased or closed operations, and/or (2) probationary employees are temporarily not required to report for work on account thereof.

“For purposes of the six-month probationary period, the period during which the enhanced or general community quarantine is enforced where the establishment has temporarily ceased or closed operations and/or the worker was temporarily not required to report for work on account thereof, is not included in the six-month probationary period as required under Article 296 of the Labor Code, as renumbered.” (Par. 2, DOLE Labor Advisory No. 14-A, Series of 2020)

Thus, affected probationary employees are also in legal limbo.

The Answer

The need to thoroughly explain the subject matter is due to the fact that this may be an unpopular opinion or unwelcomed by many. The objective is only to answer the question in terms of the legal aspects, and no more. Thus, it was important to clearly lay down the premises for a better understanding to the reader.

To the question, the answer:

No. Employees who have been on work suspension since March 17, 2020, are under force majeure resulting in the suspension of the obligations under Article 301 (formerly 286) of the Labor Code which requires payment of separation pay if employees are not recalled to work on/before the expiration of the 6-month bona fide suspension of business operations.

The counting of the 6 months will only commence if there are no longer any restrictions or limitations imposed on the employers or establishments in relation to employees who are affected thereby. Thus, if an establishment is affected by a 30% operational capacity limitation and thus only 30% of the workforce are allowed, the 70% affected employees are affected by the Government restriction which is a force majeure (similar to probationary employees under DO 14-A, series of 2020). If there are no longer any restriction, it is Day 1 of the 6 months for those unable to return to work.

In addition, public transportation availability and geographic limitations should also be considered. This is a separate force majeure affecting employees who are unable to go to work due to lack of public transportation, e.g. those living in the provinces who are unable to report for work in Metro Manila. For businesses which have multiple sites, geographic limitations of employees and workplaces should be considered as “rotating” might not be applicable. Say an employee who lives in Cavite is no longer able to return to his/her former assignment in Pasay since the store is already closed, would you re-deploy the employee to Cainta to be part of a rotation? Due to issues on public transportation and geographic limitations, it might be impractical and even unreasonable for the employees.

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On a final note, all these discussions are without prejudice to subsequent DOLE regulations that may be issued to address this very important and crucial matter affecting the employers and employees.

Update: 08 September 2020

No DOLE or DTI advisory or guidelines has been issued yet on the matter.