Can an employer validly terminate employment of employees due to closure of business?
Yes, provided that the closure is due business due to serious business losses or financial reverses.
Article 298 of the Labor Code provides that 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.
The same provision states that 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.
Among the prerogatives of management is the decision to close the entire business or to abolish a department or section thereof for economic reasons, such as to minimize expenses and reduce capitalization. Closure or cessation of business is the complete or partial cessation of the operations and/or shutdown of the establishment of the employer. Closure may either be due to serious business losses/financial reverses or otherwise. The case of Eastridge Golf Club Inc. v. Eastridge Golf Club Labor Union-SUPERand Sec. 5.5 of Department Order No. 147-15 provides that in cases of business closure, where such closure is due to serious business losses or financial reverses and is shown to be in good faith, the resulting termination of the employees shall be upheld with no separation pay due them. But when the closure of the business is not due to serious business losses or financial reverses the terminated employees shall be entitled to separation pay.
For closure or cessation of operation to be a valid ground for termination, the following must be present:
1. There must be a decision to close or cease operation of the enterprise by the management;
The decision to close the business or a part thereof is a management prerogative. The case of Alabang Country Club, Inc. v. NLRC gives a clear illustration of such prerogative:
“The audited financial statements used by the ACCI to justify its decision to close shop show that 91% to 96% of the actual revenues earned by its F&B Department comprised the costs and expenses in maintaining the department — its decision to close its F&B Department is thus justified. In this case, however, the company failed to prove that the closure of the F&B Department was due to serious business losses or financial reverses which would otherwise exempt them from paying separation pay to the terminated employees given the only evidence it submitted to prove its alleged serious losses is self-serving — it only submitted study reports of internal auditors to prove the same, whereas the normal method of proof of the profit and loss are financial statements audited by independent external auditors.”
2. The decision was made in good faith; and
In general, courts consider withdrawal from business operation as bona fide in character when it is done to (1) advance the employer’s interest; and (2) is not impelled by a motive to defeat or circumvent the tenurial rights of employees, nor should it be motivated by any specific and determinable union activity. Such closure must be dedicated by economic necessity.
3. There is no other option available to the employer except to close or cease operation.
The Supreme Court, in a long line of cases, has utilized the following standard to determine the propriety of the employer’s decision to close or cease operation, that is, the closure was done to prevent further financial drain upon an employer who cannot pay anymore their employees since business has already stopped.
