Does a losing business still need to provide separation pay?
During times of economic challenges, some businesses may be forced to terminate staff and employees to save on expenses, and they would ask their lawyer if the business still needs to provide separation pay, considering that the business has been losing money.
The amount of separation pay in the Philippines is governed by the Labor Code of the Philippines and, its amendments, which provide that no employee may be terminated or dismissed except for just or authorized causes.
When an employee is terminated for just causes, no separation pay is required, as the grounds relate to wrong doing committed by the employee, such as misconduct, disobedience, fraud, breach of trust, neglect of duty, commission of a crime, and other like causes.
On the other hand, termination of employment based on the following authorized causes require the payment of separation pay to the employee.
a. Installation of labor-saving devices
b. Redundancy
c. Retrenchment or downsizing
d. Closure or cessation of operation
e. Disease
This is because the authorized causes for termination relate to economic and business reasons of the company.
But when the business is already losing money, is separation pay still required?
The answer is yes, they must still provide the terminated employees separation pay, with one exception.
The only time employers are not compelled to pay separation pay when terminating employees based on authorized causes is when they closed their establishments or undertaking due to serious business losses or financial reversal. (G.J.T Rebuilders Machine Shop, et al. v. Ambos, et al., G.R. No. 174184, January 28, 2015)
In closure or cessation of operations, proof must be shown that:
a. it was done in good faith to advance the employer’s interest and not for the purpose of defeating or circumventing the rights of employees under the law or a valid agreement
b. a written notice on the affected employees and the DOLE is served at least one month before the intended date of termination of employment.
Moreover, serious business losses are substantial losses and means that the business must have operated at a loss for a period of time for the employer to have perceived objectively and in good faith that the business’ financial standing is unlikely to improve in the future. (Manila Polo Club Employees’ Union (MPCEU) FUR-TUCP v. Manila Polo Club, Inc., G.R. No. 172846, July 24, 2013)
Save for the exception above, the employer terminating the employment of employees are required to pay the following rates of separation pay depending on the Authorized Cause of dismissal or termination.
It may also be useful to point out some important points on authorized causes and termination.
Redundancy
Redundancy exists when an employee’s position is superfluous, or an employee’s services are in excess of what would reasonably be demanded by the actual requirements of the enterprise. Redundancy could be the result of a number of factors, like over-hiring or dropping of a particular line or service by the business.
While it is recognized as the employer’s management prerogative to characterize the employee’s service as “redundant”, DOLE Department Order No. 147-15 lays down some requirements to classify an employee as redundant for valid termination and, these are:
1. There must be superfluous positions or services of employees
2. The positions or services are in the excess of what is reasonably demanded by the actual requirements of the enterprise to operate in an economical and efficient manner
3. There must be good faith in abolishing redundant positions
4. There must be a fair and reasonable criteria in selecting the employees to be terminated
5. There must be adequate proof of redundancy such as but not limited to the new staffing pattern, feasibility study/ proposal, on the viability of the newly created positions, job description and the approval by management
Retrenchment
Retrenchment is the termination of employment initiated by the employer through no fault of and without prejudice to the employees. It is an act of the employer of dismissing employees because of losses in the operation of a business, lack of work, and considerable reduction in the volume of the business.
The following requisites are to be complied with in retrenching an employee:
1. It is undertaken to prevent actual, substantial and serious losses. If the loss is only imminent, this assessment must be objectively made and done in good faith by the employer
2. The employer must provide the proper written notice to the DOLE and Employees It is undertaken to prevent loss;
3. The proper rate of separation pay is paid to the employee
4. The employer must use fair and reasonable criteria in ascertaining who will be dismissed and retained among the employees
5. It must be undertaken in good faith
(La Consolacion College of Manila v. Pascua, G.R. No. 214744, March 14, 2018)
The use of fair and reasonable criteria in ascertaining who among the employees will be terminated means that the employer should consider seniority, efficiency rating, and less preferred status (for example part-time status), physical fitness, age, and financial hardship for certain workers.
Notably, it has been decided by the Supreme Court that a retrenchment program that does not take seniority into consideration renders the retrenchment invalid. (Emcor Incorporated vs. Sienes, G.R No. 152101, Sept 8, 2009)
The Supreme Court declared that in the absence of one element, the retrenchment scheme becomes an irregular exercise of management prerogative. (Flight Attendants and Stewards Association of the Philippines (FASAP) vs. Philippine Airlines, Inc., et al., G.R. No. 178083)
Disease
Ror a disease to be a valid ground for termination, the following must be present:
1. The employee must be suffering from any disease
2. The continued employment must be prohibited by law or prejudicial to their health as well as to the health of their co-employees
3. There must be a certification by a competent public health authority that the disease is incurable within a period of six months even with proper medical treatment
Finally, employers must not forget that the burden of proof to justify proper grounds for termination and dismissal falls on them. Considering that the amount of separation pay varies depending on the grounds for termination, and this difference could be substantial, businesses should take note of not only the authorized grounds for termination, but also the standards and requirements that must be complied with.
For businesses that are suffering losses and worrying about covering the separation pay of its employees, they would also have to worry about another big expense, which is that of payment of taxes and assessments by the Bureau of Internal Revenue. Accordingly, in our subsequent articles, we shall discuss abatement and compromise of taxes, which businesses may find useful during challenging times.
(The author, Atty. John Philip C. Siao, is a practicing lawyer and founding Partner of Tiongco Siao Bello & Associates Law Offices, teaches law at the MLQU School of Law, and an Arbitrator of the Construction Industry Arbitration Commission of the Philippines. He may be contacted at [email protected]. The views expressed in this article belong to the author alone.)
