(Philippine labor law context; focus on “agency”/contractual workers and who shoulders monetary obligations when a principal company closes or shuts down operations.)

1) The core question: who pays when the company closes?

When a workplace shuts down, the answer depends on who the law treats as the employer of the “agency worker,” and what kind of contracting arrangement exists:

Labor-only contracting (LOC) (prohibited)
- The “agency” is treated as a mere intermediary.
- The principal company is deemed the employer.
- Result: the principal can be held directly and solidarily liable for obligations arising from termination and unpaid benefits.
Legitimate job contracting / independent contracting (allowed, if compliant)
- The contractor/agency is the employer.
- The principal is generally not the employer but may have statutory liability for certain unpaid monetary claims (commonly described as “subsidiary liability” under the Labor Code and implementing rules), especially unpaid wages and wage-related benefits.
- Whether separation pay and closure-related termination pay fall within the principal’s statutory liability depends on the nature of the claim, the facts, and jurisprudential treatment of what counts as “wages/monetary claims” chargeable to the principal under contracting rules.

Because closure is a termination event, the most important legal move is correctly classifying the relationship: Was the worker really employed by the agency, or effectively by the principal?

2) Key concepts and legal framework (high-level map)

A. “Agency worker” is usually a contractor’s employee

In common usage, “agency worker” refers to a person hired by a manpower agency/contractor and deployed to a client/principal. Under Philippine law, that is generally permissible only if the arrangement is legitimate contracting and not labor-only contracting.

B. The law distinguishes:

Principal: the business receiving the service (client company where the worker is deployed).
Contractor/Agency: the entity hiring and deploying workers.
Employer (legal): the party with the power to hire/dismiss and control the worker—not just the one who “pays,” but the one that holds management prerogatives and control.

C. Governing sources (commonly invoked)

Labor Code provisions on contracting/subcontracting (commonly cited as Articles 106–109 in older numbering; later reorganizations exist).
Labor Code provisions on termination by authorized causes (closure/cessation, retrenchment, redundancy, installation of labor-saving devices, disease).
Department of Labor and Employment rules on contracting (notably DOLE Department Order No. 174, series of 2017, for private sector contracting).
Supreme Court doctrine on:
- labor-only contracting tests;
- employer-employee relationship (control test, economic reality indicators);
- liability allocation among principal and contractor;
- authorized cause termination and separation pay computation.

3) What “company closure costs” usually mean in labor terms

When operations close, “closure costs” for workers typically include some combination of:

Final pay (earned but unpaid amounts)

Unpaid wages/salary
Unpaid overtime pay, holiday pay, night differential (if applicable)
Unpaid 13th month pay (pro-rated)
Unused service incentive leave conversion (if applicable)
Any company-promised benefits that have become demandable

Separation pay (if termination is an authorized cause that requires it)

Depends on cause (closure vs retrenchment vs redundancy, etc.)
Depends on whether closure is due to serious business losses (which can change separation pay entitlement)

Backwages / reinstatement / damages (if termination is illegal)

If closure is used as a pretext, or due process is violated in a way that results in illegal dismissal findings, exposure can include backwages, separation pay in lieu of reinstatement, and possibly damages/attorney’s fees depending on findings.

Government remittances and statutory compliance

SSS, PhilHealth, Pag-IBIG remittances are separate compliance issues; non-remittance can trigger administrative/criminal exposure, but worker monetary awards in labor cases often focus on employment benefits and final pay.

4) Closure as an “authorized cause” and what it requires

A. Closure/cessation of business (authorized cause)

A business may terminate employment due to closure or cessation of operations. Typical legal requirements include:

Notice requirement

Written notices are generally required:
- to affected employees, and
- to the appropriate DOLE office
Timing: commonly understood as at least 30 days prior to effectivity for authorized causes.

Good faith

Closure must be genuine and not a disguise to bust unions or terminate employees without cause.

Separation pay rules (general principles)

If closure is not due to serious business losses or financial reverses, separation pay is typically due (commonly one month pay or one-half month per year depending on the ground; closure and retrenchment differ).
If closure is due to serious business losses/financial reverses, separation pay may not be required, but the employer bears a burden to show the losses with credible evidence (often audited financials, etc., depending on case context).

B. Distinguish closure from other authorized causes

Employers sometimes label the event “closure,” but legally it might be:

Retrenchment (cost-cutting to prevent losses)
Redundancy (positions are in excess of needs)
Installation of labor-saving devices Each has distinct standards and separation pay computations. Mislabeling can increase risk.

5) The contracting classification that decides everything

A. Labor-only contracting (LOC): when the principal becomes the employer

LOC is generally present when (common indicators):

The contractor lacks substantial capital or investment related to the job, and
The workers perform activities directly related to the principal’s main business, and/or
The principal exercises control over the manner and means of the worker’s performance beyond legitimate coordination (supervision as if they were regular staff), and/or
The contractor is essentially supplying manpower, not delivering a distinct service with its own tools, supervision, and responsibility.

Consequences in closure scenarios If a deployed worker is found to be in a labor-only contracting arrangement:

The principal is treated as the employer.
The principal may be held solidarily liable with the contractor for obligations due to the worker—this can include:
- unpaid wages and benefits,
- separation pay if legally due,
- and liabilities attached to unlawful termination findings (depending on the case).

In practice, this is the highest-liability scenario for the principal on “closure costs.”

B. Legitimate job contracting: contractor is employer; principal may still face statutory liability

If contracting is legitimate:

The contractor/agency is the employer.
The contractor must comply with labor standards (wages, benefits, lawful termination, due process).
The principal’s exposure is usually framed as statutory liability to ensure workers are paid even if the contractor defaults.

What the principal is commonly liable for in legitimate contracting

In many cases, the principal can be required to answer for:

unpaid wages, and
wage-related monetary benefits required by law to protect workers when the contractor fails to pay.

Are “closure separation pay” and termination-related pay included in the principal’s statutory liability?

This is where disputes usually happen.

Practical litigation reality:

Workers often try to include separation pay, 13th month pay, and other benefits in claims against the principal.
Principals often argue their liability is limited to “wages” in a narrower sense.

How outcomes tend to turn:

If facts suggest the principal effectively controlled employment or the contractor is a mere conduit (LOC indicators), principals get pulled into solidary liability including separation pay.
If legitimate contracting is clearly established, principals still risk being held liable for unpaid wage-related monetary claims, and arguments may arise about whether the specific separation pay obligation is within that statutory coverage.

Because decisions can be fact-sensitive, the safest way to think about risk is:

LOC → principal treated as employer → broad liability for closure costs.
Legitimate contracting → contractor as employer → principal still a risk backstop for unpaid monetary claims; separation pay inclusion depends on case framing and findings.

6) Closure of which entity: principal closes vs contractor closes

Scenario 1: The principal company closes, contractor remains in business

What should happen legally

The contractor remains the employer (if legitimate contracting).
The contractor should, in principle, redeploy workers to other clients if possible.
If redeployment is not feasible, the contractor may terminate employment due to an authorized cause (often framed as closure/cessation for that account, retrenchment, or similar), subject to:
- notice requirements, and
- separation pay rules (depending on the ground and proof of losses, etc.).

Who pays

Primary payer: contractor/agency (as employer).
Principal exposure:
- If contracting is later found to be labor-only → principal becomes direct/solidary payer.
- If contracting is legitimate → principal may still be pursued as a statutory backstop for unpaid monetary claims if the contractor cannot pay.

Important nuance: A principal’s closure does not automatically extinguish the contractor’s employer obligations to its employees. The employment contract is between worker and contractor—unless LOC is found.

Scenario 2: The contractor/agency closes, principal remains open

What should happen legally

The contractor must comply with termination rules and final pay obligations to its employees.
If the contractor shuts down and cannot pay, workers often pursue the principal under statutory liability doctrines and/or allege LOC.

Who pays

Primary payer: contractor (but may be insolvent).
Principal risk:
- If LOC indicators exist → principal may be treated as employer and held solidarily liable.
- If legitimate contracting exists → principal may still face orders to satisfy unpaid monetary claims to protect labor.

Scenario 3: Both principal and contractor close

This is the hardest recovery scenario for workers and the riskiest litigation scenario for principals if LOC can be argued, because:

workers will seek any solvent party, and
tribunals will closely examine whether the “agency” was a legitimate independent contractor or merely a labor-only contractor.

If both are insolvent, recovery may be practically limited, but legal liability may still be declared.

7) What workers commonly claim in closure cases involving agencies

A. Final pay components

Unpaid wages and wage differentials
Overtime, holiday pay, night differential
Pro-rated 13th month pay
Service incentive leave conversion
Other demandable benefits

These are frequently pursued against both contractor and principal (especially if contractor defaults).

B. Separation pay

Workers will claim separation pay if:

termination is treated as authorized cause requiring it, and
closure is not proven to be due to serious business losses (or if the invoked cause is redundancy/retrenchment with required separation pay and standards).

In agency contexts, separation pay battles often become a proxy fight over:

whether contractor is the real employer, and
whether the principal must shoulder separation pay if contractor cannot.

C. Illegal dismissal package

If closure is alleged to be pretextual, or notices/standards weren’t met, claims can include:

backwages
separation pay in lieu of reinstatement (if reinstatement is no longer feasible)
damages and attorney’s fees (depending on findings)

In agency cases, illegal dismissal arguments often hinge on:

who terminated the worker (contractor vs principal), and
who actually exercised control and dismissal power.

8) Due process and documentation issues that decide liability

A. Authorized cause notices

In closure/authorized cause terminations, missing or defective notice can create exposure. Even when closure is real, the failure to comply with statutory notice requirements can produce monetary consequences.

B. Proof of losses (when invoked to avoid separation pay)

If an employer claims serious business losses/financial reverses to avoid paying separation pay:

the evidentiary burden matters (credible financial records are often crucial). In agency settings, the contractor (as employer) must prove its claimed losses if it is the one invoking that defense.

C. Contracting compliance evidence

For legitimate job contracting, principals and contractors typically rely on:

service agreements describing a distinct service, scope, deliverables
contractor capitalization/investment indicators
contractor’s independent supervision and control structures
DOLE registration/compliance (where applicable)
payroll records showing contractor as paymaster
disciplinary records showing contractor as disciplinarian (not the principal)

If the evidence shows the principal ran day-to-day supervision like regular employees, that strengthens LOC/“principal-as-employer” arguments.

9) How “control” shows up in real workplaces (and why it matters on closure)

A principal can coordinate outcomes (what needs to be done), but risk increases when the principal dictates:

work methods step-by-step,
schedules as if integrated into the principal’s HR system,
performance evaluation and discipline as if the worker is the principal’s own employee,
hiring/firing decisions directly (e.g., “tanggalin mo ‘yan” with immediate effect),
assignment and reassignment in a way that bypasses contractor discretion.

When closure occurs, those facts can transform the case from “contractor owes separation pay” to “principal is the employer and owes everything.”

10) Special situations

A. Project-based / fixed-term arrangements routed through an agency

If the worker is legitimately project-based under the contractor, the end of a project or account can end employment without separation pay in some circumstances—but misclassification is frequently challenged. The legitimacy of project employment requires clear project designation at hiring and other standards.

B. Security guards and security agencies

Security services are a heavily litigated area. When a principal terminates the service contract or closes:

the security agency remains employer and should redeploy;
inability to redeploy can trigger authorized-cause termination rules;
principals may still be pursued depending on contracting compliance and the facts of control and payment defaults.

C. Sale/transfer of business assets vs closure

A “closure” that is actually a transfer to another entity can trigger disputes about:

successor liability theories,
bad faith closure,
continuity of business operations,
whether employees should have been absorbed.

These are complex and fact-driven.

11) Practical liability matrix (who is most likely to pay what)

If labor-only contracting is found

Principal: treated as employer; likely liable for:
- final pay, wage claims, benefits
- separation pay (if due)
- possible illegal dismissal consequences if closure is pretextual or process/standards fail
Contractor: also liable; often solidary.

If legitimate contracting is found

Contractor: primary employer; owes:
- final pay, wage claims, benefits
- separation pay if due under the applicable authorized cause
Principal: exposure as a backstop for unpaid monetary claims if contractor defaults; extent depends on how the claim is characterized and how the adjudicator applies statutory liability in the circumstances.

12) What workers and companies usually do in disputes (procedural reality)

Workers typically:

file labor complaints for monetary claims and/or illegal dismissal,
implead both contractor and principal to maximize recovery,
argue labor-only contracting and principal control,
demand payment of final pay, separation pay, and damages.

Principals typically:

argue legitimate job contracting and lack of control,
point to contractor as the employer responsible for separation pay,
emphasize compliance structures (independent supervision, contractor payroll, contractor discipline),
challenge inclusion of non-wage items in statutory liability (case-specific).

Contractors typically:

assert authorized cause and compliance with notice requirements,
claim business losses (if attempting to avoid separation pay),
argue they attempted redeployment.

13) Compliance and risk reduction principles (what matters most)

Even without litigation, the following are the pressure points that determine closure-cost exposure:

Contracting must be genuinely legitimate
- real contractor capitalization/investment
- contractor supervision/control
- contractor HR independence
- clear service deliverables beyond labor supply
Authorized-cause termination must be done correctly
- timely employee and DOLE notice
- correct ground (closure vs retrenchment vs redundancy)
- separation pay computation aligned with the ground
- credible proof if claiming losses
Keep clean records
- payroll, time records, deployment orders
- notices, memos, service agreement governance
- documentation of redeployment efforts (for contractors)
Avoid principal-driven discipline/termination
- use contractor channels; principal reports issues, contractor acts

14) Bottom line principles (Philippine context)

If an “agency worker” is effectively doing the principal’s core work under the principal’s control and the agency is merely supplying manpower, closure can expose the principal to broad “closure costs” because the arrangement may be treated as labor-only contracting.
If the arrangement is legitimate job contracting, the contractor is the employer and is primarily responsible for closure-related payments, but the principal can still be pulled in as a statutory guarantor for unpaid monetary claims if the contractor fails, depending on the claim and facts.
Most closure-cost disputes are won or lost on (a) contracting legitimacy, (b) control, (c) authorized-cause compliance (notice, good faith, standards), and (d) documentary proof, especially around claimed financial losses and proper termination ground.