Employee Rights During Business Transfer or Conversion to a Corporation: Separation Pay and Disability Discrimination in the Philippines

Introduction

In the dynamic landscape of Philippine business, companies often undergo structural changes such as transfers of ownership, mergers, acquisitions, or conversions from sole proprietorships or partnerships to corporations. These transformations can significantly impact employees, raising critical questions about their rights under Philippine labor laws. Key concerns include entitlement to separation pay when employment is affected and protections against disability discrimination during such transitions. This article provides a comprehensive overview of these rights, grounded in the Labor Code of the Philippines (Presidential Decree No. 442, as amended), relevant jurisprudence from the Supreme Court, and anti-discrimination statutes like the Magna Carta for Persons with Disability (Republic Act No. 7277, as amended by Republic Act No. 9442 and Republic Act No. 10524). It explores the legal framework, employee entitlements, employer obligations, and remedies available, emphasizing the balance between business flexibility and worker protection.

Legal Framework Governing Business Transfers and Conversions

Business Transfers: Mergers, Acquisitions, and Asset Sales

Under Philippine law, a business transfer typically occurs through mergers, consolidations, or sales of assets or shares. The Corporation Code (Batas Pambansa Blg. 68, as amended) governs corporate restructurings, but labor implications fall under the Labor Code.

Continuation of Employment: In a bona fide transfer of business ownership, such as an asset sale where the buyer continues the operations without interruption, the employment relationship is generally preserved. The Supreme Court in SME Bank, Inc. v. De Guzman (G.R. No. 184517, October 8, 2013) held that if the transfer is in good faith and the new owner assumes the business as a going concern, employees are not automatically terminated. Instead, the buyer steps into the shoes of the seller, inheriting employment contracts, accrued benefits, and liabilities.
Termination and Rehiring: However, if the transfer leads to closure or cessation of operations by the seller, employees may be terminated for authorized causes under Article 298 (formerly Article 283) of the Labor Code. This includes redundancy or retrenchment if positions are eliminated. In such cases, the new employer may rehire employees, but refusal to do so without just cause could invite claims of unfair labor practices.
Share Sales vs. Asset Sales: A mere sale of shares does not typically affect employment, as the corporation remains the employer. In contrast, asset sales might trigger separation if the business is not continued seamlessly.

Conversion to a Corporation

Converting a sole proprietorship or partnership to a corporation involves incorporating under the Corporation Code, often to limit liability or facilitate growth.

Doctrine of Piercing the Corporate Veil: The new corporation is generally considered a separate legal entity. However, if the conversion is a mere subterfuge to evade labor obligations, courts may pierce the corporate veil, treating the corporation as a continuation of the previous entity. In Claparols v. Court of Industrial Relations (G.R. No. L-30822, July 31, 1975), the Supreme Court ruled that such conversions do not dissolve existing employment relationships if the business operations remain unchanged.
Impact on Employees: Employees of the pre-conversion entity are entitled to continued employment with the new corporation unless terminated for just or authorized causes. Any mass termination disguised as a conversion could be deemed illegal dismissal.

Employee Rights to Separation Pay

Separation pay serves as a financial safety net for employees separated due to circumstances beyond their control. It is not a universal right but is mandated in specific scenarios under the Labor Code and jurisprudence.

Entitlement in Business Transfers

Authorized Causes: Under Article 298, separation pay is required for terminations due to installation of labor-saving devices, redundancy, retrenchment to prevent losses, closure or cessation of operations, or when an employee suffers from a disease and continued employment is prohibited by law or prejudicial to health. In transfers, if the seller closes operations and the buyer does not absorb all employees, affected workers are entitled to separation pay equivalent to at least one month's pay or one-half month's pay for every year of service, whichever is higher (for redundancy/retrenchment), or one month's pay per year of service (for closure).
No Entitlement in Good Faith Transfers: If the transfer is bona fide and employees are retained by the new owner, no separation pay is due. The Supreme Court in Manila Electric Company v. NLRC (G.R. No. 114129, October 24, 2003) clarified that separation pay is not warranted if employment continues uninterrupted.
Computation and Conditions: Separation pay must include all forms of compensation, such as allowances and benefits. Payment is conditional on a 30-day notice to the Department of Labor and Employment (DOLE) and the employees, plus a fair selection process for redundancies (e.g., last-in, first-out or performance-based criteria).

Entitlement in Conversions to Corporation

Similar to Transfers: If the conversion results in no operational disruption, employees are not entitled to separation pay. However, if it leads to retrenchment or closure of certain departments, separation pay applies as per Article 298.
Special Cases: In Abbott Laboratories v. NLRC (G.R. No. 76973, October 27, 1986), the Court awarded separation pay where a corporate restructuring was used to terminate unionized employees, deeming it bad faith.
Voluntary Separation: Employees may negotiate separation packages, but these are not mandatory unless stipulated in collective bargaining agreements (CBAs).

Protections Against Disability Discrimination

Disability discrimination intersects with business transfers and conversions, particularly when employees with disabilities (PWDs) are disproportionately affected by terminations or non-rehiring.

Legal Basis: Magna Carta for Persons with Disability

Republic Act No. 7277, as amended, prohibits discrimination against PWDs in all aspects of employment, including hiring, promotion, and termination.

Definition of Disability: Includes physical, mental, or sensory impairments that substantially limit major life activities. Amendments under RA 9442 and RA 10524 expanded incentives for employers hiring PWDs, such as tax deductions.
Prohibited Acts in Transfers/Conversions: During a business transfer, refusing to retain or rehire a PWD solely because of their disability constitutes discrimination. Similarly, in conversions, if the new corporation terminates PWDs under the guise of restructuring, it may violate the law. The Supreme Court in Bernardo v. NLRC (G.R. No. 122917, July 12, 1999) emphasized that terminations must not be discriminatory, and PWDs are entitled to reasonable accommodations.
Reasonable Accommodation: Employers must provide modifications (e.g., adjusted workstations) unless they cause undue hardship. Failure to do so during transitions can lead to claims.
Intersection with Separation Pay: If a PWD is terminated due to disease under Article 298, separation pay is mandatory, but the termination must be certified by a competent public health authority. Discriminatory intent negates this, potentially leading to reinstatement and backwages.

Enforcement and Remedies

Burden of Proof: The employee must show prima facie discrimination, after which the burden shifts to the employer to prove non-discriminatory reasons.
Incentives for Compliance: Employers hiring at least 1% PWDs in their workforce qualify for incentives, encouraging inclusion during transfers.

Employer Obligations and Compliance

Due Process Requirements

Notice and Hearing: For terminations, employers must furnish two notices: one to explain the cause and allow defense, and a final notice of decision.
DOLE Reporting: Mandatory for separations due to authorized causes.

Collective Bargaining Agreements

CBAs may provide enhanced protections, such as higher separation pay or anti-discrimination clauses, which prevail over minimum legal standards.

Good Faith Requirement

All restructurings must be in good faith; otherwise, they may be declared illegal, leading to reinstatement without loss of seniority and backwages.

Remedies for Violations

Illegal Dismissal Claims: Filed with the NLRC; remedies include reinstatement, backwages, and damages.
Discrimination Complaints: Under the Magna Carta, PWDs can file with DOLE, courts, or the National Council on Disability Affairs. Penalties include fines (P50,000 to P200,000) and imprisonment (6 months to 6 years).
Class Actions: In mass terminations, employees may file collective suits.

Conclusion

Employee rights during business transfers or conversions to corporations in the Philippines are robustly protected to prevent abuse while allowing business evolution. Separation pay ensures financial security for lawful terminations, while anti-discrimination laws safeguard PWDs from unfair treatment. Employers must navigate these changes with transparency and fairness, adhering to due process to avoid litigation. Employees, in turn, should be vigilant and seek legal counsel from DOLE or labor lawyers to enforce their rights. Ultimately, these protections foster a balanced labor environment, promoting both economic growth and social justice.