I. Introduction

More and more businesses in the Philippines are shifting from company-owned models to franchise systems—especially in food, retail, and services. A common pattern is:

A company operates branches directly;
Later, it converts some or all branches into franchised outlets;
Operations are transferred to franchisees (often separate corporations or individuals).

When this happens, employees are often told:

“We’re turning this branch into a franchise. Your employer will now be the franchisee.”

Or, sometimes worse:

“Because we’re converting to a franchise, your employment ends on [date].”

This raises critical questions:

Can employees be terminated just because a business is franchised?
Is the franchisee obliged to absorb the workers?
What separation pay, if any, must be given?
What happens to seniority, union rights, and benefits?

This article explains the legal framework and practical consequences of a company transfer to a franchise in the Philippine setting, focusing on employee rights, employer obligations, and common problem areas.

II. Legal Foundations

1. Constitutional and statutory anchors

Key principles that always apply:

Security of tenure
- Article XIII of the 1987 Constitution and Article 294 (formerly 279) of the Labor Code protect employees from dismissal except for just or authorized causes, and only with due process.
- Being “franchised” is not, by itself, a ground to terminate employment.
Protection to labor / social justice policy
- The Constitution declares that the State shall afford full protection to labor.
- When the law or facts are ambiguous, courts typically tilt in favor of the worker.
Non-impairment of contracts vs. police power
- Business contracts (like franchise agreements) cannot be used to defeat statutory labor rights.
- A franchisor and franchisee cannot agree among themselves to waive or reduce employees’ statutory entitlements.
Labor Code framework The main provisions involved in transfers/franchising scenarios are:
- Article 298 (formerly 283) – Authorized causes:
  - Closure or cessation of business;
  - Retrenchment to prevent losses;
  - Redundancy;
  - Installation of labor-saving devices.
- Article 299 (formerly 284) – Disease as a ground for termination (less relevant here but part of authorized causes).
- Articles on wages, benefits, and termination pay;
- Provisions on unfair labor practice, collective bargaining, and contracting/subcontracting.

III. Types of Business Transfer and Why They Matter

Not all “transfers” are the same. Employee rights depend heavily on the structure of the transaction.

1. Transfer by sale of shares (change in ownership only)

The corporation (employer) remains the same legal entity.
Only the shareholders change (e.g., from original owners to incoming franchise group).

Effect on employees:

As a rule, no termination.
Employment relationships continue automatically.
Seniority, tenure, and benefits carry on as if nothing changed.
The new owners cannot terminate employees solely because they bought the company.

This is often called the successor employer doctrine in jurisprudence: a change in ownership through share transfers does not extinguish employer obligations.

2. Transfer by sale of assets / closure of branch

Example:

Head office owns and runs a branch.
It sells the branch assets and business operations to an independent franchisee.
The original employer closes its operations in that branch.

Here we have:

The original employer may validly invoke closure or cessation of business (an authorized cause).
The franchisee becomes a new and separate employer, unless there is evidence of continuity or control tying it to the old employer.

Employees’ rights now hinge on:

Whether the closure is genuine; and
Whether the franchisee assumes or refuses to assume workers.

3. Internal restructuring / “conversion to franchise” without legal closure

Sometimes, the company says it is “franchising” but, in reality:

The same corporation continues to operate the business;
The so-called “franchisee” is just a marketing label or internal rebranding; or
The “franchisee” is owned/controlled entirely by the same people, and the workers’ jobs are the same.

In such cases, courts may view the transfer as sham or as an attempt to bypass labor rights, and may:

Treat the franchisor and franchisee as a single employer or as solidarily liable;
Declare dismissals illegal if security of tenure is breached.

IV. Termination of Employment Due to Transfer to Franchise

1. Is franchising itself a valid ground for dismissal?

No. Franchising, by itself, is not among the just or authorized causes in the Labor Code.

Termination might be legal only if it fits under an authorized cause, such as:

Closure or cessation of business (Article 298);
Redundancy – if positions become unnecessary;
Retrenchment – if needed to prevent serious losses.

The conversion to franchise is only the background. The legality of dismissal depends on whether the situation meets the criteria for these causes and follows the proper procedures.

2. Closure or cessation of business

If the company genuinely ceases operating a particular establishment (e.g., it stops running the branch and turns it entirely over to the franchisee), it may:

Terminate employees on the ground of closure, provided that:
1. Bona fide closure – Not done in bad faith or to simply circumvent labor laws;
2. 30-day prior written notice to:
  - The affected employees; and
  - The Department of Labor and Employment (DOLE);
3. Separation pay is given, except if closure is due to serious business losses duly proven.

Separation pay for closure:

If not due to serious losses → at least one (1) month salary or one-half (1/2) month salary for every year of service, whichever is higher;
A fraction of at least six (6) months is considered one full year.
If closure is due to serious losses → no separation pay is legally required, but the employer must prove the losses convincingly (usually via audited financial statements).

3. Redundancy or retrenchment because of franchising

Sometimes, the company retains employees but claims that some positions are “redundant” due to the shift to a franchise model.

A valid redundancy requires:

Superfluity of the position(s);
Good faith in abolishing the positions;
Fair and reasonable criteria in selecting who to terminate (e.g., efficiency, seniority);
30-day written notice to employees and DOLE;
Payment of separation pay of one (1) month pay or one (1) month pay per year of service, whichever is higher.

Retrenchment (to prevent losses) also requires proof of actual or imminent substantial losses and likewise requires notice and separation pay (usually 1 month or 1/2 month per year of service, whichever is higher).

4. Due process requirements

Even for authorized causes, the employer must comply with:

Substantive due process – there is a valid authorized cause (closure, redundancy, etc.);
Procedural due process – the mandatory 30-day notices.

Failure to give proper notice or pay correct separation can lead to liability for illegal dismissal or at least nominal damages.

V. When the Franchisee Takes Over: Absorption and New Employment

1. Is the franchisee required to absorb the employees?

As a general rule:

A new owner or employer (franchisee) is not legally bound to absorb the employees of the previous employer, unless:
- It expressly assumes that obligation in the contract;
- There is a CBA or company policy to that effect; or
- Circumstances show there is actually no genuine change of employer (same entity in substance).

However, while not legally required in all cases, absorption is common in practice and often encouraged by DOLE as a fair solution.

2. What happens if the franchisee voluntarily absorbs the workers?

When employees are rehired by the franchisee, several issues arise:

Continuity of tenure / bridging of service
- By default, employment with the new employer is a new employment.
- Service with the old employer is not automatically credited for purposes like retirement or seniority, unless:
  - The parties expressly agree to recognize past service;
  - Or jurisprudence treats the new employer as a successor employer (e.g., where the business is a going concern and the new employer continues operations substantially as before).
Probationary vs. regular status
- If employees had already become regular with the old employer, they do not automatically remain regular with the new employer.
- The franchisee may hire them as:
  - Regular employees from day one; or
  - Probationary employees, provided the rules on probationary employment are followed (reasonable standards made known at the start, maximum six months in most cases).
Wage rates and benefits
- The franchisee must at least comply with:
  - Minimum wage laws;
  - Mandatory benefits (13th month pay, service incentive leave, etc.).
- Company-specific benefits (e.g., higher allowances, unique incentives) are not automatically carried over unless:
  - The new employer agrees; or
  - There is a legal basis (e.g., successorship doctrine, assumption in contract).
No “waiver” of rights by mere re-employment
- Accepting employment under a franchisee does not constitute waiver of any rights against the previous employer (e.g., to claim full separation pay, backwages in case of illegal dismissal, etc.).
- Any waivers or quitclaims signed must be voluntary, informed, and supported by reasonable consideration to be valid.

VI. Collective Bargaining, Unions, and CBAs

1. Effect of transfer on union and CBA

Where there is a legitimate transfer of business and the enterprise continues substantially the same, jurisprudence recognizes that:

The new employer may be considered a successor employer, and
The existing Collective Bargaining Agreement (CBA) and union representation may continue to bind it, at least for the remaining CBA term.

Key points:

Change of ownership does not automatically dissolve a union.
If the business remains essentially the same, union rights persist.
The new employer may be required to recognize the union as bargaining agent of the employees in the bargaining unit it retains.

In a franchise context:

If a single branch is spun off and becomes a franchise, the effect on the union depends on:
- Whether that branch was part of the bargaining unit;
- Whether the employees are absorbed;
- Whether the union remains majority in the new setup.

2. Union security clauses

Union security clauses in CBAs (e.g., closed shop, maintenance of membership) may continue to operate if the CBA remains binding.
However, they cannot override statutory rules or basic rights (e.g., cannot force non-employees to join, cannot sanction illegal dismissals).

VII. Monetary Rights on Separation or Transition

When a transfer to a franchise leads to termination, the following typically become due from the old employer:

Separation pay (if termination is on authorized grounds):
- Closure (no serious losses) → 1 month or 1/2 month per year of service (whichever is higher).
- Redundancy → 1 month or 1 month per year of service (whichever is higher).
- Retrenchment → 1 month or 1/2 month per year of service (whichever is higher).
Pro-rated 13th month pay up to the date of termination.
Cash conversion of unused leave credits if company policy or law so provides (e.g., 5-day Service Incentive Leave for those entitled).
Unpaid wages and overtime pay, night shift differential, holiday pay, premium pay, etc.
Other company-specific benefits that have accrued (e.g., prorated bonuses, incentives under existing programs, accrued allowances if the policy so provides).
Final pay – DOLE has issued advisories that final pay should be released within a reasonable time (often within 30 days), although practice and enforcement may vary.

Separately, if the employment relationship continues (no valid authorized cause, or employees are “forced” to resign), employees may:

Contest the termination as illegal dismissal, and
Claim reinstatement (or separation pay in lieu) plus backwages and damages.

VIII. Social Security, PhilHealth, and Pag-IBIG

When employment ends due to transfer/franchising:

The old employer must:
- Remit all due SSS, PhilHealth, and Pag-IBIG contributions;
- Give certifications or documents needed by the worker (e.g., SSS records, certificates of employment, BIR Form 2316).
The franchisee as new employer must:
- Register employees under its own SSS/PhilHealth/Pag-IBIG Employer IDs;
- Start remitting contributions for the period of new employment.

Missing contributions can be claimed from the responsible employer and may result in liability to government agencies and to the employee.

IX. Contracting, Subcontracting, and Franchise Structures

Franchising can sometimes overlap with contracting and subcontracting arrangements.

1. Legitimate franchise vs. labor-only contracting

A legitimate franchisee is typically:

An independent business;
With its own substantial capital and investment;
Operating its own business for its own account and under its own responsibility;
Free to control the manner of work, subject only to brand standards.

However, if:

The so-called franchisee has no substantial capital;
The workers in the franchise outlet are effectively selected, supervised, and controlled by the franchisor;
The franchisee simply provides workplace and nominal management;

then DOLE and the courts may find the arrangement to be labor-only contracting or a sham, making:

The franchisor the real employer, or
The franchisor and franchisee solidarily liable for labor standards and security of tenure.

2. Tests used by courts

Courts often apply:

The four-fold test:
- Power of selection and engagement of employee;
- Payment of wages;
- Power of dismissal;
- Control test – who controls the means and methods of work.
The economic reality test – whether the worker is economically dependent on the alleged employer.

In a franchising setup, if the franchisor retains effective control over the workers’ day-to-day activities, it risks being treated as an employer in law, regardless of the contract labels.

X. Data Privacy and Employee Information During Transfer

Under the Data Privacy Act, employee data (personal and sensitive) must be processed subject to:

Lawful basis (e.g., contract, legal obligation, legitimate interest, or consent);
Transparency – informing employees how their data will be used;
Security measures – protection against unauthorized access or breaches.

When a business transfers to a franchisee, the old employer may share employee data with the franchisee only in accordance with these principles, such as:

Where necessary to fulfill employment contracts or establish new ones;
Where required by law or regulators;
Subject to internal policies and privacy notices.

Employees have rights to information, access, and correction of their personal data.

XI. Common Problem Scenarios and Employee Remedies

Scenario 1: “Sign this resignation or you won’t be absorbed.”

Often, employees are pressured to sign resignation letters so that:

The old employer avoids paying separation pay;
The franchisee can claim they are hiring “new” employees.

Legal view:

Resignation must be voluntary.
Coerced or conditional resignations may be treated as illegal dismissal.
Employees can challenge forced resignations and claim:
- Reinstatement;
- Backwages;
- Damages;
- Or, separation pay in lieu of reinstatement.

Scenario 2: No notice, sudden closure, and no separation pay

If a branch is suddenly closed for franchising and employees are told to stop working immediately without notice and separation pay, this likely violates:

Article 298 (notice and separation pay requirements);
Possibly, security of tenure.

Employees may:

File a complaint with DOLE or NLRC for illegal dismissal, unpaid wages, and mandatory benefits.

Scenario 3: Franchisee pays below minimum wage or withholds benefits

Once employed under the franchisee, workers are legally entitled to:

Minimum wage applicable in the region;
13th month pay;
Service incentive leave (if qualified);
Holiday pay, overtime, night differential (when applicable);
SSS, PhilHealth, Pag-IBIG contributions.

Violations can be addressed via:

DOLE labor standards enforcement;
Complaints before DOLE regional offices or NLRC, depending on the claim.

If the franchisor is heavily involved in control and supervision, it may also be held solidarily liable.

XII. Practical Checklist for Employees Facing a Transfer to Franchise

If your company or branch is being turned into a franchise, consider the following:

Ask for clarity in writing.
- What exactly is changing? Employer name? Ownership? Branch management?
- Will there be a formal closure by the current employer?
Check your termination papers.
- Is it called resignation, end of contract, authorized cause, or something else?
- Were you given 30-day written notice for closure/redundancy?
Review your financial entitlements.
- Are you receiving the correct separation pay?
- Does it reflect your years of service (remember: more than 6 months = 1 year)?
- Are all unpaid benefits and 13th month pay included?
Clarify your status with the franchisee.
- Will you be hired? Under what terms (regular or probationary)?
- Will your past service be recognized (bridging of service)?
- What will your salary and benefits be?
Be careful with quitclaims.
- Read any waiver or quitclaim carefully.
- Check if the amounts paid are reasonable and complete.
- A quitclaim does not automatically bar you from contesting illegal dismissal if the consideration is unconscionably low or if you signed under duress.
Seek professional advice if needed.
- Labor law is technical and fact-specific; even small factual details can change the legal outcome.

XIII. Conclusion

In the Philippines, “transfer to franchise” is not a magic eraser of employee rights. Franchising is a business model; it does not stand above the Constitution or the Labor Code.

Key takeaways:

Security of tenure remains central. Employees cannot be lawfully dismissed just because a branch or company is franchised.
Any termination must be grounded on valid authorized causes, with proper notice and correct separation pay.
A franchisee is generally not obliged to absorb employees, but if it does, the terms must still respect minimum labor standards.
Where the franchise arrangement is a disguise for labor-only contracting or a sham transfer, the franchisor can be treated as the real employer and held liable.
Union rights, CBAs, and accrued benefits do not simply vanish with a change in business label.

Employees affected by franchising transitions should look beyond labels and examine the legal substance of what is happening—who is really closing, who is really employing, and whether their statutory rights are being respected.

(This article provides general legal information in the Philippine context and is not a substitute for personalized legal advice on a specific case.)