In the corporate world, "sister companies"—entities owned or controlled by the same parent company—often shuffle talent to meet operational needs. While this may seem like a simple internal move, from a legal standpoint, it is a significant event that triggers specific rights and obligations under the Labor Code of the Philippines and prevailing jurisprudence.
1. The General Rule: Continuity vs. Termination
Under Philippine law, every corporation is a distinct legal entity (the Doctrine of Corporate Fiction). Therefore, transferring an employee from Company A to Company B is technically a termination of the first employment contract and the beginning of a new one.
However, the legal treatment of this transfer depends on how the transition is structured:
- Consented Transfer: The employee agrees to the transfer, often with a "continuity of service" agreement.
- Forced Transfer/Redundancy: The transfer is a result of a reorganization or the closing of a department.
- Tripartite Agreement: A formal agreement between the old company, the new company, and the employee.
2. Is Separation Pay Mandatory?
The entitlement to separation pay depends on the reason for the transfer and the agreement between the parties.
| Scenario | Entitlement to Separation Pay |
|---|---|
| Voluntary Transfer | Generally No. If the employee resigns from Company A to join Company B, they are not entitled to separation pay unless stipulated in a contract or CBA. |
| Redundancy/Retrenchment | Yes. If the transfer is a way to avoid laying off the employee due to redundancy, the employee is entitled to month pay or month pay per year of service (whichever is higher). |
| Corporate Merger/Consolidation | Varies. Usually, the new entity absorbs the employees and honors their previous tenure, but if the employee refuses the new terms, they may be entitled to separation pay. |
Key Legal Note: If the transfer is forced and results in a "demotion in rank or a diminution in pay," it may constitute Constructive Dismissal, allowing the employee to claim full backwages and separation pay.
3. The Concept of "Length of Service" (Tenure)
One of the most contested issues in sister-company transfers is whether the years of service in Company A should be carried over to Company B.
- Standard Practice: Without an agreement, tenure "resets." The employee starts as a new hire in Company B.
- Total Continuity: If Company B agrees to recognize the years of service from Company A, this must be documented. This is crucial for future retirement benefits and 13th-month pay computations.
- The "Piercing the Veil" Exception: If the sister companies are being used to defraud the employee or circumvent labor laws (e.g., transferring them every 5 months to prevent regularization), the court may "pierce the veil of corporate fiction" and treat them as one employer, mandating total tenure recognition.
4. Treatment of Accrued Benefits
When transferring, the "clearing" process usually involves:
- Final Pay: Company A must release all earned wages, pro-rated 13th-month pay, and the cash conversion of unused Service Incentive Leaves (SIL).
- Tax Documentation: Company A must issue a BIR Form 2316 for the period served.
- Retirement Fund: If Company A has a retirement plan, the employee must either be paid their vested share or the fund must be transferred to Company B’s plan (if applicable).
5. Best Practices for Implementation
To avoid litigation, the following steps are recommended for both employers and employees:
- Written Consent: Always obtain a signed "Letter of Acceptance" or "Tripartite Transfer Agreement."
- Clarify Seniority: Explicitly state whether the transfer is with "continuity of service" or if it is a "fresh hire" arrangement.
- No Diminution of Benefits: Ensure the salary and benefits in the sister company are equal to or better than the previous position to avoid claims of constructive dismissal.
Would you like me to draft a sample Tripartite Transfer Agreement or a Consent Letter that incorporates these Philippine legal requirements?