The transfer of employees from a company-owned operation to a franchisee company is a recurring issue in Philippine labor practice, particularly in retail, food and beverage, quick-service restaurants, convenience stores, and gasoline stations. While franchising is a legitimate and widely used business model, the moment it involves the movement of employees from one employer to another, it immediately intersects with the constitutional guarantee of security of tenure and the Labor Code’s strict rules against involuntary separation.

This article exhaustively discusses the current state of Philippine law and jurisprudence (as of December 2025) on the subject.

1. Fundamental Principle: Security of Tenure and the Personal Nature of Employment

Article XIII, Section 3 of the 1987 Constitution and Article 294 (formerly 279) of the Labor Code guarantee security of tenure. An employee may only be separated for just or authorized cause and after due process.

The employment contract is intuitu personae — it is entered into with a specific employer. An employee cannot be compelled to work for another employer without his or her consent. Therefore, a unilateral transfer to a franchisee (a separate juridical entity) is, in principle, illegal unless it falls under one of the recognized exceptions discussed below.

Supreme Court ruling (repeatedly affirmed):

“An employee cannot be transferred to another employer without his consent, even if the new employer is a sister company or subsidiary, because that would violate the security of tenure.” (Peckson v. Robinsons Supermarket Corp., G.R. No. 198534, July 3, 2013; reiterated in The Coffee Bean and Tea Leaf Phils. v. Arenas, G.R. No. 208908, March 8, 2017)

2. Intra-Company Transfer vs. Inter-Company Transfer

Type	Allowed?	Conditions	Effect on Employer
Within the same juridical entity (e.g., from one branch to another of the same corporation)	Yes (management prerogative)	Must be reasonable, not demotion in rank or diminution of benefits, not for harassment	Employer remains the same
To a separate juridical entity (franchisee, even if affiliated)	Generally NO without consent	Only valid if employee voluntarily accepts or if position is validly abolished via authorized cause	Employer changes

A franchisee is almost always a separate corporation, partnership, or single proprietorship. Therefore, transfer to a franchisee is inter-company and cannot be imposed.

3. Common Scenarios and Their Legality

Scenario A – Direct “Transfer” or “Absorption” Without Abolishing Positions

The company simply tells employees: “Starting next month you will be under the franchisee but your salary and position remain the same.”

This is illegal constructive dismissal. The employer is unilaterally changing a fundamental term of the contract (the identity of the employer). Even if salary and benefits are identical or improved, the employee still has the right to refuse.

Leading cases:

San Miguel Corporation v. NLRC (G.R. No. 119293, June 10, 2003)
Indino v. National Labor Relations Commission (G.R. No. 203816, September 11, 2013)
The Coffee Bean and Tea Leaf case (supra)

Result: Employee who refuses is entitled to reinstatement with full backwages or, if strained relations exist, separation pay in lieu of reinstatement plus full backwages.

Scenario B – Valid Redundancy/Closure Due to Franchising, Followed by Rehiring by Franchisee

The company decides in good faith to cease direct operations of certain outlets and convert them to franchised operations. It declares the positions redundant or closes the installation, pays separation benefits, and terminates the employees legally. The franchisee then independently hires (or prioritizes hiring) the separated employees under new contracts.

This is legal, provided all redundancy requirements are strictly complied with:

Written notice to affected employees and DOLE at least one (1) month before effectivity
Payment of separation pay:
- For redundancy: at least one (1) month pay or at least one-half (½) month pay for every year of service, whichever is higher
- For closure not due to serious business losses: same as redundancy
- For closure due to serious business losses: at least one (1) month or one-half (½) month per year, whichever higher (Art. 298, formerly 283)
Good faith in abolishing the position (franchising must be a genuine business decision, not a ruse to bust a union or avoid benefits)
Fair and reasonable criteria in selecting who are affected (though in full outlet franchising, all employees in that outlet are naturally affected)

Cases upholding this:

Waterloo Industrial Corp. v. CA (G.R. No. 147854, August 22, 2007)
Alabang Country Club v. NLRC (G.R. No. 157611, June 27, 2008) – business judgment rule applies; courts will not interfere with bona fide franchising decision
Jollibee Foods Corp. v. Balbido (G.R. No. 224546, January 20, 2021) – franchising of stores was upheld as valid redundancy

If the franchise agreement requires the franchisee to hire the former employees at the same or better terms, that is a private arrangement between franchisor and franchisee and does not bind the employees unless they agree.

Scenario C – Sham Franchising / Alter-Ego Situation

When the “franchisee” is actually controlled by the same owners or family members and is used merely to reduce salaries, remove benefits, or bust the union.

The Supreme Court will pierce the veil of corporate fiction and treat the franchisee as a mere alter ego or adjunct of the original employer.

Consequence: Solidary liability for money claims, illegal dismissal, etc.

Cases:

Complex Electronics Employees Assn. v. NLRC (G.R. No. 121315, July 19, 1999)
Prince Transport, Inc. v. Garcia (G.R. No. 167291, January 12, 2011)
Various 7-Eleven cases where Philippine Seven Corporation was held solidarily liable with franchisees in some instances because of the degree of control exercised

Indicators of sham franchising:

Same owners/family members
Franchisor pays salaries or withholds taxes for franchisee employees
Franchisor exclusively handles HR functions
Franchisee has no substantial capital or investment of its own
Employees continue to report to the same supervisors

4. Effect of Collective Bargaining Agreement (CBA) Provisions

Many CBAs in franchised industries contain clauses on “successorship” or “priority hiring” in case of franchising. Such clauses are valid and binding.

Example language upheld by the Supreme Court:

“In the event of franchising of company-owned stores, the Company shall require the franchisee to give preference in employment to affected regular employees under the same or substantially similar terms and conditions.”

If the CBA contains such a provision, violation thereof constitutes unfair labor practice (Art. 259, formerly 248).

5. Diminution of Benefits Upon Transfer/Rehiring

Even if the employee voluntarily accepts employment with the franchisee, the new employer cannot reduce benefits that have ripened into vested rights (e.g., 13th-month pay, service incentive leave, retirement).

However, company-specific benefits (e.g., rice subsidy, HMO, car plan) that are not mandated by law may be removed by the new employer unless the employee’s acceptance letter or new contract expressly continues them.

Wesleyan University-Philippines v. Reyes (G.R. No. 208321, July 30, 2014) – length of service is carried over only if there is an express agreement or if the new employer is a mere continuation/alter ego.

In practice, most legitimate franchisees reset the seniority for company-specific benefits but continue to recognize tenure for separation pay computation if the employee is later terminated.

6. DOLE Position (as of 2025)

DOLE Department Advisory No. 01-2020 and various opinions consistently state:

Franchising per se is not prohibited.
Direct transfer without consent is constructive dismissal.
Conversion to franchising may be a valid ground for redundancy provided good faith and procedural requirements are observed.
Franchisees are the true employers of their own personnel (DOLE D.O. 174-17, Rule VIII-A on legitimate contracting/subcontracting does not apply to franchising, but the principles on control are analogous).

7. Summary of Employee Rights When Outlet is Franchised

Situation	Employee Right
Company simply announces “you are now under the franchisee”	Refuse and file illegal dismissal; entitled to reinstatement + full backwages or separation pay + backwages
Company declares redundancy/closure due to franchising and pays separation pay	Accept separation pay and end employment, or challenge the redundancy if not in good faith
Franchisee offers new employment	Voluntarily accept or decline; if accept, negotiate terms (seniority carry-over is negotiable)
CBA has priority hiring clause	Enforce the clause; franchisee may be compelled to hire under same/substantially similar terms

Conclusion

Under Philippine law as of December 2025, an employer may not unilaterally transfer employees to a franchisee company. The only lawful methods are:

Obtain the employee’s voluntary, knowing, and unconditional consent (preferably in writing with acknowledgment of new terms), or
Validly abolish the positions through redundancy or installation closure due to bona fide franchising, pay full separation benefits, terminate cleanly, and allow the franchisee to hire the employees anew.

Any attempt to force the transfer without following either path constitutes constructive dismissal and exposes both franchisor and franchisee (especially if alter egos) to solidary liability for backwages, damages, and attorney’s fees.

Employers contemplating franchising of outlets must therefore carefully choose between the “clean break + rehiring” model (more legally secure but costly due to separation pay) or securing individual quitclaims/releases with incentives (riskier if coerced).

Employees, for their part, are well-protected: they can refuse the new employer without forfeiting their rights against the old one, provided the redundancy/closure is not genuine.