Legality of Transferring Employees to Franchise Companies in the Philippines

The practice of transferring employees from a company-owned outlet to a franchisee upon conversion of the outlet to a franchised operation is widespread in the Philippines, particularly in food and beverage, retail, and service chains. While the practice is common and generally accepted when properly executed, it is governed by strict rules on security of tenure, management prerogative, prohibition on labor-only contracting, and the requirement of employee consent when changing employers. Done incorrectly, the transfer can result in illegal dismissal, constructive dismissal, or solidary liability for the franchisor.

Core Legal Principles Governing the Transfer

1. Security of Tenure (Article 294, Labor Code, as renumbered)
   Employees enjoy security of tenure under the Constitution (Article XIII, Section 3) and the Labor Code. They may only be separated for just cause (Article 297) or authorized cause (Article 298). A unilateral change of employer without consent is a substantial alteration of the employment contract and constitutes constructive dismissal or illegal dismissal.

2. Management Prerogative Applies Only Within the Same Employer
   The employer’s right to transfer, reassign, or reorganize personnel is part of management prerogative (Peckson v. Robinsons Supermarket Corporation, G.R. No. 198534, July 3, 2013; OSS Security Services v. NLRC, G.R. No. 112752, February 9, 2000). However, this prerogative is limited to transfers within the same juridical entity. Once the transferee is a separate and distinct employer (the franchisee), the prerogative ends and employee consent becomes mandatory.

3. Employment Contract is Intuitu Personae
   The contract of employment is personal in nature. The employee entered into the contract with a specific employer. Unilaterally substituting a new employer violates the contract unless the employee expressly consents (Philippine Fuji Xerox Corp. v. NLRC, G.R. No. 111501, March 5, 1996; Consolidated Food Corporation v. NLRC, G.R. No. 118647, September 25, 1996).

Typical Scenarios in Franchising and Their Legality

Scenario 1: Complete Closure or Cessation of Company-Owned Operation (Authorized Cause under Article 298)

The franchisor closes the company-owned outlet and the franchisee opens a new, separately owned and operated outlet in the same location.

• This is the cleanest and most defensible method.
• Closure of a department, branch, or outlet is a valid authorized cause even if the overall business is profitable (North Davao Mining v. NLRC, G.R. No. 112546, March 13, 1996; J.A.T. General Services v. NLRC, G.R. No. 148340, January 26, 2004).
• Requirements:
  • Written notice to employees at least one month before effectivity.
  • Written notice to DOLE at least one month before.
  • Payment of separation pay (at least one month pay or ½ month pay for every year of service, whichever is higher).
  • Good faith (no intent to circumvent tenure).
• After valid termination, the franchisee is free to hire any person, including the former employees. Prioritizing former employees is allowed and encouraged but not mandatory unless stipulated in a CBA or franchise agreement.

Scenario 2: Absorption by Franchisee with Employee Consent

The franchisor offers employees continued employment with the franchisee under the same or substantially similar terms.

• This is lawful provided there is clear, voluntary, and informed consent (preferably in writing via a Deed of Transfer of Employment or Novation Agreement).
• The consent must be free from coercion. Offering separation pay as an alternative if the employee refuses is strong evidence of voluntariness.
• Best practice: Execute individual Deeds of Release, Waiver, and Quitclaim (properly notarized and with consideration) after full payment of any differential benefits.
• If the new terms are less favorable (lower salary, removal of company-wide benefits, change in rest days, etc.), the transfer is prejudicial and consent will be scrutinized closely. Refusal may be justified and can lead to a finding of illegal dismissal against the franchisor if it insists on termination.

Scenario 3: Automatic/Unilateral Transfer Without Consent

The franchisor simply directs employees to report to the franchisee without obtaining individual consent.

• This is illegal and constitutes constructive dismissal or illegal dismissal (The Philippine American Life & General Insurance Co. v. Gramaje, G.R. No. 156963, November 11, 2004; Mardironico, et al. v. Ayala Corporation, G.R. No. 202887, June 8, 2020).
• Even if the franchisee continues the exact same salary and benefits, the change of employer itself is a substantial alteration requiring consent.

Scenario 4: Sale or Transfer of Assets/Outlet as a Going Concern

The franchisee purchases the equipment, lease rights, inventory, and goodwill of the outlet.

• Under the successor-employer doctrine, the buyer (franchisee) is obliged to absorb the employees of the sold establishment without change in existing terms (Manlimos v. NLRC, G.R. No. 113337, March 2, 1995; Suntay v. Cojuangco-Suntay, G.R. No. 132524, December 29, 1998, by analogy).
• However, pure franchising rarely involves a complete sale of the business unit; it is usually a license plus lease of premises/equipment. Thus, the successor-employer doctrine seldom applies cleanly to franchising.

Prohibition on Labor-Only Contracting (Article 106–109, Labor Code; DOLE D.O. 174-17)

Even if the transfer is structured as absorption by the franchisee, the arrangement will be struck down as prohibited labor-only contracting if:

• The franchisee does not have substantial capital or investment (at least ₱5,000,000 net worth required under D.O. 174-17), or
• The franchisee does not exercise genuine control over the employees (franchisor dictates hiring, firing, discipline, work methods beyond brand standards), or
• The work performed is directly related to the franchisor’s core business and is necessary or desirable to its main operation.

Consequence: The franchisor is deemed the true employer and is solidarily liable with the franchisee for all labor claims, including reinstatement and backwages (Alilin v. Petron Corporation, G.R. No. 177592, June 9, 2014; Magsalin v. National Organization of Working Men, G.R. No. 148492, May 9, 2003).

Legitimate franchising with genuine independence of the franchisee (own payroll, own supervision, own P&L responsibility) is permissible job contracting, not labor-only.

Collective Bargaining Agreement (CBA) Provisions

If employees are unionized, the CBA almost always contains provisions on:

• Prior notice and consultation with the union before conversion.
• Preference in hiring by the franchisee.
• Portability of service credits or separation pay formula higher than statutory. Violation of CBA provisions is an unfair labor practice (Article 259).

Practical Guidelines Adopted by Major Franchisors (Standard Industry Practice)

Most large Philippine franchisors (Jollibee, Mang Inasal, Max’s, 7-Eleven, Mercury Drug, etc.) follow this template:

1. Announce conversion and explain that the outlet will cease to be company-operated.
2. Offer employees two options in writing: Option A: Transfer to the franchisee with continuity of service and same or better terms. Option B: Separation from the company with full separation pay and benefits.
3. Give reasonable period (usually 30 days) to choose.
4. Those who choose Option A sign individual novation agreements and quitclaims.
5. Those who choose Option B are paid separation pay and cleared.
6. Franchise agreement usually contains a clause requiring the franchisee to prioritize hiring of qualified existing personnel.

This procedure has consistently withstood legal challenge when properly documented.

Conclusion

Transferring employees to a franchisee upon conversion of a company-owned outlet is legally permissible in the Philippines provided it is done through one of the following methods:

• Valid closure/redundancy with separation pay, followed by independent hiring by the franchisee, or
• Voluntary absorption by the franchisee with express, uncoerced employee consent and no diminution of benefits.

Unilateral or forced transfer to a separate employer is illegal and exposes the franchisor to substantial liability for illegal dismissal, backwages, damages, and possible unfair labor practice charges. When executed with transparency, written options, and proper documentation, the practice is not only legal but is the standard and accepted method of converting outlets in Philippine franchising.