In the Philippines, the closure of a business is a recognized Authorized Cause for the termination of employment under the Labor Code. While an employer has the management prerogative to cease operations, this right is balanced by the statutory obligation to protect workers' welfare through specific legal procedures and financial compensations.
1. Legal Basis for Termination
Under Article 298 (formerly 283) of the Labor Code, an employer may terminate the services of any employee due to the "closure of establishment or cessation of operations."
The law distinguishes between two types of closures:
- Closure NOT due to serious business losses: Separation pay is mandatory.
- Closure DUE TO serious business losses or financial reverses: The employer is generally exempt from paying separation pay, provided the losses are sufficiently proven.
2. Mandatory Requirements for a Valid Closure
For a closure to be legally valid and to avoid claims of illegal dismissal, the employer must comply with the following "Two-Notice Rule" and procedural standards:
- Written Notice to the Employee: A formal notice must be served to the affected employees at least thirty (30) days before the intended date of closure.
- Written Notice to the DOLE: A notice (RKS Form 5) must be filed with the Department of Labor and Employment (DOLE) Establishment Report System at least thirty (30) days before the closure.
- Good Faith: The closure must be genuine and not a pretext to defeat the employees' right to self-organization or security of tenure.
- Payment of Separation Pay: Except in cases of proven serious financial losses.
3. Computation of Separation Pay
If the closure is not due to serious financial losses (e.g., voluntary liquidation, expiration of lease, or strategic pivot), the employee is entitled to:
Separation Pay = One-half (1/2) month pay for every year of service.
- Fractional Year: A fraction of at least six (6) months shall be considered as one (1) whole year.
- Minimum Amount: In no case shall the separation pay be less than one (1) month’s pay.
- Base Amount: This typically includes the basic salary and other regular allowances that the employee was receiving.
Comparison Table: Entitlement Based on Cause
| Cause of Closure | Separation Pay Requirement |
|---|---|
| Business Reversal/Losses | Not required (unless stipulated in CBA or contract) |
| Voluntary Closure | 1/2 month pay per year of service |
| Redundancy (due to closure of a dept.) | 1 month pay per year of service |
4. Final Pay and Additional Benefits
Upon closure, the employee is entitled to receive their Final Pay, which is distinct from separation pay. According to DOLE Labor Advisory No. 06, Series of 2020, final pay must include:
- Pro-rated 13th Month Pay: Calculated from the start of the calendar year up to the last day of service.
- Service Incentive Leave (SIL): Cash conversion of unused SIL (5 days per year) for those who have rendered at least one year of service.
- Unused Vacancy/Sick Leaves: Only if provided for by the Employment Contract or Collective Bargaining Agreement (CBA).
- Salary Earned: Unpaid wages for the final payroll period.
- Income Tax Refund: If applicable, due to excess withholding tax.
5. Tax Treatment
Under the National Internal Revenue Code (NIRC) and relevant BIR Revenue Regulations:
- Separation Pay: Amounts received by an employee due to death, sickness, or other physical disability, or for any cause beyond the control of the said official or employee (such as company closure), are exempt from income tax and withholding tax.
- Final Pay components: Regular components like back wages or unused leave conversions (exceeding the de minimis threshold) may still be subject to standard taxation.
6. Sickness and Social Security Benefits
Employees of closed companies are eligible for certain social safety nets provided they were active members of the Social Security System (SSS):
SSS Unemployment Benefit
Displaced employees may apply for a cash benefit equivalent to 50% of their average monthly salary credit for a maximum of two (2) months, provided they meet the following:
- Must not be over 60 years old (with exceptions).
- Must have paid at least 36 monthly contributions, 12 of which should be within the 18-month period immediately preceding the involuntary separation.
7. The Certificate of Separation
Employers are legally obligated to issue a Certificate of Employment within three (3) days from the time of the request. Additionally, to claim SSS unemployment benefits, the employee will need a Notice of Termination and a DOLE Certification of Involuntary Separation.
8. Liability of Officers
As a general rule, corporate officers are not personally liable for the separation pay of employees unless it is proven that the closure was done with malice or bad faith. However, if the company is a sole proprietorship, the owner’s personal assets may be reached to satisfy labor claims.