In the dynamic landscape of Philippine business, corporate restructuring, mergers, and the movement of personnel between "sister companies" (affiliates or subsidiaries under a common parent) are frequent occurrences. A recurring point of contention in these transitions is whether an employee is entitled to separation pay upon being transferred from one corporate entity to another.
Under the Labor Code of the Philippines and established jurisprudence by the Supreme Court, the answer depends on whether the transfer constitutes a termination of the employment relationship or a mere continuation of service under a different corporate name.
1. The General Rule: Termination as a Prerequisite
Separation pay is a statutory benefit due to an employee whose employment is terminated for authorized causes (e.g., redundancy, retrenchment, or closure of business) or under specific circumstances provided by law or CBA.
The fundamental rule is: If there is no termination of employment, there is no right to separation pay. When an employee is moved to a sister company, the law looks at the substance of the arrangement. If the employee’s services are simply "continued" by the new company with no gap in service and with a recognition of prior years of tenure, the law generally views this as a lateral transfer rather than a compensable termination.
2. The Doctrine of Separate Corporate Personality
A critical factor in these disputes is the Doctrine of Separate Corporate Personality. Under Philippine law, a corporation has a legal personality distinct from its stockholders and from other corporations to which it may be connected.
- Sister Companies are Distinct Entities: Even if Company A and Company B are owned by the same stockholders, they are treated as two different employers.
- The Impact on Transfers: Technically, moving from Company A to Company B involves ending a contract with one and starting a new one with another. However, the courts often look past this technicality to prevent the evasion of employee benefits.
3. The "Transfer" vs. "Termination" Distinction
To determine if separation pay is due, one must identify which of the following scenarios applies:
Scenario A: The Continuous Employment Arrangement
If the transfer is part of a corporate reorganization where the new company (the transferee) formally agrees to assume all obligations of the old company (the transferor), separation pay is typically not required.
- Key Condition: The employee’s tenure (years of service) must be carried over.
- Result: The employee is not "separated" in the eyes of the law; they are merely continuing their journey with a new entity. Separation pay will only be triggered if they are eventually terminated by the second company.
Scenario B: Termination Followed by New Hiring
If Company A terminates the employee due to an authorized cause (e.g., the department is being closed) and Company B (the sister company) decides to hire that person as a new employee, the situation changes.
- Key Condition: The employee starts at Company B with "zero" seniority/tenure.
- Result: Company A must pay separation pay because the original employment contract was severed. The fact that the employee found a new job with a sister company does not exempt the first employer from its legal obligation to pay for the termination.
4. When Separation Pay is Legally Mandatory
Even in transfers between sister companies, separation pay must be paid if the movement is a result of any of the following Authorized Causes under Article 298 (formerly 283) of the Labor Code:
| Cause | Requirement | Rate of Separation Pay |
|---|---|---|
| Redundancy | When the position is superfluous. | 1 month pay OR 1 month per year of service (whichever is higher). |
| Retrenchment | To prevent serious business losses. | 1 month pay OR 1/2 month per year of service (whichever is higher). |
| Closure | Stopping operations (not due to losses). | 1 month pay OR 1/2 month per year of service (whichever is higher). |
| Disease | If continued employment is prohibited by law. | 1 month pay OR 1/2 month per year of service (whichever is higher). |
5. Piercing the Veil of Corporate Fiction
In cases where an employer moves employees between sister companies specifically to defeat their right to tenure or to avoid paying benefits, the courts may apply the doctrine of "Piercing the Veil of Corporate Fiction."
If it is proven that the sister companies are being used as a shield to commit fraud or subvert the rights of the workers, the court will treat the different companies as a single entity. In such cases, the employee’s service is considered continuous from the first company to the last, and any attempt to deny benefits based on the "new" contract will be struck down.
6. Summary of Key Takeaways
- Voluntary Transfer: If an employee voluntarily resigns from Company A to join Company B, they are generally not entitled to separation pay (unless provided by company policy).
- Forced Transfer with Tenure Recognition: If the employer directs the transfer and the sister company recognizes the previous tenure, no separation pay is due at the time of transfer.
- Forced Transfer without Tenure Recognition: If the transfer results in a loss of seniority or is treated as a "fresh start," it is a termination of the first employment, and separation pay from the first company is mandatory.
- Offer of Transfer as an Alternative to Retrenchment: If a company is retrenching but offers a position in a sister company, the employee may choose to accept the transfer (continuing tenure) or decline and take the separation pay, provided the new offer involves a substantial change in rank or pay.