(Philippine labor law primer; general information, not individualized legal advice.)

1) The basic rule: closure is an “authorized cause” of termination

In the Philippines, an employer may lawfully terminate employees due to closure or cessation of business operations. This is treated as an authorized cause—meaning it is not due to employee fault, but due to business reasons.

The key question for employees is: Does closure require separation pay? Answer: Usually yes, but not always. It depends mainly on why the business is closing and whether the closure is genuine.

2) Legal basis (core provisions you’ll keep hearing)

Philippine separation pay in closure cases is primarily governed by the Labor Code provisions on authorized causes, commonly cited in practice as:

Article 298 [formerly Article 283] – covers termination due to:
- installation of labor-saving devices
- redundancy
- retrenchment to prevent losses
- closure or cessation of operations (not due to serious business losses)
Article 299 [formerly Article 284] – disease (not a closure ground, but sometimes discussed alongside separation pay rules)
Article 301 [formerly Article 286] – temporary suspension of operations/business undertakings (a “floating status” concept), typically limited to 6 months

These provisions interact with DOLE regulations and extensive Supreme Court jurisprudence interpreting what counts as a valid closure and when separation pay is due.

3) What counts as “company closure” for separation pay purposes?

“Closure” generally means the employer stops operating a business or undertaking, either:

Complete closure – the entire business shuts down; or
Partial closure – only a branch, plant, department, or unit shuts down (and employees assigned there are terminated)

Closure can be due to many reasons:

business owner’s decision to stop
expiration of a franchise or license
loss of market
inability to continue operations
government order (sometimes)
disaster/fire (sometimes)
corporate restructuring (sometimes presented as closure)

Important: the law looks at substance, not labels. Calling something “closure” doesn’t automatically make it legal.

4) The big divider: closure with separation pay vs. closure without separation pay

A. Closure NOT due to serious business losses (separation pay is required)

If a company closes for reasons other than serious business losses—even if it is the owner’s choice—employees terminated due to that closure are generally entitled to separation pay.

Separation pay amount (closure not due to serious losses): ✅ At least 1 month pay OR ½ month pay per year of service, whichever is higher

A fraction of at least 6 months is typically counted as 1 whole year for computation.

This is the most common “closure” scenario for separation pay.

B. Closure DUE to serious business losses (separation pay may be not required)

If the employer closes because of serious business losses or financial reverses, the law recognizes a harsher economic reality and generally does not require separation pay.

However, this is where disputes often happen.

Key points:

The employer must show the losses are real, serious, and adequately supported by evidence.
In practice, this is commonly proven by audited financial statements, credible financial records, and consistent documentation.
Mere allegations (“we’re losing money”) are not enough.

If the employer fails to prove serious losses, the closure may be treated as closure not due to serious losses, and separation pay can be awarded.

5) Retrenchment vs. Closure: why the label matters

Employers sometimes choose between “retrenchment” and “closure,” but these are distinct:

Retrenchment to prevent losses: operations continue but workforce is reduced
- Separation pay: commonly 1 month pay OR ½ month pay per year, whichever is higher
Closure: business/undertaking stops operating
- Separation pay: same formula unless due to serious losses (then potentially none)

In disputes, labor tribunals look at what actually happened (Did the business truly stop? Was it only downsizing? Was there replacement hiring?).

6) Notice requirement: 30 days to the employee and to DOLE

For authorized cause terminations (including closure), the employer is generally required to give:

Written notice to affected employees, and
Written notice to DOLE

At least 30 days before the effective date of termination.

Failure to comply may expose the employer to liability (often in the form of damages or monetary awards), even if the closure itself is valid.

Practical note: Many lawful closures still get challenged because the employer skipped or mishandled notice.

7) Temporary closure / suspension of operations (“floating status”)

Not every shutdown is a termination right away.

Under the concept of temporary suspension of operations, employees may be placed on a status where:

work is temporarily unavailable, and
the employment relationship is not immediately severed

Typical rule: Temporary suspension should not exceed 6 months.

If operations resume within the allowable period, employees are expected to be recalled.
If the suspension exceeds the allowable period (and no lawful basis/arrangement exists), it may ripen into a constructive dismissal or require proper authorized-cause termination processes.

Separation pay during temporary suspension: Usually, separation pay becomes relevant only if the employer ultimately terminates employment due to closure/retrenchment, not merely because operations paused.

8) How separation pay is computed (with examples)

A. What is “1 month pay”?

“Month pay” is typically understood as the employee’s latest monthly salary rate. Depending on context, disputes can arise on whether certain regular allowances are included, but the usual baseline is the employee’s salary rate.

B. The formula (closure not due to serious losses)

Separation pay = higher of:

1 month pay, or
½ month pay × years of service (count fractions of ≥6 months as 1 year)

Example 1

Monthly pay: ₱20,000
Service: 3 years and 7 months → counted as 4 years
Option A: 1 month = ₱20,000
Option B: ½ month × 4 = ₱10,000 × 4 = ₱40,000 ✅ Separation pay = ₱40,000

Example 2

Monthly pay: ₱18,000
Service: 1 year and 3 months → 1 year
Option A: ₱18,000
Option B: ₱9,000 × 1 = ₱9,000 ✅ Separation pay = ₱18,000

9) Closure of a branch or department: are employees covered?

Yes. If only a branch or unit closes and employees are terminated as a result, separation pay rules apply the same way as partial closure—unless:

the employer can lawfully transfer/reassign employees to other posts (and employees are not terminated), or
the employer proves serious business losses justifying no separation pay (if applicable)

A common litigation issue is whether the employer genuinely had no available positions elsewhere, or whether terminations were selectively imposed.

10) Sale of business, merger, or “we closed but reopened under a new name”

A business may claim closure, but facts may show continuity:

A. Asset sale vs. stock sale (high-level labor impact)

If business operations continue and the workforce is retained, closure may be questioned.
If employees are terminated due to closure and a new operator continues operations, disputes may arise on:
- whether there was a genuine closure, or
- whether the move was a device to avoid security of tenure and monetary obligations

B. “Closure” that is a pretext

Indicators that a closure may be challenged:

the same business reopens quickly in the same place
same equipment, same customers, same management
hiring of new workers shortly after “closure”
inconsistent explanations to employees/DOLE
termination targeted at union members or specific employees

If closure is proven sham or used to defeat rights, the termination can be treated as illegal dismissal, potentially leading to backwages and other monetary consequences (reinstatement may be impractical if the business truly ceased, but illegality can still carry monetary awards).

11) Separation pay is not the only money due at closure

Even when separation pay is not required (e.g., proven serious losses), employees may still be entitled to final pay items such as:

unpaid wages
proportionate 13th month pay
cash conversion of unused service incentive leave (if applicable)
earned commissions (if demandable and due)
other company policy/CBA benefits that already accrued

Important: Separation pay is distinct from final pay. Employers sometimes try to treat one as inclusive of the other; employees often dispute this.

12) Who is entitled? (employment types and common edge cases)

A. Regular employees

Covered—most closure separation pay discussions involve regular employees.

B. Probationary employees

Generally covered if terminated due to authorized causes like closure; the law does not exclude probationary employees from authorized-cause separation pay when they are terminated for that reason (service length affects the amount).

C. Fixed-term employees

If the contract simply expires at the end of its term, that’s not “closure termination.” But if the employee is terminated before the term ends due to closure, separation pay issues can arise.

D. Project-based / seasonal employees

If employment ends because the project/season ends, separation pay for closure typically isn’t triggered. But if the project employer closes an undertaking and terminates workers for that reason, separation pay may apply depending on facts.

E. Managerial employees

Still employees under labor standards for separation pay in authorized-cause termination, unless a specific exclusion applies by law (rare for separation pay).

F. Employees with a CBA or company policy

A CBA or company policy may grant higher separation pay than the Labor Code minimum. If so, the better benefit generally governs.

13) What if the employer claims “serious losses” to avoid paying?

This is one of the most common disputes.

Practical realities:

The burden is effectively on the employer to show serious losses.
Labor tribunals scrutinize credibility: audited financial statements, consistency, timing, and whether losses are substantial—not minor dips.

If serious losses are not sufficiently established, separation pay is often ordered.

14) DOLE and NLRC: where employees usually file claims

If employees believe separation pay or final pay is unpaid, or closure is dubious, typical avenues include:

DOLE (for certain money claims and labor standards enforcement contexts), and/or
NLRC (illegal dismissal cases, monetary claims, and disputes involving termination)

Which forum is appropriate depends on the nature and amount of the claim and whether the issue is a termination dispute versus a straightforward labor standards violation.

15) Common employer compliance checklist (what “lawful closure” usually looks like)

For closure not due to serious losses, best practice compliance usually includes:

A clear management decision/documentation to cease operations (board resolution, owner decision, permits, etc.)
30-day written notice to employees
30-day written notice to DOLE
Computation and payment of:
- separation pay (if due)
- final pay items
Issuance of certificates of employment, final payslips, BIR forms as applicable
Documented settlement (if any), ensuring it is voluntary and fair (quitclaims are not automatically invalid, but are closely scrutinized)

Noncompliance doesn’t automatically make closure invalid, but it can create monetary exposure.

16) Employee practical checklist (what to gather if you want to assess a claim)

If you’re an employee affected by closure, useful documents typically include:

employment contract / appointment papers
payslips, payroll summaries, or latest salary rate evidence
company notices and memos about closure
DOLE notices if provided
proof of length of service
any CBA/policy providing separation benefits
termination letters, quitclaims, and release documents (do not sign under pressure)

17) Quick summary: when separation pay is due in closure

✅ Due: Closure/cessation of business not due to serious losses
- Minimum: 1 month pay OR ½ month pay per year, whichever is higher
❌ May be not due: Closure due to serious business losses/financial reverses, if proven
⚠️ Still payable regardless: final pay (earned wages/benefits)
⚠️ Risk area: “closure” used as a pretext → may be treated as illegal dismissal

If you want, share a hypothetical set of facts (monthly rate, years/months of service, date of notice, and whether the employer claims losses). I can walk through (1) likely entitlement and (2) a clean sample computation and demand outline in Philippine context.