I. Overview

When a business in the Philippines closes or ceases operations, employees are not automatically left empty-handed. Philippine labor law generally requires the payment of separation pay if the closure results in termination of employment not attributable to employee fault. The entitlement, however, depends on the cause and nature of the closure, compliance with procedural requirements, and the employer’s financial condition.

This article explains the legal bases, rules, exceptions, computation, procedural requirements, and key jurisprudential doctrines on separation pay arising from company closure.

II. Legal Bases

The main statutory anchor is the Labor Code of the Philippines, particularly the provision on authorized causes for termination.

Closure or cessation of business operations as an authorized cause
- Previously Article 283, now renumbered as Article 298 of the Labor Code.
- This provision governs terminations due to:
  - installation of labor-saving devices
  - redundancy
  - retrenchment to prevent losses
  - closure or cessation of operation of the establishment or undertaking
Implementing Rules and Regulations (IRR) of the Labor Code
- Provide procedural details, including notice to employees and DOLE.
Philippine Supreme Court jurisprudence
- Defines good faith closure, proof of losses, and proper computation.

III. What Counts as “Company Closure”?

Closure or cessation of business operations may be:

Total closure: the entire business stops operating.
Partial closure: a department, branch, or line of business shuts down.
Temporary cessation: operations stop for a period but may resume.
Permanent closure: operations end with no intent to reopen.

Entitlement to separation pay is primarily tied to permanent closure, whether total or partial, that results in employment termination.

IV. General Rule on Separation Pay

Under Article 298, employees terminated because of closure or cessation of business are entitled to separation pay, unless the closure is due to serious business losses or financial reverses.

Standard separation pay for closure not due to losses:

One (1) month pay or
One-half (1/2) month pay for every year of service, whichever is higher.

A fraction of at least six (6) months is treated as one (1) whole year.

V. The Crucial Distinction: Closure With vs. Without Losses

A. Closure NOT due to serious losses

Employees must be paid separation pay.

Examples:

Strategic business decision to exit the market
Owner’s retirement without qualifying as a closure due to losses
Business shift or reorganization that results in shutdown of a unit
Closure to avoid future operational risk, but not because of proven losses

Key idea: If closure is a management prerogative choice in good faith and not anchored on serious losses, separation pay is mandatory.

B. Closure due to serious business losses or financial reverses

Employees are NOT entitled to separation pay if the employer proves serious losses.

This is the statutory exception in Article 298.

What the employer must show:

Losses are substantial, serious, actual, and real, not merely expected.
Losses are shown through sufficient, credible evidence—usually:
- audited financial statements
- income tax returns
- other verifiable accounting records

If losses are not adequately proven, the closure is treated as not due to losses, and separation pay becomes due.

VI. Good Faith vs. Bad Faith Closure

Even if a company closes, courts examine good faith.

Good faith closure:

genuine decision to stop operations
not intended to defeat employees’ rights
supported by legitimate business reasons
procedural requirements followed

Bad faith closure (effects):

employer may be liable for separation pay and/or damages
termination could be ruled illegal

Red flags for bad faith:

closure is a façade to remove union members or specific employees
business continues under a new name/entity doing the same activity
assets transferred to a related company while operations persist
selective “closure” only affecting certain employees

VII. Procedural Requirements (Notice Rule)

Even with a valid closure, employers must comply with due process for authorized causes:

Written notice to employees
Written notice to DOLE
Both notices must be served at least 30 days before the intended date of termination.

Failure to observe the 30-day notice requirement does not automatically invalidate closure, but typically results in liability for nominal damages (monetary penalty) for violation of procedural due process.

VIII. How Separation Pay Is Computed

Formula under Article 298 (closure not due to losses):

Separation Pay = Higher of:

1 month salary, or
(1/2 month salary × years of service)

“Salary” means:

the employee’s latest basic monthly pay, including fixed regular allowances that form part of wage (courts focus on what is regularly received as part of compensation).

Example:

Monthly basic pay: ₱20,000
Years of service: 5 years, 8 months → counts as 6 years
Computation:
- 1 month = ₱20,000
- 1/2 month × 6 = ₱10,000 × 6 = ₱60,000
- Separation pay due: ₱60,000

IX. Coverage: Who Is Entitled?

Generally covered if terminated due to closure:

Regular employees
Probationary employees (if termination is for closure, not for failing standards)
Project or fixed-term employees if the closure ends employment before project/term completion
Managerial and rank-and-file employees alike

Not covered:

Employees terminated for just causes (e.g., misconduct)
Employees who resigned voluntarily
Employees whose employment legally ended independent of closure (e.g., a fixed term naturally expired and closure happened later)

X. Partial Closure, Redundancy, and Retrenchment Interplay

Sometimes an employer labels a termination as “closure,” but the facts show another authorized cause.

Partial closure may overlap with redundancy (positions become superfluous) or retrenchment (cost-cutting to prevent losses).
Courts look at substance over label.

Why this matters:

Separation pay rates differ.
- Redundancy/labor-saving devices: 1 month per year of service
- Retrenchment/closure not due to losses: 1/2 month per year (or 1 month, whichever higher)
- Closure due to losses: none, if proven

Employers cannot evade higher separation pay by misclassifying the ground.

XI. Closure Due to Force Majeure or Calamity

If closure is triggered by extraordinary events (fire, earthquake, war, pandemic shocks), the legal analysis still follows Article 298:

If closure is permanent and not necessarily tied to proven serious financial losses → separation pay is typically due.
If employer proves closure is because of serious financial reverses attributable to the event → separation pay may be excused.

The burden of proof remains on the employer.

XII. Bankruptcy, Insolvency, and Corporate Dissolution

Bankruptcy or insolvency does not automatically remove separation pay liability.
Separation pay is a statutory obligation unless serious losses are shown.
In liquidation, employees’ monetary claims (including separation pay) may be treated as preferred claims, subject to distribution rules in insolvency proceedings.

XIII. Sale of Business vs. Closure

Important distinction:

Sale/transfer of business as a going concern is not closure if operations continue.
If employees are terminated because of a sale and not absorbed, separation pay may be due depending on the actual authorized cause (often redundancy).

If the business is sold and truly ceases, it may qualify as closure.

XIV. Remedies When Separation Pay Is Not Paid

Employees may:

File a complaint for unpaid separation pay at the NLRC or DOLE regional office (depending on amount and procedure).
Seek:
- separation pay
- final pay (unpaid wages, 13th month, leave conversions, etc.)
- nominal damages for lack of notice
- attorney’s fees in proper cases

Prescription: Money claims arising from employer-employee relations generally prescribe in three (3) years from the time the cause of action accrued.

XV. Practical Employer Compliance Checklist

To lawfully close with minimal legal exposure:

Board/owner resolution approving closure and reason
30-day written notices to:
- affected employees
- DOLE
Prepare final pay package, including:
- separation pay (if due)
- unpaid wages
- pro-rated 13th month pay
- cash conversion of unused service incentive leaves (if applicable)
Document proof of losses if invoking the “no separation pay” exception:
- audited FS
- tax filings
- credible accounting records
Ensure closure is genuine and in good faith
Uniform application of termination criteria if partial closure

XVI. Key Doctrines from Jurisprudence (High-Level Takeaways)

Philippine case law repeatedly emphasizes:

Employer bears burden of proving serious business losses to avoid separation pay.
Audited financial statements are the gold standard.
Good faith is essential; closure used to defeat labor rights is illegal.
Procedural notice is mandatory; violation yields nominal damages.
Courts examine real business activity to detect sham closures.

XVII. Conclusion

Separation pay on company closure in the Philippines hinges on a single legal pivot: Is the closure due to serious business losses, credibly proven?

If not due to serious losses → separation pay is mandatory.
If due to serious losses → no separation pay, but proof must be strong.
Either way → 30-day notices to employees and DOLE are required.

Understanding these distinctions protects employees’ statutory rights and helps employers close operations lawfully, minimizing disputes and liabilities.