1) The legal framework: “authorized cause” termination

In the Philippines, a company’s decision to shut down operations is generally treated as an authorized cause for termination under the Labor Code—specifically the provision on closure or cessation of operation (now commonly cited as Article 298 [formerly Article 283]).

An authorized cause termination is lawful when:

it is based on a ground recognized by law (such as closure), and
the employer complies with the substantive and procedural requirements.

Closure cases are highly fact-specific because the key question is not only whether the business closed, but why—particularly whether the closure is due to serious business losses (which can eliminate separation pay).

2) What “company closure” means legally

A. Total, permanent closure

This is the classic scenario: the business stops operating entirely and permanently—e.g., liquidation, winding up, cessation of operations, surrender of premises, or abandonment of the enterprise.

B. Partial closure / cessation (closure of a branch, department, or site)

A company may close only a branch, store, plant, account, or line of business. This is still treated as authorized cause termination for affected employees, but the employer must show a legitimate basis and fair selection criteria if not everyone is terminated.

C. Temporary suspension is different (not closure)

The Labor Code also recognizes temporary suspension of operations (often discussed as “floating status” in some industries). If operations are merely suspended and employees are placed on temporary layoff within the legally allowed period, this may not be termination and separation pay may not apply—unless the suspension ripens into termination.

3) The most important distinction: closure with serious losses vs. closure without serious losses

Under Article 298 (formerly 283), closure splits into two major categories:

A. Closure NOT due to serious business losses or financial reverses

Separation pay is required.

This includes closures such as:

voluntary shutdown even if still financially capable,
closure due to business strategy (e.g., owner retirement, market repositioning),
closure due to loss of lease/location when not proven as “serious losses,”
closure due to regulatory/business decisions not anchored on proven severe losses,
closure due to reorganization where the employer chooses to stop a unit/line.

Separation pay rate (closure not due to serious losses): One (1) month pay OR one-half (1/2) month pay per year of service, whichever is higher.

B. Closure DUE to serious business losses or financial reverses

Separation pay is not required if serious losses are properly proven.

This is the narrow exception where the employer may terminate due to closure without separation pay, because the business is genuinely unable to pay.

Critical point: The employer bears the burden to show that the closure is truly due to serious losses. If the losses are not proven to the required standard, the closure is treated as not due to serious losses, and separation pay becomes due.

4) Substantive requirements: when is closure lawful?

A closure-based termination is expected to meet these substantive benchmarks:

A. Good faith

Closure must be in good faith—not a pretext to defeat employees’ rights, bust a union, evade wage orders, or sidestep legal obligations.

If closure is in bad faith, the termination can be attacked as illegal dismissal, with potential consequences such as reinstatement (if feasible) or separation pay in lieu of reinstatement, plus backwages and damages depending on the case posture.

B. If claiming “serious losses,” proof must be credible and convincing

Courts typically expect objective proof—commonly audited financial statements and records showing:

losses are actual and substantial, not minimal,
losses are real, not speculative,
losses are sufficiently connected to the closure decision.

A mere allegation of losses, unaudited internal reports, or generalized claims often fail.

C. If only a branch/unit is closed, selection criteria must be fair

For partial closure, the employer should show a rational basis for:

why that unit is being shut down, and
which employees are affected (especially if some will be retained elsewhere).

Commonly cited fair criteria include seniority, efficiency, status, and other objective standards—applied consistently and without discrimination.

5) Procedural requirements: notice to employees and to DOLE

For authorized cause terminations (including closure), the Labor Code requires written notice to:

the affected employees, and
the Department of Labor and Employment (DOLE)

at least 30 days before the effectivity date of termination.

What if the employer closes suddenly?

Even if operations stop abruptly, the legal requirement remains, and failure to observe notice may expose the employer to liability (often framed as nominal damages for violation of statutory due process in authorized cause termination), even if the closure ground is otherwise valid.

Philippine jurisprudence is well known for distinguishing:

a termination that is substantively valid (closure is real), versus
an employer that is procedurally noncompliant (no proper notice).

Procedural defects may not automatically convert a valid authorized cause into an illegal dismissal, but they can still result in monetary liability.

6) How separation pay is computed for closure (when payable)

A. The closure separation pay formula (not due to serious losses)

Separation Pay = the higher of:

One (1) month pay, or
One-half (1/2) month pay × years of service

B. “Years of service” and rounding rule

A common rule applied in separation pay computations is:

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

Examples:

2 years and 5 months → counted as 2 years
2 years and 6 months → counted as 3 years

C. What is “one month pay”?

In practice, “one month pay” is generally anchored on the employee’s latest salary rate and typically includes:

basic salary, and
regularly paid allowances that are integrated into wage computations (depending on how they are granted and treated).

It generally does not include purely contingent or reimbursement-type benefits (e.g., business expense reimbursements) or benefits that are not wage-like in nature.

Because inclusion/exclusion of certain pay components can be contested, the most defensible approach is to identify which items are regular and wage-related versus discretionary or reimbursement-based.

D. Worked examples (illustrative)

Example 1: Employee served 8 years, monthly pay ₱20,000

One month pay = ₱20,000
1/2 month per year = ₱10,000 × 8 = ₱80,000 Higher amount = ₱80,000 → separation pay ₱80,000

Example 2: Employee served 1 year, monthly pay ₱18,000

One month pay = ₱18,000
1/2 month per year = ₱9,000 × 1 = ₱9,000 Higher amount = ₱18,000 → separation pay ₱18,000

7) Separation pay is not the only money due at closure: “final pay” components

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

unpaid salaries/wages up to last day worked
13th month pay (pro-rated, if not fully released)
cash conversion of unused service incentive leave (SIL) or other convertible leaves (depending on policy/CBA and whether the employee is entitled)
unpaid allowances or commissions that are already earned under the compensation scheme
tax adjustments/refunds (where applicable)

Many workplaces also have a policy or practice on releasing final pay within a reasonable period after separation; delays can become a labor standards issue depending on circumstances.

8) Interaction with retirement pay (RA 7641) and other benefits

A. Retirement pay vs. separation pay

An employee who is qualified for retirement under:

a company retirement plan/CBA, or
the statutory minimum retirement pay rules (when applicable)

may be entitled to retirement pay. Whether an employee can collect both retirement pay and separation pay depends heavily on:

the wording of the retirement plan/CBA,
company policy,
and the legal characterization in jurisprudence (many cases treat them as alternative benefits unless the governing instrument clearly allows both).

In many real-world closure situations, the dispute becomes: Which benefit applies and which is higher? The controlling contract/policy language matters.

B. SSS unemployment/involuntary separation benefit

The SSS system provides an unemployment/involuntary separation benefit subject to eligibility requirements. A closure-triggered termination is often considered involuntary, but actual eligibility depends on statutory requirements such as contributions, age, and filing conditions.

This is separate from separation pay; it is not paid by the employer.

9) Special scenarios and common misconceptions

A. “Bankruptcy or liquidation means no separation pay”

Not automatically.

If closure is truly due to serious losses, separation pay under Article 298 may be not required.
But if the employer fails to prove serious losses to the legal standard, separation pay may still be due.
In liquidation, employees’ claims may become part of distribution rules; the Labor Code recognizes worker preference in certain insolvency contexts, but collection depends on available assets and the liquidation process.

B. “Closure always requires separation pay”

No. The serious-losses exception can remove the separation-pay obligation—but only if properly established.

C. “If the company changes owners, that’s a closure”

Not always.

Stock sale (change in shareholders) usually does not terminate employment by itself because the corporate employer remains the same juridical entity.
Asset sale where the seller shuts down and terminates employees can trigger separation pay issues for the seller; whether the buyer must absorb employees depends on the transaction structure and circumstances.

D. “Project-based/fixed-term employees never get separation pay”

Not always.

If employment ends because the project ends or the term expires, separation pay is generally not due. But if the company closes and terminates employees before the natural end of the project/term due to an authorized cause, separation pay rules may apply depending on the legal classification and proof.

E. “If the employer didn’t give 30-day notice, closure termination is automatically illegal”

Philippine case law is widely associated with this principle: lack of statutory notice in an otherwise valid authorized cause termination often leads to monetary liability (commonly framed as nominal damages) rather than automatic illegality—though outcomes can vary based on facts, bad faith, and how the case is pleaded and proven.

10) What employees can do if separation pay (or final pay) is unpaid

A. SEnA (Single Entry Approach)

Labor money claims and disputes commonly begin through DOLE’s mandatory conciliation-mediation mechanism under SEnA.

B. Filing money claims / illegal dismissal cases

Depending on the issue, employees may pursue:

a money claim (separation pay, unpaid wages, benefits), and/or
an illegal dismissal case (if closure is alleged as a pretext or done in bad faith)

C. Prescription periods (practical guide)

Commonly cited prescriptive periods in labor disputes include:

Money claims arising from employer-employee relations: 3 years
Illegal dismissal claims: often treated under a 4-year prescriptive period framework in many discussions and cases

These periods can be affected by how the claim is framed and when the cause of action accrued, so timeliness matters.

11) Practical checklist: determining separation pay entitlement in closure cases

Step 1: Identify the employer’s asserted basis

“We are closing because of serious business losses”
“We are closing for business reasons, but not necessarily losses”
“We are closing a branch/unit only”

Step 2: Verify compliance with 30-day notices

written notice to employees
written notice to DOLE

Step 3: Determine if “serious losses” are credibly proven

audited financial statements and corroborating evidence
clear linkage between losses and closure
consistency and good faith

Step 4: Apply the correct separation pay rule

Closure not due to serious losses: separation pay = higher of (1 month) or (1/2 month × years)
Closure due to serious losses: separation pay may be 0, but final pay items remain due

Step 5: Compute years of service properly

include fraction rules (≥ 6 months counted as 1 year)

Step 6: Account for final pay and other benefits

13th month (pro-rated)
unpaid wages
unused leave conversion (if applicable)
retirement plan benefits (if eligible)

12) Key points to remember

Closure is a recognized authorized cause under the Labor Code.
Separation pay depends primarily on whether closure is due to “serious business losses.”
If not due to serious losses: separation pay is the higher of one month pay or 1/2 month pay per year of service.
If due to serious losses and properly proven: separation pay may be not required, but final pay obligations remain.
30-day written notice to both employees and DOLE is a standard procedural requirement; noncompliance can create monetary exposure even if closure is real.