The Supreme Court has ruled that employers who close their businesses must provide separation pay to their employees unless they can prove the closure was due to serious business losses supported by credible financial records over a sufficient period. This ruling clarifies that employers bear the burden of proving such losses with substantial evidence beyond a single financial statement, ensuring that employees are protected when businesses cease operations for reasons other than genuine financial distress.

Closing Shop or Dodging Pay? Proving Serious Losses in Labor Disputes

G.J.T. Rebuilders Machine Shop, owned by the Trillana spouses, faced a complaint for illegal dismissal after closing their shop. Ricardo Ambos, Russell Ambos, and Benjamin Putian, machinists at G.J.T. Rebuilders, claimed they were terminated without receiving separation pay, prompting them to file a complaint before the Labor Arbiter. The company argued that severe business losses forced them to close, thus negating the need for separation pay. The National Labor Relations Commission (NLRC) initially sided with the company, but the Court of Appeals (CA) reversed this decision, emphasizing that the company failed to provide convincing evidence of ongoing serious business losses. The case eventually reached the Supreme Court, which was tasked to determine whether G.J.T. Rebuilders adequately demonstrated that its closure was necessitated by serious business losses.

The Supreme Court reviewed Article 283 of the Labor Code, which addresses the closure of establishments and the corresponding rights of employees. This provision allows employers to terminate employment due to business closure but mandates separation pay unless the closure results from serious financial difficulties. According to Article 283 of the Labor Code:

Art. 283. Closure of establishment and reduction of personnel. – The employer may also terminate the employment of any employee due to the installation of labor saving devices, redundancy, retrenchment to prevent losses or the closing or cessation of operation of the establishment or undertaking unless the closing is for the purpose of circumventing the provisions of this Title, by serving a written notice on the workers and the Department of Labor and Employment at least one (1) month before the intended date thereof.  In case of termination due to installation of labor saving devices or redundancy, the worker affected thereby shall be entitled to a separation pay equivalent to at least his one (1) month pay or to at least one (1) month pay for every year of service, whichever is higher.  In case of retrenchment to prevent losses and in cases of closures or cessation of operations of establishment or undertaking not due to serious business losses or financial reverses, the separation pay shall be equivalent to one (1) month pay or to at least one-half (1/2) month pay for every year of service, whichever is higher.  A fraction of at least six (6) months shall be considered one (1) whole year.

The Court recognized that the decision to close a business is a management prerogative but emphasized that this prerogative does not exempt employers from their obligations to employees. Employers must pay separation pay unless they demonstrate that the closure was due to significant financial setbacks. The court underscored the importance of distinguishing between closure to prevent losses and closure due to existing serious business losses, which would exempt the employer from paying separation pay.

To establish serious business losses, employers must present financial statements that illustrate a pattern of losses over a sustained period. The evidence should clearly show that the company’s financial health is unlikely to improve. The Supreme Court referred to several precedents where companies successfully demonstrated serious business losses through comprehensive financial records. For instance, in North Davao Mining Corporation v. NLRC, the company presented financial statements showing continuous losses from 1988 to 1992. Similarly, in Manatad v. Philippine Telegraph and Telephone Corporation, the corporation presented evidence of losses from 1995 to 1999. In LVN Pictures Employees and Workers Association (NLU) v. LVN Pictures, Inc., financial statements revealed a loss pattern from 1957 to 1961.

In contrast, G.J.T. Rebuilders only presented financial statements covering two fiscal years, 1996 and 1997, which the Court found insufficient. Although the company incurred a net loss in 1997, it had a net income in 1996. The Supreme Court concluded that this two-year period was inadequate to prove that the business would not recover from its losses. The court noted that the financial statement was also belatedly subscribed under oath, which further diminished its credibility. Because G.J.T. Rebuilders failed to demonstrate substantial and sustained financial losses, the Court ruled that they were obligated to pay separation pay to the dismissed employees.

Furthermore, the Supreme Court addressed the issue of procedural compliance with Article 283 of the Labor Code, which requires employers to provide written notice to both the affected employees and the Department of Labor and Employment (DOLE) at least one month before the intended date of closure. Failure to comply with this notice requirement entitles the employees to nominal damages. The court found that G.J.T. Rebuilders did not provide the required written notice to its employees or the DOLE before closing its business. Although the company claimed to have discussed the closure with its employees and later submitted an Affidavit of Closure to the DOLE, these actions did not meet the legal requirement of prior written notice. As a result, the Court awarded nominal damages of P10,000.00 to each of the respondents for the procedural lapse.

Finally, the Supreme Court addressed the award of attorney’s fees, noting that such awards are exceptional and require specific justification. In labor cases, attorney’s fees are typically awarded only in instances of unlawful withholding of wages or when they arise from collective bargaining negotiations. Since neither of these circumstances applied in this case, and the lower courts did not provide specific legal or factual basis for the award, the Supreme Court removed the attorney’s fees from the judgment.

In summary, the Supreme Court denied G.J.T. Rebuilders’ petition, affirming the Court of Appeals’ decision with modifications. The Court ordered G.J.T. Rebuilders to pay Ricardo Ambos, Russell Ambos, and Benjamin Putian separation pay, with a 6% legal interest from the finality of the decision until full payment. Additionally, the company was required to pay each respondent P10,000.00 as nominal damages, also with a 6% legal interest from the finality of the decision until full payment. The award of attorney’s fees was deleted.

FAQs

What was the central issue in this case?	The key issue was whether G.J.T. Rebuilders provided sufficient evidence of serious business losses to justify not paying separation pay to its employees upon closure. The Supreme Court examined the financial records presented to determine if the company met its burden of proof.
What does the Labor Code say about separation pay?	Article 283 of the Labor Code mandates that employers must pay separation pay to employees when closing a business, unless the closure is due to serious business losses. The separation pay is equivalent to one-month pay or at least one-half-month pay for every year of service, whichever is higher.
What kind of evidence is needed to prove serious business losses?	Employers need to present credible financial statements showing a continuing pattern of losses over a sufficient period. A single year of losses is generally not enough; the evidence must demonstrate a sustained decline in financial health.
What happens if an employer fails to give proper notice of closure?	If an employer fails to provide written notice to the affected employees and the Department of Labor and Employment at least one month before the closure, they are liable for nominal damages. This applies even if the closure itself is deemed valid.
Why were attorney’s fees removed in this case?	The Supreme Court removed the attorney’s fees because there was no unlawful withholding of wages or any basis arising from collective bargaining negotiations. Additionally, the lower courts did not provide any specific legal or factual justification for awarding these fees.
How was the separation pay calculated for each employee?	The separation pay was calculated based on each employee’s daily salary, the number of days they worked per month, and their total years of service. The higher amount between one-month pay and one-half-month pay for every year of service was awarded.
What was the basis for awarding nominal damages?	Nominal damages were awarded because G.J.T. Rebuilders failed to comply with the procedural requirements of Article 283 of the Labor Code. They did not provide the required written notice to the employees or the DOLE before closing the business.
Can a company close down even if it’s not suffering from losses?	Yes, the decision to close a business is a management prerogative, but employers must still comply with labor laws. Unless the closure is due to serious business losses, they are obligated to pay separation pay and must provide proper notice.

This case emphasizes the importance of due process and the protection of employees’ rights during business closures. Employers must substantiate claims of financial distress with robust evidence and adhere to procedural requirements to avoid liability.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: G.J.T. REBUILDERS MACHINE SHOP, G.R. No. 174184, January 28, 2015