In the case of Sangwoo Philippines, Inc. v. Sangwoo Philippines, Inc. Employees Union – Olalia, the Supreme Court addressed the rights of employees when a company closes due to serious financial losses. The Court ruled that while employees are generally entitled to separation pay upon termination due to company closure, this is not the case when the closure is caused by genuine financial losses. However, the employer must still provide proper notice to the employees; failure to do so, even in cases of legitimate closure, entitles employees to nominal damages for the procedural lapse.

When Economic Hardship Meets Employee Rights: Examining Closure Due to Losses

The narrative unfolds with Sangwoo Philippines, Inc. (SPI) grappling with dwindling orders and financial strain. Initially, the company notified its employees’ union, SPEU, of a temporary shutdown. Negotiations continued, and an agreement was reached, addressing wages and benefits. However, the situation worsened, leading to successive extensions of the shutdown, and eventually, a permanent closure notice was posted. This move triggered a legal battle, questioning the company’s obligations to its employees during such economic distress. The central legal question revolves around whether employees are entitled to separation pay when a company closes due to verified financial losses, and what constitutes sufficient notice in such cases.

The Labor Arbiter (LA) initially sided with SPI, acknowledging the proven business losses and the validity of the closure. However, the National Labor Relations Commission (NLRC) modified this ruling, granting separation pay to the employees, arguing that since some employees had already received benefits, all should be treated equally. The Court of Appeals (CA) then intervened, reversing the NLRC’s decision on separation pay but ordering financial assistance based on a settlement offer SPI had made. The Supreme Court, in its final deliberation, partly sided with both parties, providing a nuanced understanding of employer responsibilities and employee rights in business closure scenarios. The crux of the matter lies in interpreting Article 297 (formerly Article 283) of the Labor Code, which distinguishes between closures due to losses and those for other reasons.

The Supreme Court emphasized that the right to separation pay is not absolute in cases of business closure. Article 297 of the Labor Code stipulates different obligations based on the reasons for closure. The provision states:

Article 297. 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 worker and the Ministry of Labor and Employment at least one (1) month before the intended date thereof. xxx 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 at least one-half (½) month pay for every year of service, whichever is higher. A fraction of at least six (6) months shall be considered as one (1) whole year.

Drawing from the case of Galaxie Steel Workers Union (GSWU-NAFLU-KMU) v. NLRC, the Court reiterated that employers are not obligated to provide separation benefits when the closure is a direct result of significant financial losses. The Court quoted:

Article [297] of the Labor Code does not obligate an employer to pay separation benefits when the closure is due to serious losses. To require an employer to be generous when it is no longer in a position to do so, in our view, would be unduly oppressive, unjust, and unfair to the employer. Ours is a system of laws, and the law in protecting the rights of the working man, authorizes neither the oppression nor the self-destruction of the employer.

Having consistently proven its severe financial losses before the LA, NLRC, and CA, SPI was deemed not required to grant separation benefits. However, the Court found SPI deficient in adhering to the notice requirements. The law mandates that a one-month prior written notice be served to both the employees and the DOLE. The purpose is to provide employees with sufficient time to prepare for job loss. The Court, citing Galaxie, underscored that posting notices on bulletin boards is insufficient; personal, written notices must be served individually to each employee.

The Supreme Court thus ruled that because SPI failed to provide individual written notices, it was liable for nominal damages. While there was a valid cause for termination (closure due to losses), the procedural lapse required compensation. Referring to the case of Industrial Timber Corporation v. Ababon, the Court considered factors such as the good faith of the employer and the grant of other termination benefits. The Court lowered the nominal damages from P50,000 to P10,000 per employee, considering SPI’s circumstances and good faith. Importantly, this award only applied to the minority employees who had not accepted separation pay and signed quitclaims.

FAQs

What was the key issue in this case?	The key issue was whether employees are entitled to separation pay when their company closes due to serious financial losses, and whether the employer properly notified the employees of the closure.
Are employees always entitled to separation pay when a company closes?	No, employees are generally entitled to separation pay, but an exception exists when the company closes due to serious financial losses. In such cases, the employer is not legally obligated to pay separation benefits.
What notice is an employer required to give before closing a business?	The employer must provide a one-month prior written notice to both the employees and the Department of Labor and Employment (DOLE) before closing the business. This notice should be personally served to each employee.
What happens if an employer fails to provide the required notice?	If the employer fails to provide the required notice, the employees are entitled to nominal damages for the procedural lapse, even if the closure itself was valid.
What are nominal damages?	Nominal damages are a small sum awarded when a legal right has been violated, but no actual financial loss has been proven. In this case, it compensates the employees for the employer’s failure to follow proper procedure.
How much were the nominal damages in this case?	The Supreme Court reduced the nominal damages to P10,000 per employee, considering the company’s financial situation and good faith in closing due to serious losses.
Did all employees receive nominal damages?	No, only the minority employees who did not accept separation pay and sign quitclaims received nominal damages. Those who had already accepted benefits were considered to have waived their right to further claims.
What is the purpose of the notice requirement before termination?	The purpose of the notice requirement is to inform employees of the specific date of termination or closure of business operations, and must be served upon them at least one month before the date of effectivity to give them sufficient time to make the necessary arrangement

This case clarifies the balance between protecting employees’ rights and recognizing the realities of business operations. It underscores that while employers facing genuine financial hardship are not always obligated to provide separation pay, they must still adhere to procedural requirements, like providing adequate notice, to ensure fair treatment. The decision reinforces the importance of clear communication and adherence to legal protocols during business closures, protecting employees’ rights to be informed and prepared, even in challenging economic times.

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: Sangwoo Philippines, Inc. v. Sangwoo Philippines, Inc. Employees Union – Olalia, G.R. No. 173154, December 09, 2013