In the Philippines, a corporate merger does not automatically lead to the dismissal of employees from the absorbed company. According to the Supreme Court, employment contracts are assumed by the surviving corporation, ensuring job security for the employees. This decision underscores the constitutional protection of labor rights, preventing companies from using mergers as a pretext for unlawful terminations. Therefore, employees are entitled to continue their employment under the new entity unless there are lawful grounds for termination, such as redundancy or closure of operations, reinforcing the stability of employment in corporate restructuring.

When Corporate Giants Merge: Can Your Employer Terminate You?

The case of Philippine Geothermal, Inc. Employees Union vs. Unocal Philippines, Inc. (now Chevron Geothermal Philippines Holdings, Inc.) revolves around the question of whether a corporate merger results in the implied termination of employment for the absorbed company’s employees. The Philippine Geothermal, Inc. Employees Union (Union) argued that when Unocal Corporation merged with Blue Merger Sub, Inc. (a subsidiary of Chevron Texaco Corporation), it effectively terminated the employment of its members working for Unocal Philippines. The Union sought separation benefits under their Collective Bargaining Agreement (CBA), claiming the merger constituted a cessation of operations. Unocal Philippines, however, maintained that the merger did not result in any termination of employment and refused to grant separation benefits. This disagreement led to a legal battle that ultimately reached the Supreme Court.

At the heart of the dispute was the Union’s contention that the merger severed the ties between the employees and their original employer, Unocal Corporation, entitling them to separation pay. The Secretary of Labor initially ruled in favor of the Union, stating that the merger resulted in new contracts and a new employer. However, the Court of Appeals (CA) reversed this decision, asserting that Unocal Philippines was a separate entity from Unocal Corporation and that the merger did not dissolve Unocal Philippines or affect its employees. The CA further noted that the CBA only provided for separation pay in cases of redundancy, retrenchment, installation of labor-saving devices, or closure of operations, none of which occurred here.

The Supreme Court (SC) had to determine whether the CA erred in reversing the Secretary of Labor’s decision. The first issue was whether Unocal Philippines changed its theory of the case on appeal. Before the Secretary of Labor, Unocal Philippines seemed to acknowledge that it was a party to the merger, but before the CA, it argued it was not a party to the merger because it was a subsidiary of Unocal California, and thus had a separate and distinct personality from Unocal Corporation. The SC found that Unocal Philippines did indeed change its theory on appeal, which is generally not allowed. The court emphasized that raising a factual question for the first time on appeal is impermissible, as it deprives the opposing party of the opportunity to present evidence to disprove the new claim.

Building on this principle, the SC then addressed the substantive issue of whether the merger resulted in the termination of the Union’s members’ employment. After finding the CA erred, the SC had to rule based on existing facts and settled law. The Court referenced Section 80 of the Corporation Code, which outlines the effects of a merger. Despite not explicitly addressing the fate of employees, the SC cited the case of Bank of the Philippine Islands v. BPI Employees Union-Davao Chapter-Federation of Unions in BPI Unibank, which held that the surviving corporation automatically assumes the employment contracts of the absorbed corporation. This ruling is grounded in both the Corporation Code and the constitutional policies protecting labor rights. The court stated:

Taking a second look on this point, we have come to agree with Justice Brion’s view that it is more in keeping with the dictates of social justice and the State policy of according full protection to labor to deem employment contracts as automatically assumed by the surviving corporation in a merger, even in the absence of an express stipulation in the articles of merger or the merger plan.

The rationale behind this is that the surviving corporation inherits all rights, privileges, properties, and liabilities of the absorbed corporation. This includes the obligations under existing employment contracts. Therefore, the employment contracts are not terminated unless there is a legal basis for doing so. The SC emphasized that this interpretation aligns with the constitutional mandate to afford full protection to labor and promote their welfare. In line with this view, it’s vital to respect constitutional rights when dealing with employment-related disputes.

Further reinforcing its decision, the SC pointed to the constitutional provisions on labor rights, specifically Article II, Section 18, and Article XIII, Section 3. These provisions mandate the State to protect the rights of workers and ensure their security of tenure. The Court reasoned that interpreting a merger as an automatic termination of employment would violate these constitutional safeguards. Moreover, such an interpretation would undermine the public interest inherent in employment contracts.

However, despite its ruling on the legal effect of a merger, the SC ultimately sided with Unocal Philippines, denying the Union’s claim for separation benefits. The Court emphasized that separation benefits are not automatically granted in cases of mergers. Rather, they are typically awarded when employees lose their jobs due to redundancy, retrenchment, the installation of labor-saving devices, or the closure and cessation of operations. In this particular instance, none of these conditions were met. The court explained the specific circumstances that warrant separation pay:

In the event of closure, cessation of operations, retrenchment, redundancy or installation of labor saving devices, the COMPANY will pay just and fair compensation for those who will be separated from the COMPANY.

The SC noted that the Union members continued their employment with Unocal Philippines after the merger, with their tenure, salaries, and benefits remaining intact. The Union even entered into a new CBA with Unocal Philippines post-merger, which further indicated that there was no termination of employment. Therefore, because the employees’ job positions were never actually in jeopardy, and their day-to-day was uninterrupted, the requirements for separation pay were not met, making this ruling a necessary action.

While the SC acknowledged the policy of ruling in favor of labor, it also recognized the rights of management and the need for fair play. The Court reiterated that it cannot unduly trample upon the rights of employers in the guise of social justice. Accordingly, the Supreme Court affirmed the Court of Appeals’ decision, denying the Union’s petition for review. This ruling underscores the importance of balancing the protection of labor rights with the legitimate business interests of companies undergoing corporate restructuring.

FAQs

What was the key issue in this case?	The primary issue was whether the merger of Unocal Corporation with Blue Merger and Chevron resulted in the implied termination of employment for the employees of Unocal Philippines, entitling them to separation benefits.
Does a corporate merger automatically terminate employment in the Philippines?	No, a corporate merger does not automatically terminate employment. The surviving corporation assumes the employment contracts of the absorbed corporation, ensuring job security for the employees unless there are legal grounds for termination.
What happens to employment contracts during a merger?	Employment contracts are automatically assumed by the surviving corporation in a merger. This means that the employees of the absorbed corporation become part of the manpower complement of the surviving corporation with their existing terms and conditions of employment.
Under what circumstances are employees entitled to separation pay in a merger?	Employees are typically entitled to separation pay if the merger results in redundancy, retrenchment, installation of labor-saving devices, or closure and cessation of operations. However, if the employees continue their employment with the surviving corporation without any loss of tenure or benefits, they are generally not entitled to separation pay.
What did the Secretary of Labor initially rule in this case?	The Secretary of Labor initially ruled in favor of the Union, stating that the merger resulted in new contracts and a new employer, implying a termination of employment. Therefore, the Secretary of Labor initially awarded the Union separation pay under the Collective Bargaining Agreement.
How did the Court of Appeals rule on the Secretary of Labor’s decision?	The Court of Appeals reversed the Secretary of Labor’s decision, asserting that Unocal Philippines was a separate entity from Unocal Corporation and that the merger did not dissolve Unocal Philippines or affect its employees.
What was the Supreme Court’s final decision?	The Supreme Court affirmed the Court of Appeals’ decision, denying the Union’s petition for review. The Court held that the merger did not result in the implied termination of employment and that the employees were not entitled to separation benefits since they continued their employment with Unocal Philippines.
Can an employer terminate employees during a merger?	An employer can terminate employees during a merger, but only for just or authorized causes as provided by the Labor Code. These causes include serious misconduct, willful disobedience, gross and habitual neglect of duties, fraud or breach of trust, redundancy, retrenchment, or closure of operations.
What is the significance of Section 80 of the Corporation Code in this context?	Section 80 of the Corporation Code outlines the effects of a merger or consolidation, including the transfer of all rights, privileges, properties, and liabilities of the absorbed corporation to the surviving corporation. This provision is the basis for the ruling that employment contracts are also assumed by the surviving corporation.

In conclusion, the Philippine Supreme Court’s decision in Philippine Geothermal, Inc. Employees Union vs. Unocal Philippines, Inc. clarifies that a corporate merger does not automatically terminate employment, ensuring greater job security for employees in the Philippines. This ruling reinforces the constitutional protection of labor rights and emphasizes the need to balance these rights with the legitimate business interests of companies undergoing corporate restructuring.

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: THE PHILIPPINE GEOTHERMAL, INC. EMPLOYEES UNION vs. UNOCAL PHILIPPINES, INC., G.R. No. 190187, September 28, 2016