Friday, May 09, 2014

Rights of employees and obligations of employers in business closure, asset sale, or stock sale

(Note: For counseling on labor problems, please contact the Public Assistance and Complaints Unit (PACU) of the Department of Labor and Employment, Muralla St. cor. Gen. Luna St., Intramuros, 1002 Manila, between Pamantasan ng Lungsod ng Maynila and the Bulletin. You may call DOLE Hotline: 1349 from your fixed-line phones. You can also inquire through an online form.)

Business closure The law permits an employer to dismiss its employees if the business is being closed down. Obligations of employer:

(1) serve written notices on the employees and the Department of Labor at least one month before the intended date of closure;

(2) pay the dismissed employees separation pay, except if the closure is due to serious business losses or financial reverses.

Exemption from giving separation pay: .

a. the closure was due to serious business losses or financial reverses; .

b. the employer must show convincing evidence that it actually suffered serious financial reverses.
Asset sale The business owner sells all or substantially all of the assets to another party. The business owner who sells in good faith is authorized to dismiss the affected employees. But the owner must give separation pay to the employees.

The buyer in good faith, on the other hand, is:

(1) not obliged to absorb the employees affected by the sale.

(2) not liable for paying their claims.
Stock sale

The individual or corporate shareholders sell a controlling block of stock to new or existing shareholders. The employees cannot be dismissed simply because new majority stockholders and new management have taken over the business.

Sari-sari Group of Companies, Inc. v. Piglas Kamao, G.R. No. 164624, 11 August 2008, 561 SCRA 569

Facts: The employees agreed with the corporation’s act of considering them as terminated. They accepted their separation pay.

Ruling: Despite having accepted the separation pay, the employees can contest the legality of their dismissal.

SME Bank vs. De Guzman, G.R. No. 184517, October 8, 2013

Background facts:

The original principal shareholders and corporate directors of Small and Medium Enterprise Bank, Incorporated (SME Bank) were Eduardo M. Agustin, Jr. (Agustin) and Peregrin de Guzman, Jr. (De Guzman). Some of SME Bank’s employees were Elicerio Gaspar (Elicerio), Ricardo Gaspar, Jr.(Ricardo), Eufemia Rosete (Eufemia), Fidel Espiritu (Fidel), Simeon Espiritu, Jr. (Simeon, Jr.), and Liberato Mangoba (Liberato).

SME Bank experienced financial difficulties in June 2001. To remedy the situation, Agustin and De Guzman sold 86.365% of the shares of stock of SME Bank to spouses Abelardo and Olga Samson. The Samson couple then became the principal shareholders of SME Bank, while Aurelio Villaflor, Jr. was appointed bank president.

Before the sale, Simeon Espiritu (Espiritu), then the general manager of SME Bank, met with all the employees of the head office and of the Talavera and Muñoz branches of SME Bank. He persuaded them to tender their resignations, with the promise that they would be rehired when they reapplied.

Relying on this representation, Elicerio, Ricardo, Fidel, Simeon, Jr., and Liberato tendered their resignations dated August 27, 2001. As for Eufemia, she first tendered a resignation letter and then a retirement letter dated September 2001. But as it turned out, the employees, except for Simeon, Jr., were not rehired.

The employees demanded the payment of their respective separation pays but their requests were denied. They then filed a Complaint with the National Labor Relations Commission (NLRC) – Regional Arbitration Branch No. III against SME Bank, the Samson couple, and Villaflor for unfair labor practice; illegal dismissal; illegal deductions; underpayment; and nonpayment of allowances, separation pay and 13th month pay. The employees later on amended their Complaint to include Agustin and De Guzman as respondents.

In defense, the Samson Group (the Samson couple, and Villaflor) contended that Elicerio, Ricardo, Fidel, and Liberato voluntarily resigned from their posts while Eufemia retired from her position. As their resignations and retirements were voluntary, they were not dismissed from their employment. In support of this argument, the Samson Group presented copies of their resignation and retirement letters, which were couched in terms of gratitude.

Labor Arbiter dismisses case against the Samson Group but rules against Agustin and De Guzman

(1) The buyer of an enterprise is not bound to absorb its employees, unless there is an express stipulation to the contrary.

(2) The employees were illegally dismissed, because they had involuntarily executed their resignation letters after relying on representations that they would be given their separation benefits and rehired by the new management. The arbiter ordered Agustin and De Guzman to pay the complainants’ separation pay.

NLRC ruling: mere change in management not a valid ground to terminate the employees

Dissatisfied with the judgment, Elicerio and the other employees appealed to the NLRC. Agustin and De Guzman also appealed. The employees questioned the labor arbiter’s failure to award backwages. Agustin and De Guzman, on the other hand, contended that they should not be held liable for the payment of the employees’ claims.

The NLRC found that there was only a mere transfer of shares – and therefore, a mere change of management – from Agustin and De Guzman to the Samson Group. As the change of management was not a valid ground to terminate respondent bank employees,

(1) Elicerio and the other employees were illegally dismissed;

(2) Agustin, De Guzman, and the Samson Group should be held jointly and severally liable for the employees’ separation pay and backwages.

Supreme Court ruling: corporate officers who act in bad faith or with malice liable for illegal dismissal

(1) Elicerio and the other employees are entitled to separation pay, full backwages, moral damages, exemplary damages and attorney’s fees. They tendered resignation letters only because they were led to believe that, upon reapplication, they would be reemployed by the new management. They had no real intention of leaving their posts.

While resignation letters containing words of gratitude may indicate that the employees were not coerced into resignation, this fact alone is not conclusive proof that they intelligently, freely and voluntarily resigned. To rule that resignation letters couched in terms of gratitude are, by themselves, conclusive proof that the employees intended to relinquish their posts would open the floodgates to possible abuse.

In order to withstand the test of validity, resignations must be made voluntarily and with the intention of relinquishing the office, coupled with an act of relinquishment. Therefore, in order to determine whether the employees truly intended to resign from their respective posts, the Court cannot merely rely on the tenor of the resignation letters, but must consider the totality of circumstances.

(2) Contrary to SME Bank’s argument, there was no transfer of the business establishment but merely a change in the new majority shareholders and new management of the corporation. This change is not a just or authorized cause for termination of employment under the Labor Code.

SME Bank continued to be the employer of respondent employees notwithstanding the equity change in the corporation. A corporation has a personality separate and distinct from that of its individual shareholders or members. Thus, a change in the composition of its shareholders or members would not affect its corporate liabilities.

As the employer of the illegally dismissed employees before and after the equity transfer, SME Bank is liable for the satisfaction of their claims.

(3) Liability of corporate directors and officers in illegal dismissal cases


Corporate officers are not personally liable for their official acts. A corporation, by legal fiction, has a personality separate and distinct from its officers, stockholders, and members.

Corporate directors and officers are solidarily liable with the corporation if they acted with malice or in bad faith in terminating the employees.

Agustin and De Guzman are corporate directors who acted in bad faith. They may be held solidarily liable with SME Bank for the satisfaction of the employees’ lawful claims.

The dismissal of Elicerio and the other employees was done in bad faith. Motivated by their desire to sell their shares of stock to the Samson couple, Agustin and De Guzman agreed to and later implemented the precondition in the Letter Agreements as to the termination or retirement of SME Bank’s employees. But instead of going through the proper procedure, the bank manager induced the employees to resign or retire from their respective employments, while promising that they would be rehired by the new management. Fully relying on that promise, they tendered courtesy resignations or retirements and eventually found themselves jobless. Clearly, this sequence of events constituted a gross circumvention of labor laws and a violation of the employees’ constitutionally guaranteed right to security of tenure.