Cessation of business; when authorized; proper procedures under Labor Code - G.R. No. 171993

G.R. No. 171993

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Accordingly, under Article 283 of the Labor Code, as amended, there are three requisites for a valid cessation of business operations: (a) service of a written notice to the employees and to the Department of Labor and Employment (DOLE) at least one month before the intended date thereof; (b) the cessation of business must be bona fide in character; and (c) payment to the employees of termination pay amounting to one month pay or at least one-half month pay for every year of service, whichever is higher.

In this case, it is obvious that petitioner corporation’s cessation of business operations was not due to serious business losses. Mere poor sales collection, coupled with mismanagement of its affairs does not amount to serious business losses. Nonetheless, petitioner corporation can still validly cease or close its business operations because such right is legally allowed, so long as it was not done for the purpose of circumventing the provisions on termination of employment embodied in the Labor Code.[48] As has been stressed by this Court in Industrial Timber Corporation v. Ababon, thus:
Just as no law forces anyone to go into business, no law can compel anybody to continue the same. It would be stretching the intent and spirit of the law if a court interferes with management's prerogative to close or cease its business operations just because the business is not suffering from any loss or because of the desire to provide the workers continued employment.[49]

A careful perusal of the records revealed that, indeed, petitioner corporation has stopped and ceased business operations beginning 30 June 1997. This was evidenced by a notarized Affidavit of Non-Operation dated 31 August 1998. There was also no showing that the cessation of its business operations was done in bad faith or to circumvent the Labor Code. Nevertheless, in doing so, petitioner corporation failed to comply with the one-month prior written notice rule. The records disclosed that respondent, being petitioner corporation’s employee, and the DOLE were not given a written notice at least one month before petitioner corporation ceased its business operations. Moreover, the records clearly show that respondent’s dismissal was effected on the same date that petitioner corporation decided to stop and cease its operation. Similarly, respondent was not paid separation pay upon termination of his employment.

As respondent’s dismissal was not due to serious business losses, respondent is entitled to payment of separation pay equivalent to one month pay or at least one-half month pay for every year of service, whichever is higher. The rationale for this was laid down in Reahs Corporation v. National Labor Relations Commission,[50] thus:

The grant of separation pay, as an incidence of termination of employment under Article 283, is a statutory obligation on the part of the employer and a demandable right on the part of the employee, except only where the closure or cessation of operations was due to serious business losses or financial reverses and there is sufficient proof of this fact or condition. In the absence of such proof of serious business losses or financial reverses, the employer closing his business is obligated to pay his employees and workers their separation pay.

The rule, therefore, is that in all cases of business closure or cessation of operation or undertaking of the employer, the affected employee is entitled to separation pay. This is consistent with the state policy of treating labor as a primary social economic force, affording full protection to its rights as well as its welfare. The exception is when the closure of business or cessation of operations is due to serious business losses or financial reverses duly proved, in which case, the right of affected employees to separation pay is lost for obvious reasons.[51] [Emphasis supplied.]

As previously discussed, respondent’s dismissal was due to an authorized cause, however, petitioner corporation failed to observe procedural due process in effecting such dismissal. In Culili v. Eastern Telecommunications Philippines, Inc.,[52] this Court made the following pronouncements, thus:

x x x there are two aspects which characterize the concept of due process under the Labor Code: one is substantive — whether the termination of employment was based on the provision of the Labor Code or in accordance with the prevailing jurisprudence; the other is procedural — the manner in which the dismissal was effected.

Section 2(d), Rule I, Book VI of the Rules Implementing the Labor Code provides:

(d) In all cases of termination of employment, the following standards of due process shall be substantially observed:

x x x x

For termination of employment as defined in Article 283 of the Labor Code, the requirement of due process shall be deemed complied with upon service of a written notice to the employee and the appropriate Regional Office of the Department of Labor and Employment at least thirty days before effectivity of the termination, specifying the ground or grounds for termination.

In Mayon Hotel & Restaurant v. Adana, [citation omitted] we observed:

The requirement of law mandating the giving of notices was intended not only to enable the employees to look for another employment and therefore ease the impact of the loss of their jobs and the corresponding income, but more importantly, to give the Department of Labor and Employment (DOLE) the opportunity to ascertain the verity of the alleged authorized cause of termination.[53] [Emphasis supplied].


The records of this case disclosed that there was absolutely no written notice given by petitioner corporation to the respondent and to the DOLE prior to the cessation of its business operations. This is evident from the fact that petitioner corporation effected respondent’s dismissal on the same date that it decided to stop and cease its business operations. The necessary consequence of such failure to comply with the one-month prior written notice rule, which constitutes a violation of an employee’s right to statutory due process, is the payment of indemnity in the form of nominal damages.[54] In Culili v. Eastern Telecommunications Philippines, Inc., this Court further held:

In Serrano v. National Labor Relations Commission [citation omitted], we noted that “a job is more than the salary that it carries.” There is a psychological effect or a stigma in immediately finding one’s self laid off from work. This is exactly why our labor laws have provided for mandating procedural due process clauses. Our laws, while recognizing the right of employers to terminate employees it cannot sustain, also recognize the employee’s right to be properly informed of the impending severance of his ties with the company he is working for. x x x.

x x x Over the years, this Court has had the opportunity to reexamine the sanctions imposed upon employers who fail to comply with the procedural due process requirements in terminating its employees. In Agabon v. National Labor Relations Commission [citation omitted], this Court reverted back to the doctrine in Wenphil Corporation v. National Labor Relations Commission [citation omitted] and held that where the dismissal is due to a just or authorized cause, but without observance of the due process requirements, the dismissal may be upheld but the employer must pay an indemnity to the employee. The sanctions to be imposed however, must be stiffer than those imposed in Wenphil to achieve a result fair to both the employers and the employees.

In Jaka Food Processing Corporation v. Pacot [citation omitted], this Court, taking a cue from Agabon, held that since there is a clear-cut distinction between a dismissal due to a just cause and a dismissal due to an authorized cause, the legal implications for employers who fail to comply with the notice requirements must also be treated differently:

Accordingly, it is wise to hold that: (1) if the dismissal is based on a just cause under Article 282 but the employer failed to comply with the notice requirement, the sanction to be imposed upon him should be tempered because the dismissal process was, in effect, initiated by an act imputable to the employee; and (2) if the dismissal is based on an authorized cause under Article 283 but the employer failed to comply with the notice requirement, the sanction should be stiffer because the dismissal process was initiated by the employer's exercise of his management prerogative.[55] [Emphasis supplied.]


Thus, in addition to separation pay, respondent is also entitled to an award of nominal damages. In conformity with this Court’s ruling in Culili v. Eastern Telecommunications Philippines, Inc. and Shimizu Phils. Contractors, Inc. v. Callanta, both citing Jaka Food Processing Corporation v. Pacot,[56] this Court fixed the amount of nominal damages to P50,000.00.
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