Absorbing Employees in a Merger or Takeover

Absorbing Employees in a Merger or Takeover

In cases of mergers or acquisitions, where a company purchases and takes over the operations of another, is the absorbing company required to retain the employees of the purchased company?

The answer is in the affirmative. The absorbed company loses its employees to the acquiring company and is required to retain them until they are absorbed into the new operation.

In the case of Philippine Geothermal Inc. v. Unocal Philippines, Inc., G.R. No. 190187, 28 September 2016, the Supreme Court (SC) held that the absorbing corporation automatically assumes the employment contracts of the absorbed corporation, such that the absorbed corporation’s employees become part of the manpower complement of the surviving corporation.

The Court said: “In the instant case, Unocal is a corporation that is acquiring Philex’s operations. The acquisition of Philex’s assets and operations by Unocal automatically results in the employment contract of Philex employees becoming part of the manpower complement of Unocal.” The Court concluded that the application of the “automatic termination” principle would be unfair to Unocal and therefore, it was unconstitutional.

Thus, the company that will run the operations and business of the absorbed or purchased entity cannot terminate employees of the absorbed company.

The rationale for the Supreme Court ruling above is anchored on the nature and effects of absorption/merger as provided under Section 79 of the Corporation Code, the said provision is produced below, to wit:

Sec. 79. Effects of Merger or Consolidation – x x x (e) The surviving or consolidated corporation shall be responsible for all the liabilities and obligations of each constituent corporation as though such surviving or consolidated corporation had itself incurred such liabilities or obligations x x x  [Emphasis Supplied.]

The aforementioned acquisition of all liabilities and obligations of the absorbed corporation necessarily includes the rights and obligations of the absorbed corporation under its employment contracts[1]. Apart from the Corporation Code, the principle of absorption of employees finds support in our Labor Code, particularly Art. II, Sec. 18 and Art. XIII, Sec. 3. Both Labor Code provisions uphold the State’s duty to afford protection to labor.

In view of the foregoing, the company that will purchase and control the operations of the acquired corporation should absorb the employees of the company, which the former intends to acquire. To terminate the employees would be illegal dismissal.

The absorbing company, need only ensure that the affected employees are included in the payroll of the surviving/acquiring company, and would receive statutory benefits such as Pag-ibig, PhilHealth and SSS. Therefore, it is the duty of acquiring company to inform or report to government agencies concerned (Pag-ibig, PhilHealth, SSS, DOLE and BIR) the employment of the said absorbed workers.

If the company that takes-over does not intend to retain some employees due to redundancy, the company has to fill out an RKS Form 5 and submit the same to the DOLE Field Office having jurisdiction over the place of business of absorbing company and comply with the requirements of the DOLE for retrenching these employees, provided there are authorized causes legal grounds to do so.

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[1] G.R. No. 190187 (ibid.)


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