How to Implement a Redundancy Program during a Corporate Spin-Off - Nicolas and De Vega Law Offices Image Article

Employee Termination When Corporate Spin-Offs Happen

It happens not too often that a corporation either purchases an existing company, or spins-off a division or department of a company into a separate corporation. When this happens, the original corporation will be transferring the functions of one of its divisions to the new corporation. This will result in the complete cessation of operations of one of the divisions of the corporation, and the operations of said division will now be undertaken by the new corporation.

Certainly, the spin-off will result in the termination of employees. As with most companies, termination of employment is a bitter seed that breeds conflict and controversy, as it is often marred with uncertainty and misunderstanding. 

Management’s Right to Terminate Employment Due to Redundancy under a Corporate Spin-Off

The right of management to dismiss workers due to redundancy is governed by the Article 283 of the Labor Code.  This is one of the authorized causes in the termination of employment. The pertinent provision of the Labor Code reads: 

Article 283.  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 operations 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 workers and the Department of Labor and Employment at least one (1) month before the intended date thereof. In case of termination due to the installation of labor-saving devices or redundancy, the worker affected thereby shall be entitled to a separation pay equivalent to at least one (1) month pay or to at least one (1) month pay for every year of service, whichever is higher. In case of retrenchment to prevent losses and in cases of closure or cessation of operations of establishment or undertaking not due to serious business losses or financial reverses, the separation pay shall be equivalent to at least one (1) month pay or at least one-half (1/2) 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.

Definition and Nature of Redundancy as Interpreted by the Supreme Court

Redundancy, for purposes of the Labor Code, exists where the services of an employee are in excess of what is reasonably demanded by the actual requirements of the enterprise. Succinctly put, a position is redundant where it is superfluous, and superfluity of a position or positions may be the outcome of a number of factors, such as over-hiring of workers, decreased volume of business, or dropping of a particular product line or service activity previously manufactured or undertaken by the enterprise. The employer has no legal obligation to keep in its payroll more employees than are necessary for the operation of its business. (Wiltshire File Co., Inc. v. NLRC, 193 SCRA 672)  

Redundancy in an employer’s personnel force necessarily or even ordinarily refers to duplication of work. That no other person was holding the same position that private respondent held prior to the termination of his services, does not show that his position had not become redundant. Indeed, in any well-organized business enterprise, it would be surprising to find duplication of work and two (2) or more people doing the work of one person. (DOLE Philippines, Inc. v. NLRC, 417 Phil. 428)

Thus, it is clear that termination of employment on the ground of redundancy, such as in the case at bar where the services of several employees will be terminated on the ground that the department to which they were connected was abolished, is a valid prerogative of the company.

Corporate Requirements to Prevent Liability for Validity of Redundancy Program in Corporate Spin-Off

The issue which now looms is the manner at which such termination should be exercised to prevent any liability from attaching against the Company. In this regard, the Rules and Regulations Implementing the Labor Code provides:

“For termination of employment as defined in Article 283 of the Labor Code, the requirement of due process shall be deemed complied with upon the 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, specifically the ground or grounds for termination.”

Therefore, for the implementation of any redundancy program to be valid, the employer must comply with the following procedural requisites:

a) serve a written notice of termination to each of  the affected employees and to the Philippine Department of Labor and Employment (“DOLE”) at least 30 days prior to the effectivity of the employment termination (or such longer period that might be provided under any agreement with these employees, or under company practice or policy); and

b) pay the affected employees separation pay of at least one (1) month pay or to at least one (1) month pay for every year of service, whichever is higher, or such higher separation benefits that might be provided by agreement with these employees or by company practice or policy. While earlier jurisprudence treats employment severance due to the closure of a department or division of a company as redundancy which entitles the affected employees to the higher separation pay of one month pay for every year of service, more recent Supreme Court cases treat this as closure under Article 283 of the Labor Code which gives rise to the lower separation pay mentioned above.  Philippine Tobacco Flue-Curing & Redrying Corporation v. National Labor Relations Commission (“NLRC”), et al., G.R. No. 127395, Dec. 10, 1998, cited in Abasolo, et al. v. NLRC, G.R. No. 118475, Nov. 29, 2000.

Specifically, the purpose of such previous notice to DOLE must be to enable it to ascertain the verity of the cause for termination of employment. It must be emphasized that violation of statutory procedural requirements on written notice by the employer to both the employee and/or the DOLE would warrant the payment of indemnity in the form of nominal damages. The amount of such damages is addressed to the sound discretion of the court, taking into account the relevant circumstances. In the case of JAKA Food Processing Corp. v. Pacot, et al., G.R. No. 151378, March 28, 2005, the indemnity awarded by the Supreme Court to each of the complainants for violation of written notice rule was pegged at P50,000.00 as nominal damages.  

Lastly, under Article 284 of the Labor Code, three requirements must be complied with in cases of closures or cessations of business operations as authorized causes for termination of employment: (a) service of a written notice on the employee and the DOLE at least one (1) month before the intended date of the closure or cessation; (b) the closure or cessation of business operations must be bona fide in character; and, where the closure or cessation is not due to serious business losses or financial reverses, (c) payment to the employee affected of separation pay equivalent to at least one (1) month pay or at least one-half (1/2) month pay for every year of service, whichever is higher. (Mobil Employees Association and Inter-Island Labor Organization v. NLRC, G.R. No. 79329, March 28, 1990.)

Steps to Follow in Implementing Redundancy Program arising from a Corporate Spin-Off

In full compliance with the law, the following steps are suggested to be undertaken by the Company:

1.            Inform and apprise affected employee/s of the state of business operation and the need to reduce workforce or abolition of particular position due to redundancy.

2.            If possible, present proofs of the fact that there is necessity to introduce changes in order to streamline business operation and eliminates weaknesses in the corporate structure affecting revenue and profitability.  Reorganization of workforce may be pursued to achieve economy and efficiency.

3.            Comply with the procedural requirements in terminating affected employee/s.

 (1)         written notice served on the employees and

 (2)         the Department of Labor and Employment at least thirty (30) days  prior to the intended date of effectivity of termination.

4.            Payment of Separation Pay in accordance with the provision of the Labor Code.

It is advised that full compliance with the above steps be made, to obviate any wrongful dismissal suit to be filed by the employee.  In the event that written notice to the Department of Labor and Employment at least thirty (30) days prior to the intended date of effectivity of termination is no longer possible, there have been Supreme Court cases which state that notice with the DOLE is not necessary where the employee has voluntarily accepted the retrenchment.

When Employees Consented to Redundancy Program under Corporate Spin-Off

Where the affected employees of the Company have voluntarily assented to their separation from the company, and already accepted the separation package offered to them by the company, the Supreme Court ruled: 

“The lack of notice to the Department of Labor and Employment (DOLE) does not render the redundancy program void.  Petitioner accurately invokes International Harvester, Inc. vs. NLRC.

‘x x x if an employee consented to his retrenchment or voluntarily applied for retrenchment with the employer due to the installation of labor-saving devices, redundancy, closure or cessation of operation or to prevent financial losses to the business of the employer, the required previous notice to the DOLE is not necessary as the employee thereby acknowledged the existence of a valid cause for termination of his employment.’

Here, most of the private respondents even filled up application forms to be considered for the redundancy program and thus acknowledged the existence that their services were redundant.” (DOLE Philippines, Inc. vs. Oliver, et al., G.R. No. 120009, September 13, 2001, citing International Hardware, Inc. vs. NLRC, 176 SCRA 256 (1989)

Thus, there is basis in stating that if the employee consented to or voluntarily applied for retrenchment with the employer due to redundancy, the required previous notice to the DOLE is not necessary as the employee thereby acknowledges the existence of a valid cause for termination of his employment.

Nevertheless, it is advisable for any company to require the affected employees to sign quitclaims acknowledging receipt of the separation and final benefits and releasing the company from further claims and liabilities.

Good Faith and Legitimate Business Reason for Corporate Spin-Off

The foregoing paragraphs assume, however, that the termination on the ground of redundancy of the affected employees is done in good faith and not for the purpose of circumventing their rights to security of tenure and to their current benefits.  In this connection, the company should be prepared to show that there is a legitimate business reason for the spin-off of the division to a new corporation. 

The company should also be able to show that it completely ceased the operation of such division after the spin-off.  Moreover, there should be no intermingling of funds and operations between these two companies.  Otherwise, we cannot discount the possibility that the labor tribunals might pierce the separate juridical personalities of the original company and the new corporation, and render the termination an illegal dismissal. 

About Nicolas and De Vega Law Offices

If you need assistance in labor-related issues, compliance with DOLE issuances, and company employment policies,  or business-related concerns, we can help you find solutions. Nicolas and de Vega Law Offices is a full-service law firm in the Philippines.  You may visit us at the 16th Flr., Suite 1607 AIC Burgundy Empire Tower, ADB Ave., Ortigas Center, 1605 Pasig City, Metro Manila, Philippines.  You may also call us at +632 84706126, +632 84706130, +632 84016392 or e-mail us at info@ndvlaw.com. Visit our website www.ndvlaw.com.

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