When Are Directors Liable for Illegal Dismissal?
Introduction
When a company illegally dismisses employees, the corporation is ordinarily responsible for reinstatement, backwages, separation pay, and other monetary awards. Individual directors and officers are not automatically required to pay these amounts from their personal funds.
Personal liability arises only when the employee sufficiently alleges and proves that a particular director or officer acted in bad faith, with malice or gross negligence, assented to a patently unlawful corporate act, or otherwise falls within a specific statutory exception. The issue is therefore not simply whether the dismissal was illegal, but whether the individual officer personally participated in the unlawful conduct.
Separate Corporate Personality Is the Starting Rule
Under the Revised Corporation Code, a corporation has a personality separate and distinct from its directors, trustees, officers, stockholders, and members. Obligations incurred by the corporation are generally its own obligations.
Section 30 of R.A. No. 11232 provides that directors, trustees, or officers may be held jointly and severally liable for damages when they willfully and knowingly vote for or assent to patently unlawful corporate acts, act with gross negligence or bad faith in directing corporate affairs, or acquire a personal or pecuniary interest conflicting with their corporate duties.
This rule also applies in labor disputes. The fact that a director signed a termination notice, approved a restructuring plan, or held a senior corporate position does not, by itself, establish personal liability.
When Can a Director Be Ordered to Pay?
Personal liability may be imposed when the employee proves that the responsible director or officer personally falls within one or more recognized exceptions:
- the director or officer assented to a patently unlawful act;
- the director or officer acted in bad faith or with gross negligence in directing corporate affairs;
- the director or officer had a conflict of interest that caused damage to the corporation, its employees, or other persons;
- the director or officer expressly agreed to be personally and solidarily liable; or
- a specific law makes the director or officer personally liable for the corporate act.
These exceptions are reflected in Section 30 of R.A. No. 11232 and were reiterated in Montallana v. La Consolacion College Manila, et al., G.R. No. 208890, November 17, 2014, and Harpoon Marine Services, Inc., et al. v. Francisco, G.R. No. 167751, March 2, 2011.
Bad Faith Must Be Alleged and Proved
Bad faith is more than an incorrect business decision, poor judgment, or ordinary negligence. It involves a dishonest purpose, conscious wrongdoing, moral obliquity, or a deliberate breach of a known duty.
In Dimson v. Chua, G.R. No. 192318, March 9, 2016, the Supreme Court held that two requirements must concur before an officer may be held personally liable: bad faith must be alleged in the complaint, and bad faith must be established by evidence. The Court rejected personal liability where there was no specific allegation or proof that the officer participated in the illegal dismissal.
Similarly, Kho v. Magbanua, et al., G.R. No. 237246, June 26, 2019, recognized that a procedural defect in an employee’s termination does not automatically prove bad faith. Failure to observe procedural due process may make the dismissal procedurally defective, but it does not alone justify charging the corporation’s officers personally.
Direct Participation and the Responsible Officer
The employee must identify the officer who was directly responsible for the unlawful act. Courts do not generally impose liability on every member of the board merely because the board approved a corporate action.
In Guillermo v. Uson, G.R. No. 198967, February 17, 2016, the Supreme Court explained that personal liability attaches to the responsible officer—the person directly responsible for the illegal dismissal or other violation of labor law who acted in bad faith.
Where the evidence does not identify the responsible officer, the president may, in appropriate circumstances, be treated as the officer responsible for the corporation’s unlawful act. This is not an automatic rule of liability; the finding must still be supported by the circumstances and evidence of bad faith.
What the Employee Must Prove
An employee seeking to hold a director personally liable should present evidence addressing both the illegal dismissal and the officer’s personal conduct.
| Issue | Required showing |
|---|---|
| Illegal dismissal | The employee was dismissed without a valid just or authorized cause, or without compliance with applicable procedural requirements. |
| Personal participation | The director or officer personally approved, directed, implemented, or knowingly tolerated the unlawful act. |
| Bad faith or equivalent fault | The officer acted with malice, fraud, gross negligence, dishonest purpose, or willful and knowing assent to an unlawful act. |
| Due process | The officer was properly impleaded and given an opportunity to defend against the claim for personal liability. |
Corporate status, position, or authority to sign documents is insufficient without proof connecting the officer to the unlawful conduct.
NLRC Jurisdiction and the Need for Proper Impleading
The National Labor Relations Commission may adjudicate an employee’s labor claims against the employer and, when properly pleaded and proven, against responsible corporate officers. However, a person who was not made a party and was not served with the required process cannot ordinarily be subjected to a personal monetary judgment.
In Dimson v. Chua, the Supreme Court ruled that a labor tribunal cannot acquire jurisdiction over a person who was neither impleaded as a party nor served with summons. A judgment imposing liability on such person is void for lack of due process.
Accordingly, an employee should name the director or officer as a respondent when personal liability is genuinely being claimed. The complaint should state the specific acts showing participation, bad faith, malice, gross negligence, or another applicable exception.
Liability at the Execution Stage
Personal liability may sometimes be determined even after the labor judgment has become final, particularly when the evidence shows that the corporate form was deliberately used to evade payment of the award.
In Guillermo v. Uson, the Court recognized that the corporate veil may be pierced at the execution stage when directors or officers deliberately use the corporation to defeat a final labor judgment or resort to fraud, malice, or bad faith. The remedy is not available merely because the corporation is unable to pay.
For example, transferring corporate assets to defeat execution, dissolving or abandoning the corporation to avoid a final award, or using another related entity as a vehicle to conceal assets may support a finding of personal liability if adequately proven.
Illustrative Situations
Board-approved retrenchment based on fabricated grounds
If directors authorize retrenchment based on fabricated financial statements or unsubstantiated losses, and the evidence shows that they knowingly used those grounds to remove employees, personal liability may attach. In Uichico, et al. v. National Labor Relations Commission, et al., G.R. No. 121434, June 27, 1997, corporate officers were held liable where they acted in bad faith by authorizing retrenchment on fabricated or unsupported grounds.
Director signs a defective termination notice
A director who merely signs a termination notice in the ordinary course of corporate administration is not automatically personally liable. The employee must still prove that the director knew the dismissal lacked legal basis or deliberately caused the unlawful termination.
Corporation fails to pay a final labor award
Nonpayment alone does not establish bad faith. Personal liability may arise only when the officer used the corporation to fraudulently evade the award or otherwise engaged in dishonest conduct designed to defeat the employee’s rights.
Remedies for an Employee
If the dismissal is declared illegal, the usual monetary remedies may include reinstatement without loss of seniority rights, full backwages, and other benefits. When reinstatement is no longer feasible because of the lapse of time or serious strained relations, separation pay may be awarded instead.
In Park Hotel, et al. v. Soriano, et al., G.R. No. 171118, March 4, 2012, the Court recognized that separation pay may be awarded in lieu of reinstatement and that separation pay and backwages are not mutually exclusive when the circumstances justify both awards.
The corporation remains the primary judgment debtor. A director or officer becomes personally liable only upon a specific and supported finding that the statutory or jurisprudential requirements are present.
Guidance for Employers and Directors
- Document the legitimate business reason for termination, retrenchment, closure, or redundancy.
- Preserve financial records and other evidence supporting an authorized cause.
- Ensure that notices, hearings when required, and termination notices comply with labor law.
- Record the factual basis of board resolutions and identify the officers who participated in the decision.
- Avoid relying on fabricated, incomplete, or unsupported grounds for dismissal.
- Do not transfer assets or reorganize corporate structures for the purpose of defeating a final labor award.
Guidance for Employees
An employee seeking personal liability should distinguish the employer’s liability from the officer’s liability. The complaint should identify the officer, allege the officer’s specific conduct, and explain why that conduct constitutes bad faith, malice, gross negligence, or assent to a patently unlawful act.
Relevant evidence may include board resolutions, memoranda, emails, financial records, termination directives, statements showing retaliatory motive, and transactions indicating an attempt to evade labor obligations. General accusations against the entire board are unlikely to satisfy the requirement of specific allegation and proof.
Conclusion
The NLRC may order an individual director or officer to pay backwages and other labor awards, but only under established exceptions to separate corporate personality. The employee must generally prove both the illegal dismissal and the responsible officer’s bad faith, malice, gross negligence, direct participation, or other legally recognized basis for personal liability.
The safest approach for employees is to plead and prove the officer’s specific acts. For directors and officers, careful documentation, lawful termination procedures, and avoidance of transactions intended to defeat labor judgments are essential safeguards against personal liability.
About Nicolas and De Vega Law Offices
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 [email protected]. Visit our website https://ndvlaw.com.
