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07. Termination of Employment Contracts
Employment Law Overview Philippines

07. Termination of Employment Contracts

Grounds for Termination

Under Philippine law, an employee may only be lawfully terminated when there are just or authorized causes and following compliance with the prescribed procedure. This is anchored on the principle of security of tenure, which is not only statutorily provided, but is also guaranteed by the Philippine Constitution. The following are just causes for termination:

  • Serious misconduct or willful disobedience;
  • Gross and habitual neglect of duties;
  • Fraud or willful breach of trust;
  • Commission of a crime or offense by the employee against his/her employer, the employer’s immediate family or his/her duly authorized representatives; and
  • Other causes analogous to the foregoing. Based on Philippine case law, examples of such analogous causes include: (i) theft committed by an employee against a person other than his/her employer, if proven by substantial evidence; (ii) gross incompetence or inefficiency, such as the failure to attain a reasonable work quota which was fixed by the employer in good faith; (iii) failure to meet the standards of a bona fide occupational qualification; and (iv) a severe failure to comply with company rules and regulations. Further, no act or omission shall be considered as an analogous cause unless expressly provided in the company rules, regulations, or policies.

On the other hand, the following are authorized causes for termination:

  • Installation of labor-saving devices;
  • Redundancy;
  • Retrenchment to prevent losses;
  • Closure or cessation of business; and

Disease not curable within six (6) months as certified by competent public authority, and continued employment of the employee is prejudicial to his/her health or to the health of his/her co-employees.

Collective Dismissals

Collective dismissals fall under the following authorized causes for termination: installation of labor-saving devices, redundancy, retrenchment, and closure of business.

An employer may implement termination by redundancy when the following are present:

  • Superfluous positions or services of employees;
  • Positions or services are in excess of what is reasonably demanded by the actual requirements of the enterprise to operate in an economical and efficient manner;
  • Good faith in abolishing redundant positions;
  • Fair and reasonable criteria in selecting the employees to be terminated; and
  • Adequate proof of redundancy such as feasibility studies/proposals.

A valid retrenchment program requires the concurrence of the following:

  • Retrenchment must be reasonably necessary and likely to prevent business losses;
  • Losses, if already incurred, are substantial, serious, actual and real, or if only expected, are reasonably imminent;
  • Expected or actual losses must be proved by sufficient and convincing evidence;
  • Retrenchment must be in good faith and not to defeat or circumvent the employees’ right to security of tenure; and
  • Fair and reasonable criteria in ascertaining the retention and dismissal of employees, such as, but not limited to: status, efficiency, seniority, physical fitness, age, and financial hardship for certain workers.

Mass termination due to closure of business or cessation of operation requires the concurrence of the following:

  • There is a decision to close or cease operation of the enterprise by the management:
  • Such decision was made in good faith; and
  • No other option available to the employer except to close or cease operations.

A valid termination due to the installation of labor-saving devices requires the concurrence of the following:

  • Introduction of machinery, equipment or other devices;
  • Introduction must be done in good faith;
  • Purpose for such introduction must be valid such as to save on cost, enhance efficiency, and other justifiable economic reasons;
  • No other option available to the employer than the introduction of machinery, equipment or device and the consequent termination of employment of those affected thereby; and
  • Fair and reasonable criteria in selecting employees to be terminated.

The foregoing requirements must always be complied with regardless of the number of employees affected.

Further, with regard to the installation of labor-saving devices, redundancy, and retrenchment, when there are two (2) employees occupying the same position in the company to be affected by any of the three (3) enumerated authorized causes of termination, the last one employed will necessarily be the first one to go, i.e., Last-In, First-Out Rule, except when an employee volunteers to be separated from employment.

Individual Dismissals

The law guarantees the employees’ right to security of tenure, meaning, no employee can be dismissed from work except for just or authorized cause, and only after due process.

Is Severance Pay Required?

Severance pay as a result of termination of employment, is set by law and given only in cases of dismissals due to authorized causes. If the authorized cause is the installation of labor-saving devices or redundancy, the separation pay is equivalent to one (1) month pay for one (1) month for every year of service, whichever is higher.

If the authorized cause is retrenchment, closure or cessation of business not due to serious business losses, or an incurable disease, the separation pay is equivalent to one (1) month pay or one-half (1/2) month pay for every year of service, whichever is higher.

If the dismissal is due to a just cause, separation pay is not required to be given to employees.

Employers are likewise not obliged to give separation pay if the closure or cessation of business is due to serious business losses. However, to prove serious business losses, employers must present in evidence financial statements showing the net losses suffered by the business within a sufficient period of time. Generally, it cannot be based on a single financial statement showing losses.

Separation Agreements

Employment may be terminated by mutual consent of the employer and the employee through the execution of a Mutual Separation Agreement (“MSA”). This mode of termination effectively transfers the extinguishment of the employer-employee relationship from the ambit of Philippine labor laws to the relevant laws on obligations and contracts, dispensing with the notice requirement in relation to termination for just or authorized causes. It is not necessary to offer separation payment to the employee executing the MSA, since only his/her consent is essential to the execution thereof. However, in practice, employers offering the option to mutually terminate employment through the execution of an MSA, usually provide a stipulation in the agreement paying the employee amounts over and above those which he/she would be legally entitled to, for the purpose of making the MSA more attractive to the employee.

Remedies for Employee Seeking to Challenge Wrongful Termination

Philippine laws had made it easier for employees to file claims against the employers through the Single Entry Approach (SenA), which refers to the administrative approach to provide an accessible, speedy, impartial, and inexpensive settlement procedure of all labor and employment issues through a 30-day mandatory conciliation-mediation.

If a matter was not settled at the SEnA level, it may be referred to an office or agency of the Department of Labor or Employment, or to the National Labor Relations Commission (NLRC) wherein a Labor Arbiter (LA) would adjudicate on the dispute.

The decision of the LA may be appealed to the NLRC within ten (10) days from receipt. If the employer obtains an unfavorable decision from the NLRC, it may file a motion for reconsideration (MR) also within ten (10) days from receipt.

If the same is still unfruitful, the decision of the NLRC may be assailed before the Court of Appeals (CA) within sixty (60) days from notice of denial of the MR through a Petition for Certiorari.

Any adverse decision of the CA may be appealed to the Supreme Court within fifteen (15) days from the notice of judgment.

Nevertheless, the likelihood of a claim being raised formally against the employer through this mechanism ultimately depends on the level of litigiousness of the affected employee.

In establishments with a collective bargaining agreement (CBA), the termination may be questioned through the grievance machinery established under the CBA. If the complaint is not resolved at such level, it may be submitted to voluntary arbitration.

Whistleblower Laws

The Labour Code considers it unfair labor practice to dismiss, discharge, or otherwise prejudice or discriminate against an employee for having given or being about to give testimony under the Labour Code.

Any questions

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