Illegal Dismissal: Employer Liability After a Prolonged Business Suspension

The Supreme Court’s 2023 decision in Keng Hua Paper Products Co., Inc. v. Ainza (G.R. No. 224097) clarifies a critical point for employers: a business suspension that lasts more than six months does not automatically end an employment relationship. If the employer fails to validly terminate or recall workers after that period, it may be held liable for illegal dismissal with full backwages and separation pay.

The Case: An Ondoy-Damaged Factory and Workers Told to Stay Home

Keng Hua Paper Products, a Malabon-based manufacturer, suspended operations after Typhoon Ondoy severely damaged its equipment in September 2009. In January 2010, three employees — Carlos Ainza, Primo Dela Cruz, and Benjamin Gelicami — were told at the factory gate that they no longer had jobs. The company resumed operations in May 2010 but claimed the workers simply did not return.

The employees filed an illegal dismissal complaint in March 2011. The Labor Arbiter and the National Labor Relations Commission (NLRC) initially ruled there was no illegal dismissal, treating the cessation as a fortuitous event. The Court of Appeals reversed, finding the employees were illegally dismissed. The Supreme Court affirmed.

The Six-Month Rule on Suspension of Operations

Under Article 301 of the Labor Code, a bona fide suspension of business operations for a period not exceeding six months does not terminate employment. The employer must reinstate the employee if the worker indicates a desire to return within one month of resumption.

The Court explained that a temporary lay-off should not last longer than six months. After that period, the employer must either recall the workers or permanently retrench them following the law’s requirements. Failure to do so amounts to dismissal, making the employer liable.

In this case, the suspension ran from September 2009 to May 2010 — more than six months. The company admitted it never recalled the employees when the six-month period lapsed, reasoning that there was no work. The Court rejected this, holding that the employees’ employment was terminated by operation of law.

Valid Termination: Substantive and Procedural Requirements

The Court distinguished between two authorized causes: retrenchment to prevent losses and closure or cessation of business operations. While both require the same procedural steps, they have different substantive requirements.

Under Article 298 of the Labor Code, a valid termination requires:

1. Written notice to the employees and the Department of Labor and Employment (DOLE) at least one month before the intended date of termination; and
2. Payment of separation pay.

For retrenchment, the employer must additionally prove by clear and convincing evidence that:

• The losses are substantial, actual, and real, or reasonably imminent;
• The retrenchment is reasonably necessary to prevent losses;
• The employer acted in good faith;
• Fair and reasonable criteria were used in selecting who to retrench; and
• The employer adopted other cost-saving measures first.

For closure, the cessation must be bona fide — not intended to circumvent employees’ rights.

Why the Employer Lost

The Court found that Keng Hua failed on both substantive and procedural grounds:

• No proof of losses. The company submitted only comparative income statements to the BIR, not independently audited financial statements proving actual losses.
• No written notices. There was no evidence of notice to the employees or to DOLE.
• No separation pay. The company failed to show payment of termination benefits.
• No fair criteria. There was no indication of reasonable selection criteria for who would be retrenched.
• Continued operations. The income statements showed the company was still operating four years after Ondoy, undermining the claim of permanent closure.

Because the termination was illegal, the workers were entitled to reinstatement and full backwages under Article 294 of the Labor Code. However, given that more than a decade had passed and reinstatement was no longer feasible, the Court awarded separation pay of one month’s salary for every year of service, computed from each worker’s first day of employment until the finality of the decision, plus attorney’s fees of 10% of the monetary award.

Practical Takeaways

• A business suspension beyond six months does not automatically end employment. Employers must either recall workers or validly terminate them within that period.
• Do not rely on verbal instructions. Telling employees at the gate that they have no jobs, without written notice to them and DOLE, is a fatal procedural error.
• Prove losses with audited financial statements. Unaudited income statements submitted to the BIR are insufficient to justify retrenchment.
• Follow the two-step process. Serve written notice at least one month before termination and pay separation pay — these requirements admit no exceptions.
• When in doubt, consult counsel. The cost of a valid termination is far lower than the liability for illegal dismissal, which includes backwages, separation pay, and attorney’s fees.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.