Abella vs. NLRC

An employer who terminates employees due to the closure or cessation of operations not caused by serious business losses or financial reverses is obligated to pay separation pay under Article 284 of the Labor Code as amended by Batas Pambansa Blg. 130, and such statutory obligation does not unconstitutionally impair the employer's prior lease contract because the prohibition against impairment is not absolute and yields to the State's police power to protect labor.

Petitioner Rosalina Perez Abella was a leaseholder of farmland in Monteverde, Negros Occidental, known as Hacienda Danao-Ramona, which she operated as an agricultural enterprise. During the lease period, she employed private respondents Ricardo Dionele, Sr. and Romeo Quitco as regular farm workers, both of whom were eventually promoted to the position of Cabo. The dispute arose from the intersection of petitioner's leasehold arrangement with the landowners and her statutory obligations as an employer under the Labor Code, as amended by Batas Pambansa Blg. 130, which introduced separation pay requirements for closures not attributable to serious business losses.

On June 27, 1960, petitioner Rosalina Perez Abella leased a farmland in Monteverde, Negros Occidental, known as Hacienda Danao-Ramona, for a period of ten years, renewable at her option for another ten years. On August 13, 1970, she exercised her option to extend the lease contract for another ten years.

During the existence of the lease, petitioner employed private respondents Ricardo Dionele, Sr. and Romeo Quitco. Dionele had been a regular farm worker since 1949 and was promoted to Cabo in 1963. Quitco started as a regular employee in 1968 and was promoted to Cabo in November of the same year.

Upon the expiration of her leasehold rights, petitioner dismissed the private respondents and turned over the hacienda to its owners on October 5, 1981. The owners thereafter continued the management, cultivation, and operation of the farm. On November 20, 1981, private respondents filed a complaint against petitioner at the Ministry of Labor and Employment, Bacolod City District Office, for overtime pay, illegal dismissal, and reinstatement with backwages.

After the parties presented their respective evidence, Labor Arbiter Manuel M. Lucas, Jr. rendered a decision on July 16, 1982, ruling that the dismissal was warranted by the cessation of business but granting private respondents separation pay. The Labor Arbiter found that the closure was not due to business reverses or losses, and accordingly awarded termination pay at the rate of half-month salary for every year of service, with a fraction of six months considered as one whole year. On appeal, the National Labor Relations Commission affirmed the decision on April 8, 1985, and denied petitioner's motion for reconsideration on June 10, 1985.

• Expiration of Lease: Petitioner argued that since her lease agreement had already expired, she is not liable for payment of separation pay, as she could no longer reinstate the complainants in the farm.
• Cessation of Business as Just Cause: Petitioner maintained that the turnover of the hacienda constituted a complete cessation or closure of business operations, a just cause for employment termination under Article 272 of the Labor Code.
• Impairment of Obligations and Contracts: Petitioner contended that Article 284 of the Labor Code as amended by Batas Pambansa Blg. 130 violates the constitutional guarantee against impairment of obligations and contracts, because when she leased Hacienda Danao-Ramona on June 27, 1960, neither she nor the lessor contemplated the creation of the obligation to pay separation pay to workers at the end of the lease.

• Entitlement to Separation Pay: Whether private respondents are entitled to separation pay upon the cessation of petitioner's business operations due to the expiration of her leasehold rights.
• Constitutionality of Article 284: Whether Article 284 of the Labor Code as amended by Batas Pambansa Blg. 130 violates the constitutional guarantee against impairment of obligations and contracts.

• Entitlement to Separation Pay: Yes. Article 284 of the Labor Code as amended by BP 130 applies, requiring separation pay for closures or cessations of operations not due to serious business losses or financial reverses.
• Constitutionality of Article 284: No constitutional violation. The prohibition against impairment of contracts is not absolute and yields to the State's police power to protect the welfare of labor; the workers were not parties to the lease contract and thus the law does not impair the rights of the contracting parties as between themselves.

• Entitlement to Separation Pay: The applicable law is Article 284 of the Labor Code as amended by Batas Pambansa Blg. 130, which governs closures of establishments and reductions of personnel. Petitioner invoked Article 272, which pertains to just causes of termination, but the Labor Arbiter did not dispute the justification of the termination; rather, the Arbiter applied Article 284, which provides for the rights of employees under the circumstances of termination. Because the closure was not due to serious business losses or financial reverses, the provision mandates separation pay equivalent to one month pay or at least one-half month pay for every year of service, whichever is higher. The purpose of Article 284 is the protection of workers whose employment is terminated due to closure; without it, employees like Dionele (33 years of service) and Quitco (14 years of service) would lose the benefits to which they are entitled. Although they were absorbed by the new management of the hacienda, absent any showing that the latter assumed the responsibilities of the former employer, they would be considered new employees and their years of service would amount to nothing.

• Constitutionality of Article 284: The contention that Article 284 impairs the lease contract is untenable. The constitutional prohibition against impairment of obligations and contracts is not absolute and unqualified; it prohibits unreasonable impairment only. The State retains authority to safeguard the vital interests of its people, and legislation enacted for the promotion of the general good may modify or abrogate contracts already in effect, provided the means adopted are within the scope of the reserved power of the State. Existing laws are read into contracts to fix obligations between the parties, and the reservation of essential attributes of sovereign power — including police power — is read into contracts as a postulate of the legal order. Moreover, to come under the constitutional prohibition, the law must effect a change in the rights of the parties with reference to each other and not with reference to non-parties. Article 284 refers to employment benefits of farm hands who were not parties to petitioner's lease contract with the owner of Hacienda Danao-Ramona; that contract cannot annul subsequent legislation designed to protect the interest of the working class. In the implementation and interpretation of the Labor Code, the workingman's welfare is the primordial and paramount consideration, and all doubts shall be resolved in favor of labor pursuant to Article 4 of the Labor Code.

• Police Power as Limitation on Non-Impairment Clause — The constitutional prohibition against impairment of obligations and contracts is not absolute and unqualified; it prohibits unreasonable impairment only. The State retains authority to safeguard the vital interests of its people through legislation enacted for the general good, which may modify or abrogate contracts already in effect. All contracts made with reference to any matter subject to regulation under police power must be understood as made in reference to the possible exercise of that power. The Court applied this doctrine to hold that Article 284 of the Labor Code as amended by BP 130 does not unconstitutionally impair petitioner's lease contract, because the law protects workers who were not parties to that contract and the prohibition applies only to changes in the rights of the parties with reference to each other, not to non-parties.

• Pro-Labor Interpretation of the Labor Code — In the implementation and interpretation of the provisions of the Labor Code and its implementing regulations, the workingman's welfare should be the primordial and paramount consideration. All doubts in the implementation and interpretation of the Code shall be resolved in favor of labor, pursuant to Article 4 of the Labor Code. The policy is to extend the applicability of the decree to a greater number of employees who can avail of benefits under the law, in consonance with the State's avowed policy to give maximum aid and protection to labor.

• "It should not be overlooked, however, that the prohibition to impair the obligation of contracts is not absolute and unqualified. The prohibition is general, affording a broad outline and requiring construction to fill in the details. The prohibition is not to read with literal exactness like a mathematical formula for it prohibits unreasonable impairment only." — This passage, quoted from Anucension vs. National Labor Union, articulates the foundational principle that the non-impairment clause yields to the State's police power, and is the ratio decidendi for rejecting petitioner's constitutional challenge to Article 284.

• "Moreover, to come under the constitutional prohibition, the law must effect a change in the rights of the parties with reference to each other and not with reference to non-parties." — This passage defines the scope of the non-impairment clause as it pertains to third parties, establishing that legislation protecting non-parties to a contract (here, the farm workers) does not impair the obligations between the contracting parties themselves.

• "In any event, it is well-settled that in the implementation and interpretation of the provisions of the Labor Code and its implementing regulations, the workingman's welfare should be the primordial and paramount consideration." — This passage reaffirms the pro-labor interpretive principle derived from Article 4 of the Labor Code, guiding courts to resolve all doubts in favor of labor.

• Anucension vs. National Labor Union, 80 SCRA 368-369 (1977) — Controlling precedent on the non-impairment clause. The Court relied on this case to establish that the prohibition against impairment of contracts is not absolute and yields to the State's police power to safeguard the vital interests of the people.
• Basa vs. Federacion Obrera de la Industria Tabaquera y Otros Trabajadores de Filipinas (FOITAF), L-27113, November 19, 1974, 61 SCRA 93 — Cited within the Anucension quotation for the proposition that legislation impairing contracts can be sustained when enacted for the promotion of the general good and when the means adopted are within the scope of the reserved power of the State.
• Volshel Labor Union vs. Bureau of Labor Relations, 137 SCRA 43 (1985) — Followed for the principle that the workingman's welfare should be the primordial and paramount consideration in implementing and interpreting the Labor Code.
• Sarmiento vs. Employees Compensation Commission, 144 SCRA 422 (1986) — Followed for the policy of extending the applicability of labor laws to a greater number of employees, in consonance with the State's policy to give maximum aid and protection to labor. Cited in turn Cristobal vs. Employees Compensation Commission, 103 SCRA 329, and Acosta vs. Employees Compensation Commission, 109 SCRA 209.

• Article 284, Labor Code (as amended by Batas Pambansa Blg. 130, Section 15) — Governs closure of establishment and reduction of personnel. Provides that in cases of closure or cessation of operations not due to serious business losses or financial reverses, the affected worker shall be entitled to separation pay equivalent to one month pay or at least one-half month pay for every year of service, whichever is higher, with a fraction of at least six months considered one whole year. Applied as the basis for awarding separation pay to private respondents.
• Article 272, Labor Code — Pertains to just causes of termination. Petitioner invoked this provision, but the Court clarified that it governs the justification for termination, whereas Article 284 governs the rights of employees upon termination due to closure.
• Article 4, Labor Code — Provides that all doubts in the implementation and interpretation of the provisions of the Code, including its implementing rules and regulations, shall be resolved in favor of labor. Cited as the guiding principle for pro-labor interpretation.

Teehankee, C.J., Yap, Fernando, Narvasa, Melencio-Herrera, Gutierrez, Jr., Cruz, Feliciano, Gancayco, Padilla, Bidin, Sarmiento, and Cortes, JJ., concurred.