Alabang Country Club Inc. vs. NLRC

Closure or cessation of a department or section of a business, even absent proof of substantial losses, is a valid authorized cause for termination under Article 283 of the Labor Code, provided it is done in good faith to advance the employer's interest and not to circumvent employee rights; employees terminated due to such closure are entitled to separation pay but not to backwages or reinstatement. The case further establishes that retrenchment (reduction of personnel) and closure of a business undertaking are separate and independent authorized causes, distinguished by whether the employer reduces the workforce or completely ceases operations of a department or section.

Petitioner Alabang Country Club Inc. (ACCI) is a stock, non-profit corporation that operates and maintains a country club and various sports and recreational facilities for the exclusive use of its members. Respondent Alabang Country Club Independent Employees Union (the Union) is a duly registered labor organization of ACCI employees, with which ACCI had a Collective Bargaining Agreement effective April 9, 1993 to April 9, 1996. The individual respondents were sixty-three employees assigned to ACCI's Food and Beverage Department. The dispute arose from ACCI's decision to cease operating its F&B Department and contract out its operations to a concessionaire, La Tasca Restaurant Inc., resulting in the termination of all F&B Department employees effective January 1, 1995.

Sometime in 1993, Francisco Ferrer, then President of ACCI, requested its Internal Auditor, Irene Campos-Ugalde, to conduct a study on the profitability of ACCI's Food and Beverage Department. Ugalde used the audited figures in the financial statements prepared by Sycip Gorres Velayo & Co. (SGV&Co.) for the years 1989 to 1993 in reflecting the total revenue and costs and expenses of the F&B Department. However, while SGV&Co. deducted the entire "undistributed operating costs and expenses" — consisting of "general and maintenance costs" — from the total income of ACCI, Ugalde allocated a percentage of these expenses and charged the same against the total revenue of the F&B Department. Her report showed that from 1989 to 1993, the F&B Department had been incurring substantial losses in the aggregate amount of ₱8,727,135.00. The report further noted that losses dropped in 1993 due to a joint management-employee cost-cutting undertaking, but only to reduce losses without reaching a break-even level; that ACCI could generate income from the F&B Department if its operation were transferred to a concessionaire; and that actual breakages alone were approximately ₱298,000 from January 1 to May 15, 1994, averaging ₱60,000 monthly.

Realizing that it was no longer profitable to maintain its own F&B Department, ACCI's management decided to cease operating the department and to open it to a contractor or concessionaire. On November 11, 1994, ACCI's Labor Committee Chairman Catalino Santos met with the Union officers and members to discuss the financial standing of the F&B Department. ACCI subsequently entered into an agreement on December 1, 1994 with La Tasca Restaurant Inc., under which La Tasca would pay ACCI fifteen percent of its gross sales net of sales tax plus five percent of monthly gross sales net of sales tax for light and water expenses. La Tasca also agreed to absorb all affected F&B Department employees immediately as regular employees without a probationary period, at the same salary they had been receiving from ACCI.

Also on December 1, 1994, ACCI sent individual termination letters to its F&B Department employees, informing them that their services were being terminated effective January 1, 1995, and that they would be paid separation pay equivalent to 125% of their monthly salary for every year of service. On December 11, 1994, the Union, with the authority of the individual respondents, filed before the NLRC a complaint for illegal dismissal, unfair labor practice, regularization, and damages with a prayer for a writ of preliminary injunction. The Union then filed a notice of strike. ACCI, finding that the requirements under the Labor Code had not been complied with, suspended on December 28, 1994 those who participated in the strike. The Union averred that no strike was actually held and that employees were caught by surprise when La Tasca employees arrived with equipment and took over their posts on December 28, 1994. As scheduled, ACCI ceased operating its F&B Department on January 1, 1995, and La Tasca began operating its own F&B business at the Alabang Country Club.

During the proceedings before the Labor Arbiter, the Union and individual respondents presented audited financial statements prepared by SGV&Co. showing that the F&B Department had been consistently earning profits, with positive net income ranging from ₱959,533 to ₱2,911,810 for 1989 to 1993, and except for 1992, marked increases in annual net income per year. For 1994, the F&B Department posted an annual net income of ₱1,562,385. They argued that the standards for losses under Lopez Sugar Corporation vs. Federation of Free Workers to justify retrenchment were not met. ACCI countered that it could exercise management prerogatives to adopt cost-saving programs, prevent losses, concentrate on core businesses, and lay off workers and contract out their jobs. During the pendency of the proceedings, forty-seven of the individual respondents accepted separation benefits from ACCI at 125% of their monthly salary for every year of service and executed waivers and quitclaims. Fifteen more individual respondents likewise received their separation packages and executed waivers and quitclaims during the pendency of the petition before the Court of Appeals. In total, sixty-two of the sixty-three individual respondents received separation pay and executed duly notarized waivers and quitclaims; only Filipino Dizon appeared not to have received the separation package.

• Right to Terminate for Authorized Cause: Petitioner argued that the Court of Appeals gravely disregarded the Club's right to terminate its employees for an authorized cause, particularly to secure its continued viability and existence.
• Sufficiency of Evidence: Petitioner maintained that the findings of both the NLRC and the Labor Arbiter that the F&B employees were validly terminated were supported by audited financial statements and other substantial evidence, and that the petition for certiorari before the Court of Appeals should have been dismissed.
• Impropriety of Reinstatement, Backwages, and Attorney's Fees: Petitioner argued that the order for reinstatement, payment of backwages, and the award of attorney's fees were not proper since respondents were terminated for an authorized cause and after compliance with due process.
• Waivers and Quitclaims: Petitioner contended that sixty-two of the sixty-three respondents had already acknowledged receipt of the monetary award in full satisfaction, executing waivers and quitclaims in its favor.

• Profits Shown by Audited Statements: Respondents countered that the F&B Department had been reporting gains as shown by the Statement of Income and Deficit prepared by SGV&Co., and that compliance with the standards for losses under Lopez Sugar Corporation vs. Federation of Free Workers to justify retrenchment was not met by ACCI.
• Grave Abuse of Discretion: Respondents alleged that the Labor Arbiter and the NLRC committed grave abuse of discretion and utter ignorance of the law in completely disregarding the audited financial statements prepared by SGV&Co. showing that ACCI's F&B Department had been consistently earning profits.

• Nature of Termination: Whether the termination of the F&B Department employees constituted retrenchment to prevent losses or closure/cessation of a business undertaking under Article 283 of the Labor Code.
• Proof of Losses: Whether ACCI sufficiently proved substantial and continuing business losses to justify the closure of its F&B Department.
• Validity of Closure Absent Proof of Losses: Whether a closure or cessation of a department may be a valid authorized cause for termination even absent proof of serious business losses.
• Relief Due to Employees: Whether reinstatement, backwages, and attorney's fees were properly awarded by the Court of Appeals.
• Validity of Waivers and Quitclaims: Whether the waivers and quitclaims executed by sixty-two of the sixty-three individual respondents were valid and binding.

• Nature of Termination: The termination constituted closure or cessation of a business undertaking, not retrenchment. Retrenchment involves reduction of personnel; closure involves complete cessation of business operations or termination of all personnel in a department.
• Proof of Losses: No. ACCI failed to prove substantial losses by sufficient and convincing evidence, the internal auditor's study report being self-serving and contradicted by SGV&Co.'s audited financial statements showing positive net income for the F&B Department.
• Validity of Closure Absent Proof of Losses: Yes. Closure or cessation of an undertaking not due to serious business losses is a valid authorized cause under Article 283, provided it is done in good faith and not to circumvent employee rights.
• Relief Due to Employees: No. Reinstatement and backwages were not proper because the employees were not illegally dismissed; they were entitled only to separation pay under Article 283.
• Validity of Waivers and Quitclaims: Yes. The duly notarized waivers and quitclaims were valid and binding, no respondent having challenged their reasonableness or voluntariness.

• Nature of Termination: The Court distinguished retrenchment from closure of a business undertaking. Retrenchment is the reduction of personnel for the purpose of cutting down on costs of operations in terms of salaries and wages, resorted to because of losses, lack of work, and considerable reduction in the volume of business. Closure of a business or undertaking due to business losses is the reversal of fortune of the employer whereby there is a complete cessation of business operations to prevent further financial drain. In the present case, ACCI did not reduce the number of personnel in the F&B Department; it terminated the employment of all personnel assigned thereat and ceased operating the department entirely, contracting out its operations to La Tasca. This constituted closure or cessation of an undertaking, a separate and independent authorized cause from retrenchment under Article 283 of the Labor Code.

• Proof of Losses: The Court agreed with the Court of Appeals that the study report submitted by ACCI's internal auditor — the only evidence presented to prove alleged losses — was self-serving and fell short of the stringent requirement that the employer prove sufficiently and convincingly its allegation of substantial losses. Financial statements audited by independent external auditors, not a mere study report of an internal auditor, constitute the normal method of proof of the profit and loss of a company. The SGV&Co. audited financial statements for 1989 to 1993 showed positive net income for the F&B Department ranging from ₱959,533 to ₱2,911,810, with marked increases in annual net income except for 1992. For 1994, the department posted an annual net income of ₱1,562,385. The internal auditor's study report failed to provide the necessary details on how the undistributed operating costs and expenses charged to the F&B Department were arrived at, including the basis for allocating association dues and real estate tax directly to the department as expenses.

• Validity of Closure Absent Proof of Losses: Notwithstanding the failure to prove substantial losses, the Court found the closure justified as cessation of an undertaking not due to serious business losses, which is allowed under Article 283. The closure of operation of an establishment or undertaking not due to serious business losses includes both the complete cessation of operations and the cessation of only part of a company's activities. For any bona fide reason, an employer can lawfully close shop anytime; just as no law forces anyone to go into business, no law can compel anybody to continue the same. The Court found basis for ACCI's claim that the continued maintenance of the F&B Department had become more expensive through the years, as an evaluation of the audited financial statements showed that 91% to 96% of the actual revenues earned by the department comprised the costs and expenses in maintaining it. ACCI's decision to place its F&B operations under a concessionaire was to be respected absent a showing of bad faith. Management's exercise of its prerogative to close a section, branch, department, plant, or shop will be upheld as long as it is done in good faith to advance the employer's interest and not for the purpose of defeating or circumventing the rights of employees under the law or a valid agreement.

• Relief Due to Employees: Because the closure was found to be a valid authorized cause under Article 283, the employees were not illegally dismissed and therefore not entitled to backwages. However, under Article 283, in cases of closures or cessation of operations not due to serious business losses or financial reverses, the employer is mandated to pay separation pay equivalent to one month pay or at least one-half month pay for every year of service, whichever is higher. ACCI had in fact voluntarily provided separation pay equivalent to one month and a quarter (1¼) for every year of service, a fraction of a year being considered one year, which exceeded the statutory minimum and was consistent with the Collective Bargaining Agreement.

• Validity of Waivers and Quitclaims: A waiver or quitclaim is a valid and binding agreement between the parties, provided that it constitutes a credible and reasonable settlement and the one accomplishing it has done so voluntarily and with a full understanding of its import. The waivers and quitclaims executed by the individual respondents who received separation pay were duly notarized, and the certificate of acknowledgment in each served as prima facie evidence of due execution under Rule 132, Section 30 of the Rules of Court. Not one of the individual respondents who executed the waivers or quitclaims came forward to challenge the reasonableness of the settlement or the voluntariness of the execution of the documents. Accordingly, the waivers and quitclaims were upheld as valid and binding, and only the remaining employee, Filipino Dizon, who had not received the separation package, was entitled to payment.

• Distinction Between Retrenchment and Closure of Business Undertaking — Retrenchment is the reduction of personnel for the purpose of cutting down on costs of operations in terms of salaries and wages, resorted to by an employer because of losses in operation of a business occasioned by lack of work and considerable reduction in the volume of business. Closure of a business or undertaking due to business losses is the reversal of fortune of the employer whereby there is a complete cessation of business operations to prevent further financial drain upon an employer who cannot pay anymore his employees since business has already stopped. They are two separate and independent authorized causes for termination of employment. The key factual distinction is whether the employer reduced the number of personnel (retrenchment) or terminated all personnel in a department or section and ceased its operations entirely (closure).

• Closure or Cessation of Undertaking Not Due to Serious Business Losses — Under Article 283 of the Labor Code, an employer may terminate employment due to the closing or cessation of the establishment or undertaking unless the closing is for the purpose of circumventing the provisions of the Labor Code. This includes both the complete cessation of operations and the cessation of only part of a company's activities. For any bona fide reason, an employer can lawfully close shop anytime. Management's prerogative to close a section, branch, department, plant, or shop will be upheld as long as it is done in good faith to advance the employer's interest and not for the purpose of defeating or circumventing the rights of employees under the law or a valid agreement. In such cases, separation pay equivalent to one month pay or at least one-half month pay for every year of service, whichever is higher, is required.

• Proof of Business Losses — Financial statements audited by independent external auditors, and not a mere study report of an internal auditor of a company, constitute the normal method of proof of the profit and loss of the company. For closure of a business or department due to serious business losses to be regarded as an authorized cause, it must be proven that the losses incurred are substantial and actual or reasonably imminent; that the same increased through a period of time; and that the condition of the company is not likely to improve in the near future. An internal auditor's study report that allocates undistributed operating costs to a department without providing the necessary details on how the allocation was arrived at is self-serving and insufficient.

• Validity of Waivers and Quitclaims — A waiver or quitclaim is a valid and binding agreement between the parties, provided that it constitutes a credible and reasonable settlement and the one accomplishing it has done so voluntarily and with a full understanding of its import. Duly notarized waivers and quitclaims carry a certificate of acknowledgment that serves as prima facie evidence of their due execution under Rule 132, Section 30 of the Rules of Court. The validity of such instruments may be upheld where none of the executing parties comes forward to challenge the reasonableness of the settlement or the voluntariness of execution.

• "While the Labor Code provides for the payment of separation package in case of retrenchment to prevent losses, it does not obligate the employer for the payment thereof if there is closure of business due to serious losses." — This passage delineates the distinction between retrenchment and closure in terms of separation pay obligations, a point central to the Court's characterization of the case as one involving closure rather than retrenchment.

• "For any bona fide reason, an employer can lawfully close shop anytime. Just as no law forces anyone to go into business, no law can compel anybody to continue the same." — This is the canonical formulation of the principle upholding management prerogative to close a business or department for bona fide reasons, frequently cited in subsequent labor jurisprudence.

• "Management's exercise of its prerogative to close a section, branch, department, plant or shop will be upheld as long as it is done in good faith to advance the employer's interest and not for the purpose of defeating or circumventing the rights of employees under the law or a valid agreement." — This articulates the controlling standard for evaluating the validity of a partial closure: good faith and the absence of intent to circumvent employee rights.

• "A waiver or quitclaim is a valid and binding agreement between the parties, provided that it constitutes a credible and reasonable settlement and the one accomplishing it has done so voluntarily and with a full understanding of its import." — This states the governing test for the validity of waivers and quitclaims in labor settlements, applied by the Court to uphold the notarized instruments executed by sixty-two of the sixty-three employees.

• Lopez Sugar Corporation vs. Federation of Free Workers, 189 SCRA 179 (1990) — Cited by respondents and the Court for the four conditions governing retrenchment on the ground of serious business losses: (1) losses must be substantial and not merely de minimis; (2) losses must be reasonably imminent as perceived objectively and in good faith; (3) retrenchment must be reasonably necessary and likely to prevent expected losses; (4) losses must be proven by sufficient and convincing evidence. The Court applied these standards in finding ACCI's evidence of losses insufficient.

• Bogo-Medellin Sugarcane Planters Association, Inc. vs. NLRC, 296 SCRA 108 (1998) — Cited by the Court of Appeals for the doctrine that financial statements audited by independent external auditors, not a mere internal auditor's study report, constitute the normal method of proof of profit and loss. The Supreme Court adopted this principle.

• Dela Salle University vs. Dela Salle University Employees Association, 330 SCRA 363 (2000) — Cited alongside Bogo-Medellin for the same proposition regarding the proper method of proving corporate profit and loss through audited financial statements.

• J.A.T. General Services vs. National Labor Relations Commission, 421 SCRA 78 (2004) — Followed for the proposition that retrenchment and closure of a business establishment or undertaking are two separate and independent authorized causes for termination of employment, and for the definition of closure as the reversal of fortune of the employer involving complete cessation of business operations.

• Coca-Cola Bottlers (Phils.), Inc. vs. NLRC, 194 SCRA 592 (1991) — Followed for the principle that closure of operation of an establishment or undertaking not due to serious business losses includes both the complete cessation of operations and the cessation of only part of a company's activities.

• Wack Wack Golf and Country Club vs. National Labor Relations Commission, G.R. No. 149793, April 15, 2005 — Followed for the doctrine that a waiver or quitclaim is valid and binding if it constitutes a credible and reasonable settlement executed voluntarily with full understanding of its import.

• Article 283, Labor Code — Governs closure of establishment and reduction of personnel. The provision allows termination due to installation of labor-saving devices, redundancy, retrenchment to prevent losses, or closing or cessation of the establishment or undertaking unless the closing is for the purpose of circumventing the Labor Code. It requires one month written notice to the worker and the Ministry of Labor and Employment. For closures or cessation of operations not due to serious business losses or financial reverses, separation pay equivalent to one month pay or at least one-half month pay for every year of service, whichever is higher, is mandated. The Court applied this provision to hold that ACCI's closure of its F&B Department was a valid authorized cause and that separation pay was due, but backwages and reinstatement were not.

• Rule 132, Section 30, Rules of Court — Provides that every instrument duly acknowledged or proved and certified as provided by law may be presented without further proof, the certificate of acknowledgment being prima facie evidence of the execution of the instrument or document involved. The Court applied this provision to uphold the validity of the duly notarized waivers and quitclaims executed by sixty-two of the sixty-three individual respondents.

Panganiban (Chairman), Sandoval-Gutierrez, and Garcia, JJ., concurred. Corona, J., was on leave.