Manlimos vs. NLRC

A bona fide change of ownership in a corporation does not constitute a cessation of business operations and does not obligate the transferee to absorb the transferor's employees; the transferee may hire them only on a probationary basis as an exercise of management prerogative. Probationary employees nonetheless enjoy the constitutional protection of security of tenure and may be dismissed only for just cause or for failure to qualify as regular employees under reasonable standards made known to them at the time of engagement, with notice and hearing.

The petitioners were regular employees of Super Mahogany Plywood Corporation, a domestic corporation organized in 1988 and based in Butuan City, where they worked as patchers, taper-graders, and receivers-dryers. On 1 September 1991, a new owner/management group headed by Alfredo Roxas acquired complete ownership of the corporation, and the petitioners were advised of the change. The dispute arose from the legal consequences of that transfer of ownership on the petitioners' employment status, particularly whether the change amounted to a cessation of business operations under the Labor Code and whether the transferee corporation was obliged to retain or re-employ the former employees as regular workers.

The petitioners were among the regular employees of Super Mahogany Plywood Corporation, a domestic corporation organized in 1988 and based in Butuan City, where they had been hired as patchers, taper-graders, and receivers-dryers. On 1 September 1991, a new owner/management group headed by Alfredo Roxas acquired complete ownership of the corporation. The petitioners were advised of the change of ownership, but they continued to work for the new owner and were considered terminated, with their conformity, only as of December 1991, when they received their separation pay, 13th month pay, and all other benefits due them computed as of that month. Each of them then executed on 17 December 1991 a Release and Waiver, which they acknowledged before Atty. Nolasco Discipulo, Hearing Officer of the Butuan City District Office of the Department of Labor and Employment.

On 27 December 1991, the new owner caused the publication of a notice for the hiring of workers, indicating therein who of the separated employees could be accepted on probationary basis. The petitioners then filed their applications for employment. Except for Rosario Cuarto, they were hired on probationary basis for six months as patchers or tapers, but were compensated on piece-rate or task basis.

For their alleged absence without leave, Perla Cumpay and Virginia Etic were considered, as of 4 May 1992, to have abandoned their work. The rest were dismissed on 13 June 1992 because they allegedly committed acts prejudicial to the interest of the new management, consisting of their "including unrepaired veneers in their reported productions on output as well as untaped corestock or whole sheets in their supposed taped veneers/corestock." Upon their appeal, the effectivity of such termination was deferred to 20 June 1992.

Petitioners Ronald Booc, Jaime Timbal, German Gista, Federico Amper, Francisco Evale, and Renante Yacapin filed a complaint with the Sub-Regional Arbitration Branch No. X of the NLRC in Butuan City (NLRC-SRAB 10-07-00104-92) for non-payment of wages, underpayment of wages, incentive leave pay, non-payment of holiday pay, overtime pay, 13th month pay, separation pay, reinstatement with back wages, illegal termination, and damages. Petitioners Ronald Manlimos, Froilan Pagalan, Merlita Duhay Lungsod, Elizabeth Andagan, Doris Serdan, Leonora Bibiano, Perla Cumpay, Virginia Etic, Remegia Noel, and Rosario Cuarto also filed a complaint with the same office (NLRC Case No. SRAB-10-08-00124-92) for illegal termination, reinstatement with back wages, non-payment of wages, underpayment of wages, non-payment of incentive leave pay, overtime pay, 13th month pay, and damages. Both complaints were later amended and consolidated. The private respondent answered the amended complaints, and the parties thereafter submitted their position papers.

The petitioners maintained that they remained regular employees regardless of the change of management in September 1991 and their execution of the Release and Waiver, arguing that the corporation's juridical personality was unaffected even if ownership of its shares of stock changed hands, and that their signing of the Release and Waiver was of no moment because the consideration was woefully inadequate and quit claims executed by laborers are frowned upon as contrary to public policy. The private respondent, on the other hand, contended that the petitioners were deemed legally terminated from their previous employment as evidenced by the execution of the Release and Waiver and the filing of their applications for employment with the new owner, that the new owner was well within its legal right to consider the petitioners' probationary/temporary appointment as terminated, and that the petitioners were not illegally dismissed.

Labor Arbiter Marissa Macaraig-Guillen, in her decision of 30 April 1993, ruled for the petitioners, declaring the dismissals invalid and illegal and ordering the private respondent to reinstate the complainants to their positions without loss of seniority rights and privileges and to pay them backwages, 13th month pay, service incentive leave pay, and attorney's fees in the total sum of P542,150.40. She reasoned that the transfer of ownership partook of a cessation of business operations not due to business reverses under Article 283 of the Labor Code and that, under Mobil Employees Association vs. National Labor Relations Commission, the requisites for such termination had to be complied with; she found the first and third requisites present but concluded that there was no cessation of operations, so that upon resumption of work in January 1992 the complainants re-entered the respondent's employ as regular employees who could not be dismissed without cause and due process. The NLRC reversed on appeal, finding the change of ownership to have been made in good faith and holding that Mobil was inapplicable because it involved termination under Article 283 and not termination arising from a change of corporate ownership; it sustained only the 13th month pay, subject to recomputation, and upheld the subsequent probationary hiring as a management prerogative. On the abandonment charge against Cumpay and Etic, the record showed no proof of intent to abandon, and the private respondent failed to observe the notice and hearing requirements of due process.

• Continuity of Regular Employment: Petitioners maintained that they remained regular employees regardless of the change of management in September 1991 and their execution of the Release and Waiver.
• Unaffected Corporate Personality: Petitioners argued that, being a corporation, the private respondent's juridical personality was unaffected even if ownership of its shares of stock changed hands.
• Invalidity of the Release and Waiver: Petitioners contended that their signing of the Release and Waiver was of no moment not only because the consideration was woefully inadequate, but also because employees who receive their separation pay are not barred from contesting the legality of their dismissal, and quit claims executed by laborers are frowned upon for being contrary to public policy.

• Legal Termination: Respondent contended that the petitioners were deemed legally terminated from their previous employment as evidenced by the execution of the Release and Waiver and the filing of their applications for employment with the new owner.
• Management Prerogative: Respondent argued that the new owner was well within its legal right or prerogative in considering as terminated the petitioners' probationary/temporary appointment.
• No Illegal Dismissal: Respondent maintained that the petitioners were not illegally dismissed and hence were not entitled to the reliefs prayed for.

• Grave Abuse of Discretion: Whether the NLRC acted with grave abuse of discretion in reversing the decision of the Labor Arbiter.
• Change of Ownership as Cessation of Operations: Whether the change of ownership of the corporation amounted to a cessation of business operations under Article 283 of the Labor Code, requiring compliance with its requisites before the dismissal of employees may be effected.
• Obligation to Absorb Employees: Whether the private respondent was obligated to absorb or re-employ the petitioners as regular employees notwithstanding the bona fide change of ownership and the petitioners' execution of the Release and Waiver.
• Legality of the Dismissal of Cumpay and Etic: Whether the dismissal of Perla Cumpay and Virginia Etic on the ground of abandonment was valid.

• Grave Abuse of Discretion: No. The NLRC committed no grave abuse of discretion in reversing the Labor Arbiter, its findings on the bona fide change of ownership and the management prerogative to hire on probationary basis being supported by the record and the law.
• Change of Ownership as Cessation of Operations: No. A change of ownership of a corporation does not amount to a cessation of business operations, the corporation continuing to exist as a distinct and separate juridical entity.
• Obligation to Absorb Employees: No. A transferee of a business establishment acquired in good faith is under no legal duty to absorb the transferor's employees; the most it may do is to give preference to qualified separated employees in filling vacancies.
• Legality of the Dismissal of Cumpay and Etic: No. The dismissal of Cumpay and Etic was illegal, abandonment not having been proven and the notice and hearing requirements of due process not having been observed.

• Grave Abuse of Discretion: The Labor Arbiter's reliance on Mobil Employees Association vs. National Labor Relations Commission was misplaced. Mobil involved the termination of employment under Article 283 (formerly Article 284) of the Labor Code, where the original employer, Mobil Oil Philippines, Inc., completely withdrew from business and was even dissolved. In the present case, there was only a change of ownership of Super Mahogany Plywood Corporation; the corporation itself, as a distinct and separate juridical entity, continues to exist. The issue of whether there was a closing or cessation of business operations which could have operated as a just cause for termination of employment was therefore not material. The change in ownership of the management was done bona fide, and the petitioners did not, at any moment before the filing of their complaints, raise any doubt on the motive for the change; on the contrary, upon being informed thereof and of their eventual termination from employment, they freely and voluntarily accepted their separation pay and other benefits and individually executed the Release or Waiver, which they acknowledged before no less than a hearing officer of the DOLE.

• Change of Ownership as Cessation of Operations: A change of ownership in a business concern is not proscribed by law. In Central Azucarera del Danao vs. Court of Appeals, the Court recognized that it is within the employer's legitimate sphere of management control of the business to adopt economic policies or make changes or adjustments in its organization or operations that would insure profit to itself or protect the investment of its stockholders; as an exercise of such management prerogative, the employer may merge or consolidate its business with another, or sell or dispose of all or substantially all of its assets and properties, which may bring about the dismissal or termination of its employees in the process. There was no showing that the former owners conspired with the new owners to insulate the former management from any liability to its workers.

• Obligation to Absorb Employees: Where the transfer of ownership is in good faith, the transferee is under no legal duty to absorb the transferor's employees, as there is no law compelling such absorption. The most that the transferee may do, for reasons of public policy and social justice, is to give preference to the qualified separated employees in the filling of vacancies in its facilities. Since the petitioners were effectively separated from work due to a bona fide change of ownership and were accordingly paid their separation pay, which they freely and voluntarily accepted, the private respondent corporation was under no obligation to employ them; it could, however, give them preference in hiring. The private respondent in fact hired, but on probationary basis, all the petitioners except Rosario Cuarto, whose non-hiring was legally permissible. The hiring of employees on a probationary basis is an exclusive management prerogative, the employer having the right to choose who will be hired and who will be denied employment, and it is within the exercise of this right that employers may set or fix a probationary period within which to test and observe the employee's conduct before hiring him permanently. While probationary employees do not enjoy permanent status, they are accorded the constitutional protection of security of tenure and may only be terminated for just cause or when they fail to qualify as regular employees in accordance with reasonable standards made known to them by the employer at the time of their engagement; this protection, however, ends upon the expiration of the period provided for in their probationary contract, after which the parties are free to renew the contract or not. The petitioners themselves admitted that upon their request the effective date of their separation was deferred from 13 June 1992 to 20 June 1992, which date apparently coincided with the expiration of the six-month probationary period; this development rendered moot the question of whether there was a just cause for the dismissal of the petitioners other than Cumpay and Etic.

• Legality of the Dismissal of Cumpay and Etic: A different conclusion was reached with respect to Perla Cumpay and Virginia Etic, who were dismissed on 4 May 1992 for having allegedly abandoned their work. To constitute abandonment, there must be a clear and deliberate intent to discontinue one's employment, without any intention of returning. The private respondent not only failed to prove such intent; it also violated the due process rule in the dismissal of employees. The requirements of lawful dismissal of an employee by his employer are two-fold: notice and hearing. These requirements constitute the essential elements of due process. These requirements not having been met with respect to Cumpay and Etic, their dismissal was consequently illegal. It results that only Cumpay and Etic were entitled to reinstatement and back wages; nonetheless, considering that their probationary employment would have similarly expired six months after commencement, reinstatement was no longer feasible.

• Bona fide change of corporate ownership — A change of ownership in a business concern is not proscribed by law and does not, by itself, amount to a cessation of business operations, because the corporation continues to exist as a distinct and separate juridical entity. The Court applied this doctrine in holding that the transfer of complete ownership of Super Mahogany Plywood Corporation to the group of Alfredo Roxas did not trigger Article 283 of the Labor Code and did not render the transfer a just cause for the termination of the petitioners' employment.

• Non-absorption of transferor's employees by a bona fide transferee — An innocent transferee of a business establishment has no liability to the employees of the transferor and is under no legal duty to continue employing them, nor is it liable for the past unfair labor practices of the previous owner, except when the liability is assumed by the new employer under the contract of sale or when liability arises because the new owner participated in thwarting or defeating the rights of the employees. The most the transferee may do, for reasons of public policy and social justice, is to give preference to qualified separated employees in the filling of vacancies. The Court applied this to hold that the private respondent was under no obligation to employ the petitioners and that the non-hiring of Rosario Cuarto was legally permissible.

• Management prerogative to hire and set probationary employment — The hiring of employees on a probationary basis is an exclusive management prerogative; the employer has the right to choose who will be hired and who will be denied employment, and may set or fix a probationary period within which to test and observe the employee's conduct before hiring him permanently. The labor tribunal cannot substitute its own judgment for that of the employer on how the latter will run its business. The Court applied this in sustaining the private respondent's probationary hiring of the petitioners, except Cuarto, following the change of ownership.

• Security of tenure of probationary employees — While probationary employees do not enjoy permanent status, they are accorded the constitutional protection of security of tenure; they may only be terminated for just cause or when they fail to qualify as regular employees in accordance with reasonable standards made known to them by the employer at the time of their engagement. This protection ends upon the expiration of the period provided for in their probationary contract, after which the parties are free to renew the contract or not. The Court applied this in holding that the deferral of the petitioners' separation date to 20 June 1992, coinciding with the expiration of their six-month probationary period, rendered moot the question of just cause for their dismissal.

• Abandonment — To constitute abandonment, there must be a clear and deliberate intent to discontinue one's employment, without any intention of returning. The Court applied this in ruling that the private respondent failed to prove such intent with respect to Perla Cumpay and Virginia Etic.

• Two-fold requirements of lawful dismissal — The requirements of lawful dismissal of an employee by his employer are two-fold: notice and hearing. These requirements constitute the essential elements of due process. The Court applied this in holding that the dismissal of Cumpay and Etic was illegal for failure to observe these requirements.

• "A change of ownership in a business concern is not proscribed by law." — This one-sentence pronouncement anchors the Court's rejection of the Labor Arbiter's premise that the transfer of ownership amounted to a cessation of business operations; it is the threshold rule from which the rest of the disposition flows.

• "Where such transfer of ownership is in good faith, the transferee is under no legal duty to absorb the transferor employees as there is no law compelling such absorption. The most that the transferee may do, for reasons of public policy and social justice, is to give preference to the qualified separated employees in the filling of vacancies in the facilities of the purchaser." — This passage states the canonical formulation of the non-absorption doctrine, distinguishing the transferee's legal obligation from its discretionary, policy-based option to give hiring preference.

• "It is settled that while probationary employees do not enjoy permanent status, they are accorded the constitutional protection of security of tenure. They may only be terminated for just cause or when they fail to qualify as regular employees in accordance with reasonable standards made known to them by the employer at the time of their engagement." — This defines the scope of a probationary employee's security of tenure and supplies the standard against which the private respondent's probationary hiring and subsequent dismissals were measured.

• "It is settled that to constitute abandonment, there must be a clear and deliberate intent to discontinue one's employment, without any intention of returning." — This states the controlling test for abandonment, which the Court found unsatisfied as to Cumpay and Etic, thereby rendering their dismissal illegal.

• Mobil Employees Association vs. National Labor Relations Commission, 183 SCRA 737 [1990] — Distinguished. The Labor Arbiter relied on this case for the requisites of termination under Article 283 of the Labor Code, but the Court held it inapplicable because it involved an employer that completely withdrew from business and was even dissolved, unlike the mere change of corporate ownership in this case.

• Central Azucarera del Danao vs. Court of Appeals, 137 SCRA 295 [1985] — Followed as the controlling precedent. The Court quoted its ruling that a bona fide sale or disposition of a business enterprise is an element of exemption from liability, that an innocent transferee has no liability to the transferor's employees, and that the transferee is not liable for past unfair labor practices except when liability is assumed under the contract of sale or when the new owner participated in thwarting the employees' rights.

• Sunio vs. NLRC, 127 SCRA 390 [1984] — Cited in support of the proposition that a change of ownership in a business concern is not proscribed by law.

• San Felipe Neri School of Mandaluyong, Inc. vs. NLRC, 201 SCRA 478 [1991] — Cited alongside Central Azucarera del Danao for the rule on the transferee's non-liability and the absence of a legal duty to absorb the transferor's employees.

• MDII Supervisors and Confidential Employees Association vs. Presidential Assistant on Legal Affairs, 79 SCRA 40 [1977] — Cited for the rule that where the transfer of ownership is in good faith, the transferee is under no legal duty to absorb the transferor's employees, the most it may do being to give preference to qualified separated employees.

• Grand Motor Parts Corp. vs. Minister of Labor, 130 SCRA 436 [1984] — Cited for the rule that the hiring of employees on a probationary basis is an exclusive management prerogative and that employers may fix a probationary period to test and observe the employee's conduct before permanent hiring.

• Biboso vs. Victorias Milling Co., 76 SCRA 250 [1977] and Colegio de San Agustin vs. NLRC, 201 SCRA 398 [1991] — Cited for the rule that the constitutional protection of security of tenure of probationary employees ends upon the expiration of the probationary period, after which the parties are free to renew the contract or not.

• Nueva Ecija I Electric Cooperative, Inc. vs. Minister of Labor, 184 SCRA 25 [1990], Dagupan Bus Co. vs. NLRC, 191 SCRA 328 [1990], and Batangas Laguna Tayabas Bus Co. vs. NLRC, 212 SCRA 792 [1992] — Cited for the settled rule that abandonment requires a clear and deliberate intent to discontinue one's employment without any intention of returning.

• Cathedral School of Technology vs. NLRC, 214 SCRA 551 [1992] and Tiu vs. NLRC, 215 SCRA 540 [1992] — Cited for the rule that the lawful dismissal of an employee requires notice and hearing.

• Abiera vs. NLRC, 215 SCRA 476 [1992] — Cited for the proposition that notice and hearing constitute the essential elements of due process in the dismissal of employees.

• National Labor Union vs. Insular Yebana Tobacco Corporation, 2 SCRA 924 — Cited in the NLRC resolution, quoted by the Court, for the rule that the hiring of employees on a probationary basis is an exclusive management prerogative and that the labor tribunal cannot substitute its own judgment on how the employer will run its business.

• Article 283 (formerly Article 284), Labor Code — Governs termination of employment due to cessation of business operations or retrenchment, requiring service of written notice to the employees and to the Ministry of Labor and Employment at least one month before the intended date thereof, a bona fide cessation, and payment of termination pay. The Court held this provision inapplicable because the change of corporate ownership did not amount to a cessation of business operations.

• Article 281, Labor Code — Governs probationary employment and the security of tenure of probationary employees. The Court cited it in holding that probationary employees may be terminated only for just cause or for failure to qualify as regular employees under reasonable standards made known to them at the time of engagement, and that this protection ends upon the expiration of the probationary period.

• Rule 65, Rules of Court — The procedural vehicle for the special civil action for certiorari by which the petitioners sought to set aside the NLRC resolutions for having been rendered with grave abuse of discretion.

Padilla, Bellosillo, Quiason, and Kapunan, JJ., concurred in the decision.