Zambrano vs. Philippine Carpet Manufacturing Corporation

Closure or cessation of business operations is an authorized cause for termination of employment under Article 298 of the Labor Code, provided that: (a) written notice is served on the employees and the DOLE at least one month before the intended date of closure; (b) the cessation of business is bona fide in character and not impelled by a motive to defeat or circumvent the tenurial rights of employees; and (c) the employees are paid termination pay. The Court will not interfere with management's prerogative to close or cease business operations, even absent losses, as long as the closure is bona fide and the employees receive their termination pay.

The petitioners were employees of private respondent Philippine Carpet Manufacturing Corporation (Phil Carpet), a corporation engaged in carpet manufacturing. Phil Carpet had a wholly owned and controlled corporation, Pacific Carpet Manufacturing Corporation (Pacific Carpet), which was registered with the Securities and Exchange Commission on January 29, 1999. The petitioners were officers and members of the Philippine Carpet Manufacturing Employees Association (PHILCEA), a labor union. The case involves the application of Article 298 (formerly Article 283) of the Labor Code on closure of establishment as an authorized cause for termination, Article 259 (formerly Article 248) on unfair labor practices of employers, and the doctrine of piercing the corporate veil.

The petitioners were employees of private respondent Philippine Carpet Manufacturing Corporation (Phil Carpet). On January 3, 2011, they were notified of the termination of their employment effective February 3, 2011, on the ground of cessation of operations due to serious business losses. The petitioners believed their dismissal was without just cause and in violation of due process, alleging that the closure of Phil Carpet was a mere pretense to transfer its operations to its wholly owned and controlled corporation, Pacific Carpet Manufacturing Corporation (Pacific Carpet). They claimed that job orders of some regular clients of Phil Carpet were transferred to Pacific Carpet, and that from October to November 2011, several machines were moved from Phil Carpet's premises to Pacific Carpet. They asserted that their dismissal constituted unfair labor practice as it involved the mass dismissal of all union officers and members of the Philippine Carpet Manufacturing Employees Association (PHILCEA).

In its defense, Phil Carpet countered that it permanently closed and totally ceased its operations because of a steady decline in demand for its products due to global recession, stiffer competition, and the effects of a changing market. Based on the Audited Financial Statements conducted by SGV & Co., it incurred losses of ₱4.1M in 2006; ₱12.8M in 2007; ₱53.28M in 2008; and ₱47.79M in 2009. As of the end of October 2010, unaudited losses already amounted to ₱26.59M. The company implemented several cost-cutting measures, including voluntary redundancy and early retirement programs. In 2007, the car carpet division was closed. From a high production capacity of about 6,000 square meters of carpet a month in 2002, its final production capacity steadily went down to an average of 350 square meters per month for 2009 and 2010. The Board of Directors approved the recommendation of management to cease manufacturing operations. The petitioners and the DOLE were served written notices one month before the intended closure. The petitioners were paid separation pay and voluntarily executed their respective Release and Quitclaim before DOLE officials.

The Labor Arbiter dismissed the complaints, finding that the termination was due to total cessation of manufacturing operations because of continuous serious business losses from 2007 to 2010, that written notices were served, that the petitioners voluntarily accepted separation pay and executed quitclaims, and that there was no showing that the closure was motivated by union activity. The NLRC affirmed, and the CA likewise dismissed the petition for certiorari, ruling that the closure was not made in bad faith, that there was no convincing evidence of transfer of job orders, that the machines were sold to Pacific Carpet as shown by sales invoices and official receipts, and that the dismissal did not constitute unfair labor practice. The CA further opined that mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality.

• Illegal Dismissal / Pretense of Closure: The petitioners argued that Phil Carpet did not totally cease its operations; that most of the job orders of Phil Carpet were transferred to its wholly owned subsidiary, Pacific Carpet; and that the closure was a mere pretense to transfer operations.
• Unfair Labor Practice: The petitioners asserted that their dismissal constituted unfair labor practice as it involved the mass dismissal of all union officers and members of PHILCEA.
• Piercing the Corporate Veil: The petitioners argued that the losses of Phil Carpet were almost proportionate to the net income of its subsidiary, Pacific Carpet, and that the alleged sale between Phil Carpet and Pacific Carpet was simulated, warranting the disregard of Pacific Carpet's separate corporate personality.
• Validity of Quitclaims: The petitioners argued that the signing of quitclaims did not bar them from pursuing their case because they were made to believe that the closure was legal.

• Authorized Cause for Termination: Phil Carpet averred that the termination of the petitioners' employment as a consequence of its total closure and cessation of operations was in accordance with law and supported by substantial evidence.
• Substantial Evidence: Phil Carpet argued that the petitioners could only offer bare and self-serving claims and sham evidence such as financial statements that did not pertain to Phil Carpet.
• Finality of Compromise Settlement: Phil Carpet argued that under the Labor Code, any compromise settlement voluntarily agreed upon by the parties with the assistance of the regional office of the DOLE was final and binding upon the parties.

• Lawful Cause for Dismissal: Whether the petitioners were dismissed from employment for a lawful cause.
• Unfair Labor Practice: Whether the petitioners' termination from employment constitutes unfair labor practice.
• Liability of Pacific Carpet: Whether Pacific Carpet may be held liable for Phil Carpet's obligations.
• Validity of Quitclaims: Whether the quitclaims signed by the petitioners are valid and binding.

• Lawful Cause for Dismissal: Yes. The termination of the petitioners' employment was due to an authorized cause — closure or cessation of operations under Article 298 of the Labor Code — because Phil Carpet suffered serious business losses, complied with the notice requirement, and paid separation pay.
• Unfair Labor Practice: No. The petitioners failed to discharge their burden of proving unfair labor practice, as they did not identify the specific acts of Phil Carpet constituting unfair labor practice nor point out the specific provisions violated.
• Liability of Pacific Carpet: No. None of the tests for piercing the corporate veil was satisfactorily met; mere ownership of stocks and interlocking directorates are insufficient to establish an alter ego relationship.
• Validity of Quitclaims: Yes. The quitclaims were valid and binding because the closure was supported by substantial evidence, the contents were clear and simple, and the amount received was reasonable and complied with the Labor Code.

• Lawful Cause for Dismissal: Under Article 298 (formerly Article 283) of the Labor Code, closure or cessation of operations is an authorized cause for terminating an employee. Three requirements are necessary for a valid cessation of business operations: (a) service of a written notice to the employees and to the DOLE at least one month before the intended date thereof; (b) the cessation of business must be bona fide in character; and (c) payment to the employees of termination pay amounting to one month pay or at least one-half month pay for every year of service, whichever is higher. The LA's findings that Phil Carpet suffered from serious business losses which resulted in its closure were affirmed in toto by the NLRC and subsequently by the CA. The Court found no reason to take exception from the rule that factual findings of labor officials are generally accorded not only respect, but even finality, and are binding on the Supreme Court. Phil Carpet continuously incurred losses starting 2007, as shown by the Audited Financial Statements offered in evidence by the petitioners themselves. Even if the petitioners refused to consider these losses as serious enough to warrant closure, it was a business judgment on the part of the company's owners and stockholders to cease operations, a judgment which the Court has no business interfering with. The only limitation provided by law is that the closure must be bona fide in character and not impelled by a motive to defeat or circumvent the tenurial rights of employees. Phil Carpet notified DOLE and the petitioners of its decision to cease manufacturing operations on January 3, 2011, or at least one month prior to the intended date of closure on February 3, 2011. The petitioners were also given separation pay equivalent to 100% of their monthly basic salary for every year of service.

• Unfair Labor Practice: Article 259 (formerly Article 248) of the Labor Code enumerates the unfair labor practices of employers, all of which in essence relate to the workers' right to self-organization. An employer may only be held liable for unfair labor practice if it can be shown that his acts affect in whatever manner the right of his employees to self-organize. The alleging party has the burden of proving unfair labor practice, and substantial evidence is required to support the claim. Good faith is presumed, and he who alleges bad faith has the duty to prove the same. The petitioners miserably failed to discharge the duty imposed upon them. They did not identify the acts of Phil Carpet which constituted unfair labor practice, nor did they point out the specific provisions which Phil Carpet violated. The constitutional commitment to the policy of social justice cannot be understood to mean that every labor dispute shall automatically be decided in favor of labor. As far as the pieces of evidence offered by the petitioners are concerned, there is no showing that the closure of the company was an attempt at union-busting.

• Liability of Pacific Carpet: A corporation has a personality separate and distinct from the persons composing it, as well as from any other legal entity to which it may be related. The corporate veil may be pierced only when the corporation is just an alter ego of a person or of another corporation, and only when it becomes a shield for fraud, illegality, or inequity committed against third persons. The doctrine of piercing the corporate veil applies only in three basic areas: (1) defeat of public convenience; (2) fraud cases; or (3) alter ego cases. The alter ego theory requires the concurrence of three elements: control of the corporation by the stockholder or parent corporation, fraud or fundamental unfairness imposed on the plaintiff, and harm or damage caused to the plaintiff by the fraudulent or unfair act of the corporation. The absence of any of these elements prevents piercing the corporate veil. None of the tests was satisfactorily met in this case. Although ownership by one corporation of all or a great majority of stocks of another corporation and their interlocking directorates may serve as indicia of control, by themselves and without more, these circumstances are insufficient to establish an alter ego relationship. Pacific Carpet was registered with the SEC on January 29, 1999, such that it could not be said that Pacific Carpet was set up to evade Phil Carpet's liabilities. As to the transfer of machines, where one corporation sells or otherwise transfers all its assets to another corporation for value, the latter is not, by that fact alone, liable for the debts and liabilities of the transferor.

• Validity of Quitclaims: Where the person making the waiver has done so voluntarily, with a full understanding thereof, and the consideration for the quitclaim is credible and reasonable, the transaction must be recognized as being a valid and binding undertaking. Not all quitclaims are per se invalid or against policy, except (1) where there is clear proof that the waiver was wangled from an unsuspecting or gullible person, or (2) where the terms of settlement are unconscionable on their face. The petitioners questioned the validity of the quitclaims on the ground that Phil Carpet's closure was a mere pretense. As the closure of Phil Carpet was supported by substantial evidence, the petitioners' reason for seeking the invalidation of the quitclaims must necessarily fail. The contents of the quitclaims, which were in Filipino, were clear and simple, such that it was unlikely that the petitioners did not understand what they were signing. The amount they received was reasonable as the same complied with the requirements of the Labor Code.

• Authorized Cause for Closure of Establishment — Under Article 298 (formerly Article 283) of the Labor Code, closure or cessation of operations of an establishment is an authorized cause for terminating an employee. Three requirements are necessary for a valid cessation of business operations: (a) service of a written notice to the employees and to the DOLE at least one month before the intended date thereof; (b) the cessation of business must be bona fide in character; and (c) payment to the employees of termination pay amounting to one month pay or at least one-half month pay for every year of service, whichever is higher. The Court applied this doctrine in affirming the validity of the petitioners' dismissal, finding that Phil Carpet suffered serious business losses, complied with the notice requirement, and paid separation pay.

• Piercing the Corporate Veil (Alter Ego Theory) — The doctrine of piercing the corporate veil applies only in three basic areas: (1) defeat of public convenience; (2) fraud cases; or (3) alter ego cases. The alter ego theory requires the concurrence of three elements: (1) control of the corporation by the stockholder or parent corporation; (2) fraud or fundamental unfairness imposed on the plaintiff; and (3) harm or damage caused to the plaintiff by the fraudulent or unfair act of the corporation. The absence of any of these elements prevents piercing the corporate veil. The Court applied this doctrine in refusing to hold Pacific Carpet liable for Phil Carpet's obligations, finding that none of the tests was satisfactorily met.

• Validity of Quitclaims — Where the person making the waiver has done so voluntarily, with a full understanding thereof, and the consideration for the quitclaim is credible and reasonable, the transaction must be recognized as being a valid and binding undertaking. Not all quitclaims are per se invalid or against policy, except (1) where there is clear proof that the waiver was wangled from an unsuspecting or gullible person, or (2) where the terms of settlement are unconscionable on their face. The Court applied this doctrine in upholding the quitclaims signed by the petitioners, finding that the closure was supported by substantial evidence, the contents were clear and simple, and the amount received was reasonable.

• "A reading of the foregoing law shows that a partial or total closure or cessation of operations of establishment or undertaking may either be due to serious business losses or financial reverses or otherwise. Under the first kind, the employer must sufficiently and convincingly prove its allegation of substantial losses, while under the second kind, the employer can lawfully close shop anytime as long as cessation of or withdrawal from business operations was bona fide in character and not impelled by a motive to defeat or circumvent the tenurial rights of employees, and as long as he pays his employees their termination pay in the amount corresponding to their length of service. Just as no law forces anyone to go into business, no law can compel anybody to continue the same." — This passage from Industrial Timber Corporation v. Ababon, quoted in the decision, articulates the standard for valid closure of business operations and the limits of judicial interference with management's prerogative.

• "The Supreme Court is not a trier of facts, and this doctrine applies with greater force in labor cases. Factual questions are for the labor tribunals to resolve. In this case, the factual issues have already been determined by the labor arbiter and the National Labor Relations Commission. Their findings were affirmed by the CA. Judicial review by this Court does not extend to a reevaluation of the sufficiency of the evidence upon which the proper labor tribunal has based its determination." — This passage from Alfaro v. Court of Appeals, quoted in the decision, explains the Court's deference to the factual findings of labor tribunals, which was the basis for affirming the dismissal of the illegal dismissal complaint.

• "To summarize, piercing the corporate veil based on the alter ego theory requires the concurrence of three elements: control of the corporation by the stockholder or parent corporation, fraud or fundamental unfairness imposed on the plaintiff, and harm or damage caused to the plaintiff by the fraudulent or unfair act of the corporation. The absence of any of these elements prevents piercing the corporate veil." — This passage from Philippine National Bank v. Hydro Resources Contractors Corporation, quoted in the decision, states the three-pronged test for the alter ego theory, which the Court applied in refusing to pierce Pacific Carpet's corporate veil.

• Industrial Timber Corporation vs. Ababon, 515 Phil. 805 (2006) — Controlling precedent cited for the three requirements for a valid cessation of business operations under Article 283 of the Labor Code and the principle that no law can compel anybody to continue a business.
• Alfaro vs. Court of Appeals, 416 Phil. 310 (2001) — Followed for the doctrine that the Supreme Court is not a trier of facts and that factual findings of labor tribunals are generally accorded finality and binding effect.
• Philippine National Bank vs. Hydro Resources Contractors Corporation, 706 Phil. 297 (2013) — Controlling precedent cited for the three basic areas where the doctrine of piercing the corporate veil applies and the three-pronged test for the alter ego theory.
• Standard Chartered Bank Employees Union (NUBE) vs. Confesor, 476 Phil. 346 (2004) — Followed for the rule that substantial evidence is required to support a claim of unfair labor practice.
• Magsalin vs. National Organization of Working Men, 451 Phil. 254 (2003) — Followed for the rule that a quitclaim is valid and binding where the waiver was made voluntarily, with full understanding, and for credible and reasonable consideration.
• Boga-Medellin Sugarcane Planters Association, Inc. vs. NLRC, 357 Phil. 113 (1998) — Followed for the exceptions to the validity of quitclaims: clear proof of wangling from an unsuspecting or gullible person, or unconscionable terms of settlement.

• Article 298 (formerly Article 283), Labor Code — Closure of establishment and reduction of personnel. The Court applied this provision in upholding the validity of the petitioners' dismissal, finding that Phil Carpet's closure was an authorized cause, that written notices were served on the workers and the DOLE at least one month before the intended closure, and that separation pay was paid.
• Article 259 (formerly Article 248), Labor Code — Unfair Labor Practices of Employers. The Court applied this provision in ruling that the petitioners failed to prove that Phil Carpet committed any of the enumerated unfair labor practices, as they did not identify the specific acts constituting unfair labor practice nor point out the specific provisions violated.
• Article 258 (formerly Article 247), Labor Code — Concept of Unfair Labor Practice. The Court cited this provision to explain that unfair labor practices violate the constitutional right of workers and employees to self-organization.

• Associate Justice Diosdado M. Peralta (Acting Chairperson, Second Division)
• Associate Justice Samuel R. Martires
• Associate Justice Antonio T. Carpio (On Official Leave)
• Associate Justice Marvic M.V.F. Leonen (On Leave)

N/A — No dissenting opinions were noted in the provided case text.