Termination due to closure must be based on bona fide reason. The fact that the employees do not believe the losses does not invalidate said termination.

The Supreme Court held as follows:

Rommel M. Zambrano, et al. vs. Philippine Carpet Manufacturing Corporation/Pacific Carpet Manufacturing Corporation, et al.
G.R. No. 224099, June 21, 2017


The Zambrano, et al. averred that they 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 operation due to serious business losses.

They were of the belief that their dismissal was without just cause and in violation of due process because 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 the 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 the premises of Phil Carpet 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 there had been a steady decline in the demand for its products due to global recession, stiffer competition, and the effects of a changing market.

That based on the Audited Financial Statements conducted by SGV & Co., it incurred losses of P4.1M in 2006; P.12.8M in 2007; P.53.28M in 2008; and P47.79M in 2009. As of the end of October 2010, unaudited losses already amounted to P.26.59M. Thus, in order to stem the bleeding, the company implemented several cost-cutting measures, including voluntary redundancy and early retirement programs.

In 2007, the car carpet division was closed. Moreover, 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. Subsequently, the Board of Directors decided to approve the recommendation of its management to cease manufacturing operations.

The termination of Zambrano, et al.s’ employment was effective as of the close of office hours on February 3, 2011. Phil Carpet likewise faithfully complied with the requisites for closure or cessation of business under the Labor Code. Zambrano, et al. and the Department of Labor and Employment (DOLE) were served written notices one (1) month before the intended closure of the company. Zambrano, et al. were also paid their separation pay and they voluntarily executed their respective Release and Quitclaim6 before the DOLE officials.

LA Ruling:

The Labor Arbiter (LA) dismissed the complaints for illegal dismissal and unfair labor practice. It ruled that the termination of Zambrano, et al.’s employment was due to total cessation of manufacturing operations of Phil Carpet because it suffered continuous serious business losses from 2007 to 2010.

The LA added that the closure was truly dictated by economic necessity as evidenced by its audited financial statements. It observed that written notices of termination were served on the DOLE and on Zambrano, et al. at least one (1) month before the intended date of closure.

NLRC Ruling:

The NLRC affirmed the findings of the LA. It held that the Audited Financial Statements show that Phil Carpet continuously incurred net losses starting 2007 leading to its closure in the year 2010.

The NLRC added that Phil Carpet complied with the procedural requirements of effecting the closure of business pursuant to the Labor Code.

CA Ruling:

The CA ruled that the total cessation of Phil Carpet’s manufacturing operations was not made in bad faith because the same was clearly due to economic necessity. It determined that there was no convincing evidence to show that the regular clients of Phil Carpet secretly transferred their job orders to Pacific Carpet; and that Phil Carpet’s machines were not transferred to Pacific Carpet but were actually sold to the latter after the closure of business as shown by the several sales invoices and official receipts issued by Phil Carpet.

The CA adjudged that the dismissal of Zambrano, et al. who were union officers and members of PHILCEA did not constitute unfair labor practice because Phil Carpet was able to show that the closure was due to serious business losses.

The CA opined that Zambrano, et al.’s claim that their termination was a mere pretense because Phil Carpet continued operation through Pacific Carpet was unfounded because 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.

Zambrano, et al. moved for reconsideration, but their motion was denied by the CA. Hence, the petition before the SC.

Guide to Valid Dismissal of Employees Second Edition by Atty. Villanueva


Whether or not the mere fact that complaining employees refuse to recognize the claim of losses by employer that dismissed their employment for closure is sufficient to invalidate the termination

Whether or not termination that affects the rights to self-organization of union members automatically amounts to unfair labor practice

Whether or not ownership by one corporation of another and presence of interlocking directors are sufficient to establish alter ego relationship enough to pierce the veil of corporate fiction

SC Ruling:

The SC did not find merit in the petition.

Closure of business is the reversal of fortune of the employer whereby there is a complete cessation of business operations and/or an actual locking-up of the doors of establishment, usually due to financial losses.

Closure of business, as an authorized cause for termination of employment, aims to prevent further financial drain upon an employer who cannot pay anymore his employees since business has already stopped. In such a case, the employer is generally required to give separation benefits to its employees, unless the closure is due to serious business losses.

Carpet continuously incurred losses starting 2007, as shown by the Audited Financial Statements which were offered in evidence by Zambrano, et al. themselves. Zambrano, et al., in claiming that Phil Carpet continued to earn profit in 2011 and 2012, disregarded the reason for such income, which was Phil Carpet’s act of selling its remaining inventories. Notwithstanding such income, Phil Carpet continued to incur total comprehensive losses in the amounts of P9,559,716 and P12,768,277 for the years 2011 and 2012, respectively.

Even if Zambrano, et al. refuse to consider these losses as serious enough to warrant Phil Carpet’s total and permanent 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.” Thus, when an employer complies with the foregoing conditions, the Court cannot prohibit closure “just because the business is not suffering from any loss or because of the desire to provide the workers continued employment.”

Unfair labor practice refers to acts that violate the workers’ right to organize. There should be no dispute that all the prohibited acts constituting unfair labor practice in essence relate to the workers’ right to self-organization.

Thus, 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 general principle is that one who makes an allegation has the burden of proving it. Although there are exceptions to this general rule, in the case of unfair labor practice, the alleging party has the burden of proving it.

Moreover, good faith is presumed and he who alleges bad faith has the duty to prove the same.

Zambrano, et al. miserably failed to discharge the duty imposed upon them. They did not identify the acts of Phil Carpet which, they claimed, constituted unfair labor practice. They did not even point out the specific provisions which Phil Carpet violated.

Thus, they would have the Supreme Court pronounce that Phil Carpet committed unfair labor practice on the ground that they were dismissed from employment simply because they were union officers and members. The constitutional commitment to the policy of social justice, however, cannot be understood to mean that every labor dispute shall automatically be decided in favor of labor.

In this case, as far as the pieces of evidence offered by Zambrano, et al. are concerned, there is no showing that the closure of the company was an attempt at union-busting. Hence, the SC held that the charge that Phil Carpet is guilty of unfair labor practice must fail for lack of merit.

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 or connection between Phil Carpet on the one hand and Pacific Carpet on the other hand, that will justify the puncturing of the latter’s corporate cover.

The SC declared 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.” It has likewise ruled that the “existence of interlocking directors, corporate officers and shareholders is not enough justification to pierce the veil of corporate fiction in the absence of fraud or other public policy considerations.

Citing the case of Philippine National Bank vs. Hydro Resources Contractors Corporation, 706 Phil. 297 (2013).

The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1) defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; 2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or 3) alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.

Case law lays down a three-pronged test to determine the application of the alter ego theory, which is also known as the instrumentality theory, namely:

  • Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own;
  • Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiffs legal right; and
  • The aforesaid control and breach of duty must have proximately caused the injury or unjust loss complained of.

The first prong is the “instrumentality” or “control” test. This test requires that the subsidiary be completely under the control and domination of the parent. It examines the parent corporation’s relationship with the subsidiary. It inquires whether a subsidiary corporation is so organized and controlled and its affairs are so conducted as to make it a mere instrumentality or agent of the parent corporation such that its separate existence as a distinct corporate entity will be ignored. It seeks to establish whether the subsidiary corporation has no autonomy and the parent corporation, though acting through the subsidiary in form and appearance, “is operating the business directly for itself.

The second prong is the “fraud” test. This test requires that the parent corporation’s conduct in using the subsidiary corporation be unjust, fraudulent or wrongful. It examines the relationship of the plaintiff to the corporation. It recognizes that piercing is appropriate only if the parent corporation uses the subsidiary in a way that harms the plaintiff creditor. As such, it requires a showing of “an element of injustice or fundamental unfairness.

The third prong is the “harm” test. This test requires the plaintiff to show that the defendant’s control, exerted in a fraudulent, illegal or otherwise unfair manner toward it, caused the harm suffered. A causal connection between the fraudulent conduct committed through the instrumentality of the subsidiary and the injury suffered or the damage incurred by the plaintiff should be established. The plaintiff must prove that, unless the corporate veil is pierced, it will have been treated unjustly by the defendant’s exercise of control and improper use of the corporate form and, thereby, suffer damages.

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.

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