Can employers refuse paying workers due to business losses?

As a general rule, no. Employers should pay their legal obligations arising from law and from contract as well as from established company practice. They have to pay, come hell or high water. If they have to beg, steal, or borrow, that is not the problem of the employees. Services rendered must be paid. But if the company has already become bankrupt, insolvent, totally without assets, can we still draw blood from stone? Let us look at the law and the jurisprudence on the matter.

Under Article 110, Book Three of the Labor Code, as amended by RA 6715, it is provided: "In the event of bankruptcy or liquidation of the employer's business, his workers shall enjoy first preference as regards their wages and other monetary claims, any provision of law to the contrary notwithstanding. Such unpaid wages and monetary claims shall be paid in full before claims of the government and other creditors shall be paid."

Under Article 298 of the same code, it is provided, among others: "In case of retrenchment to prevent losses and in cases of closures and cessation of operations, of establishments or undertaking not due to serious business losses or financial reverses, the separation pay shall be equivalent to one month pay or one-half month pay for every year of service. xxx"

The Supreme Court en banc (meaning all the 15 justices) decided the case of North Davao Mining Corp., GR 112546, March 13, 1996, held that there is no more obligation to pay separation pay if the closure is due to serious financial losses. Interpreting Article 283, now Article 298, the Supreme Court declared: "Article 283 governs the grant of separation benefits 'in case of closures or cessation of operation of business establishment 'NOT DUE TO SERIOUS BUSINESS LOSSES or financial reverse. Where however, the closure was due to business losses which amounted to over 20 billion, the Labor Code does not impose any obligation upon the employer to pay separation benefits."

The problem here is to define what is "serious business losses"? Every company would claim that it is losing. But how serious should the losses be so as to be exempted from paying a legal obligation like separation pay? There is a need for the DOLE to define this, and if it is not within its power, then there is a need for legislation to fill this gap.

In another case, however, involving the grant of bonuses, the Supreme Court was very strict in compelling the company to pay even when it is admitted that it was heavily losing in its operations. The facts, of course, in that case of Eastern Telecom, GR 185665, February 8, 2012 were different from those in North Davao. In the Eastern Telecom case, the management signed a contract with the union, thus it was an obligation arising from the contract. In North Davao, it was an obligation arising from the law.

In Eastern Telecom, the management obligated itself to pay, on top of the 13th month pay mandated by law, another set of bonuses; 14th month, 15th month, and 16th month bonuses. This was included in the CBA between the union and the company. There was no condition or qualification that the same are not due in case of financial losses.

Thus when the company did incur huge losses, it decided to stop paying all those bonuses. The union complained, and the Supreme Court decided in favor of the union. The Supreme Court said that a contract should be complied with and since the obligation was not conditional, management had to pay. Remember also that unlike North Davao which was bankrupt, Eastern Telecom merely suffered losses.

The Supreme Court, in the Eastern Telecom case, held that the decision of management to unilaterally renege on a bilateral agreement violated two major principles in labor law: First, it breached a contract; second, it violated Article 100 on the rule of non-withdrawal and non-diminution. North Davao did not sign any contract. And it did not withdraw anything. It simply could not afford anymore. One cannot draw blood from stone. That was the hard reality. Even if the law says one has to pay, if there is no more money, there is no more honey. That is how the cookie crumbles.