SUPREME COURT

SECOND DIVISION

J.A.T. GENERAL SERVICES and

JESUSA ADLAWAN TOROBU,
Petitioners,

-versus- G.R. No. 148340

January 26, 2004

NATIONAL LABOR RELATIONS

COMMISSION and JOSE F.
MASCARINAS, chanroblespublishingcompany

Respondents.
x----------------------------------------------------x

DECISION

QUISUMBING, J.:

For review are the Decision[1] dated February 27, 2001 of the Court of
Appeals in CA-G.R. SP No. 60337, and its Resolution[2] dated May 28,
2001, denying the motion for reconsideration. The Court of Appeals
dismissed the petition for certiorari filed by petitioners and affirmed
the Resolution[3] of the National Labor Relations Commission
(NLRC), Third Division, which affirmed the Decision[4] of Labor
Arbiter Jose G. De Vera in NLRC-NCR Case No. 00-03-02279-98,
which found petitioners liable for illegal dismissal and ordered
petitioners to pay private respondent Jose Mascarinas separation pay,
backwages, legal holiday pay, service incentive leave pay and 13th
month pay in the aggregate sum of P85,871.00. chanroblespublishingcompany

The facts, as culled from the records, are as follows:

Petitioner Jesusa Adlawan Trading & General Services (JAT) is a

single proprietorship engaged in the business of selling second-hand
heavy equipment. JAT is owned by its namesake, co-petitioner
Jesusa Adlawan Torobu. Sometime in April 1997, JAT hired private
respondent Jose F. Mascarinas as helper tasked to coordinate with
the cleaning and delivery of the heavy equipment sold to customers.
Initially, private respondent was hired as a probationary employee
and was paid P165 per day that was increased to P180 in July 1997
and P185 in January 1998. chanroblespublishingcompany

In October 1997, the sales of heavy equipment declined because of the

Asian currency crisis. Consequently, JAT temporarily suspended its
operations. It advised its employees, including private respondent,
not to report for work starting on the first week of March 1998. JAT
indefinitely closed shop effective May 1998. chanroblespublishingcompany

A few days after, private respondent filed a case for illegal dismissal
and underpayment of wages against petitioners before the NLRC.

In his Complaint, private respondent alleged that he started as helper

mechanic of JAT on January 6, 1997 with an initial salary rate of
P165.00 per day, which was increased to P180.00 per day after six (6)
months in employment. He related that he was one of those
retrenched from employment by JAT and was allegedly required to
sign a piece of paper which he refused, causing his termination from
employment. chanroblespublishingcompany

On December 14, 1998, JAT filed an Establishment Termination

Report with the Department of Labor and Employment (DOLE),
notifying the latter of its decision to close its business operations due
to business losses and financial reverses. chanroblespublishingcompany

After due proceedings, the Labor Arbiter rendered a decision on

March 25, 1999, finding the dismissal of herein private respondent
unjustified and ordering JAT to pay private respondent separation
pay and backwages, among others. The decretal portion of the
decision reads as follows: chanroblespublishingcompany

WHEREFORE, all the foregoing premises being considered,

judgment is hereby rendered ordering the respondents [herein
petitioners] to pay complainant the aggregate sum of
P85,871.00. chanroblespublishingcompany

SO ORDERED.[5]

The Labor Arbiter ruled that (1) private respondent Jose F.

Mascarinas’ dismissal was unjustified because of petitioners’ failure
to serve upon the private respondent and the DOLE the required
written notice of termination at least one month prior to the
effectivity thereof and to submit proof showing that petitioners
suffered a business slowdown in operations and sales effective
January 1998; (2) private respondent may recover backwages from
March 1, 1998 up to March 1, 1999 or P66,924.00[6] and separation
pay, in lieu of reinstatement, at the rate of one (1) month pay for
every year of service, or P10,296.00;[7] (3) the payrolls submitted by
JAT showed that effective May 1, 1997, private respondent’s wages
did not conform to the prevailing minimum wage, hence, private
respondent is entitled to salary differentials from May 1, 1997 to
January 6, 1998, in the amount of P1,066.00;[8] (4) that private
respondent be awarded legal holiday pay in the amount of
P1,850.00,[9] service incentive leave pay in the amount of P925.00[10]
and 13th month pay for 1997 in the amount of P4,810.00.[11] chanroblespublishingcompany

On appeal, the NLRC affirmed the decision of the labor arbiter.[12]

The NLRC found that the financial statements submitted on appeal
were questionable, unreliable and inconsistent with petitioners’
allegations in the pleadings, particularly as to the date of the alleged
closure of operation; hence, they cannot be used to support private
respondent’s dismissal. The NLRC also affirmed the monetary
awards because petitioners failed to prove the payment of benefits
claimed by private respondent. chanroblespublishingcompany

Dissatisfied, petitioners filed a Petition for Certiorari under Rule 65

before the Court of Appeals, which the latter dismissed. The decretal
portion of the decision reads as follows:
 WHEREFORE, foregoing premises considered, the instant
petition, having no merit in fact and in law, is hereby DENIED
DUE COURSE, and ordered DISMISSED, and the assailed
decision of the National Labor Relations Commission
AFFIRMED, with costs to petitioners. chanroblespublishingcompany

SO ORDERED.[13]

The Court of Appeals affirmed the findings of the NLRC, particularly

on the illegal dismissal of the private respondent. The appellate court
held that the petitioners failed to prove by clear and convincing
evidence their compliance with the requirements for valid
retrenchment. It cited the findings of the NLRC on the belated
submission of the financial statements during appeal that could not
be given sufficient weight, and that the petitioners’ late submission of
notice of closure is indicative of their bad faith. chanroblespublishingcompany

Petitioners filed a Motion of Reconsideration, which was denied by

the Court of Appeals.

Hence, the present petition alleging that the:

A. THE LOWER COURT (sic) ERRED IN RULING THAT A

NOTICE TO THE DEPARTMENT OF LABOR AND
EMPLOYMENT (DOLE) IS NECESSARY IN CASE OF
TEMPORARY SUSPENSION OF BUSINESS; chanroblespublishingcompany

B. THE LOWER COURT (sic) ERRED IN RULING THAT

PRIVATE RESPONDENT IS ENTITLED TO BACKWAGES
DESPITE THE FACT THAT PRIVATE RESPONDENT WAS
NOT DISMISSED FROM SERVICE AT THE TIME THE
COMPLAINT WAS FILED; chanroblespublishingcompany

C. THE LOWER COURT (sic) ERRED IN RULING THAT

THE EMPLOYER HAS THE BURDEN OF PROVING THE
EXISTENCE OF AN EMPLOYER-EMPLOYEE RELATIONSHIP
BETWEEN THE PARTIES;
 D. ASSUMING ARGUENDO THAT THE NOTICE TO THE
LABOR DEPARTMENT FAILED TO COMPLY WITH THE
ONE-MONTH PERIOD, THE LOWER COURT (sic) ERRED IN
AWARDING BACKWAGES AND/OR SEPARATION PAY TO
PRIVATE RESPONDENT EVEN FOR PERIOD AFTER
PETITIONERS FILED A NOTICE OF ACTUAL CLOSURE OF
THE COMPANY BEFORE THE LABOR DEPARTMENT.[14] chanroblespublishingcompany

The relevant issues for our resolution are: (a) whether or not private
respondent was illegally dismissed from employment due to closure
of petitioners’ business, and (b) whether or not private respondent is
entitled to separation pay, backwages and other monetary awards.

On the first issue, the petitioners claim that the Court of Appeals
erroneously concluded that they are liable for illegal dismissal
because of non-compliance of the procedural and substantive
requirements of terminating employment due to retrenchment and
cessation of business. They argued that there was no closure but only
suspension of operation in good faith in March 1998, when private
respondent claimed to have been illegally dismissed, due to the
decline in sales and heavy losses incurred in its business arising from
the 1997 Asian financial crisis. Petitioners assert that under Article
286 of the Labor Code, a bona fide suspension of the operation of a
business for a period not exceeding six (6) months shall not terminate
employment and no notice to an employee is required. However,
petitioners relate that JAT was compelled to permanently close its
operation eight (8) months later or on November 1998, when the
hope of recovery became nil but only after sending notices to all its
workers and DOLE. Thus, petitioners argue that it cannot be held
liable for illegal dismissal in March 1998 since there was no
termination of employment during suspension of operations and a
notice to employee is not required, unlike in the case of permanent
closure of business operation.chanroblespublishingcompany

We need not belabor the issue of notice requirement for a suspension

of operation of business under Article 286[15] of the Labor Code. This
matter is not pertinent to, much less determinative of, the disposition
of this case. Suffice it to state that there is no termination of
employment during the period of suspension, thus the procedural
requirement for terminating an employee does not come into play yet.
Rather, the issue demanding a sharpened focus here concerns the
validity of dismissal resulting from the closure of JAT. chanroblespublishingcompany

A brief discussion on the difference between retrenchment and

closure of business as grounds for terminating an employee is
necessary. While the Court of Appeals defined the issue to be the
validity of dismissal due to alleged closure of business, it cited
jurisprudence relating to retrenchment to support its resolution and
conclusion. While the two are often used interchangeably and are
interrelated, they are actually two separate and independent
authorized causes for termination of employment. Termination of an
employment may be predicated on one without need of resorting to
the other.chanroblespublishingcompany

Closure of business, on one hand, 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. On the other hand,
retrenchment is reduction of personnel usually due to poor financial
returns so as to cut down on costs of operations in terms of salaries
and wages to prevent bankruptcy of the company. It is sometimes
also referred to as down-sizing. Retrenchment is an authorized cause
for termination of employment which the law accords an employer
who is not making good in its operations in order to cut back on
expenses for salaries and wages by laying off some employees. The
purpose of retrenchment is to save a financially ailing business
establishment from eventually collapsing.[16]
chanroblespublishingcompany

In the present case, we find the issues and contentions more centered
on closure of business operation rather than retrenchment. Closure
or cessation of operation of the establishment is an authorized cause
for terminating an employee under Article 283 of the Labor Code, to
wit:

ART. 283. Closure of establishment and reduction of

personnel. – The employer may also terminate the employment
of any employee due to the installation of labor-saving devices,
 redundancy, retrenchment to prevent losses or the closing or
cessation of operation of the establishment or undertaking
unless the closing is for the purpose of circumventing the
provisions of this Title, by serving a written notice on the
workers and the Department of Labor and Employment at least
one (1) month before the intended date thereof. In case of
retrenchment to prevent losses and in cases of closures or
cessation of operations of establishment or undertaking not due
to serious business losses or financial reverses, the separation
pay shall be equivalent to one (1) month pay or to at least one-
half (1/2) month pay for every year of service, whichever is
higher. A fraction of at least six (6) months shall be considered
one (1) whole year. chanroblespublishingcompany

However, the burden of proving that such closure is bona fide falls
upon the employer. (Industrial Timber Corporation vs. NLRC, 339
Phil. 395, 405 [1997]).[17] In the present case, JAT justifies its closure
of business due to heavy losses caused by declining sales. It belatedly
submitted its 1997 Income Statement[18] and Comparative Statement
of Income and Capital for 1997 and 1998[19] to the NLRC to prove that
JAT suffered losses starting 1997. However, as noted earlier, these
were not given much evidentiary weight by the NLRC as well as the
Court of Appeals, to wit: chanroblespublishingcompany

The financial statements submitted by the respondents on

appeal are questionable for the following reasons: (1) the figures
in Annexes “D-2” and “E” of the appeal memorandum (which
both refer to 1997) do not tally; (2) they (the respondents)
allegedly closed on March 1, 1998. Yet, their 1998 financial
statement (Annex “E”) indicates operations up to and ending
December 31, 1998. In view of the foregoing, the above-
mentioned financial statements do not justify the complainant’s
dismissal.[20]chanroblespublishingcompany

The foregoing findings of the Court of Appeals is conclusive on us.

We see no cogent reason to set it aside. While business reverses or
losses are recognized by law as an authorized cause for terminating
employment, it is an essential requirement that alleged losses in
business operations must be proven convincingly. Otherwise, said
ground for termination would be susceptible to abuse by scheming
employers, who might be merely feigning business losses or reverses
in their business ventures in order to ease out employees.[21] In this
case, the financial statements were not only belatedly submitted but
were also bereft of necessary details on the extent of the alleged losses
incurred, if any. The income statements only indicated a decline in
sales in 1998 as compared to 1997. These fell short of the stringent
requirement of the law that the employer prove sufficiently and
convincingly its allegation of substantial losses. While the
comparative income statement shows a net loss of P207,091 in 1998,
the income statement of 1997 still shows JAT posting a net income of
P19,361. Both statements need interpretation as to their impact on
the company’s termination of certain personnel as well as business
closure. chanroblespublishingcompany

Having concluded that private respondent was not validly dismissed

resulting from closure of business operations due to substantial
losses, we now proceed to determine whether or not private
respondent was validly dismissed on the ground of closure or
cessation of operations for reasons other than substantial business
losses. chanroblespublishingcompany

A careful examination of Article 283 of the Labor Code shows that

closure or cessation of business operation as a valid and authorized
ground of terminating employment is not limited to those resulting
from business losses or reverses. Said provision in fact provides for
the payment of separation pay to employees terminated because of
closure of business not due to losses, thus implying that termination
of employees other than closure of business due to losses may be
valid.chanroblespublishingcompany

Hence, in the case of North Davao Mining Corporation vs. NLRC,

[G.R. No. 112546, 13 March 1996, 254 SCRA 721, 727],[22] we
emphasized that:

Art. 283 governs the grant of separation benefits “in case of

closures or cessation of operation” of business establishments
“NOT due to serious business losses or financial reverses x x
x.” Where, however, the closure was due to business losses–as
in the instant case, in which the aggregate losses amounted to
over P20 billion–the Labor Code does not impose any
 obligation upon the employer to pay separation benefits, for
obvious reasons. There is no need to belabor this point. Even
the public respondents, in their Comment filed by the Solicitor
General, impliedly concede this point.

In another case, Industrial Timber Corporation vs. NLRC, [339 Phil.

395, 405 (1997)],[23] we held more emphatically that:

In any case, Article 283 of the Labor Code is clear that an

employer may close or cease his business operations or
undertaking even if he is not suffering from serious business
losses or financial reverses, as long as he pays his employees
their termination pay in the amount corresponding to their
length of service. It would, indeed, be stretching the intent and
spirit of the law if we were to unjustly interfere in
management’s prerogative to close or cease its business
operations just because said business operation or undertaking
is not suffering from any loss. chanroblespublishingcompany

In the present case, while petitioners did not sufficiently establish

substantial losses to justify closure of the business, its income
statement shows declining sales in 1998, prompting the petitioners to
suspend its business operations sometime in March 1998, eventually
leading to its permanent closure in December 1998. Apparently, the
petitioners saw the declining sales figures and the unsustainable
business environment with no hope of recovery during the period of
suspension as indicative of bleak business prospects, justifying a
permanent closure of operation to save its business from further
collapse. On this score, we agree that undue interference with an
employer’s judgment in the conduct of his business is uncalled for.
Even as the law is solicitous of the welfare of employees, it must also
protect the right of an employer to exercise what is clearly a
management prerogatives. As long as the company’s exercise of the
same is in good faith to advance its interest and not for the purpose of
defeating or circumventing the rights of employees under the law or a
valid agreement such exercise will be upheld. (Maya Farms
Employees Organization vs. NLRC, G.R. No. 106256, 28 December
1994, 239 SCRA 508, 515).[24] chanroblespublishingcompany
In the event, under Article 283 of the Labor Code, three requirements
are necessary for a valid cessation of business operations, namely: (a)
service of a written notice to the employees and to the DOLE at least
one (1) 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 at least one-half (1/2)
month pay for every year of service, or one (1) month pay, whichever
is higher. (Caffco International Limited vs. Office of the Minister-
Ministry of Labor & Employment, G.R. No. 76966, 7 August 1992, 212
SCRA 351, 357).[25] chanroblespublishingcompany

The closure of business operation by petitioners, in our view, is not

tainted with bad faith or other circumstance that arouses undue
suspicion of malicious intent. The decision to permanently close
business operations was arrived at after a suspension of operation for
several months precipitated by a slowdown in sales without any
prospects of improving. There were no indications that an impending
strike or any labor-related union activities precipitated the sudden
closure of business. Further, contrary to the findings of the Labor
Arbiter, petitioners had notified private respondent[26] and all other
workers through written letters dated November 25, 1998 of its
decision to permanently close its business and had submitted a
termination report to the DOLE.[27] Generally, review of labor cases
elevated to this Court on a petition for review on certiorari is confined
merely to questions of law. But in certain cases, we are constrained to
analyze or weigh the evidence again if the findings of fact of the labor
tribunals and the appellate court are in conflict, or not supported by
evidence on record or the judgment is based on a misapprehension of
facts.[28]
chanroblespublishingcompany

In this case, we are persuaded that the closure of JAT’s business is not
unjustified. Further we hold that private respondent was validly
terminated, because the closure of business operations is justified.

Nevertheless in this case, we must stress that the closure of business

operation is allowed under the Labor Code, provided separation pay
be paid to the terminated employee. It is settled that in case of
closure or cessation of operation of a business establishment not due
to serious business losses or financial reverses, the employees are
always given separation benefits. (Complex Electronics Employees
Association vs. NLRC, 369 Phil. 666, 684 [1999]).[29] The amount of
separation pay must be computed from the time private respondent
commenced employment with petitioners until the time the latter
ceased operations. (Industrial Timber Corp.-Stanply Operations vs.
NLRC, G.R. No. 112069, February 14, 1996, 253 SCRA 623, 630-
631).[30] chanroblespublishingcompany

Considering that private respondent was not illegally dismissed,

however, no backwages need to be awarded. Backwages in general
are granted on grounds of equity for earnings which a worker or
employee has lost due to illegal dismissal.[31] It is well settled that
backwages may be granted only when there is a finding of illegal
dismissal.[32] chanroblespublishingcompany

The other monetary awards to private respondent are undisputed by

petitioners and unrefuted by any contrary evidence. These awards,
namely legal holiday pay, service incentive leave pay and 13th month
pay, should be maintained. chanroblespublishingcompany

WHEREFORE, the petition is given due course. The assailed

Resolutions of the Court of Appeals in CA-G.R. SP No. 60337 are
AFFIRMED with the MODIFICATION that the award of
P66,924.00 as backwages is deleted. The award of separation pay
amounting to P10,296.00 and the other monetary awards, namely
salary differentials in the amount of P1,066.00, legal holiday pay in
the amount of P1,850.00, service incentive leave pay in the amount of
P925.00 and 13th month pay in the amount of P4,910, or a total of
P29,047.00 are maintained. No pronouncement as to costs. chanroblespublishingcompany

SO ORDERED.

Puno, J., (Chairman), Austria-Martinez, Callejo, Sr., and

Tinga, JJ., concur.

chanroblespublishingcompany

[1] Penned by Associate Justice Jose L. Sabio, Jr., with Associate Justices
Hilarion L. Aquino, and Mercedes Gozo-Dadole concurring. chanroblespublishingcompany

[2] Rollo, pp. 32-33.

[3] Id. at 43-47.
[4] Id. at 38-41.
[5] Id. at 41.
[6] P198.00/day x 26 days x 13 mos. = P66,924.00, Rollo, p. 40.
[7] From January 1997 up to March 31, 1999, or two (2) years x P5,148.00 =
P10,296.00, ibid. chanroblespublishingcompany

[8] From May 1, 1997 up to January 6, 1998 at P185.00/day less amount paid at
P180.00/day = P5.00 x 26 days x 8.2 mos. = P1,066.00, id. at 41. chanroblespublishingcompany

[9] P185.00 x 10 legal holidays = P1,850.00, ibid.

[10] P185.00 x 5 days = P925.00, ibid.
[11] P185.00 x 26 days = P4,810.00, ibid.
[12] Rollo, p. 47.
[13] Id. at 30.
[14] Id. at 12-13.
[15] ART. 286. When employment not deemed terminated. – The bona fide
suspension of operation of a business or undertaking for a period not
exceeding six (6) months, or the fulfillment by the employee of a military or
civic duty shall not terminate employment. chanroblespublishingcompany

[16] See SCRA Annotation, “Reversal of Fortune as Ground for Dismissal” by

Rogelio E. Subong, 282 SCRA 617, 621-622.
[17] Industrial Timber Corporation vs. NLRC, 339 Phil. 395, 405 [1997]
[18] Rollo, p. 34.
[19] Id. at 35.
[20] Id. at 46.
[21] Garcia vs. NLRC, No. L-67825, 4 September 1987, 153 SCRA 639, 651.
[22] North Davao Mining Corporation vs. NLRC, [G.R. No. 112546, 13 March
1996, 254 SCRA 721, 727]. chanroblespublishingcompany

[23] Industrial Timber Corporation vs. NLRC, [339 Phil. 395, 405 (1997)]
[24] Maya Farms Employees Organization vs. NLRC, G.R. No. 106256, 28
December 1994, 239 SCRA 508, 515. chanroblespublishingcompany

[25] Caffco International Limited vs. Office of the Minister-Ministry of Labor &
Employment, G.R. No. 76966, 7 August 1992, 212 SCRA 351, 357
[26] Rollo, p. 59. chanroblespublishingcompany

[27] Id. at 36-37. chanroblespublishingcompany

[28] Ignacio vs. Coca-Cola Bottlers Phils., Inc., G.R. No. 144400, 19 September
2001, 365 SCRA 418, 423.
[29] Complex Electronics Employees Association vs. NLRC, 369 Phil. 666, 684
[1999]chanroblespublishingcompany

[30] Industrial Timber Corp.-Stanply Operations vs. NLRC, G.R. No. 112069,
February 14, 1996, 253 SCRA 623, 630-631
[31] Belaunzaran vs. NLRC, 333 Phil. 670, 679 (1996).
[32] Supra, note 30 at 629.