Employment Termination: Separation Pay for Probationary Employees in Company Closure (Philippine Context)

Disclaimer: This article is for general informational purposes only and does not constitute legal advice. For specific concerns or questions about your situation, it is best to consult a qualified labor law practitioner.

1. Introduction

The Labor Code of the Philippines provides for various ways by which an employer-employee relationship may be terminated. One of these methods is the closure of a business, also referred to as an “authorized cause” for termination. When a business closes, key questions often arise about the payment of separation pay—particularly whether probationary employees (i.e., those still within their trial or evaluation period) are entitled to receive separation pay. This article aims to clarify the legal rules and principles governing separation pay for probationary employees in the context of company closure in the Philippines.

2. Relevant Legal Framework

2.1. The Labor Code of the Philippines

Articles 297–299 (formerly Articles 282–284) of the Labor Code outline the grounds and processes for termination of employment.
Article 298 (formerly Article 283) specifically deals with “authorized causes” for termination, which include:
- Installation of labor-saving devices;
- Redundancy;
- Retrenchment to prevent losses; and
- Closure or cessation of operation of the establishment or undertaking (except in cases of proven financial losses).

2.2. Department of Labor and Employment (DOLE) Issuances

The DOLE periodically issues rules, regulations, and advisories to clarify the application of the Labor Code’s provisions. The Implementing Rules and Regulations (IRR) of the Labor Code also provide guidance on how to compute separation pay and the procedural requirements for valid termination.

3. Defining “Probationary Employment”

A probationary employee is one who is on a trial period during which the employer determines whether the employee is fit for regular employment, based on reasonable standards made known at the time of engagement.
Under the Labor Code (Article 296, formerly Article 281), the probationary period shall not exceed six (6) months from the date the employee started working, unless covered by an apprenticeship agreement stipulating a longer period.

Despite the limited or “on-trial” nature of their tenure, probationary employees are still covered by labor laws and enjoy security of tenure within the probationary period, albeit in a more limited sense than regular employees. This means that probationary employees cannot be dismissed without valid cause or without compliance with due process.

4. Authorized Cause: Company Closure

4.1. Closure of Business as an Authorized Cause

The Labor Code recognizes that an employer may close or cease its operations for various legitimate reasons. When closure is due to business reasons—such as corporate restructuring, poor market conditions, or any bona fide decision to discontinue business—the employer may validly terminate the employment of its workforce, subject to compliance with legal requirements.

Key Points:

Written Notice – The employer must serve a written notice of closure on both the employees and the DOLE at least 30 days before the intended date of closure.
Separation Pay – In cases of closure not due to serious business losses, employees (including probationary employees) are generally entitled to separation pay.

4.2. Closure Due to Serious Business Losses

If the company can prove that the closure is due to serious financial losses, the employer is not obligated to pay separation pay under Article 298. However, the burden of proving genuine losses rests heavily on the employer, who must submit substantial evidence (e.g., audited financial statements).

5. Separation Pay for Probationary Employees in Case of Closure

5.1. General Rule of Entitlement

No Distinction: The Labor Code does not distinguish between probationary employees and regular employees when it comes to the payment of separation pay due to company closure—all employees are covered so long as the termination is for an authorized cause not attributed to their fault.
Legal Basis: Article 298 states that an employee terminated due to closure of business (other than closure due to serious losses) is entitled to separation pay “equivalent to at least one (1) month pay or at least one-half (1/2) month pay for every year of service, whichever is higher.”
Pro-Rata Computation: For employees who have not completed a full year of service (which will include most probationary employees), the separation pay is usually computed pro rata (i.e., proportionate to the length of service rendered).

5.2. Computation of Separation Pay

When closure is not due to serious losses, the Labor Code formula for separation pay typically is:

Separation Pay = 1 month pay OR 1/2 month pay for every year of service (whichever is higher)

For less than one (1) year of service, the Supreme Court and DOLE have recognized that employees are still entitled to a fraction of the separation pay corresponding to the fraction of the year spent in service. Thus:

If the employee worked for only 3 months under probation, they would get the equivalent of 3/12 (or 1/4) of the computed separation pay based on the relevant formula.
There is no absolute uniform standard for fractioning in practice; however, the most common method is straightforward pro rata (months of service / 12).

5.3. Closure Due to Financial Losses

No Separation Pay: If the employer can sufficiently prove legitimate and substantial business losses, no separation pay is due to any employee, whether probationary or regular.
Documentation: Employers must show credible financial records (e.g., audited financial statements) demonstrating losses over a period or severe financial distress that justifies closure.

6. Procedural Due Process Requirements

Even in cases of authorized cause such as closure, employers must observe procedural due process:

30-Day Notice to Employees and DOLE
- This notice should specify the cause for termination (i.e., closure), the intended date of effectivity, and additional details about the termination.
- The notice gives affected employees an opportunity to prepare for the loss of employment and to seek alternative employment or other remedies.
Payment of Final Wages and Separation Pay (if applicable)
- Upon the effective date of termination, the employer should pay any unpaid wages, accrued benefits (e.g., proportionate 13th month pay, unused leave conversions if provided by law or company policy), and the computed separation pay if closure is not due to proven losses.

Failure to comply with these procedural requirements can render the termination ineffectual or legally questionable, potentially exposing the employer to legal disputes.

7. Jurisprudence and Practical Considerations

7.1. Supreme Court Decisions

Philippine Supreme Court rulings have consistently held that employees on probationary status are not excluded from receiving separation pay in authorized cause terminations. The essence of the rulings is that the cause (i.e., closure of business) is not the employee’s fault or related to the performance of the probationary employee. Therefore, if the closure is bona fide (and not due to serious business losses), the probationary employee must receive separation pay in the same manner as a regular employee.

7.2. Good Faith in Closure

Courts look into whether the closure is done in good faith or is merely a scheme to dismiss employees (e.g., to avoid regularization or to defeat existing labor claims). If found to be in bad faith, the employer may be held liable for illegal dismissal and subject to additional damages or liabilities.

7.3. Practical Tips for Employers

Documentation: Maintain accurate financial statements and notices to employees.
Compliance: Strictly follow the 30-day notice and DOLE submission requirements.
Calculation: Use a standardized, transparent formula for separation pay, ensuring the fraction-of-year calculation is fair.

7.4. Practical Tips for Probationary Employees

Know Your Rights: Even if you are still on probation, confirm that you receive the appropriate separation pay if the closure is not due to proven serious losses.
Request Documentation: If closure is claimed to be due to business losses, you can ask for any documentation or proof of these losses.
Seek Legal Advice: If in doubt about the correctness of the termination process or your entitlements, consult with a lawyer or the DOLE.

8. Summary of Key Points

Probationary Employees Are Covered: In cases of company closure, probationary employees are included in the coverage for separation pay, provided the closure is not due to serious financial losses.
Authorized Cause: Closure of a business is an authorized cause under Article 298. Employers must notify both employees and the DOLE 30 days before the intended closure.
Separation Pay Entitlement:
- One (1) month pay or one-half (1/2) month pay for every year of service, whichever is higher, pro-rated to the length of service rendered if less than a year.
- No separation pay is due if the employer can prove serious financial losses.
Due Process Compliance: Termination for closure must comply with procedural due process. Failure to do so may result in claims for illegal dismissal.
Good Faith: Closure must be done in good faith and not as a ploy to circumvent employees’ rights.

9. Conclusion

Under Philippine labor law, probationary employees enjoy the same statutory protections regarding separation pay when a company closes—as long as the closure is not due to serious business losses. Employers must strictly comply with notice and due process requirements, and must grant separation pay in accordance with the Labor Code formula. Where there is a claim of financial losses, employers carry the burden of proof. Ultimately, an employer’s good faith and adherence to lawful procedures are crucial in determining the legality of the closure and the corresponding entitlements of all employees, including probationary ones.

For any specific or complex situation, it remains prudent to consult legal counsel or approach the Department of Labor and Employment to ensure that all legal requirements are properly met.