Termination Due to Lack of Projects in Construction Firms (Philippine Context)
All there is to know on the topic

1. Introduction

In the Philippines, the construction industry plays a significant role in economic development and employment generation. Because of the project-based nature of most construction work, however, fluctuations in demand and availability of projects can create unique labor and employment concerns. One recurring issue is the termination of employees due to “lack of projects.” Whether it be a construction company closing down or a temporary lull between major contracts, Philippine labor laws and regulations define the legal framework for such terminations.

This article aims to provide a comprehensive overview of termination due to lack of projects in the Philippine construction industry, grounded in the Labor Code of the Philippines, rules from the Department of Labor and Employment (DOLE), and relevant Supreme Court jurisprudence.

2. Legal Framework for Termination of Employment

The Labor Code of the Philippines (Presidential Decree No. 442, as amended) governs all aspects of employment termination. Under the Labor Code, two main categories of termination exist:

Just Causes (Article 297, formerly Article 282) – These pertain to reasons attributable to the employee’s own wrongful acts or omissions (e.g., serious misconduct, willful disobedience, gross neglect, etc.).
Authorized Causes (Article 298 and Article 299, formerly Articles 283 and 284) – These are reasons based on business or economic considerations (e.g., redundancy, retrenchment to prevent losses, closure of business), or those affecting the health of the employee.

When a construction firm contemplates ending employment ties due to lack of projects, the relevant provisions typically fall under Authorized Causes—particularly “closure or cessation of business” or “retrenchment to prevent losses.” However, in the construction industry, there is a special classification of employment, known as project employment, which also significantly affects how and when termination may legally occur.

3. Project Employment in Construction

3.1 Definition and Characteristics

Under Philippine law and Department of Labor and Employment (DOLE) regulations (e.g., DOLE Department Order No. 19, series of 1993, and other issuances related to the construction industry), certain employees of construction firms are hired on a “project basis.” This means:

Specific Undertaking: They are engaged for a particular project or phase thereof, with the duration of employment co-terminous with the project’s completion.
Completion or Phase-Out: Project employees are ordinarily separated from employment once the project they are assigned to has been completed.

Project employment agreements help construction companies match manpower needs with project timetables. These also delineate the period or scope of the employees’ work.

3.2 Valid Termination of Project Employees

Because they are contracted to work only for the duration of a particular project or undertaking, termination of project employees at the project’s end does not necessarily constitute illegal dismissal, provided:

There is a clear written contract specifying that employment is only for the specific project or undertaking.
The employee is apprised at the time of hiring that their employment is co-terminous with the project.
Actual completion or termination of the project (or its phase) can be objectively determined.

Where these conditions are met, the completion of a project serves as a valid cause for separation. It does not require the same notice and separation pay mandated by the Labor Code for “authorized causes” under Articles 298 or 299—unless there is a company policy or collective bargaining agreement that provides otherwise, or if the project employment contract states a benefit for such case.

4. Authorized Causes for Lack of Projects

When lack of projects is not merely the completion of a project for project-based employees—i.e., when a construction company with regular or rank-and-file employees faces a protracted or indefinite shortage of incoming contracts—it may resort to termination under the following “authorized causes” found in the Labor Code:

Closure or Cessation of Business (Article 298)
Retrenchment to Prevent Losses (Article 298)
Redundancy (Article 298)

Each of these must comply with both substantive and procedural requirements.

4.1 Closure or Cessation of Business

Definition: Occurs when an employer decides to cease operations (whether entirely or just a specific department or division).
Substantive Requirement: The decision is in good faith (i.e., there is a genuine intention to cease business operations, as opposed to a scheme to circumvent employees’ security of tenure).
Procedural Requirements:
1. Written Notice: The employer must serve a written notice to both the affected employees and the DOLE at least 30 days before the intended date of closure.
2. Separation Pay: If the closure is not due to business losses, employees are entitled to separation pay of one month’s pay or at least one-half month’s pay per year of service, whichever is higher. In case of serious and duly proven business losses, separation pay may not be required, although the employer still must give the required notice.

4.2 Retrenchment to Prevent Losses

Definition: A management prerogative to reduce workforce to prevent or minimize business losses.
Substantive Requirements:
1. The losses sought to be prevented are actual or imminent.
2. The retrenchment is reasonably necessary and likely to effectively address such losses.
3. It is carried out in good faith, and the employer uses fair and reasonable criteria (e.g., efficiency, seniority) in choosing who to retrench.
Procedural Requirements:
1. 30-Day Written Notice to the employee and to the DOLE.
2. Separation Pay equivalent to one month’s pay or at least one-half month’s pay per year of service, whichever is higher.

4.3 Redundancy

Definition: A situation where the services of an employee are in excess of what is reasonably demanded by the actual requirements of the enterprise. In construction, this might apply if the firm retains more staff than needed during a lull.
Substantive Requirements:
1. The employer must prove the surplus of employees, demonstrating an actual or prospective reduction in business.
2. Implementation of fair and reasonable criteria (e.g., efficiency rating, performance, seniority).
Procedural Requirements:
1. 30-Day Written Notice to the employee and to the DOLE.
2. Separation Pay equivalent to one month’s pay or at least one month’s pay per year of service, whichever is higher (Redundancy usually involves a higher standard separation pay than retrenchment or closure for reasons not due to losses).

5. Distinction Between Project-Based and Regular Employees

One critical issue in the construction industry is properly identifying employees as project-based or regular:

Project Employees:
- Hired for a specific project or phase, with the understanding that employment ends once that project or phase is completed.
- No requirement for separation pay if the completion of the project is the only reason for termination (assuming good faith, valid project-based contract, and no agreement to pay additional benefits).
- No 30-day advance notice to DOLE is required purely for the end of a project.
Regular Employees:
- Those who have been performing tasks necessary or desirable to the usual business or trade of the employer and have rendered service for the period required under the Labor Code (six months or more) without a valid project-based contract specifying a project.
- Termination must fall under a just or authorized cause. When there is a lack of projects that will likely continue for an extended period (i.e., not simply a short gap between phases), the authorized cause route (closure, retrenchment, redundancy) and compliance with notice and separation pay is usually required.

Misclassification can expose employers to legal challenges and claims for illegal dismissal. Construction firms must ensure that employees labeled as “project-based” truly meet the legal standards.

6. Procedural and Documentary Requirements

When terminating employees due to lack of projects under authorized causes, key steps must be followed to avoid claims of illegal dismissal:

Documentation of Financial or Operational Reasons
- Ensure there is evidence (e.g., financial statements, notice of cancelled projects, official communications) showing genuine lack of projects or potential losses.
Criteria for Selection of Employees to be Terminated
- If terminating only a portion of the workforce (e.g., retrenchment or redundancy), adopt fair and objective criteria (seniority, performance, efficiency ratings).
Service of 30-Day Notice
- Provide written notice to each affected employee and to the DOLE at least 30 days prior to intended date of termination.
Payment of Separation Pay
- Compute according to the proper formula for closure, retrenchment, or redundancy, if applicable.
Good Faith and Absence of Discrimination
- Ensure that the decision is not tainted by bad faith or used to victimize particular workers or union members.

7. Common Pitfalls and Legal Risks

Failure to Observe the 30-Day Notice Period
- One of the most common procedural lapses is the employer’s failure to comply with the mandatory 30-day notice to both the employee and the DOLE. This lapse can render the dismissal procedurally infirm, even if the substantive basis is valid.
Mislabeling Employees as Project-Based
- Some construction firms inadvertently (or intentionally) classify regular employees as project-based to avoid obligations. If challenged, courts or labor arbiters will look beyond the contract’s label and examine the nature of the work, duties performed, and length of service.
Non-Payment or Underpayment of Separation Pay
- In authorized cause terminations, employees are entitled to separation pay (except in certain cases of proven serious losses), and failure to pay the correct amount can lead to illegal dismissal rulings and additional monetary awards.
Using Lack of Projects as a Pretext for Dismissals
- If a company still operates but selectively dismisses certain employees under the guise of “lack of projects,” they risk a labor complaint if there is no bona fide evidence of reduced work, or if retention/selection criteria is arbitrary or discriminatory.

8. Relevant Jurisprudence

A number of Supreme Court decisions and National Labor Relations Commission (NLRC) rulings clarify the treatment of construction employees and the concept of “lack of projects” as an authorized cause. Some landmark rulings include:

Philippine National Construction Corporation v. NLRC
Held that project employees must be informed at the time of hiring that they were hired for a project, and their tenure ends upon the completion of that project.
ALU-TUCP v. NLRC
Clarified that in authorized cause terminations, compliance with procedural requirements (written notice to DOLE and employees) is mandatory, and failure to observe the same leads to liability for nominal damages.
Abesco Construction and Development Corporation v. Ramirez
Affirmed that the completion of a project is a valid cause for separation of a project employee, provided the employee knew from the outset that employment was project-based.

These and other cases underscore the importance of correctly identifying the nature of employment and following procedural due process.

9. Practical Tips for Employers

Draft Clear Employment Contracts
- Identify explicitly whether employment is project-based or regular. In project-based contracts, specify the project scope and duration.
Maintain Proper Records
- Keep records of financial statements, project timelines, employee performance, notices, and other documents to justify decisions and defend against potential complaints.
Consult Legal Counsel Early
- Before implementing a mass layoff, retrenchment, or closure, confer with a labor lawyer to ensure all substantive and procedural safeguards are satisfied.
Communicate with Employees
- Advance communication fosters transparency and lessens labor disputes. Let employees know the business rationale and reasons behind termination decisions.

10. Conclusion

“Lack of projects” is a genuine challenge in the Philippine construction industry, where the availability of contracts can ebb and flow significantly. Employers must navigate the unique landscape of project employment vis-à-vis the authorized causes for termination under the Labor Code. Proper classification of employees, adherence to strict procedural requirements (particularly the 30-day notice and separation pay obligations), and the observance of good faith are all crucial to lawful terminations.

For construction firms, it is essential to balance management prerogatives—such as deciding workforce size based on available projects—with employees’ security of tenure and the obligations mandated by labor law. When done correctly, terminations rooted in an authentic shortage of projects can be accomplished without violating the rights of employees or incurring unnecessary legal risk. When done incorrectly, however, the penalties and liabilities can be substantial.

Ultimately, vigilance in drafting employment contracts, classifying employees, and observing due process at every stage can help ensure that “termination due to lack of projects” is both legally defensible and fair in the eyes of Philippine labor law.