Separation Pay of Employees in Merger

On Merger and Award of Separation Pay to Employees of Absorbed Corporation


The Philippine Geothermal, Inc. Employees Union v. Unocal Philippines, Inc. (now known as Chevron Geothermal Philippines Holdings, Inc.); G.R. No. 190187; 28 September 2018

In Philippinne Geothermal, Inc. Employees Union v. Unocal Philippines, the Supreme Court held that the acquisition by the surviving corporation “of all assets, interests, and liabilities of the absorbed corporation necessarily includes the rights and obligations of the absorbed corporation under its employment contracts. Consequently, the surviving corporation becomes bound by the employment contracts entered into by the absorbed corporation. These employment contracts are not terminated. They subsist unless their termination is allowed by law.

The Supreme stated further:

The merger of Unocal Corporation with Blue Merger and Chevron does not result in an implied termination of the employment of petitioner’s members. Assuming respondent is a party to the merger, its employment contracts are deemed to subsist and continue by “the combined operation of the Corporation Code and the Labor Code under the backdrop of the labor and social justice provisions of the Constitution.”

Considering that the concerned employees were not impliedly dismissed by reason of the merger, they were therefore not entitled to a separation pay.

The Union, however, claims that such a view is contrary to its freedom to contract, considering its members did not enter into employment contracts with the surviving corporation. In rejecting this line of reasoning, the Supreme Court said:

However, petitioner is not precluded from leaving the surviving corporation. Although the absorbed employees are retained as employees of the merged corporation, the employer retains the right to terminate their employment for a just or authorized cause. Likewise, the employees are not precluded from severing their employment through resignation or retirement. The freedom to contract and the prohibition against involuntary servitude is still, thus, preserved in this sense. This is the manner by which the consent of the employees is considered by the law.

Hence, assuming respondent is a party to the merger, the merger still does not operate to effect a termination of the employment of respondent’s employees. Should they be unhappy with the surviving corporation, the employees may retire or resign from employment.

On the contention of the contention that the employees must be awarded the separation pay in the interest of social justice, the Supreme Court amplified:

X x x x x this Court has held that this award is granted only under the following exceptional cases: (1) the dismissal of the employee was not for serious misconduct; and (2) it did not reflect on the moral character of the employee.

In this case, there is no dismissal of the employees on account of the merger. Petitioner does not deny that respondent actually continued its normal course of operations after the merger, and that its members, as employees, resumed their work with their tenure, salaries, wages, and other benefits intact. Petitioner was even able to execute with respondent, after the merger, the Collective Bargaining Agreement from which it anchors its claims.

The Supreme Court concluded:

Given these circumstances, petitioner is not entitled to separation pay. Although the policy of the state is to rule in favor of labor in light of the social justice provisions under the Constitution, this Court cannot unduly trample upon the rights of management, which are likewise entitled to respect in the interest of fair play.