Title
E. Razon, Inc. vs. Secretary of Labor and Employment
Case
G.R. No. 85867
Decision Date
May 13, 1993
ERI/MPSI, after contract cancellation, held liable for employee separation pay; MARINA not responsible under permit terms, affirmed by Supreme Court.
separation pay
management contract
court ruling
A

Case Summary (G.R. No. 85867)

Procedural Posture and Venue

The petitioner filed a petition for certiorari seeking to annul the DOLE orders that required it, rather than MARINA, to pay the workers’ separation pay. The Court treated the petition as one challenging the Secretary of Labor and Employment’s rulings and their alleged grave abuse of discretion amounting to excess of jurisdiction in the determination of the party liable for separation pay.

Underlying Management Contract and PPA’s Cancellation

Through public bidding on January 18, 1974, ERI and the government, through PPA, executed a management contract covering all piers in South Harbor, Manila for an initial term of five years renewable for another five years. After PPA cancelled MPSI’s management contract on July 19, 1986, allegedly for violations, PPA took over the cargo-handling operations and equipment of MPSI. Two days later, on July 21, 1986, PPA issued Permit No. 104286 to MARINA for cargo-handling services for a period of one year, later renewed, covering operations until July 20, 1987.

Permit Conditions and Employee “Absorption”

The permit contained additional terms and conditions appended as Annex B. Paragraph 7 stated that labor and personnel of the previous operator, except positions of trust and confidence, “shall be absorbed by grantee,” and that labor or employees’ benefits under the existing CBA “shall likewise be honored.” As MARINA began operations, it required the workers of ERI/MPSI to accomplish individual information sheets. Soon thereafter, many of the workers discovered that they were treated as newly hired employees effective July 21, 1986, and they demanded separation pay. Both MARINA and ERI/MPSI refused to be liable for that separation pay claim.

In response to the threat of work disruption, PPA authorized MARINA to deduct PHP 2,000,000.00 from the amount due to MPSI as partial payment of separation pay for the affected employees’ claims.

Strike, Negotiated Agreement, and Dispute Escalation

The workers, organized in the Associated Workers Union (AWU), filed a notice of strike on October 12, 1987. This prompted meetings among PPA, MARINA, ERI/MPSI, and union representatives including AWU, Associated Port Checkers Workers Union (APCWU), Associated Skilled and Technical Employees Union (ASTEU), and Marina Management Employees (MARINE ME). On November 3, 1987, they forged an Agreement for the “immediate and reasonable resolution” of the long-standing separation benefits claim that had resulted in impending labor strikes.

The Agreement fixed computation at “one (1) month for every year of service.” It also provided, without admitting liability, that PPA through MARINA would disburse PHP 5 million directly to the workers, described as partaking “of the nature of rental” for MPSI equipment, based on fair and reasonable rental and fair market value determined by an independent appraiser mutually agreed upon by PPA, MARINA, and MPSI. Although the Agreement stated that the remaining balance of separation benefits would be paid in full before December 24, 1987, the workers struck on December 22, 1987 because of apprehension that benefits would not be paid, as the appraisal of MPSI equipment had not yet been completed.

DOLE Intervention under Article 263(g)

To prevent paralyzation of the port’s essential operations, MPSI requested that the Secretary of Labor assume jurisdiction. Invoking Article 263(g) of the Labor Code, the then Secretary of Labor Franklin M. Drilon issued an order on December 23, 1987. He held the labor dispute was “imbued with national interest,” ordered the striking workers to return to work within 24 hours, and directed management to accept them back. He required faithful compliance with the November 3, 1987 Agreement and made available, pending appraisal, the PHP 5 million committed by the PCGG from MPSI’s account. He also directed the National Conciliation and Mediation Board to form a committee to monitor and assist in implementation.

Subsequently, the workers’ separation pay was taken from proceeds of the sale to PPA of ERI cargo-handling equipment and from MARINA rentals from July 21, 1986 to January 29, 1988.

The Assailed Orders and the Core Administrative Determination

On May 31, 1988, Secretary Drilon issued the assailed order resolving the question whether MARINA assumed liability for separation pay under Paragraph 7 of Annex B to PPA Permit No. 104286. He answered in the negative.

He rejected MPSI’s successor-employer theory, which relied on the general rule that a collective bargaining agreement is a contract in personam and, therefore, not enforceable against a successor employer, citing Fernando vs. Angat Labor Union (5 SCRA 248 [1962]). The Secretary stressed that the dispute did not arise from a normal business takeover such as sale or merger. Instead, it arose from cancellation of the contract, which was later upheld as valid. He reasoned that the Agreement binding MARINA to assume obligations to workers was not an agreement between the two businesses but arose from MARINA’s permit issued by PPA.

Secretary Drilon further treated Paragraph 7 as applicable prospectively, because MARINA “had then yet to start its operations,” and because Paragraph 14 of the same permit made MARINA responsible only for obligations, liabilities, or claims arising from transactions or undertakings in connection with cargo-handling operations “as of the actual date of transfer.” He concluded that the undertaking connected with MARINA’s operations commenced at the actual take-over. He also stated the basic labor policy implication that compensation for loss of employment from the entity where services had already been rendered should come from that entity.

Accordingly, he directed MPSI (now ERI) to pay the remaining balance of separation pay in full, satisfying the separation pay obligation at the rate agreed upon in the November 3, 1987 Agreement.

When MPSI and AWU moved for reconsideration, Secretary Drilon denied their motion on November 21, 1988, prompting ERI’s certiorari petition.

Issues Framed by the Petitioner

The petitioner argued that the Secretary committed grave abuse of discretion amounting to excess of jurisdiction in several respects: it claimed that MARINA became a successor-employer upon the permit take-over and thus should have been bound to honor workers’ rights to security of tenure and seniority privileges; it asserted that the Secretary adopted a strained interpretation of Paragraph 7; it contended that MARINA should be deemed to have discontinued or terminated the employment when it “absorbed” the workers; it complained that petitioner was held liable notwithstanding that it never dismissed or separated the workers; and it maintained that MARINA should be ordered to reimburse amounts it had been paid from its assets.

The Court observed that the issue was not whether separation pay was due. The controversy concerned which corporation—petitioner ERI/MPSI or MARINA—should bear the separation pay liability.

Governing Labor Principle on Separation Pay

The decision recognized that separation or severance pay is an allowance generally based on length of service, payable upon severance of employment status except in disciplinary discharge situations, citing Marcopper Mining Corporation vs. NLRC (200 SCRA 167 [1991]). Under Article 283 of the Labor Code, separation pay is required when termination of employment is occasioned by the “cessation of operations” of an establishment. The Court therefore treated the employer whose business operation ceased—ERI/MPSI, whose management contract was cancelled and for whom services had been rendered—as ordinarily burdened with the obligation to pay separation pay.

Interpretation of Paragraph 7 of the Permit

Petitioner anchored its claim on Paragraph 7 of PPA Permit No. 104286, which stated that employees of the “previous operator” would be absorbed by MARINA and that benefits under the existing CBA would be honored. The Secretary and the Court confronted the meaning of “absorbed” as used in the permit, noting that it initially suggests assimilation or incorporation and a “take over” in business parlance.

However, the Court held that the circumstances did not justify the conclusion that by “absorbing” ERI/MPSI employees, MARINA substituted itself as an employer in a manner that would erase the employment separation that resulted from the cancellation of MPSI’s management contract. The Court distinguished the concept of absorption from the legal consequences of the termination of the employment relationship with the previous employer.

The Court noted that although the Court in Marina Port Services, Inc. vs. NLRC (193 SCRA 420 [1991]) had opined that, by virtue of Paragraph 7, the security guards became MARINA employees, the undeniable fact remained that upon cancellation of the management contract, ERI/MPSI ceased to be an employer. While the cessation was not due to ERI/MPSI’s acts, the Court ruled that it could not be shifted to MARINA merely because MARINA started operations shortly afterward and later re-hired the workers.

The Court rejected petitioner’s reliance on MARINA’s issuance of permits and timing of operations as establishing absolute identity between ERI/MPSI and MARINA. It also recalled that the legality of cancellation of MPSI’s permit had been laid to rest in E. Razon, Inc. vs. Philippine Ports Authority (151 SCRA 233 [1987]).

Prospective Application and Paragraph 14 of the Permit

The Court upheld Secretary Drilon’s reading that Paragraph 7, insofar as it addressed employees’ benefits, should be applied prospectively relative to MARINA’s operations. This conclusion received support from Paragraph 14 of the permit, which limited MARINA’s responsibility to obligations, liabilities, or claims arising from transactions or undertakings “as of the actual date of transfer.”

The decision reasoned that MARINA may have been motivated to rehire by considerations of skill and continuity, but no l

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