Separation Pay Charged to Retirement Fund

May an employee's separation pay be charged to the retirement fund?

RA 7641 is an act amending PD 442 by providing for retirement pay to qualified private sector employees in the absence of any retirement plan in the establishment.

In Ford Philippines Salaried Employees Association v. NLRC, a case decided before the advent of RA 7641, the Supreme Court ruled that if it is provided in the retirement plan of the company that the retirement, death and disability benefits paid in the plan are considered integrated with and in lieu of termination benefits under the Labor Code, then the retirement fund may be validly used to pay such termination or separation pay because of closure of business.

Ford Philippines Employees v. NLRC (G.R. No. 75347; December 11, 1987)

The fact that, since the establishment and effectivity of the Retirement Plans, it had been the policy and practice of the companies to charge termination, retirement and analogous benefits for separated employees to the Retirement Fund, without a single complaint or dissent on the part of the unions or any employee, for that matter, is a manifestation on the part of the unions that separation benefits (not necessarily retirement benefits) are covered by the "integration provision" of the Retirement Plans and are chargeable to and deductible from the Retirement Fund.

The purpose of the Plans or Fund, as provided in Article 1, Section 2 of the Retirement Plans, is "to assist the employees financially in providing for their retirement years." This purpose, however, is subject to the terms and conditions set forth in the Plan. And one such condition is the integration of separation benefits with and in lieu of the retirement, death, and disability benefits under the Plan. Such being the case, and considering that the Retirement Plan should be interpreted in its entirety so as to give meaning to an the provisions therein, the phrase retirement years should not be literally construed as referring only to cases of employees' retirement from the companies, but should be broadly interpreted as inclusive of all other instances of employees' separation from the companies, such as, by reason of death, disability or closure of business.
Furthermore, the companies cannot be charged with "diversion of funds" for deducting the separation benefits from the Retirement Fund, because payment of separation benefits is among the liabilities contemplated in Section 3, Article 1 of the Plan, which reads:

Section 3. Exclusive Benefit of the Employees: Under no circumstances, prior to the satisfaction of all liabilities with respect to the participants and their beneficiaries under the plan, shall any income or corpus of the Trust Fund or any Funds contributed to the Trust Fund by the Company be diverted to or used for purposes other than for the exclusive benefit of the Plan participants and their beneficiaries.

It cannot also be said that, by deducting the separation benefits from the Retirement Fund, the companies are paying the employees who have earned vested rights under the plan, with separation benefits out of their own money, and that in effect, a "recovery" is made by the companies of their contribution to the Plan.

The Retirement Fund was fully and solely funded by Ford and Ensite, that is, without contributions from any of their employees. And the "vested right" of the employees in the Plan simply means that they are entitled to the Fund even in cases of their voluntary resignation from the companies. But, as it happened, the companies closed down, thereby pre-empting any voluntary resignation on the part of the employees. Still, the employees are paid full separation benefits.

Based on the foregoing, the NLRC and the Labor Arbiter were justified in sustaining the companies' action in charging the Retirement Fund for payment of the employees' separation benefits occasioned by the companies' closure of business in the Philippines.

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