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Prestige Hotel leased premises belonging to Major Corporation. However, Prestige Hotel reneged on the payment of rental fees, prompting Major…

2026 Bar Exam · Labor Law & Social Legislation · Question 5 · Essay

The question

Prestige Hotel leased premises belonging to Major Corporation. However, Prestige Hotel reneged on the payment of rental fees, prompting Major Corporation to file an ejectment case against Prestige Hotel. To gain funds and to amicably settle the case, Prestige Hotel decided to sell its assets to any interested company. To help Prestige Hotel, Major Corporation persuaded Infinite Corporation to lease the premises. Thereafter, Prestige Hotel ceased operations. Consequently, Major Corporation formally turned over the possession of the leased premises to Infinite Corporation, which immediately occupied the same. The employees of Prestige Hotel assert that they should be absorbed by Infinite Corporation. Are the employees correct? Explain.

Held

No, the employees of Prestige Hotel are not correct in asserting that they should be absorbed by Infinite Corporation, under the ruling in Sundowner Development Corporation v. Drilon, G.R. No. 82341 (1989-12-06).

Explanation

The law guarantees workers security of tenure, meaning they cannot be terminated except for just or authorized causes with due process. However, this protection applies within the employer-employee relationship. When a business sells its assets or leases its premises to another company, the labor contracts do not automatically transfer to the new company because labor contracts are personal (in personam) and bind only the original parties. The new company, as a separate legal entity, has the constitutional right to select its own employees and is not legally required to absorb the employees of the previous employer unless the transaction is done in bad faith to evade labor obligations.

The Supreme Court in Sundowner Development Corporation v. Drilon clarified that the purchaser or lessee of assets or premises is not liable to absorb the employees of the seller or lessor unless there is evidence of bad faith or a contractual obligation to do so. The mere fact that the new company operates the same type of business in the same premises does not create an employer-employee relationship with the predecessor’s employees. The predecessor employer remains responsible for its employees’ claims.

Application to the facts

In this case, Prestige Hotel ceased operations and sold its assets to raise funds and settle its obligations. Major Corporation, the lessor, persuaded Infinite Corporation to lease the premises after Prestige Hotel stopped operations. Infinite Corporation immediately occupied the premises and began its business. There is no indication that Infinite Corporation expressly assumed the labor contracts of Prestige Hotel or agreed to absorb its employees. The transaction appears to be a lease of premises and sale of assets, not a transfer of the employer-employee relationship.

Following the Sundowner ruling, Infinite Corporation, as a separate entity, is not legally bound to absorb the employees of Prestige Hotel. Prestige Hotel remains responsible for its employees. Unless there is evidence that the transaction was done in bad faith to avoid labor obligations or that Infinite Corporation expressly agreed to absorb the employees, the employees of Prestige Hotel cannot demand absorption by Infinite Corporation.

This is general legal information, not legal advice.