Puerto Rico Supreme Court Favors Employers on Business Reorganization and Unjustified Dismissal

In a recent case issued by the Supreme Court of Puerto Rico (“the Court”), the Court addressed the standard and level of proof that must be presented by employers when raising as an affirmative defense a corporate reorganization. In Segarra Rivera vs. International Shipping Agency, 2022 T.S.P.R. 33, 208 D.P.R. ____ (Mar. 23, 2022), the Court ruled that in cases involving unjustified dismissal claims under Act No. 80 of May 30, 1976 (Act 80), the employer is not required to present evidence in a specific way of a bona fide accreditation in order to lawfully prove the existence of a reorganization process or business plan. Accordingly, it should be enough for employers to certify and prove that the business reorganization implemented a valid managerial decision and was not made on a mere whim.

Plaintiff filed suit against his employer for unjustified dismissal, age discrimination and damages, after thirty-six employees were dismissed due to a company reorganization. According to plaintiff, the company was using the reorganization and workforce reduction as a sham to justify the dismissals. The company, in turn, alleged that they had dismissed the employees pursuant to a bona fide reorganization. Specifically, the company had, because of business reasons, changed the type of service they offered to the public. As a result, the company needed to restructure the workforce to align with their updated services and operations. In support, the employer offered evidence to prove the bona fide nature of the reorganization, specifically providing documentation of income decrease due to the loss of their main customers. The company further presented evidence of having lost a major client that accounted for 65%-75% of their business traffic.

The Court, in introducing its discussion of the Act 80 claim, recognized that our legal system does not prohibit employers from dismissing their employees but that it seeks to protect employee rights only against an employer’s arbitrary actions. Act 80 specifically provides just cause for dismissals related to total, temporary or partial closure of operations and reorganization changes in the services rendered to the public, as well as downsizing made necessary by a reduction in the volume of production, sales, or profit or for the purpose of increasing competitivity or productivity.1

The Court further explained that Act 80 acknowledges there are circumstances in the operation and management of a business that may merit dismissing an employee for just cause. Employers may, therefore, lawfully dismiss their employees in the context of a company reorganization, provided that the reorganization is bone fide and not based on a mere whim. In such cases, employers may optimize resources by eliminating job positions, creating new ones, or merging preexisting roles. A bona fide accreditation in these situations means that employers cannot simply claim the existence of a reorganization to automatically justify employment dismissals; rather, the employer should provide supporting evidence of the implemented reorganization plan as well as its usefulness towards meeting the employer’s stated purpose. A decrease in production, sales, or profits in a company — if the decrease is substantial enough that it threatens the continuity of the business — can also support employers that take necessary measures to limit expenses, such as reducing the workforce. When claiming such a defense, an employer must provide evidence of the decrease in production and establish the causal relationship between the economic circumstances and the need for the employee dismissal. In this case, the Court held that the undisputed facts and the evidence provided by the employer showed there was no material dispute over the employee’s dismissal, since it resulted from a bona fide reorganization, to wit: a change in services rendered to the public, in response to a substantial decline in profits and the economic crisis the company was facing.

In so reasoning, the Court reiterated its previous ruling in SLG Zapata v. JF Montalvo, 189 D.P.R. 414 (2013), stating a court’s function is not to administer or advise employers on how to manage their companies, as long as their decisions are not motivated by discriminatory reasons and are not made arbitrarily. The opinion further clarifies that to demonstrate just cause for dismissal, it is sufficient for the employer to provide evidence of a valid reason for termination, such as a business reorganization. Thus, the obligation imposed by Act 80 is not subject to proving the existence of a business restructuring plan in a specific way. It’s sufficient for employers to demonstrate that the action responded to a valid managerial decision under the circumstances and was not arbitrary. The PRSC then ruled the company had showed it carried out a business reorganization to handle an economic crisis and adapt to the situation in a competitive way. Said reorganization had clearly changed the services rendered at the company.

Hon. Justice Estrella Martínez dissented (Hon. Justices Oronoz Rodríguez and Colón Pérez joining), contending that the Court’s ruling relaxes the necessary supporting evidence that an employer must present to justify a dismissal under the assumption of a business reorganization, giving employers a blank slate to justify workforce reductions on the pretext of a reorganization.

See Footnotes

P.R. Laws Ann. tit. 29 § 185b(d)(e)(f).

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.