Recent Puerto Rico Court of Appeals Rulings Provide Guidance Regarding What Constitutes a Transfer of Going Business

Two recent rulings from the Puerto Rico Court of Appeals provide guidance as to what constitutes the transfer of a going business vis-à-vis the closing of a business, to determine whether the employer is liable for payment of severance to employees who are discharged within the context of those transactions. 

In Quintero v. Bestov Broadcasting, Inc., plaintiff was a sales executive who worked at Radio Puerto Rico, a radio station owned and operated by Bestov Broadcasting, Inc. (“Bestov”).  Due to its economic difficulties, Bestov entered into a three-year lease with an option to buy agreement (“Agreement”) with Boricua Broadcasting Corp. (“Boricua”), to lease its facilities, equipment and on-air radio time. Pursuant to the Agreement, Bestov retained the control over its policies, as well as the authority and power over its operations and programming, including the right to refuse or cancel programming or advertising that did not comply with Bestov’s policies.  As the Agreement required Boricua hire its own staff and pay their salaries, Bestov discharged all of Radio Puerto Rico’s employees.  Boricua, in turn, hired several of Bestov’s employees, although plaintiff was not amongst them.  Plaintiff sued Bestov alleging unjust dismissal and claiming severance.  In response, Bestov alleged that it had just cause to dismiss plaintiff because its operations had partially or completely closed due to its financial difficulties. 

The Court of Appeals looked at the interplay between Act 80 and the labor code to determine whether Bestov had established that plaintiff’s termination of employment should be deemed for just cause.  Puerto Rico Act 80 of May 30, 1976 (“Act 80”) provides that any person hired for an indefinite period of time, and discharged without just cause, is entitled to receive a severance payment, in addition to any wages owed.  The law also provides that just cause exists for the discharge of an employee in the case of a full, temporary or partial closing of the operations of the establishment.  However, in the case of transfer of a going business, if the buyer chooses not to continue with the services of all or any of the employees, and hence does not become their employer, the former employer shall be liable for the compensation. 

In finding that Bestov’s business did not cease to exist, the Court noted that Bestov temporarily leased its facilities and equipment to Boricua, and continued exercising authority over the programming and operations of the business.  Further, Boricua hired all of Bestov’s workforce, except plaintiff, and the parties executed an agreement to lease with an option to buy, to guarantee the continuity of the identity of the business.  Accordingly, the Court found, that the discharge constituted a transfer of going business and, as such, Bestov was liable for plaintiff’s severance. 

On the very next day, the Court of Appeals decided the case of Meléndez Martínez v. M. Cuebas, Inc., this time finding just cause existed for plaintiff’s dismissal due to the employer’s closing of business operations.  In this case, plaintiff, a sales representative at M. Cuebas, Inc. (“Cuebas”), was discharged when Cuebas sold part of its assets, including products and machinery, to Bohío International Corporation (“Bohío”).  The letter of intent setting forth the terms and conditions of the sale of assets in relevant part provided: “[t]his sale is being negotiated upon Seller's unequivocal decision to close its operations.”  

The Court found that Cuebas’ asset sales did not constitute a transfer of going business, but only a sale of assets.  Unlike in the case of Quintero v. Bestov Broadcasting, Inc., here, the purchaser did not use Cuebas’ plant nor its workforce, equipment, or production method, nor did the seller continue supervising the operations of the business.  Further, the purchaser did not operate Cuebas’ business during the transition period nor did it acquire Cuebas’ business name.  Accordingly, the Court found that Cuebas had engaged in a full closing of its operations and, as such, plaintiff’s employment was terminated for just cause.

Although the above rulings entered by the Puerto Rico Court of Appeals are not precedent and, therefore, not binding, they are consistent with Puerto Rico statutory law.  Under the law, where an employer leases its business, but retains control of it, for example, by forcing the lessee to apply its policies, this transaction will most likely be deemed a transfer of a going business.  Under such a transfer, the employer that is transferring the business generally is liable for severance under Act 80, for the discharge of any employee.  In contrast, where the employer sells some or all of its assets to another company, and retains no control over the buyer’s business policies and practices, such transaction will most likely be considered a closing of operations, for which the employer generally would not be liable for severance under Act 80.  As illustrated by these two cases, employers who are considering discharging an employee due to either the selling or leasing of the business should be mindful of any attendant obligations arising under Puerto Rico’s employment laws for payment of severance.

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.