Installation of Labor-saving Devices

1. Concept

(m) “Installation of Labor-saving Devices” refers to the reduction of the number of workers in any workplace made necessary by the introduction of laborsaving machinery or devices. (DOLE DEPARTMENT ORDER NO. 147, SERIES OF 2015, Rule I-A, Section 4; henceforth, “DOLE DO-147”)

The installation of labor-saving devices contemplates the installation of machinery to effect economy and efficiency in its method of production. (Edge Apparel, Inc. v. NLRC, G.R. No. 121314, 12 February 1998)

a. Legal basis

1) Labor Code

Art. 283. [DOLE Renumbered: 298] Closure of establishment and reduction of personnel. – The employer may also terminate the employment of any employee due to the installation of labor-saving devices, x x x by serving a written notice on the workers and the Ministry of Labor and Employment at least one (1) month before the intended date thereof. In case of termination due to the installation of labor-saving devices x x x the worker affected thereby shall be entitled to a separation pay equivalent to at least his one (1) month pay or to at least one (1) month pay for every year of service, whichever is higher. x x x A fraction of at least six (6) months shall be considered one (1) whole year. (PRESIDENTIAL DECREE NO. 442, a.k.a. LABOR CODE OF THE PHILIPPINES)

2) Omnibus Rules Implementing the Labor Code

SECTION 9. Termination pay. — (a) An employee shall be entitled to termination pay equivalent to at least one month’s salary for every year of service a fraction of at least six (6) months being considered as one whole year, in case of termination of his employment due to the installation of labor-saving devices… (Title I, Book 6, Omnibus Rules Implementing the Labor Code)

3) DOLE Department Order No. 147, Series of 2015

DOLE Department Order No. 147, Series of 2015, reiterates installation of labor-saving devices as an authorized for separating an employee under Section 5.4(a), Rule I-A.

b. Management prerogative

The law authorizes an employer, like the herein petitioner, to terminate the employment of any employee due to the installation of labor saving devices. The installation of these devices is a management prerogative, and the courts will not interfere with its exercise in the absence of abuse of discretion, arbitrariness, or maliciousness on the part of management, as in this case. (Magnolia Products Corporation v. NLRC, G.R. No. 114952, 29 January 1996)

Nevertheless, case law qualifies that the exercise of such prerogative “must not be in violation of the law, and must not be arbitrary or malicious.” (Yulo v. Concentrix Daksh Services Philippines, Inc., G.R. No. 235873, January 21, 2019, Per Perlas-Bernabe)

Agustilo v. CA, G.R. No. 142875, September 7, 2001, Per Mendoza, J.:

• Petitioner Edgar Agustilo was hired on July 1, 1979 by respondent San Miguel Corporation (SMC) as a temporary employee at its Mandaue Brewery in Mandaue, Cebu. On October 1, 1979, he was made permanent and designated as a safety clerk. On May 1, 1982, he was transferred to the Engineering Department of the SMC Mandaue Brewery as an administrative secretary. Sometime in 1991, SMC Mandaue Brewery adopted a policy that managers would no longer be assigned secretaries and that only director level positions may be given secretaries. As a result, on August 5, 1991, petitioner’s position as administrative secretary was abolished and he was transferred to the company’s Plant Director’s Office-Quality Improvement Team (PDO QIT).

• On February 7, 1992, petitioner was informed that 584 employees, including him, would be retrenched due to the modernization program of the company. Petitioner was told that his services would be terminated effective March 15, 1992 and that he would be paid his benefits 30 days after he was cleared of all accountabilities. In a letter, dated February 13, 1992, SMC notified the DOLE of its modernization program.

• We hold that the Court of Appeals correctly found petitioner’s separation from work to be due to a valid reason, i.e., the installation of labor saving devices. As the appeals court stated:

• In the case at bar, We are of the opinion, and so hold that petitioners have demonstrated before the Labor Arbiter by clear and convincing evidence that the Mandaue plant where private respondent used to work had instituted a modernization program which consisted of, among others, “a 45 million cases per year capacity brewhouse; a 1,400 HI per hour filtration system; a complete cellaring system with six cylindro-conical tanks at 10,000 HI each to include other tankages and accessories; a 1,000 bottles per minute liter bottling line; and support systems such as three 1,000 HP NH3 compressors with two liquid overfeed NH3 separators; an 80,000 lbs. per hour water tube steam generator and a 700-HO air compressor” the operations of which are “all automated using microprocessor and electronic process controllers and instrumentation systems through intelligent interfacing with Siemens Industrial computers.” All of these high-technology innovations, at the cost of 2.6 billion pesos, truly render the functions of the Plant Director’s Office Quality Control Unit, where private respondent was transferred after his post as Administrative Secretary to the plant manager was validly abolished, upon management prerogative that the same “did not add value to the organization.”

Related: Management Prerogative

c. Automation

The institution of “new methods or more efficient machinery, or of automation” is technically a ground for termination of employment by reason of installation of labor-saving devices. (Edge Apparel, Inc. v. NLRC, supra.)

2. DOLE Standards

5.4 Standards on Authorized Causes. An employer may terminate an employee for any of the following grounds:

(a) Installation of Labor-saving Devices. – To be a valid ground for termination, the following must be present:

1. There must be introduction of machinery, equipment or other devices;

2. The introduction must be done in good faith;

3. The purpose for such introduction must be valid such as to save on cost, enhance efficiency and other justifiable economic reasons;

4. There is no other option available to the employer than the introduction of machinery, equipment or device and the consequent termination of employment of those affected thereby; and

5. There must be fair and reasonable criteria in selecting employees to be terminated (DOLE-BLR DEPARTMENT ORDER NO. 147-15 [2015], Rule I-A)

a. Machinery, equipment or other devices

The institution of “new methods or more efficient machinery, or of automation” is technically a ground for termination of employment by reason of installation of labor-saving devices but where the introduction of these methods is resorted to not merely to effect greater efficiency in the operations of the business but principally because of serious business reverses and to avert further losses, the device could then verily be considered one of retrenchment. (Edge Apparel, Inc. v. NLRC [1998], supra.)

b. Good faith

Good faith… is an intangible and abstract quality with no technical meaning or statutory definition, and it encompasses, among other things, an honest belief, the absence of malice and the absence of design to defraud or to seek an unconscionable advantage. An individual’s personal good faith is a concept of his own mind and, therefore, may not conclusively be determined by his protestations alone.  It implies honesty of intention, and freedom from knowledge of circumstances which ought to put the holder upon inquiry. The essence of good faith lies in an honest belief in the validity of one’s right, ignorance of a superior claim, and absence of intention to overreach another. (PNB v. De Jesus, G.R. No. 149295, September 23, 2003, Per Vitug, J.)

In ascertaining good faith, or the lack of it, which is a question of intention, courts are necessarily controlled by the evidence as to the conduct and outward acts by which alone the inward motive may, with safety, be determined. Good faith, or want of it, is capable of being ascertained only from the acts of one claiming its presence, for it is a condition of the mind which can be judged by actual or fancied token or signs. Good faith, or want of it, is not a visible, tangible fact that can be seen or touched, but rather a state or condition of mind which can only be judged by actual or fancied token or signs. Good faith connotes an honest intention to abstain from taking unconscientious advantage of another. (Sps. Miles v. Bautista, G.R. No. 209544, November 22, 2017, Per Tijam, J.)

Good faith is an honest intention to abstain from taking any unconscientious advantage of another, even through the forms or technicalities of the law, together with an absence of all information or belief of fact which would render the transaction unconscientious. In business relations, it means good faith as understood by men of affairs. (Manaloto v. Veloso III, G.R. No. 171365, October 6, 2010, Per Leonardo-De Castro, J.)

c. Valid purpose

Magnolia Daairy Products Corporation v. NLRC, G.R. No. 114952, January 29, 1996, Per Francisco, J.)

• [The deemed employer by the labor courts due to a finding of labor-only contracting was held to have exercised installation of labor-saving devices by virtue of installing automated machines for cleaning. The complainant as a cleaning aide.]

• The law authorizes an employer, like the herein petitioner, to terminate the employment of any employee due to the installation of labor saving devices. The installation of these devices is a management prerogative, and the courts will not interfere with its exercise in the absence of abuse of discretion, arbitrariness, or maliciousness on the part of management, as in this case. Nonetheless, this did not excuse petitioner from complying with the required written notice to the employee and to the Department of Labor and Employment (DOLE) at least one month before the intended date of termination. This procedure enables an employee to contest the reality or good faith character of the asserted ground for the termination of his services before the DOLE.

e. No other option available to employer

Editor’s Note: Installation of labor-saving devices is a management prerogative. Otherwise stated, the decision to install labor-saving device does not have to be based on any condition precedent that would constrain the employer implement labor-saving devices. Thus, this standard under DOLE DO-147 requiring an employer to have “no other operation available o the employer than the introduction of machinery, equipment or device” is not supported by law and jurisprudence. It is respectfully submitted DOLE re-evaluate having this standard. DOLE DO-147 cites Philippine Sheet Metal Workers’ Union (CLO) v. Court of Industrial Relations, En Banc, G.R. No. L-2028, April 28, 1949; however, there is no such standard required under that case as, in fact, it acknowledged that labor-saving device is valid exercise of the employer’s rights. See case digest below.

Philippine Sheet Metal Workers’ Union (CLO) v. Court of Industrial Relations, En Banc, G.R. No. L-2028, April 28, 1949, Per Reyes, J.:

• It appearing that there has been fair hearing and that there is ample evidence to support the conclusions of fact of the lower court, we would have no grounds for interfering with those conclusions. And these make it clear that there was real justification for reducing the number of workers in respondent company’s factory, such a measure having been made necessary by the introduction of machinery in the manufacture of its products, and that the company cannot be charged with discrimination in recommendating the dismissal of the fifteen laborers named in the above list since their selection was made by a committee composed of both officers and employees who took no account of the laborers’ affiliation to the unions and only considered their proven record.

• There can be no question as to the right of the manufacturer to use new labor-saying devices with a view to effecting more economy and efficiency in its method of production.

• The right to reduce personnel should, of course, not be abused. It should not be made a pretext for easing out laborers on account of their union activities. But neither should it be denied when it is shows that they are not discharging their duties in a manner consistent with good discipline and the efficient operation of an industrial enterprise.

La compañia tiene derecho de despedir a sus empleados u obreros. Si bien este derecho esta sujeto a la regulacion del Estado, en su normal ejercicio no se inmiscuye la ley. El patrono paga el jornal de sus obreros por su trabajo, y es logico y justo que el mismo tenga derecho a esperar de los mismos lealtad y fiel cumplimiento de sus obligaciones. No es el proposito de la ley obligar al principal a retener en su servicio a un obrero cuando no recibe de este trabajo adecuado, deligencia (diligencia) y buen comportamiento, o cuando su continuacion en el empleo es claramente opuesta a los intereses de su patrono, porque la ley al proteger los derechos del obrero no autoriza la opresion ni la destruccion del principal.

[Unofficial translation via Google Translate: The company has the right to dismiss its employees or workers. While this right is subject to state regulation, the law does not interfere with its normal exercise. The employer pays the wages of its workers for their labor, and it is logical and fair that the employer has the right to expect loyalty and faithful fulfillment of their obligations. It is not the purpose of the law to compel the employer to retain a worker in its service when it does not receive adequate work, diligence, and good conduct from that worker, or when its continued employment is clearly contrary to the employer’s interests, because the law, in protecting the rights of the worker, does not authorize the oppression or destruction of the employer.]

f. Fair and reasonable criteria

In authorized cause separation, the employer has to develop a termination plan using fair and reasonable criteria as to who of the employees will be affected. As to what constitutes a fair and reasonable criteria will depend on the employer.

Editor’s Note: Deciding on what will constitute as the fair and reasonable criteria is a management prerogative. One employer may choose competence, proficiency, and efficiency; while others may choose reliability, collaborative, and experience. Or, it can be any other criteria so long as they are fair and reasonable under the circumstances. Under current labor laws, there is no requirement that the employer has to absolutely apply Last-in and First-Out. Thus, DOLE DO-147’s requirement that the “Last-In, First-Out Rule” does not find support in labor laws and jurisprudence. DOLE DO-147 cites Maya Farms Employees Organization v. NLRC, G.R. No. 106256, December 28, 1994; however, that case was decided based on a Collective Bargaining Agreement between the employer and the union/employees, which required implementation of Last-In-First-Out (LIFO) in cases of lay-off or retrenchment. Thus, such rule only finds application if there is such a stipulation between the employer and the employees. Such a rule cannot be used for general application as what DOLE DO-147 is prescribing. It is respectfully submitted DOLE re-evaluate having this standard.  See case digest below.

Maya Farms Employees Organization v. NLRC, G.R. No. 106256, December 28, 1994, Per Kapunan, J.:

• The NLRC correctly held that private respondents did not violate the LIFO rule under Section 2, Article III of the CBA which provides:

Sec. 2. LIFO RULE. In all cases of lay-off or retrenchment resulting in termination of employment in the line of work, the

Last-in-First-Out (LIFO) Rule must always be strictly observed.

• It is not disputed that the LIFO rule applies to termination of employment in the line of work. Verily, what is contemplated in the LIFO rule is that when there are two or more employees occupying the same position in the company affected by the retrenchment program, the last one employed will necessarily be the first to go.

3. Due Process

For the authorized cause of installation of labor-saving device, due process requires observance of the following:

1) Authorized cause: installation of labor-saving device; and

2) Authorized cause procedure.

a. Authorized cause

The authorized cause of disease should be actual and/or duly established or proven. It should not be hypothetical or speculative.

1) No proof of financial loss required

Just like installation of labor-saving devices, the ground of redundancy does not require the exhibition of proof of losses or imminent losses. In fact, of all the statutory grounds provided in Article 283 of the Labor Code, it is only retrenchment which requires proof of losses or possible losses as justification for termination of employment. (Coats Manila Bay, Inc. v. Ortega, G.R. No. 172628, February 13, 2009, Per Tinga, J.)

b. Authorized cause procedure

If there is a good faith legitimate business reason for installation of labor-saving device, the employer is required to comply with authorized cause procedure to comply with the due process requirements.

NB: Employees who are severed from employment due to an authorized cause is entitled to separation pay.

5.5 Payment of Separation Pay. Separation pay shall be paid by the employer to an employee terminated due to installation of labor-saving devices x x x

An employee terminated due to installation of labor-saving devices x x x  shall be paid by the employer a separation pay equivalent to at least one (1) month pay or at least one (1) month pay for every year of service, whichever is higher, a fraction of six (6) months service is considered as one (1) whole year. (DOLE DO-147, Rule I-A)

More: Authorized Cause Procedure | Separation Pay

c. Non-compliance of due process

Non-compliance with the authorized cause procedure requirements results in:

1) A defective termination; and

2) Nominal damages against the employer.

More: Authorized Cause Procedure

4. Burden of proof: on employer

The burden of proving compliance with these requisites is on the employer. (Fuji Television Network, Inc. v. Espiritu, G.R. No. 204944-45, 03 December 2014)

The burden is on the employer to prove by substantial evidence the factual and legal basis for the dismissal of its employees… (Abbott Laboratories [Philippines], Inc. v. Torralba, supra.)

The burden of proving the validity of the dismissal rests on the employer. As such, the employer must prove that the requisites for a valid dismissal due to a disease have been complied with. In the absence of the required certification by a competent public health authority, this Court has ruled against the validity of the employee’s dismissal. (Manly Express Inc. v. Payong, Jr., G.R. No. 167462, 25 October 2005)

5. Distinguished

NB: Distinguishing authorized causes from each other is critical for purposes of computing separation pay.

See: Separation Pay

a. Labor-saving device v. Redundancy

The installation of labor-saving devices contemplates the installation of machinery to effect economy and efficiency in its method of production. (Edge Apparel, Inc. v. NLRC, G.R. No. 121314, February 12, 1998, Per Vitug, J.)

Redundancy exists where the services of an employee are in excess of what would reasonably be demanded by the actual requirements of the enterprise.[11] A position is redundant when it is superfluous, and superfluity of a position or positions could be the result of a number of factors, such as the overhiring of workers, a decrease in the volume of business or the dropping of a particular line or service previously manufactured or undertaken by the enterprise.[12] An employer has no legal obligation to keep on the payroll employees more than the number needed for the operation of the business. (Edge Apparel, Inc. v. NLRC [1998], supra.)

Related: Redundancy

b. Labor-saving device v. Retrenchment

Edge Apparel, Inc. v. NLRC, G.R. No. 121314, February 12, 1998, Per Vitug, J.:

• The institution of “new methods or more efficient machinery, or of automation” is technically a ground for termination of employment by reason of installation of labor-saving devices but where the introduction of these methods is resorted to not merely to effect greater efficiency in the operations of the business but principally because of serious business reverses and to avert further losses, the device could then verily be considered one of retrenchment.

• The payment of separation pay would be due when a dismissal is on account of an authorized cause. The amount of separation pay depends on the ground for the termination of employment. A dismissal due to the installation of labor saving devices, redundancy (Article 283) or disease (Article 284), entitles the worker to a separation pay equivalent to “one (1) month pay or at least one (1) month pay for every year of service, whichever is higher.” When the termination of employment is due to retrenchment to prevent losses, or to closure or cessation of operations of establishment or undertaking not due to serious business losses or financial reverses, the separation pay is only an equivalent of “one (1) month pay or at least one-half (1/2) month pay for every year of service, whichever is higher.” In the above instances, a fraction of at least six (6) months is considered as one (1) whole year.

• In this case, the Labor Arbiter and the NLRC both concluded that there had been a valid ground for the retrenchment of private respondents. The documents presented in evidence were found to “conclusively show that (petitioner) suffered serious financial losses.”  The general standards or elements needed for the retrenchment to be valid — i.e., that the losses expected are substantial and not merely de minimis in extent; that the expected losses are reasonably imminent such as can be perceived objectively and in good faith by the employer; that the retrenchment is reasonably necessary and likely to effectively prevent the expected losses; and that the imminent losses sought to be forestalled are substantiated — were adequately shown in the present case. The findings of the Labor Arbiter and the NLRC would negate any impression that petitioner was guilty of bad faith or misdoing in its retrenchment policy…

Related: Retrenchment