Retrenchment or downsizing

Summary

▪ Retrenchment is the reduction of work personnel usually due to poor financial returns, aimed to cut down costs for operation particularly on salaries and wages.

▪ To be valid, the authorized cause of retrenchment or downsizing should comply with prescribed standards.

▪ The law on retrenchment covers migrant workers.

▪ Burden of proof is on the employer to establish the validity of retrenchment.

1. Concept

Retrenchment is the termination of employment initiated by the employer through no fault of and without prejudice to the employees. It is resorted to during periods of business recession, industrial depression, seasonal fluctuations, or during lulls occasioned by lack of orders, shortage of materials, conversion of the plant to a new production program, or automation. (Lambert Pawnbrokers v. Binamira, G.R. No. 170464, 12 July 2010)

Retrenchment is the reduction of work personnel usually due to poor financial returns, aimed to cut down costs for operation particularly on salaries and wages. It is one of the economic grounds to dismiss employees and is resorted by an employer primarily to avoid or minimize business losses. (International Management Services v. Logarta, G.R. No. 163657, 18 April 2012)

Retrenchment is the reduction of personnel for the purpose of cutting down on costs of operations in terms of salaries and wages resorted to by an employer because of losses in operation of a business occasioned by lack of work and considerable reduction in the volume of business. (Manila Polo Club Employees’ Union [MPCEU] FUR-TUCP v. Manila Polo Club, Inc., G.R. No. 172846, 24 July 2013)

Retrenchment is normally resorted to by management during periods of business reverses and economic difficulties occasioned by such events as recession, industrial depression, or seasonal fluctuations. It is an act of the employer of reducing the work force because of losses in the operation of the enterprise, lack of work, or considerable reduction on the volume of business. Retrenchment is, in many ways, a measure of last resort when other less drastic means have been tried and found to be inadequate. A lull caused by lack of orders or shortage of materials must be of such nature as would severely affect the continued business operations of the employer to the detriment of all and sundry if not properly addressed. (Edge Apparel, Inc. v. NLRC, G.R. No. 121314, 12 February 1998)

In a nutshell, the law recognizes a company’s right to retrench employees when “made necessary or compelled by economic factors that would otherwise endanger its stability or existence.” Unarguably, retrenchment is only “a measure of last resort when other less drastic means have been tried and found to be inadequate.” (Lopez Sugar Corporation vs. Federation of Free Workers, G.R. Nos. 75700-01. 30 August 1990)

a. Management prerogative

Retrenchment is a management prerogative resorted to avoid or minimize business losses, and is recognized by Article 283 of the Labor Code. (International Management Services v. Logarta, supra.)

Art. 283. Closure of establishment and reduction of personnel.- The employer may also terminate the employment of any employee due to x x x retrenchment to prevent losses or the closing or cessation of operations of the establishment x x x by serving a written notice on the worker and the DOLE at least one month before the intended date thereof. x x x In case of retrenchment to prevent losses, the separation pay shall be equivalent to one (1) month pay or at least one-half month for every year of service whichever is higher. (Labor Code)

Article 283 (now Article 298) of the Labor Code, as amended, recognizes retrenchment as a right of the management to meet clear and continuing economic threats or during periods of economic recession to prevent losses. (Read-rite Philippines Inc. v. Francisco, G.R. No. 195457, 16 August 2017)

Retrenchment programs are purely business decisions within the purview of a valid and reasonable exercise of management prerogative. It is one way of downsizing an employer’s workforce and is often resorted to by the employer during periods of business recession, industrial depression, or seasonal fluctuations, and during lulls in production occasioned by lack of orders, shortage of materials, conversion of the plant for a new production program, or introduction of new methods or more efficient machinery or automation. It is a valid management prerogative, provided it is done in good faith and the employer faithfully complies with the substantive and procedural requirements laid down by law and jurisprudence. (International Management Services v. Logarta, supra.)

Essentially, the prerogative of an employer to retrench its employees must be exercised only as a last resort, considering that it will lead to the loss of the employees’ livelihood. It is justified only when all other less drastic means have been tried and found insufficient or inadequate. (Pepsi-Cola Products Philippines. Inc. v. Molon, G.R. No. 175002, 18 February 2013)

b. Authorized Cause

Retrenchment to prevent losses is one of the authorized causes for an employee’s separation from employment. (Read-rite Philippines Inc. v. Francisco, supra.)

c. Retrenchment vs. Closure

Retrenchment to prevent losses and closure not due to serious business losses are two separate authorized causes for terminating the services of an employee. (Sanoh Fulton Phils., Inc. v. Bernardo, G.R. No. 187214, 14 August 2013)

Closure of business, on one hand, is the reversal of fortune of the employer whereby there is a complete cessation of business operations and/or an actual locking-up of the doors of establishment, usually due to financial losses. Closure of business as an authorized cause for termination of employment aims to prevent further financial drain upon an employer who cannot pay anymore his employees since business has already stopped. (J.A.T. General Services v. NLRC, G.R. No. 148340, 26 January 2004)

On the other hand, retrenchment is reduction of personnel usually due to poor financial returns so as to cut down on costs of operations in terms of salaries and wages to prevent bankruptcy of the company. It is sometimes also referred to as down-sizing. Retrenchment is an authorized cause for termination of employment which the law accords an employer who is not making good in its operations in order to cut back on expenses for salaries and wages by laying off some employees. The purpose of retrenchment is to save a financially ailing business establishment from eventually collapsing. (Ibid.)

d. Permanent retrenchment vs. Temporary lay-off

Retrenchment is the severance of employment, through no fault of and without prejudice to the employee, which management resorts to during the periods of business recession, industrial depression, or seasonal fluctuations, or during lulls caused by lack of orders, shortage of materials, conversion of the plant to a new production program or the introduction of new methods or more efficient machinery, or of automation. In other words, lay-off is an act of the employer of dismissing employees because of losses in the operation, lack of work, and considerable reduction on the volume of its business. However, a lay-off would amount to dismissal only if it is permanent. When it is only temporary, the employment status of the employee is not deemed terminated, but merely suspended. (Innodata Knowledge Services, Inc. v. Inting, G.R. No. 211892, 06 December 2017)

1) Lay-off or permanent retrenchment

Retrenchment is used interchangeably with the term “lay-off.” (Arabit v. Jardine Pacific Finance, Inc., G.R. No. 181719, 21 April 2014)

Article 298 speaks of permanent retrenchment as opposed to temporary lay-off. (Innodata Knowledge Services, Inc. v. Inting, supra.)

e. Retrenchment vs. Redundancy

Retrenchment, in contrast to redundancy, is an economic ground to reduce the number of employees. In order to be justified, the termination of employment by reason of retrenchment must be due to business losses or reverses which are serious, actual and real. Not every loss incurred or expected to be incurred by the employer will justify retrenchment, since, in the nature of things, the possibility of incurring losses is constantly present, in greater or lesser degree, in carrying on the business operations. (Edge Apparel, Inc. v. NLRC, supra.)

Redundancy exists when the service capability of the workforce is in excess of what is reasonably needed to meet the demands of the business enterprise. A position is redundant where it had become superfluous. Superfluity of a position or positions may be the outcome of a number of factors such as over-hiring of workers, decrease in volume of business, or dropping a particular product line or service activity previously manufactured or undertaken by the enterprise. (3M Philippines, Inc. v. Yuseco, G.R. No. 248941, 09 November 2020)

Redundancy does not need to be always triggered by a decline in the business. Primarily, employers resort to redundancy when the functions of an employee have already become superfluous or in excess of what the business requires. Thus, even if a business is doing well, an employer can still validly dismiss an employee from the service due to redundancy if that employee’s position has already become in excess of what the employer’s enterprise requires. (Arabit v. Jardine Pacific Finance, Inc., supra.)

2. Requisites

For retrenchment, the three (3) basic requirements are:

1) Proof that the retrenchment is necessary to prevent losses or impending losses;

2) Service of written notices to the employees and to the Department of Labor and Employment at least one (1) month prior to the intended date of retrenchment; and,

3) Payment of separation pay equivalent to one (1) month pay, or at least one-half (1/2) month pay for every year of service, whichever is higher. (Sanoh Fulton Phils., Inc. v. Bernardo, supra.)

To effect a valid retrenchment, the following elements must be present:

1) The retrenchment is reasonably necessary and likely to prevent business losses which, if already incurred, are not merely de minimis, but substantial, serious and real, or only if expected, are reasonably imminent as perceived objectively and in good faith by the employer;

2) The employer serves written notice both to the employee/s concerned and the DOLE at least one month before the intended date of retrenchment;

3) The employer pays the retrenched employee separation pay in an amount prescribed by the Code;

4) The employer exercises its prerogative to retrench in good faith; and,

5) The employer uses fair and reasonable criteria in ascertaining who would be retrenched or retained. (Lambert Pawnbrokers v. Binamira, supra.)

Jurisprudential Standards

In addition, jurisprudence has set the standards for losses which may justify retrenchment, thus:

1) The losses incurred are substantial and not de minimis;

2) The losses are actual or reasonably imminent;

3) The retrenchment is reasonably necessary and is likely to be effective in preventing the expected losses; and,

4) The alleged losses, if already incurred, or the expected imminent losses sought to be forestalled, are proven by sufficient and convincing evidence. (Sanoh Fulton Phils., Inc. v. Bernardo, supra.)

DOLE Standards

The standards are:

1) The retrenchment must be reasonably necessary and likely to prevent business losses;

2) The losses, if already incurred, are not merely de minimis, but substantial, serious, actual and real, or if only expected, are reasonably imminent;

3) The expected or actual losses must be proved sufficient and convincing evidence;

4) The retrenchment must be in good faith for the advancement of its interest and not to defeat or circumvent the employees’ right to security of tenure; and,

5) There must be fair and reasonable criteria in ascertaining who would be dismissed and who would be retained among the employees, such as status, efficiency, seniority, physical fitness, age, and financial hardship for certain workers. (DOLE Department Order No. 147, Series of 2015)

a. Substantial loss

Not every loss incurred or expected to be incurred by an employer can justify retrenchment. The employer must prove, among others, that the losses are substantial and that the retrenchment is reasonably necessary to avert such losses. (Sanoh Fulton Phils., Inc. v. Bernardo, supra.)

To justify retrenchment, the “loss” referred to in Art. 283 cannot be just any kind or amount of loss; otherwise, a company could easily feign excuses to suit its whims and prejudices or to rid itself of unwanted employees. (Somerville Stainless Steel Corporation v. NLRC, G.R. No. 125887, 11 March 1998)

Firstly, the losses expected should be substantial and not merely de minimis in extent. If the loss purportedly sought to be forestalled by retrenchment is clearly shown to be insubstantial and inconsequential in character, the bona fide nature of the retrenchment would appear to be seriously in question. (Lopez Sugar Corporation vs. Federation of Free Workers, supra.)

Secondly, the substantial loss apprehended must be reasonably imminent, as such imminence can be perceived objectively and in good faith by the employer. There should, in other words, be a certain degree of urgency for the retrenchment, which is after all a drastic recourse with serious consequences for the livelihood of the employees retired or otherwise laid off. (Ibid.)

Thirdly, because of the consequential nature of retrenchment, it must be reasonably necessary and likely to effectively prevent the expected losses. The employer should have taken other measures prior or parallel to retrenchment to forestall losses, i.e., cut other costs other than labor costs. An employer who, for instance, lays off substantial numbers of workers while continuing to dispense fat executive bonuses and perquisites or so-called “golden parachutes,” can scarcely claim to be retrenching in good faith avoid losses. To impart operational meaning to the constitutional policy of providing “full protection” to labor, the employer’s prerogative to bring down labor costs by retrenching must be exercised essentially as a measure of last resort, after less drastic means — e.g., reduction of both management and rank-and-file- bonuses and salaries, going reduced time, improving manufacturing efficiencies, trimming of marketing and advertising costs, etc. — have been tried and found wanting. (Ibid.)

Lastly, but certainly not the least important, alleged losses if already realized, and the expected imminent losses sought to be forestalled, must be proved by sufficient and convincing evidence. The reason for requiring this quantum of proof is readily apparent: any less exacting standard of proof would render too easy the abuse of this ground for termination of services of employees. (Ibid.)

1) Proof

The losses must be supported by sufficient and convincing evidence and the normal method of discharging this is by the submission of financial statements duly audited by independent external auditors. (Sanoh Fulton Phils., Inc. v. Bernardo, supra.)

The employer must prove compliance with all the foregoing requirements. Failure to prove the first requirement will render the retrenchment illegal and make the employer liable for the reinstatement of its employees and payment of full backwages. (Manila Polo Club Employees’ Union [MPCEU] FUR-TUCP v. Manila Polo Club, Inc., supra.)

b. 30-day advance written notices to DOLE and employees

The purpose of the one-month prior notice rule is to give DOLE an opportunity to ascertain the veracity of the cause of termination. Non-compliance with this rule clearly violates the employee’s right to statutory due process. (Shimizu Phils. Contractors, Inc. v. Callanta, G.R. No. 165923, 29 September 2010)

To dispense with such notice would not only disregard a clear labor law provision that affords protection to an employee, but also defeats its very purpose which is to give the DOLE the opportunity to ascertain the veracity of the alleged authorized cause of termination. In fact, the Supreme Court has considered as a fatal error the employer’s failure to give a written notice to the DOLE as required under Article 283 of the Labor Code. (Ocean East Agency, Corporation v. Lopez, G.R. No. 194410, 14 October 2015)

c. Separation pay

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. (Edge Apparel, Inc. v. NLRC, supra.)

d. Good faith on employer

In one case, the Supreme Court found that the employer implemented its retrenchment program in good faith because it undertook several measures in cutting down its costs, to wit, withdrawing certain privileges of the employer’s executives and expatriates; limiting the grant of additional monetary benefits to managerial employees and cutting down expenses; selling of company vehicles; and infusing fresh capital into the company. Th complainant-employee did not attempt to refute that the employer adopted these measures before implementing its retrenchment program. (Shimizu Phils. Contractors, Inc. v. Callanta, supra.)

Retrenchment is, therefore, not a tool to be wielded and used nonchalantly. To justify retrenchment, it “must be due to business losses or reverses which are serious, actual and real.” (AM-Phil Food Concepts, Inc. v. Padilla, supra.)

e. Fair and reasonably criteria

Fair and reasonable criteria may include but are not limited to the following:

1) Less preferred status (e.g., temporary employee);

2) Efficiency; and

3) Seniority. (Yulo v. Concentrix Daksh Services Philippines, Inc., G.R. No. 235873, 21 January 2019)

The presence of these criteria used by the employer shows good faith on its part and is evidence that the implementation of redundancy was painstakingly done by the employer in order to properly justify the termination from the service of its employees. (Ibid.)

In one case, the criteria or standard used in selecting the employees to be retrenched was work efficiency which passed the test of fairness and reasonableness. (Shimizu Phils. Contractors, Inc. v. Callanta, supra.)

3. Covers Migrant Workers

Philippine Law recognizes retrenchment as a valid cause for the dismissal of a migrant or overseas Filipino worker under Article 283 of the Labor Code. (International Management Services v. Logarta, supra.)

4. Burden of proof: on employer

In termination cases either by retrenchment or closure, the burden of proving that the termination of services is for a valid or authorized cause rests upon the employer. (Sanoh Fulton Phils., Inc. v. Bernardo, supra.)

The employer must prove the requirements for a valid retrenchment by clear and convincing evidence; otherwise, said ground for termination would be susceptible to abuse by scheming employers who might be merely feigning losses or reverses in their business ventures in order to ease out employees. (Pepsi-Cola Products Philippines. Inc. v. Molon, supra.)

References

1987 Philippine Constitution

Presidential Decree No. 442, a.k.a. Labor Code of the Philippines

DOLE Department Order No. 147, Series of 2015

▪ Jurisprudence or Supreme Court Decisions (as cited above)

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Disclaimer: All information is for educational and general information only. These should not be taken as professional legal advice or opinion. Please consult a competent lawyer to address your specific concerns. Any statements or opinions of the author are solely his own and do not reflect that of any organization he may be connected.

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