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Dear PAO,

To prevent further serious losses, my business partner and I are contemplating letting go of some of our employees/staff. Before we decide on this, what should we consider to avoid legal complications, especially since there is a possibility that some (if not all) will file a labor complaint?

Roni

Dear Roni,

In the case of Team Pacific Corporation, Federico M. Fernandez and Aurora Q. Garcia v. Layla M. Parente, GR 206789, July 15, 2020, the Supreme Court, through Senior Associate Justice Marvic M.V.F. Leonen, discussed the requisites of a valid retrenchment:

“Under Article 298 of the Labor Code, retrenchment is one of the authorized causes to dismiss an employee. It involves a reduction in the workforce, resorted to when the employer encounters business reverses, losses, or economic difficulties, such as ‘recessions, industrial depressions, or seasonal fluctuations.’ This is usually done as a last recourse when other methods are found inadequate.

“A valid retrenchment may only be exercised after the employer has proved compliance with the procedural and substantive requisites of valid retrenchment. Absent any of these, then the dismissal is illegal.

“The procedural requisites for a valid retrenchment are provided for in the Labor Code:

“ARTICLE 298. [283] 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, redundancy, retrenchment to prevent losses or the closing or cessation of operation of the establishment or undertaking unless the closing is for the purpose of circumventing the provisions of this Title, 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 retrenchment to prevent losses and in cases of closures or cessation of operations of establishment or undertaking not due to serious business losses or financial reverses, the separation pay shall be equivalent to one (1) month pay or at least one-half (1/2) month pay for every year of service, whichever is higher. A fraction of at least six (6) months shall be considered one (1) whole year.

“Thus, the employer must serve a written notice on the employee and the Department of Labor and Employment one month before the date of the dismissal, and pay the required amount of separation pay.

“Meanwhile, in La Consolacion College of Manila v. Pascua, this Court enumerated three substantive requisites for a valid retrenchment:

x x x

“As to the substantive requisites, an employer must first show ‘that the retrenchment is reasonably necessary and likely to prevent business losses which, if already incurred, are not merely de minimis, but substantial, serious, actual and real, or if only expected, are reasonably imminent as perceived objectively and in good faith by the employer.’ Second, an employer must also show ‘that [it] exercises its prerogative to retrench employees in good faith for the advancement of its interest and not to defeat or circumvent the employees’ right to security of tenure.’ Third, an employer must demonstrate ‘that [it] used fair and reasonable criteria in ascertaining who would be dismissed and who would be retained among the employees, such as status (i.e., whether they are temporary, casual, regular or managerial employees), efficiency, seniority, physical fitness, age, and financial hardship for certain workers.”

“Thus, for a valid retrenchment, the employer must show that: (a) retrenchment was a necessary measure to prevent substantial and serious business losses; (b) it was done in good faith and not to defeat employees’ rights; and (c) the employer was fair and reasonable in selecting the employees who will be retrenched.” (Emphasis supplied)

All these procedural and substantial requisites for a valid retrenchment must be present in order for a dismissal to be lawful. Otherwise, the retrenched employee may file a complaint for illegal dismissal.

We hope that we were able to answer your queries. Please be reminded that this advice is based solely on the facts you have narrated and our appreciation of the same. Our opinion may vary when other facts are changed or elaborated on.

Editor’s note: Dear PAO is a daily column of the Public Attorney’s Office. Questions for Chief Acosta may be sent to [email protected]