Retrenchment – Laying Off Employees Due to Business Losses.

What is retrenchment?

Retrenchment is an authorized cause for termination of employment found under Article 298 of the Labor Code. As with other authorized causes, it is initiated by the employer and will be held as valid even when there is no fault on the part of the employee.

By definition, retrenchment is used interchangeably with the term "lay-off", according to the Supreme Court (SC). It is an act of the employer of dismissing employees because of losses in the operation of a business, lack of work, and considerable reduction on the volume of his business.[1]

In simple words, how is retrenchment different from redundancy?

Redundancy exists when the service capability of the workforce is in excess of what is reasonably needed to meet the demands of the enterprise.[2] In other words, the employee’s position is considered superfluous or unneeded. On the other hand, retrenchment is based on economic ground – business losses. 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.[3]

What are the elements for retrenchment to be a valid ground for termination of employment?

To be a valid ground for termination, the following must be present:[4]

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 by 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.

May any loss incurred or expected to be incurred justify resort to retrenchment?

The answer is in the negative. In Edge Apparel, Inc. v. NLRC[5], the SC had the occasion to say the following:

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.

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.

Further, retrenchment is, in many ways, a measure of last resort when other less drastic means have been tried and found to be inadequate.

Must the employee be notified beforehand?

Yes. Procedurally, in order to validly effect retrenchment, the employer must observe two other requirements, viz.: (a) service of a prior written notice of at least one month [prior to the intended date of retrenchment] on the workers and the DOLE, and (b) payment of the due separation pay.[6]

How is separation pay computed?

An employee terminated due to retrenchment shall be paid by the employer a separation pay equivalent to 1 month pay or at least 1/2 month pay for every year of service, whichever is higher, a fraction of 6 months service is considered as 1 whole year.[7] The computation of separation pay of an employee shall be based on his/her latest salary rate.[8]

See related posts:

"Dismissal on the ground of redundancy"

"Due process in employee termination"

You may also check the government's official publication on Workers Statutory and Monetary Benefits.

[1] Arabit v. Jardine Pacific Finance, Inc., G.R. No. 181719, April 21, 2014. [2] Ocean East Agency Corporation v. Lopez, G.R. No. 194410, October 14, 2015. [3] Edge Apparel, Inc. v. National Labor Relations Commission (NLRC), G.R. No. 121314, February 12, 1998. [4] Section 5.4 (c) - Standards on Authorized Causes, Department of Labor and Employment (DOLE) Department Order No. 147-15, Series of 2015, Amending the Implementing Rules and Regulations of Book VI of the Labor Code, as amended. [5] Supra, note 3. [6] Id. [7] Supra, note 4 at Sec. 5.5 - Payment of Separation Pay. [8] DOLE Bureau of Working Conditions. 2019 Handbook on Worker's Statutory Monetary Benefits.

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