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Retrenchment Philippines is when employees are separated from work to prevent company bankruptcy or losses.
Retrenchment is often used as the reason for Termination in the Philippines.
However, Retrenchment must follow certain rules so that it is valid [Art 283 Philippine Labor Code]:
- When Termination under Retrenchment is valid which includes showing proof that retrenchment will stop current or future losses, is in good faith and has valid and fair criteria.
- Due process, for example written notice to employees and to DOLE 30 days before
- Separation Pay is paid (calculation example in our Separation Pay Philippines article)
These 3 requirements are found in the Labor Code of the Philippines and are the basis of the DOLE Retrenchment Policy.
These are important to understand to avoid Wrongful Termination cases.
We’ll go through each of them in-depth in this article.
When is Retrenchment Valid?
Retrenchment is valid only when Substantive Requirements have been complied with.
There are 3 things that should be complied with for a valid Retrenchment:
- The company must show proof of losses
- The Retrenchment was not done in Bad Faith
- Fair and reasonable criteria were used in determine who would be retrenched
So, a company must present proof of the above requirements to show that there was valid Retrenchment.
These above requirements form the basis for Retrenchment.
These are found in the case law and are the basis for the DOLE Retrenchment Policy.
It’s important to focus on them since whether or not the Retrenchment is valid is very important in court.
They have a very large on the penalties the court gives when Wrongful Termination is found.
Proof of Losses: How does a Company prove losses?
A company must show proof of losses or imminent losses to convince the court that there was correct ground for Retrenchment in the Philippines.
Audited financial statements and supporting documents can help prove this, as well as other evidence.
In G.R. NO. 147002, the company PT&T presented audited financial statements from 1996 to 1998.
PT&T had lost Php 558 million in 1998 and could not go through with the expansion for which some of its employees were hired.
PT&T was also negotiating with its creditors to restructure its debt.
Finally, the company decided to undertake Retrenchment Program to avoid bankruptcy.
Because this evidence was clear and showed losses, the court accepted that there were valid grounds for Retrenchment.
Penalties for Wrongful Termination were not applied, and only the regular Separation Pay or Retrenchment Pay Philippines was given.
Just another note – before considering Retrenchment, a company should consider other means to try to prevent losses.
Bad Faith: Retrenchment to circumvent the law
A company is guilty of Bad Faith in Retrenchment when the Retrenchment is undertaken to circumvent the law.
Retrenchment is done when the company is trying to prevent further losses.
When a company undertakes Retrenchment but then hires to replace those positions, Retrenchment is questionable.
For example, in G.R. No. 173921, PAL retrenched employees.
Then PAL created a similar department.
It also offered to rehire those employees for regular positions.
The Supreme Court considered PAL’s retrenchment of those employees Illegal Dismissal (basically Wrongful Termination).
It said that PAL essentially acted in bad faith – it terminated employees it needed only to rehire them under cheaper benefits and without their length of service.
PAL was ordered to pay penalties due to Wrongful Termination due to this finding.
Fair and Valid Criteria: Who should be retrenched?
Fair and reasonable criteria should determine who should be retrenched when Retrenchment Philippines occurs.
For example, in La Consolacion College [G.R. No. 214744], the court decided the company used improper criteria in determining who should be retrenched.
In this case, a physician who was the 3rd most senior in her department was retrenched due to severely less enrollment.
Her seniority was not considered as other more junior employees were kept.
There was also no efficiency rating nor consideration of status (for example, temporary employees have a lower status than regular employees.)
For this reason, the Court partially granted the employees request and had her reinstated, although as a part-time employee.
So, there should be clear criteria in determining which employees should be retrenched to avoid the charge of Wrongful Termination.
Retrenchment Philippines and Procedural Due Process
Retrenchment Philippines must follow the correct Procedural Due Process to avoid claims of Wrongful Termination.
Retrenchment Philippines correct process consists of:
- Written notice sent to employees 30 days before
- Notice to DOLE 30 days before
These are important to comply with to avoid legal problems.
However, not complying with procedural due process does not mean there is Wrongful Termination if there was a clearly proven substantive reason (i.e. it was clear there were company losses).
For example, in GR 115394, GTI Sportswear had a business slowdown in making ready to wear clothing.
GTI Sportswear retrenched 38 employees and the court was satisfied that it had reason to do so.
However, the court found that GTI Sportswear had sent written notices to the employees and to DOLE 30 days before.
The court said that this made the termination merely defective, and not a case of Wrongful Termination.
The court awarded the employees Php 2,000 for the lack of due process aside from giving the employees their due Separation Pay or Retrenchment Pay Philippines.
The penalty for not following procedural due process is minimal.
However, complying with the due process does remove one more issue from a Wrongful Termination case, and so it’s best to comply.
Retrenchment Pay Philippines
Retrenchment Pay Philippines is commonly called Separation pay.
It is paid when there is Retrenchment and is computed depending on the number of years served.
The Retrenchment Pay Calculation is as follows:
- ½ month’s pay is paid per year of service
- 6 months is considered a year
- An employee gets a minimum of 1 month of separation pay
- Separation of Retrenchment Pay Philippines should include allowances
Our article on Separation Pay Philippines really discusses this in depth and answers Separation Pay FAQs, but I’ll include a sample calculation here.
Let’s say George has a regular salary of Php 20,000 and a Living Allowance of Php 2,000.
He has worked in XYZ company for 5 years and 7 months.
His Retrenchment Pay Philippines should be:
- 6 years as 7 months is over 6 months and is considered a year
- ½ of 22,000 since Allowances are included in Retrenchment Pay
- 11,000 x 6 = Php 66,000
FAQ 1: What is the difference between Retrenchment vs Redundancy?
Retrenchment is when business losses requirement the reduction of personnel while Redundancy is when the services of an employee are superfluous (for example, over hiring).
Retrenchment vs Redundancy is therefore very different in concept.
Furthermore, Retrenchment pay uses ½ month while Redundancy uses 1 month for every year of service in calculating Separation pay, so the type of termination is important to know.
Let’s have a real-world example that illustrates Retrenchment vs Redundancy.
In G.R. 121314, Edge Apparel closed the simple garments line due to a lack of orders.
Edge Apparel also presented evidence of its financial losses, which were P681,280.00 in 1989, P262,741.00 in 1990, P162,170.00 in 1991 and P749,294.00 in 1992.
Edge Apparel decided to retrench its employees.
It went through the Notice Requirements to the employees and the DOLE and then properly paid ½ month of separation pay per year of service.
The court upheld that the employees were terminated for Retrenchment vs Redundancy.
Both the Labor Arbiter and the NLRC stated that there was clear evidence that the company had experience financial losses.
The Supreme Court concurred and so stated that the Termination was under Retrenchment Philippines and not Redundancy.
FAQ 2: What’s the Difference between Retrenchment vs Closure of Business?
Retrenchment also differs from the Closure of a Business in that Retrenchment is done due to poor financial performance.
Closure of Business is when the business itself completely closes.
In JAT vs NLRC, the company first placed workers on suspension.
The company later realized that it had to close its business due to the poor business environment.
The company’s income statements showed a net loss of ₱207,091 in 1998 and a small net income of ₱19,361 in 1997.
The Supreme Court did not consider the employees validly dismissed from closure of business due to substantial losses.
If the company had been able to prove that the closure was due to serious financial losses, the company would not have had to pay Separation Pay.
As serious financial losses were not proved, the court ordered the company just to pay separation pay since it did find that there was valid termination due to cessation of business.