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Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.
AT A GLANCE:
Businesses are allowed to suspend operations and to dismiss their employees. Aside from having just and authorized causes for termination of employment, however, suspensions of operations and dismissals of employees must be done in accordance with law. Otherwise, employers must bear the consequences for their non-compliance. (Keng Hua Paper Products Co., Inc. vs. Carlos Ainza, G.R. No. 224097, February 22, 2023)
Circumstances may arise that necessitate the suspension of business operations or the reduction of personnel. While these actions are permissible under certain conditions, they must be executed in accordance with legal requirements to avoid adverse consequences for employers.
Bona Fide Suspension of Business Operations
The law recognizes the bona fide suspension of business operations as a legitimate reason for temporarily halting business activities. Such suspensions, lasting up to six months, do not terminate employment.
The law says:
The bona-fide suspension of the operation of a business or undertaking for a period not exceeding six (6) months, or the fulfillment by the employee of a military or civic duty shall not terminate employment. In all such cases, the employer shall reinstate the employee to his former position without loss of seniority rights if he indicates his desire to resume his work not later than one (1) month from the resumption of operations of his employer or from his relief from the military or civic duty. (Article 301 [formerly Article 286] of the Labor Code of the Philippines)
Employment Termination Due to Retrenchment or Closure
Employers may validly terminate employment due to retrenchment or the closure of business operations.
The law says:
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 termination due to the installation of labor-saving devices or redundancy, 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. 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. (Article 298 [formerly Article 283] of the Labor Code of the Philippines)
Retrenchment vis-à-vis Closure of Business
Retrenchment, aimed at preventing financial losses, involves reducing personnel to cut operational costs. In contrast, closure of business signifies a complete cessation of operations, often prompted by financial hardships. While both entail termination of employment, they differ in their underlying causes and procedural requirements.
Jurisprudence says:
Retrenchment to prevent losses or the closing or cessation of business operations do not compose one cause for termination of employment. Although they have the same procedural requirements, they have different causes and different requirements for validity, thus:
Closure of business, 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.
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.
The respective requirements to sustain their validity are likewise different.
For retrenchment, the three (3) basic requirements are: (a) proof that the retrenchment is necessary to prevent losses or impending losses; (b) 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 (c) 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. 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.
Upon the other hand, in termination, the law authorizes termination of employment due to business closure, regardless of the underlying reasons and motivations therefor, be it financial losses or not. However, to put a stamp to its validity, the closure/cessation of business must be bona fide, i.e., its purpose is to advance the interest of the employer and not to defeat or circumvent the rights of employees under the law or a valid agreement. (Sanoh Fulton Phils, Inc. vs. Emmanuel Bernardo, G.R. No. 187214, August 14, 2013)
Burden of Proof
In cases of retrenchment or closure, the burden of proof rests with the employer to demonstrate the validity of their actions. For retrenchment, employers must establish the necessity of reducing personnel to prevent substantial and imminent losses. Similarly, in closures, employers must demonstrate the legality of their decision and ensure it serves the legitimate interests of the business.
Jurisprudence says:
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. 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. And to repeat, in closures, the bona fides of the employer must be proven. (Sanoh Fulton Phils, Inc. vs. Emmanuel Bernardo, G.R. No. 187214, August 14, 2013)
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