Retrenchment or downsizing, when done right

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Published — December 21, 2017

The following post does not create a lawyer-client relationship between Alburo Alburo and Associates Law Offices (or any of its lawyers) and the reader. It is still best for you to engage the services of your own lawyer to address your legal concerns, if any.

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.

Related Topic: Authorized Causes in Termination of Employment

Retrenchment (or sometimes known as downsizing) is among the authorized causes for termination of employment. There is retrenchment when the reduction of work personnel was 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 [See: G.R. No. 163657].

Employers, however, must be careful to ensure that retrenchment should be undertaken in compliance with the due process requirements, or else they risk doing more harm than good to the enterprise. It is so because for retrenchment to be valid, it must be done to prevent losses, or to arrest imminent business reverses. But when retrenchment is done illegally, the employer may be held liable for illegal dismissal, notwithstanding the fact that losses to be incurred by the company are imminent, if not already suffering actual losses.

When retrenchment is proper

D.O. No. 147-15 issued by the Department of Labor and Employment (“DOLE”) sets the standards to be met before employers may validly terminate an employment based on retrenchment. To be a valid ground for termination, the following must be present:

1. The retrenchment must be reasonably necessary and likely to prevent business losses.
2. The losses, if already incurred, are not merely of minimal amounts, but should be 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.
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.

In retrenchment, proof of financial losses becomes the determining factor in proving its legitimacy. In establishing a unilateral claim of actual or potential losses, financial statements audited by independent external auditors constitute the normal method of proof of profit and loss performance of a company. The condition of business losses justifying retrenchment is normally shown by audited financial documents like yearly balance sheets and profit and loss statements as well as annual income tax returns [See: G.R. No. 174214].

If the loss 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. Also, the expected substantial loss 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, after all, is a drastic recourse with serious consequences. 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 than labor costs [See: G.R. No. 169780].

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, cannot claim to be retrenching in good faith to avoid losses. 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 like reduction of both management and rank-and-file bonuses and salaries, going on reduced time, etc. have been tried and found to be insufficient [Ibid].

Due process in retrenchment

As defined in Articles 298 and 299 of the Labor Code, the requirements of due process shall be deemed complied with upon service of a written notice to both the employee and the DOLE Regional Office where the business is located at least 30 days before the date of termination. It must also be specified on the notice that the termination is based on retrenchment.

In notifying the DOLE, such notice is made using the RKS Form 5, which the employer will be required to fill up with information that the Labor Department deems necessary regarding the dismissal of employees to be implemented by the company.

Payment of separation pay

An employee terminated due to retrenchment shall be paid by the employer a separation pay equivalent to 1 month pay or at least ½ month pay for every year of service, whichever is higher. For this purpose, a fraction of 6 months service is considered as 1 whole year.

Retrenchment programs are purely business decisions within the purview of a valid and reasonable exercise of management prerogative, provided it is done in good faith and the employer faithfully complies with the substantive and procedural requirements laid down by law [See: G.R. No. 165756]. Considering the strict legal requirements, it is imperative for business owners to understand how retrenchment is properly done, and not act based only on impulse, before doing something drastic such as actual laying off of its employees.

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Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.

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