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III.

TERMINATION OF EMPLOYMENT
A. Right to discipline.
The employers right to conduct the affairs of his business, according to its own
discretion and judgment, includes the prerogative to instill discipline in its employees and
to impose penalties, including dismissal, upon erring employees. This is a management
prerogative where the free will of management to conduct its own affairs to achieve its
purpose takes form. The only criterion to guide the exercise of its management
prerogative is that the policies, rules and regulations on work-related activities of the
employees must always be fair and reasonable and the corresponding penalties, when
prescribed, commensurate to the offense involved and to the degree of the infraction. (St.
Michaels Institute vs. Santos, G. R. No. 145280, Dec. 4, 2001; Consolidated Food
Corporation vs. NRLC, 315 SCRA 129, 139 [1999]).
Instilling discipline among its employees is a basic management right and
prerogative. Management may lawfully impose reasonable penalties such as dismissal
upon an employee who transgresses the company rules and regulations. (Deles, Jr. vs.
NLRC, G. R. No. 121348, March 9, 2000).
The employer cannot be compelled to maintain in his employ the undeserving, if not
undesirable, employees. (Shoemart, Inc. vs. NLRC, G. R. No. 74229, Aug. 11, 1989).
B. Definitions
a. Actual Dismissal
Dismissal where the employer has terminated the contract of employment
b. Constructive Dismissal concept
Constructive dismissal is an employers act amounting to dismissal but made to appear as if
it were not a dismissal in disguise. In most cases of constructive dismissal, the employee is
allowed to continue to work, but is simply reassigned, or demoted, or his pay diminished without a
valid reason to do so.
Constructive dismissal does not always involve forthright dismissal or diminution in rank,
compensation, benefit and privileges. There may be constructive dismissal if an act of clear
discrimination, insensibility or disdain by an employer becomes so unbearable on the part or the
employee that it could foreclose any choice by him except to forego his continued employment.
(See Hyatt Taxi Services case, G.R. No. 143204, June 26, 2001.)
Constructive Dismissal and Involuntary Resignation
Constructive dismissal is an involuntary resignation resulting in cessation of work resorted to
when continued employment becomes impossible, unreasonable or unlikely; when there is a
demotion in rank or a diminution in pay; or when a clear discrimination, insensibility or disdain by
an employer becomes unbearable to an employee.
In Globe Telecom, Inc. v. Florendo-Flores, it was held that where an employee ceases to work
due to a demotion of rank or a diminution of pay, an unreasonable situation arises which creates an
adverse working environment rendering it impossible for such employee to continue working for her
employer. Hence, her severance from the company was not of her own making and therefore
amounted to an illegal termination of employment. (Cited in Francisco vs. NLRC, G.R. No. 170087,
August 21, 2006.)
Example Cases
Diminution of pay. A diminution of pay is prejudicial to the employee and amounts to
constructive dismissal. (Francisco vs. NLRC)
Transfer of employee not amounting to constructive dismissal. Transfer of an employee from
one area of operation to another is a management prerogative and is not constitutive of
constructive dismissal, when the transfer is based on sound business judgment, unattended
by a demotion in rank or a diminution of pay or bad faith. (Tan vs. NLRC, G.R. No. 128290,
November 24, 1998.)
Transfer of employee amounting to constructive dismissal. A transfer amounts to
constructive dismissal when the transfer is unreasonable, unlikely, inconvenient, impossible,
or prejudicial to the employee. (Phil. Industrial Security Agency Corp. vs. Aguinaldo, G.R. No.
149974, June 15, 2005.)

C. Grounds for termination of employment


i. Substantive

Just causes and authorized causes.


As mentioned in Article 279, there are two (2) kinds of causes or grounds to terminate
employment by employer, to wit:
a. Just causes which refer to those instances enumerated under Article 282 [Termination by
employer] of the Labor Code.
ART. 282. Termination by employer. - An employer may terminate an employment for
any of the following causes:
(a) Serious misconduct or willful disobedience by the employee of the lawful orders of
his employer or representative in connection with his work;
(b) Gross and habitual neglect by the employee of his duties;
(c) Fraud or willful breach by the employee of the trust reposed in him by his employer
or duly authorized representative;
(d) Commission of a crime or offense by the employee against the person of his
employer or any immediate member of his family or his duly authorized
representatives; and
(e) Other causes analogous to the foregoing
Examples of Analogous Causes
Abandonment. Abandonment of job is a form of neglect of duty. There is
abandonment when the employee leave his job or position with a clear
and deliberate intent to discontinue his employment without any intention
of returning back.
Gross inefficiency. Gross inefficiency is analogous to and closely related to
gross neglect for both involve acts or omissions on the part of the
employee resulting in damage to the employer or to his business. (See
Lim vs. NLRC, G.R. No. 118434, July 26, 1996.)
Disloyalty/conflict of interest. Disloyalty exists when one asserts an
interest, or performs acts adverse to ones employer, such as secretly
engaging in a business which renders him a competitor and rival of his
employer. It constitutes a breach of an implied condition of the contract of
employment. (See Elizalde International vs. Court of Appeals, G.R. No.
L40553 February 26, 1981.)
Dishonesty. Acts of dishonesty deemed to be patently inimical to the
employer is analogous to breach of trust and is a valid cause for
termination of employment.
b. Authorized causes which refer to those instances enumerated under Articles 283 [Closure
of establishment and reduction of personnel] and 284 [Disease as ground for termination] of the
Labor Code.
ART. 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 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.
ART. 284. Disease as ground for termination. - An employer may terminate the services
of an employee who has been found to be suffering from any disease and whose
continued employment is prohibited by law or is prejudicial to his health as well as to
the health of his co-employees: Provided, That he is paid separation pay equivalent to
at least one (1) month salary or to one-half (1/2) month salary for every year of
service, whichever is greater, a fraction of at least six (6) months being considered as
one (1) whole year.
ii. Procedural

a. prior notice and hearing


Procedural Due Process (Just cause.)
For termination of employment based on just causes, procedural due process requires that
the employee be given the benefit of the so-called twin-notice and hearing, as follows:
First notice: Notice to Explain (NTE) or order to show cause. A written notice served on the
employee specifying the ground or grounds for termination, and giving to said employee
reasonable opportunity within which to explain his side.
Hearing or formal investigation. A hearing or conference during which the employee
concerned, with the assistance of counsel if the employee so desires, is given opportunity to
respond to the charge, present his evidence or rebut the evidence presented against him.
Second notice: Notice of decision. A written notice of termination served on the employee
indicating that upon due consideration of all the circumstances, grounds have been established to
justify his termination. (See Art. 277[b] and Sec 2, Rule I, Book VI, IRR)
b. 30-day prior notice
Procedural Due Processs (Authorized causes).
For valid termination based on authorized causes such as installation of labor-saving
devices, redundancy, retrenchment to prevent losses, and closure or cessation of operation, the
employer must serve written notice to the individual employee concerned and to the appropriate
Regional Office of DOLE at least 30 days before the effectivity of the termination.
Also, the employer must observe the following requirements as part of the process of
termination:

Good faith in the termination of employee, i.e., the implementation of the company
program resulting to termination of employees must be for a valid cause and not
merely a tool to circumvent the law on employees security of tenure;
The employer must adopt a fair and reasonable criteria in the selection of employee
to be dismissed; and,
The employee must be paid separation pay not less than the amount fixed by law.

Criteria in Selection of Employee to be Dismissed.


In the selection of the employee to be dismissed, the employer must adopt of a fair and
reasonable criteria which must be applied in good faith, such as:
1. Less preferred status of employee;
2. Efficiency rating; and
3. Seniority.
Payment of Separation Pay.
In termination of employment due to authorized causes, the employer is required to give
separation pay to the employee concerned. The amount of separation pay depends on the
specified cause of termination.
1.
In case of termination due to the installation of labor-saving devices or redundancy
at least one month pay or to at least one month pay for every year of service, whichever
is higher.
2.
In case of (a) retrenchment to prevent losses and (b) closures not due to serious
financial reverses one month pay or at least one-half month pay for every year of
service, whichever is higher.
3.
No separation pay for closure due to serious business losses.
4.
No separation pay is required when the closure of business is due to serious business
losses or financial reverses. (North Davao Mining, 1996.)
5.
When closure of the business establishment is forced upon the employer and
ultimately for the benefit of the employees. The closure contemplated under Article 283
of the Labor Code is a unilateral and voluntary act on the part of the employer to close
the business establishment. (National Federation of Labor vs. NLRC, 2000.)
Effects of Termination.
If the termination is for authorized cause and the employee is given 30-day prior notice, the
dismissal is valid.
If the termination is for authorized cause but the employee was not given 30-day prior notice, the
dismissal is valid but the employer may be ordered to pay nominal damages to dismissed
employee. In Jaka Food Processing vs. Pacot, 2005, the amount of nominal damages is
P50,000.00.
If the dismissal is not for a valid authorized cause, the dismissal is illegal, whether or not
there is 30-day prior notice. Consequently the employee shall be entitled to reinstatement and
backwages, and damages if warranted.

D. Termination by the Employer


ART. 282. Termination by employer. - An employer may terminate an employment for any of
the following causes:
(a) Serious misconduct or willful disobedience by the employee of the lawful orders of
his employer or representative in connection with his work;
Serious Misconduct concept
Serious misconduct is one of the just causes for termination of employee under Article 282 of the
Labor Code.
Misconduct has been defined as improper or wrong conduct. It is the transgression of some
established and definite rule of action, a forbidden act, a dereliction of duty, willful in character,
and implies wrongful intent and not mere error in judgment. (Austria vs. NLRC, G.R. No. 124382,
August 16, 1999.)
Elements of Serious Misconduct
To be a valid ground for termination of employment, the following elements must be present:
1. The misconduct must be serious;
2. It must relate to the performance of the employees duties; and,
3. Must show that the employee has become unfit to continue working for the employer.
Mere Error in Judgment is not Misconduct
Misconduct is a transgression of some established and definite rule of action, a forbidden
act, a dereliction of duty, willful in character, and implies wrongful intent and not mere error in
judgment. (Colegio de San Juan de Letran-Calamba vs. Villas, G.R. No. 137795, March 26, 2003)
Mere error in judgment cannot qualify as misconduct (much less a serious one) because of
lack wrongful intent. As held in NLRC vs. Salgarino, G.R. No. 164376, July 31, 2006, it is not
sufficient that the act or conduct complained of has violated some established rules or policies. It
is equally important and required that the act or conduct must have been performed with
wrongful intent.
Misconduct must be Serious
The misconduct to be serious must be of such grave and aggravated character and not
merely trivial and unimportant.
Misconduct must be in Relation to Employees Work
Misconduct, however serious, must, nevertheless, be in connection with the employees work
to constitute just cause for his separation.

(b) Gross and habitual neglect by the employee of his duties;


Gross Negligence Meaning.
Gross negligence is a just cause for termination of employment by employer under Article
282 of the Labor Code of the Philippines.
Gross negligence has been defined as the want or absence of or failure to exercise slight
care or diligence, or the entire absence of care. It evinces a thoughtless disregard of
consequences without exerting any effort to avoid them.
Negligence must be Habitual.
In order to constitute a just cause for the employees dismissal, the neglect of duties must
not only be gross but also habitual. Habitual neglect implies repeated failure to perform ones
duties for a period of time, depending upon the circumstances.
A single isolated acts of negligence do not constitute a just cause for the dismissal of the
employee. However, in a number of cases, the SC upheld the validity of dismissal on the ground
of gross negligence even if the act complained of was not habitual. Thus, a bank employee was
found grossly negligent when she delivered newly approved credit cards to a person she had not
even seen before and she did not even ask for receipts, thereby enabling fictitious persons to use
these cards, causing P740,000.00 loss to the bank. (See Citibank vs. Gatchalian, G.R. No. 111222,
January 18, 1995.)
Habitual Absenteeism and Tardiness.
Habitual absenteeism and tardiness constitute gross and habitual neglect of duty. Repeated acts
of absences without leave and frequent tardiness reflect indifferent attitude to and lack of
motivation in his work. (Valiao vs. CA, G.R. No. 146621, July 30, 2004.)

(c) Fraud or willful breach by the employee of the trust reposed in him by his employer or
duly authorized representative; + Loss of confidence
Loss of confidence arising from fraud or willful breach of trust by employee of the trust
reposed in him by his employer or his duly authorized representative is a just cause for
termination of employment under Article 282 of the Labor Code of the Philippines.
Fraud Meaning.
Fraud is any act, omission, or concealment which involves a breach of legal duty, trust, or
confidence justly reposed and is injurious to another.

Breach of Trust Meaning.


Breach of trust refers to the violation by the employee of the trust and confidence reposed in
him by his employer or duly authorized representative.
Elements of Loss of Confidence.
To determine whether the termination of employment based on loss of confidence is justified,
the following elements are generally considered:
1.
Whether the fraud or breach of trust is in connection to the employees work; and
2.
Whether the employee concerned is holding a position of trust and confidence.
Fraud or Breach must be in Connection to Employees Work.
To constitute just cause, fraud or breach of trust must be committed in connection with the
employees work or related to the performance of the employees functions.
Employee must Hold Position of Trust and Confidence.
The basic premise for dismissal on the ground of loss of confidence is that the employee
concerned holds a position of trust and confidence. It is the breach of this trust that results in the
employers loss of confidence in the employee. (See Natl Sugar Refineries Corp. vs. NLRC, G.R.
No. 122277 February 24, 1998.)
Thus, loss of confidence ideally applies only to cases involving employee occupying positions of
trust and confidence, e.g., managerial employees, and those situations where the employee is
routinely charged with the care and custody of the employers money or property, e.g., cashiers,
auditors, property custodian, etc.
Title not Conclusive Indicator of Trust and Confidence.
However, the title or appellation of the employees position is not a conclusive indicator as
to whether or not an employee holds a position of trust and confidence. The determination should
hinge on the authority actually possessed by employee.
Breach of Trust must be Willful.
Ordinary breach will not suffice. It must be willful and without justifiable excuse, there must be
basis therefor, and it must be supported by substantial evidence and not merely by the whims or
caprice of the employer. (See Falguera vs. Linsangan, G.R. No. 114848 December 14, 1995.)

(d) Commission of a crime or offense by the employee against the person of his
employer or any immediate member of his family or his duly authorized representatives; and

(e) Other causes analogous to the foregoing


I. Sexual Harrasment

II. Abandonment
Jurisprudence provides for two essential requirements for abandonment of work to exist:
1. the failure to report for work or absence without valid or justifiable reason, and
2. clear intention to sever the employer-employee relationship manifested by some overt
acts should both concur.
Further, the employees deliberate and unjustified refusal to resume his employment
without any intention of returning should be established and proven by the employer. Harpoon
Marine Services, Inc., et al. v. Fernan H. Francisco, GR No. 167751, March 2, 2011.

III. Conflict of interest

IV. Attitude problem

V. Poor performance or gross inefficiency

VI. Drug use

E. Procedural requirements (Just cause)


a. Twin Notice and hearing Rule
see above
b. Principle of discretionary justice

F. Closure of establishment and reduction of personnel


a. Installation of labor saving devices
Installation of Labor-Saving Devices Concept
The law authorizes an employer to terminate the employment of any employee due to the
installation of labor saving devices. The installation of these devices is a management prerogative,
and the courts will not interfere with its exercise in the absence of abuse of discretion, arbitrariness,
or maliciousness on the part of management. (See Magnolia Dairy Products Corporation vs. NLRC,
G.R. No. 114952, January 29, 1996.)
The installation of labor-saving devices contemplates the installation of machinery to effect
economy and efficiency in the method of production.
Distinguished from Retrenchment
The institution of new methods or more efficient machinery, or of automation is technically a
ground for termination of employment by reason of installation of labor-saving devices but where the
introduction of these methods is resorted to not merely to effect greater efficiency in the operations
of the business but principally because of serious business reverses and to avert further losses, the
device could then verily be considered one of retrenchment. (Edge Apparel vs. NLRC, G.R. No.
121314, February 12, 1998; See also Retrenchment.)
Separation Pay
In case of termination due to the installation of labor saving devices, the worker affected thereby
shall be entitled to a separation pay equivalent to at least his one month pay or to at least one month
pay for every year of service, whichever is higher. (Article 283, Labor Code.)

b. Redundancy
Redundancy Concept
Redundancy is one of the authorized causes for termination of employment under Article 283 of the
Labor Code of the Philippines.
Redundancy exists where the services of an employee are in excess of what is reasonably
demanded by the actual requirements of the enterprise. A position is redundant where it superfluous,
and superfluity of a position or positions may be the outcome of a number of factors, such as over
hiring of workers, decreased of volume business, or dropping of a particular product line or service
activity previously manufactured or undertaken by the enterprise.
In Wiltshire, the Court held that an employer has no legal obligation to keep on the payroll
employees more than the number needed for the operation of the business. (See Wiltshire File Co., v.
NLRC, 1991; Coats Manila Bay vs. Ortega, 2009)
Adequate Proof of Redundancy

It is the employers burden to show that redundancy exists. It is not enough for a company to
merely declare that it has become overmanned. It must produce adequate proof of such redundancy
to justify the dismissal of the affected employees (Asufrin vs. San Miguel Corporation, 2004).
Evidence must be presented to substantiate redundancy such as but not limited to the new staffing
pattern, feasibility studies/proposal, on the viability of the newly created positions, job description
and the approval by the management of the restructuring (Panlilio vs. NLRC, 1997).
Requirements of a Valid Redundancy Program
The employer must comply with the following requisites to ensure the validity of the
implementation of a redundancy program:
1. A written notice served on both the employees and the Department of Labor and
Employment (DOLE) at least one month prior to the intended date of retrenchment as
required by the Labor Code;
2. Payment of separation pay equivalent to at least one month pay or at least one month pay
for every year of service, whichever is higher;
3. Good faith in abolishing the redundant positions; and
4. Fair and reasonable criteria in ascertaining what positions are to be declared redundant and
accordingly abolished. (See Caltex vs. NLRC, 2007, )
Separation Pay
In case of termination due to redundancy, the worker affected thereby shall be entitled to a
separation pay equivalent to at least one (1) month pay or to at least one (1) month pay for every
year of service, whichever is higher.

Proof of Losses Not Required


Redundancy does not require the exhibition of proof of losses or imminent losses. In fact, of all the
statutory grounds provided in Article 283 of the Labor Code, it is only retrenchment which requires
proof of losses or possible losses as justification for termination of employment. (See Coats Manila
Bay case.)
Duplication of Work Not Necessary.
Redundancy does not necessarily refer to duplication of work. That no other person was holding the
same position prior to the termination of the employees services does not mean that his position had
not become redundant. Indeed, in any well-organized business enterprise, it would be surprising to
find duplication of work and two or more people doing the work of one person. (See Wiltshire case.)
In redundancy, what is looked into is the position itself, the nature of the services performed by the
employee and the necessity of such position. (Tierra International Construction Corp. vs. NLRC, 1992)
Redundancy Arising from Contracting Out of Labor
In several cases, the court upheld the dismissal on ground of redundancy even when the employer
contracts out the services of another company to perform the same task as the redundant positions.
Contracting out of labor has been held as a valid management prerogative. (See De Ocampo vs.
NLRC, 1992; Serrano vs. NLRC, 2000.)

c. Retenchment
Retrenchment Concept
Retrenchment is an economic ground to reduce the number of employees. It is the reduction of
personnel for the purpose of cutting down on costs of operations in terms of salaries and wages
resorted to by an employer because of losses in operation of a business occasioned by lack of work
and considerable reduction in the volume of business (See Alabang Country Club vs. NLRC, G.R. No.
157611, August 9, 2005 ).
Retrenchment is sometimes also referred to as downsizing. It is aimed at saving a financially ailing
business establishment from eventually collapsing.
Basic Requisites of Valid Retrenchment
To justify retrenchment, the following requisites must be complied with:
1. The retrenchment must be necessary to prevent business losses; and
2. The business losses sought to be prevented are serious, actual and real.
Meaning of To Prevent Losses

The phrase to prevent losses means that retrenchment is authorized to be undertaken by the
employer sometime before the losses anticipated are actually sustained or realized. Actual losses
need not set in prior to retrenchment. (Lopez Sugar Corporation vs. Federation of Free Workers, G.R.
Nos. 75700-01, August 30, 1990.)
Meaning of Serious, Actual and Real
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.
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. (See Edge Apparel Inc. vs. NLRC, G.R. No. 121314,
February 12, 1998 .)
The following are the general standards to determine whether the business losses sought to be
prevented are serious, actual and real, and sufficient to justify retrenchment of employees:
1. The losses expected should be substantial and not merely de minimis in extent;
2. The losses apprehended must be reasonably imminent;
3. The alleged losses if already realized, and the expected imminent losses sought to be
forestalled, must be proven by sufficient and convincing evidence. (See Lopez Sugar
Corporation case.)
Separation Pay
In case of retrenchment to prevent losses, the separation pay shall be equivalent to one month pay
or at least one-half month pay for every year of service, whichever is higher. A fraction of at least six
months shall be considered one whole year. (Article 283, LC.)

Temporary Retrenchment or Lay-Off


Article 283 of the Labor Code of the Philippines speaks only of permanent retrenchment or lay-off.
There is no specific provision in the Labor Code that governs temporary retrenchment, particularly
the requisites for its implementation and maximum duration.
To remedy this situation, the Court has applied by analogy Art. 286 to set a specific period that
employees may remain temporarily laid, or, sometimes referred to as in floating status. (See
Sebuguero vs. NLRC, G.R. No. 115394 September 27, 1995.) Article 286 provides:
Article 286. When employment not deemed terminated. The bonafide suspension of the
operation of a business or undertaking for a period not exceeding six 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 month from
the resumption of operations of his employer or from his relief from the military or civic duty.
Applying the above provision in the case of temporary retrenchment, an employee who has been
temporarily laid-off should be recalled or otherwise permanently retrenched after the lapse of six
months. Failing this would be tantamount to illegal dismissal.
d. Closure of Business
Closure of Business Concept
Closure or cessation of operation of the establishment or undertaking is another authorized
cause for termination of employment under Article 283 of the Labor Code. (See Authorized Causes for
Dismissal of Employee.)
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. (See JAT General Services vs. NLRC, G.R. No. 148340, January 26,
2004.)
Total or Partial Closure of Business
Closure or cessation of business may mean either total closure or partial closure, as in the
case of abolition of only a department or section of the establishment or of only a part of company
activities. In either case, the right of the employer to terminate employee affected by the closure has
been recognized. (See Dangan vs. NLRC, G.R. No. 63127-28, February 20, 1984; Also, La Union
Cement Workers Union vs. NLRC, G.R. No. 174621, January 30, 2009.)

Closure of Business Distinguished from Retrenchment


While closure of business and retrenchment are often used interchangeably and are
interrelated, they are actually two separate and independent authorized causes for termination of
employment. Termination of an employment may be predicated on one without need of resorting to
the other. (Read more about Retrenchment.)
Closure of business, on one hand, 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 downsizing. 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. (See JAT General Services case.)
Cessation Strictly Management Prerogative
Cessation of business is strictly management prerogative. No law can compel a company to
continue operation. The management may decide to cease operation for whatever reason it deems
proper, as long as it is done in good faith.
In Mac Adams Metal case, the court reiterated viz. Just as no law forces anyone to go into business,
no law can compel anybody to continue in it. It would indeed be stretching the intent and spirit of the
law if we were to unjustly interfere with the managements prerogative to close or cease its business
operations just because said business operation or undertaking is not suffering from any loss or
simply to provide the workers continued employment.
Cessation Need not be Due to Financial Losses
The reason for cessation need not be financial losses or drain, as long as it is done in good
faith and not for the purpose of defeating or circumventing the rights of employees under the law or
a valid agreement. Article 283 of the Labor Code does not require that the cessation be due to
serious business reverses.
The cause of cessation, whether it is due to financial losses or not, is material only in the
determination of entitlement to separation pay.
In Maya Farms Employees Organization vs. NLRC, 1994, the Court held that even if the
employer is not suffering from business losses, it can still resort to closure of business as long as the
companys exercise of the same is done in good faith to advance its interest and not for the purpose
of defeating or circumventing the rights of employees under the law or a valid agreement such
exercise will be upheld.
Separation Pay
In case of retrenchment and closures not due to serious financial reverses, the employee shall
be entitled to separation pay equivalent to one month pay or at least one-half month pay for every
year of service, whichever is higher.
If the closure is due to business losses, there is no obligation on the part of the employer to pay
separation benefits to employees.
G. Procedural requirements (Authorized Causes)
a. 30-day prior notice rule
See above
b. Criteria in Selection of Employee
See above
c. Separation pay
See above

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