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Definition

Retrenchment is the termination of employment initiated by the


employer through no fault of the employees and without prejudice to
the latter, resorted to by management during periods of business
recession, industrial depression, or seasonal fluctuations or during lulls
occasioned by lack of orders, shortage of materials, conversion of the
plant for a new production program or the introduction of new methods
or more efficient machinery, or of automation. 1 Retrenchment is a valid
management prerogative. It is, however, subject to faithful compliance
with the substantive and procedural requirements laid down by law
and jurisprudence.
Additional Requisite
In case of 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.2
The employer bears the burden to prove his allegation of economic or
business reverses with clear and satisfactory evidence it being in the
nature of an affirmative defense (Manila Hotel Corp. vs. NLRC, 141
SCRA 169). Otherwise, if the employer fails to prove it, it necessarily
means that the dismissal of an employee was not justified (Egypt Air,
et al. vs. NLRC, G.R. No. 63185, February 27,1987).3
Standards
1. The losses expected should be substantial and not merely de
minimis in extent.
1 F.F. Marine Corporation v. The Hon. Second Division, NLRC, GR. No. 152039, April 8,
2005 citing Polymart Paper Industries, Inc. v. NLRC, 355 Phil. 592 (1998), 294 SCRA
159 citing Uichico v. NLRC, G.R. No. 121434, June 2, 1997, 273 SCRA 35.
2 Waterfront Cebu City Hotel v. Ma. Melanie P. Jimenez, Jacqueline C. Baguio, Lovella
V. Carillo, and Maila G. Roble, GR. No. 174214, June 13, 2012 citing Flight Attendants
and Stewards Association of the Philippines v. Philippine Airlines, Inc., G.R. No.
178083, 22 July 2008, 559 SCRA 252, 277 citing TPI Philippines Cement Corporation
v. Cajucom VII, 518 Phil. 637, 645-646 (2006); Danzas Intercontinental, Inc. v.
Daguman, 496 Phil. 279, 288 (2005).
3 Precision Electronics Corporation v. NLRC., GR. No. 86657, October 23, 1989

2. The substantial loss apprehended must be reasonably imminent,


as such imminence can be perceived objectively and in good
faith by the employer.
3. 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
4. The alleged losses if already realized, and the expected
imminent losses sought to be forestalled, must be proved
by sufficient and convincing evidence. 4
Procedural Requirements
For a valid retrenchment, the following elements must be
present:
(1)

That retrenchment is reasonably necessary and likely


to prevent business losses which, if already incurred,
are not merely de minimis, but substantial, serious,
actual and real, or if only expected, are reasonably
imminent as perceived objectively and in good faith by
the employer;

(2)

That the employer served written notice both to the


employees and to the Department of Labor and
Employment at least one month prior to the intended
date of retrenchment;

(3)

That the employer pays the retrenched employees


separation pay equivalent to one (1) month pay or at
least month pay for every year of service, whichever is
higher;

(4)

That the employer exercises its prerogative to


retrench employees in good faith for the advancement
of its interest and not to defeat or circumvent the
employees right to security of tenure; and

(5)

That the employer used fair and reasonable criteria in


ascertaining who would be dismissed and who would be
retained among the employees, such as status,

4 Supra at 1 citing EMCO Plywood Corporation, et al. v. Perferio Abelgas, et al., G.R.
No. 148532, 14 April 2004; See also Polymart Paper Industries,
Inc. v. NLRC, supra note 29; Lopez Sugar Corporation v. Federation of Free Workers,
G.R. Nos. 75700-01, 30 August 1990, 189 SCRA 179, 186-187.

efficiency, seniority, physical fitness, age, and financial


hardship for certain workers.5
In the absence of one element, the retrenchment scheme
becomes an irregular exercise of management prerogative. The
employers obligation to exhaust all other means to avoid further
losses without retrenching its employees is a component of the first
element as enumerated above. To impart operational meaning to the
constitutional policy of providing full protection to labor, the employers
prerogative to bring down labor costs by retrenching must be exercised
essentially as a measure of last resort, after less drastic means have
been tried and found wanting.6
Some Jurisprudence
We consider it may be useful to sketch the general standards in terms
of which the acts of petitioner employer must be appraised. Firstly, the
losses expected should be substantial and not merely de minimis in
extent. If the loss purportedly sought to be forestalled by retrenchment
is clearly shown to be insubstantial and inconsequential in character,
the bonafide nature of the retrenchment would appear to be seriously
in question. Secondly, the substantial loss apprehended 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 is after all a
drastic recourse with serious consequences for the livelihood of the
employees retired or otherwise laid-off. Because of the consequential
nature of retrenchment, it must, thirdly, 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. 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", can scarcely claim to be retrenching in good faith to avoid
losses. To impart operational meaning to the constitutional policy of
providing "full protection" to labor, the employer's prerogative to bring
5 Supra at 2 citing Shimizu Phils. Contractors, Inc. v. Callanta, G.R. No. 165923, 29

September 2010, 631 SCRA 529, 540 citing Asian Alcohol Corporation v. National
Labor Relations Commission, 364 Phil. 912, 926-927 (1999); Lambert Pawnbrokers
and Jewelry Corporation v. Binamira, G.R. No. 170464, 12 July 2010, 624 SCRA 705,
716; Bio Quest Marketing, Inc. v. Rey, G.R. No. 181503, 18 September 2009, 600
SCRA 721, 727-728 citing Flight Attendants and Stewards Association of the
Philippines v. Philippine Airlines, Inc., supra note 18 at 273-274 citing further Casimiro
v. Stern Real Estate Inc. Rembrandt Hotel and/or Meehan, 519 Phil. 438, 456-457
(2006); Philippine Carpet Employees Association v. Sto. Tomas,518 Phil. 299, 316
(2006); Ariola v. Philex Mining Corp., 503 Phil. 765, 784-785 (2005).
6 Flight Attendants and Stewards Association of the Philippines v. Philippine Airlines,
Inc., Patricia Chiong and Court of Appeals, GR. No. 178083, October 2, 2009, citing
Lopez Sugar Corporation v. Federation of Free Workers, 189 SCRA 179, 188 (1990).

down labor costs by retrenching must be exercised essentially as a


measure of last resort, after less drastic means e.g., reduction of
both management and rank-and-file bonuses and salaries, going on
reduced time, improving manufacturing efficiencies, trimming of
marketing and advertising costs, etc. have been tried and found
wanting.
Lastly, but certainly not the least important, alleged losses if already
realized, and the expected imminent losses sought to be forestalled,
must be proved by sufficient and convincing evidence. The reason for
requiring this quantum of proof is readily apparent: any less exacting
standard of proof would render too easy the abuse of this ground for
termination of services of employees.7
It is almost an inflexible rule that employers who contemplate
terminating the services of their workers cannot be so arbitrary and
ruthless as to find flimsy excuses for their decisions. This must be so
considering that the dismissal of an employee from work involves not
only the loss of his position but more important, his means of
livelihood. Applying this caveat to the case at bar, it was therefore
incumbent for respondent DISC, before putting into effect any
retrenchment process on its work force, to show by convincing
evidence that it was being wrecked by serious financial
problems. Simply stating its state of insolvency or its impending doom
will not be sufficient. To do so would render the security of tenure of
workers and employees illusory. In a grander scale, to hold as valid
and legal the respondent DISC's act would be disastrous to labor. Any
employer desirous of ridding itself of its employees could then easily
do so without need to adduce proof in support of its action. We cannot
countenance this. Security of tenure is a right guaranteed to
employees and workers by the Constitution and should not be denied
on the basis of mere speculation.8
It should be observed that Article 283 of the Labor Code uses the
phrase retrenchment to prevent losses. In its ordinary connotation, this
phrase means that the employer must undertake retrenchment before
losses are actually sustained. We have, however, interpreted the law to
mean that the employer need not keep all his employees until after his
losses shall have materialized. Otherwise, the law could be vulnerable
to attack as undue taking of property for the benefit of another.9
7 Lopez Sugar Corporation v. Federation of Free Workers, GR. No. 75700-01, August
30, 1990
8 Benjamin G. Indino v. National Labor Relations Commission, GR. No. 80352,
September 29, 1989
9 Asian Alcohol Corporation v. NLRC, GR. No. 131108, March 25, 1991 citing
Revidad v. NLRC 245 SCRA 356, 373 (1995); Lopez Sugar Corporation v. Federation of Free

Rehabilitation receivership presupposes existence of losses.


However, the fact that the employer is undergoing rehabilitation
receivership does not by itself excuse it from submitting to the labor
authorities copies of its audited financial statements to prove the
urgency, necessity and extent of its retrenchment program.10
A sharp drop in income is not a ground to justify retrenchment. A
mere decline in gross income cannot in any manner be considered as
serious business losses. This is not the business loss contemplated by the
Labor Code that would justify a valid retrenchment. It should be
substantial, sustained and real.11
Financial Statements audited by independent auditors are the
best evidence of losses otherwise they may be assailed as selfserving.12

Workers, GR. No. 75700-01, August 30, 1990; Banana Growers Collective at Puyod
Farms v. NLRC, 276 SCRA 544, 552-556 (1997)
10 Chan, Joselito, Guianan, Labor Law Reviewer 2nd Revised Edition, Chan Robles
Publishing, 2014 citing Clarion Printing House, Inc. v. NLRC, GR. No. 148372, June 27,
2005 and Flight Attendants and Stewards Association of the Philippines v. Philippine
Airlines, Inc., Patricia Chiong and Court of Appeals, GR. No. 178083, July 22, 2008.
11 Lambert Pawnbrokers and Jewelry Corp. v. Helen Binamira, GR. No. 170464, July
12, 2010
12 Danzas Intercontinental Inc. and Claude F. Schaer v. Henry M. Daguman, Amador
T. Castro, Richard F. Salvador and Jonas Culala, GR. No. 154368, April 15, 2005

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