Termination Due to Retrenchment
When your business falls on hard times, you can validly terminate for authorized causes.
Business reverses happen to everyone. If these become severe enough, an employer may have to consider retrenching employees. But for legal as well as economic reasons, this is not a decision to be made lightly.
Retrenchment in the Philippines is covered by Art 297 (formerly 282) of the Labor Code, the issuances of the Department of Labor, and the decisions of the Supreme Court.
This post should help you understand what retrenchment requires in the Philippine context, its legal grounds, and the correct process to apply.
Definition of Retrenchment
A common conception of retrenchment is that this is when a business cuts its headcount because the company isn’t making money or is in danger of taking serious losses.
That’s fairly accurate.
Retrenchment, as defined by the Supreme Court, is:
… an act of the employer of dismissing employees because of losses in the operation of a business, lack of work, and considerable reduction on the volume of his business, a right consistently recognized and affirmed by this Court. [G.R. 181719, Apr 2014]
Due Process for Retrenchment requires a written notice and separation pay.
As an HR practitioner, it’s important that you know the elements required for lawful retrenchment:
- Retrenchment can be availed of if: (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. [G.R. 187214, Aug 2013]
- the employer exercises its prerogative to retrench in good faith [G.R. 170464, Jul 2010]; and
- the employer uses fair and reasonable criteria in ascertaining who would be retrenched or retained [G.R. 170464, Jul 2010].
That’s a lot of legalese, but it’s really just saying that you must retrench only for valid and serious reasons and that you’re using fair criteria for choosing who stays and who goes.
Simple enough, right?
Mitsubishi finally decided to retrench after several prior attempts at cost cutting
In addition, retrenchment must also follow two further requirements set by law [G.R. 170464, Jul 2010]:
- the employer serves written notice both to the employee/s concerned and the DOLE at least one month before the intended date of retrenchment;
- the employer pays the retrenched employee separation pay in an amount prescribed by the Code.
(An employee is entitled to receive a separation pay equivalent to one-half (1/2) month pay for every year of service, a fraction of at least six (6) months being considered as one (1) whole year)
Retrenchment in Good Faith
Mistubishi was bleeding to the tune of 1.2B pesos in years 1997 and 1998.
To stop the losses, it implemented many cost-cutting measures.
It tried to reduce office supplies use, deferred project implementation, froze hiring, and implemented a 5% cut in managerial salaries among others.
Finally, it decided it would need to permanently retrench.
![A picture showing a document, a CLOSED sign, and people in a round table discussing the Retrenchment.](data:image/svg+xml,<svg xmlns="http://www.w3.org/2000/svg" width="1080" height="720"><rect fill-opacity="0"/></svg>)
You’ll need a set of criteria uniformly applied to dismiss fairly.
When this was challenged, the Supreme Court upheld the decision in favor of Mitsubishi.
It pointed to all the proof Mistubishi submitted to show that there was a real reason for retrenchment. [G.R. 169780, Feb 2009]
When retrenchment is done for real, pressing reasons and the proof is brought to Court, you present a strong case that protects your company well.
Fair and Reasonable Criteria
When you retrench, you’ve got to decide who to keep and who to let go.
It is a good idea to have a list of criteria and evaluate each employee based on their merits.
This way, decisions are held to be fair and not motivated by personal considerations.
You’ll need a set of criteria uniformly applied to dismiss fairly.
Fair and reasonable criteria need to be proved to the Court whenever a retrenchment case is brought before them.
Without this, the Court may hold the retrenchment invalid. [G.R. 178083, Oct 2009]
Examples of Retrenchment
You probably want to lay your hands on some actual stories of retrenchment.
I’ve compiled a list of common situations (not exhaustive!) so as to better show through example what retrenchment is.
Want to see if your situation is similar? Check the brief list of examples below.
1. Reduction in the volume of work
When a Saudi Aramco contract was reduced by 40%, the Supreme Court upheld that retrenchment was valid. [G.R. 163657, Apr 2012]
2. Retrenchment of workers to prevent anticipated or actual losses.
During the economic downturn, TP Cement was dissolved and its sister company moved from production to marketing Thai based products due to substantial losses. The dismissal was valid. [G.R. 20149138, Feb 2006]
3. Closure of a department or section
Waterfront closed down its casino division but kept the hotel division open as it sustained losses of USD 3.5M. Although employees filed for illegal dismissal, the Court sided with the company. [G.R. 174214, Jen 2012]
4. Reorganization of the company
When Plastimer reorganized, it required the termination of employees to stave off further losses. The Court upheld the dismissals. [G.R. 183390, Feb 2011]
There are others, but this serves as a good place to start and hopefully makes it easier for you to understand what “retrenchment” means in practice.
Retrenchment vs. Redundancy
You’ll often find people are confused between redundancy and retrenchment.
They are similar, but the Court defines them differently.
Redundancy and retrenchment are often confused but are different from each other.
I’ve summarized from Jardine [G.R. 181719, Apr 2014]:
- Redundancy is when the services of an employee are in excess of what is needed. It can occur even when the business is doing well if labor is in excess of what the company requires.
- Retrenchment is when there are losses in the operation of the business.
Another important distinction is that the separation pay awarded to employees is different.
- Separation pay for redundancy is equivalent to the employee’s one-month pay for every year of service, a fraction of at least six (6) months being considered as one whole year.
- Separation pay for retrenchment is equivalent to one-half (1/2) month pay for every year of service, a fraction of at least six (6) months being considered as one (1) whole year, if his/her separation from
Thus, aside from a purely legal distinction, the economic effects on the company are different and significantly affect the bottom line.
Process
Follow due process!
Remember back up top, when I defined retrenchment?
Aside from the legal definition, I listed 5 items.
There was good faith, fair and reasonable criteria, and a definition of the kind of loss that is termed “retrenchment”.
I also mentioned two other requirements:
- 30-day notice to DOLE and the employee
- Separation pay of 1 month or ½ month for every year of service, whichever is higher. A fraction of at least 6 months is considered a year.
The calculation is really simple.
It’s just years of service multiplied by the employee’s compensation.
So it is:
Salary from his last pay slip
Plus all regular allowances
Multiplied by Years of service with a fraction of at least 6 months considered a year.
[DOLE 2017 Handbook on Worker’s Statutory Monetary Benefits]
Oh, and note that separation pay is not taxed, as per law.
The 30-day notice is equally simple.
You’ll need to fill out the DOLE form (RKS Form 5) and inform them and the affected employees at least 30 days in advance.
So, if you are contemplating retrenchment remember what we’ve gone through.
Retrenchment, by its nature, is not an easy decision to undertake, but ensuring you understand what it requires will make it much easier for your company and yourself.
Hello,
Speaking of retrenchment, can i ask for your help in coming up with the fair retrenchment notice to the affected employee/s?
Thank you.
Sent an email.
hello, I have the same request as Marlon David, Can you send me a fair retrenchment notice to employees? Thank you very much
Hi Lilibeth:
To create a retrenchment letter, it is necessary to understand the retrenchment strategy.
A retrenchment strategy must take into account jurisprudance and the laws on retrenchment as well as your company’s particular situation.
That is why retrenchment letter must work within a larger context.
This info material is very helpful. What documents are needed to prove the losses of a company? We have non performing stores thus we need to close them down.
Thanks again,
Rey
Dear Rey:
Thank you
In terms of proof, you should clearly present all helpful proof that will show your losses.
A common example are financial statements and projected financial statements.
Still, it is always best to work with your corporate counsel on this to ensure the correct process is followed and to examine what proof is available.
What must go first: retrenchment letter to DOLE or notice of termination to employees?
About the same, but it is prudent to furnish the DOLE with a copy of the retrenchment notice to the employees.
After I was retrenched from the company do I need to finish my clearance before I can get the separation?
Yes, the company is usually entitled to require that the proper and fair clearances be completed.
Thank you very much for the simple but precise explanation…
You are welcome.
What happen if the employer terminated the employee without just cause simply they just fired you. Is there any chance to raise this concern to DOLE or Authorities?
Yes. The DOLE can readily receive any claim and send summons for the parties to talk. It is usually a good idea to exhaust internal processes and remedies first though.
Good afternoon!
May I ask about retrenchment of employees. We are planning to lay-off some of our employees in the library during this time of COVID-19 Pandemic because our enrolees went down. The Reference Section of the Library will not be functional since we will not be having face to face with the elementary students. So is it proper to lay-off the librarian in-charge in this section?
It can be provided the business losses are established and the process is followed.
Are those agents under the probationary stage (6mos below) should also get one full month separation pay?
We are planning to do retrenchment because our client did not pay us, and we consider it as serious business losses.
An employee needs to have been employed at least 6 months to be entitled to separation pay.
Does it make a retrenchment invalid if the company reflected in the retrenchment letter is different from the employer name in the employment contract?
That depends on who the actual employer is. Determining employer-employee relationship can be very involved and depends on the facts of a case.
Hi. We had a meeting last June 8, 2020 informing who will be retrench and retain. Unfortunately, they retrench me. I signed a document indicating that i am no longer connected to the company pre dated May 31, 2020. Instructed me to turnover my work and was done July 1, 2020 as on-call employee and my lastday there too. They did not say anything when i will get my retrenchment pay and papers too, im still waiting up until now.
My question is as per law how long will i wait t for my retrenchment pay and last pay as oncall? Is it from the moment i turnover my work or the paper i sign may31 retrenchment date?
Thank you and hoping for your immediate response.
This should usually be within 30 days, subject to the fair clearance process.
Who signs the retrenchment letter, HR or the CEO?
It is usually HR, but either suffices.
Good Morning,
Can i request a sample letter of retrenchment for an employee during this pandemic.
You may find some guidance here:
http://lawyerphilippines.org/2020/05/08/covid-and-retrenchment-in-the-philippines/
Good Morning magtanong lang ako tama ba ang computation ng company nmin sa separation pay na half of monthly salary multiply kong ilang years ka ng service. nagkaroon kasi kami ng retrenchment.
In general, yes.
https://lawyerphilippines.org/2020/05/08/covid-and-retrenchment-in-the-philippines/
Hi Sir if the employees rendered 4 years and 7 months what will be the total years in service is it only 4 years or 5 years? thanks.
5 years because every fraction of at least 6 months is counted as a full year.