Retrenchment to Prevent Losses

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.

Last Edited: Friday, August 19, 2011

Caveat: Subsequent court and administrative rulings, or changes to, or repeal of, laws, rules and regulations may have rendered the whole or part of this article inaccurate or obsolete.

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