The Legal Consequence of Retrenchment

Retrenchment or lay-off of employees is one of the authorized causes for termination of employment. It has several consequences with regard the responsibility of management and the corresponding rights of employees. But first what is lay-off? Very enlightening on the matter is the case of Gloria S. Dela Cruz vs. NLRC et al., G.R. No. 119536, February 17, 1997 where the Supreme Court said the following about lay-off: A lay-off, used interchangeably with retrenchment, is a recognized prerogative of management. It is the termination of employment resorted to by the employer, through no fault of nor with prejudice to the employees, during periods of business recession, industrial depression, 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. Simply put, it is an act of the employer of dismissing employees because of losses in 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. The requisites of a valid retrenchment are covered by Art. 283 of the Labor Code. The consequences of lay-off of employees vary depending on whether the retrenchment was legal and proper or not. For it to be legal and proper, the following should be present: a) A valid cause, that is, the retrenchment was to prevent losses; b) Observance of proper procedure, that is, service of a written notice of termination to the employee and the appropriate Regional Office of the Department of Labor and Employment at least 30 days before the effectivity of the termination; c) Compliance with the standards laid down by the Supreme Court in Lopez Sugar Corp. vs. Federation of Free Workers, 189 SCRA 179, 190, August 30, 1990, that is: . . . 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 other 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 avoid losses. 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, e.g., reduction of both management and rank-and-file- bonuses and salaries, going 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. . . . So if the retrenchment is legal and proper, it is the responsibility of management to provide and it is the right of the retrenched employees to demand for the payment of separation pay which 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 being considered as one whole year. (See Article 283 of the Labor Code) In other words, if the employees legal length of service is less than three years then he shall get a separation pay equivalent to his wage for one month only but if his legal length of service is three years or more then he shall get one-half month pay for every year of service as separation pay because at three years a separation pay of one-half month pay for every year of service would be higher than his wage for one month only. While at two years a separation pay of one-half month pay for every year of service is just equal to one month pay. And at one year a separation pay of one-half month pay for every year of service would be less than one month pay. On the other hand, if the legal length of service is less than a year (which means that the actual length of service was less than six months since under the law a fraction of at least six months shall be considered as one whole year) then the one-half month pay for every year of service provision is simply inapplicable, which means that the separation pay will be one month pay. But if the retrenchment is illegal and improper, then Article 279 of the Labor Code provides, as part of the responsibility of management and rights of employees, the following: a.) reinstatement without loss of seniority rights and other privileges, b.) payment of full backwages, inclusive of allowances, c.) restoration of other benefits or their monetary equivalent. Moreover, it was held in F.F. Marine Corp., G.R. No. 152039, April 8, 2005, that if the ground for retrenchment is not proved, the retrenchment will be declared illegal and of no effect. If the retrenched employee had signed quitclaims, they may be declared invalid as not voluntarily entered into since the employees consent was vitiated by mistake or fraud. Even his acceptance of the retrenchment pay does not bar him from contesting his separation. The employee illegally retrenched is entitled to reinstatement but if reinstatement is not feasible such as where the employee asks for separation pay instead of reinstatement, then separation pay in lieu of reinstatement may be awarded at the rate of one month pay for every year of service. In addition, full backwages will have to be paid in view of the illegality of the separation, the retrenchment having been found illegal. Note, however, that the separation pay granted by the court in the abovementioned case is not the separation pay provided under Art. 283 of the Labor Code but is a different kind of

separation pay as it is a separation pay in lieu of reinstatement. The separation pay in lieu of reinstatement is higher than that provided in Article 283 and is granted in cases of illegal retrenchment whereas the one provided under Art. 283 is paid in cases of legal retrenchment. Furthermore, if the retrenchment is found to be defective or improper because the employer failed to comply with the notice requirement, the retrenched employees are entitled to nominal damages the amount of which would vary depending on the circumstances of the case. In JAKA Food Processing Corp. vs. Pacot, et al., G.R. No. 151378, March 28, 2005, the Supreme Court ordered the employer to pay P50,000 as nominal damages because the latter failed to give the required one month notice. It is important to note, however, that retrenchment may also be temporary. If so, the employees temporarily laid-off are not entitled to the separation pay granted under Article 283 of the Labor Code. As clarified by the Supreme Court in the Dela Cruz case cited earlier, when the a lay-off is temporary, the employment status of the employee is not deemed terminated, but merely suspended. Article 286 of the Labor Code provides, in part, that the bona fide suspension of the operation of the business or undertaking for a period not exceeding six months does not terminate employment. Also, Article 286 further provides that 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 (1) month from the resumption of operations of his employer. But if the temporary retrenchment lasts for more than six months then the employees are deemed constructively dismissed and are thus entitled to the corresponding benefits for their separation. (Agro Commercial Security, G.R. Nos. 82823-24, July 31, 1989) Certainly, retrenchment is not as simple as it seems to be. There are serious consequences which must be taken note of by both management and labor in order for them to be in the right side of things.

Proper Dismissal of Employees

Atty. Hector Jamandre Diaz The procedure in dismissing employees depends on the cause of the termination1. Termination may be for JUST or AUTHORIZED causes under the Labor Code: 1. JUST CAUSES enumerated in Article 282 of the Labor Code: (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, The employer is required to observe the twin notice requirements, that is: FIRST NOTICE: Written notice of accusation and schedule for hearing; and SECOND NOTICE: Written notice of termination. Procedural Due Process: 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:
1. 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.
2. Hearing or formal investigation. A hearing or conference during which the employee,

with the assistance of his counsel, if the employee desires, is given opportunity to respond to the charge, present his evidence or rebut the evidence presented against him.
3. 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. (Art. 277 (b) and Sec 2, Rule I, Book VI, IRR) Service of Notices: Service of notice to show cause and notice of termination should both be served to the employee by personally handing him a copy. If this is not possible, the notices may be served on the employees last known address by registered mail. Posting of the notice on the bulletin board is not sufficient compliance. (Shoppers Gain Supermart, 1996) If the employee refused to receive notice, employer must serve the same by registered mail at his last known address.

See Sec. 2, Rule 1 of the Implementing Rules of Book VI of the Labor Code, as amended by Department Order No. 10 which took effect on June 22, 1997

Opportunity to Respond: The very purpose of requiring the employer to observe proper termination process is to give the employee ample opportunity to respond to the charges against him or to defend himself. What the law require is ample opportunity. Ample opportunity means every kind of assistance that management must accord the employee to enable him to prepare adequately for his defense including legal representation. Requirements for First Notice (NTE): The first notice informing the employee of the charges against him should set out clearly the charge/s. It should neither be pro-forma nor vague. This is consistent with the requirement that the employee should be afforded ample opportunity to be heard and not mere opportunity. Moreover, the dismissal, if necessary, must be based on the same grounds cited in the NTE. If the dismissal is based on grounds other than those specified in the notice, he is deemed to have been deprived of due process. (Glaxo Wellcome vs. NEW-DFA, 2005.) Effect of Refusal of Employee to Participate in Investigation: By refusing to participate, the employee is deemed to have waived his right to defend himself. (Leonardo vs. NLRC, 2000.) Effects or Consequences of Termination:
1. If dismissal is for just cause and with prior notice and hearing, the dismissal is valid. 2. If dismissal is for just cause but without prior notice and hearing, the dismissal is valid but

the employer may be required to pay nominal damages to the dismissed employee.
3. If there is no just cause for dismissal, whether or not there is prior notice and hearing, the

dismissal is illegal. The employee is entitled to reinstatement, backwages and damages. Cases:
1. The employee refused to participate in the investigation being conducted by the

personnel management. The Court ruled that by refusing to participate, he cannot claim that he was denied due process. (Leonardo vs. NLRC, 2000.)
2. The employment contract contains stipulation that the employment may be terminated

by either party after one month notice or one month salary in lieu of notice. The stipulation was held to be illegal. The requirement of prior notice and opportunity to be heard cannot be substituted by mere payment of salary. (PNB vs. Cabansag, 2005.)
3. Before the notice of termination is given, there must be a finding of guilt after

conducting a hearing or conference wherein the concerned employee is afforded the opportunity to respond to the charge and explain his side. Nonetheless, in China Banking Corp.n v. Borromeo, G.R. No. 156515, Oct 19, 2004, and in Pampanga II Electric Coop., Inc. v. NLRC, 250 SCRA 31 (1995), Bernardo v. NLRC, 255 SCRA 108 (1996); and Magos v. NLRC, 300 SCRA 484 (1998), the Supreme Court has ruled that a hearing or formal administrative investigation may be dispensed with if the employee expressly admitted his infractions. 2. AUTHORIZED CAUSES provided in Articles 283 and 284 of the Labor Code:

(a) Installation of labor-saving devices; (b) Redundancy; (c) Retrenchment to prevent losses; (d) Closure or cessation of operation of the establishment or undertaking; or (e) Employee has a disease which makes his continued employment prohibited by law or prejudicial to his health as well as to the health of his co-employees and is certified by a competent public authority to be of such nature or at such a stage that it cannot be cured within a period of six months even with proper medical treatments. Procedure: A written notice of termination is given to the concerned employee and the appropriate Regional Office of the DOLE at least 30 days before the effectivity of the termination specifying the ground or grounds for termination. No hearing is required. However, if the termination is brought about by the completion of contract or phase thereof, or by failure of an employee to meet the standards of the employer in the case of probationary employment, then it is enough that the employee is given written notice within a reasonable time from the effective date of termination. But it must be noted that prior to the completion of the contract or phase thereof or before the end of the probationary period, the concerned employee can only be dismissed based on a just cause under Art. 282 or authorized cause under Articles 283 and 284 of the Labor Code. If the termination was really for a valid cause and was done after observing proper procedure, then the dismissal is legal. Hence, the employee is not entitled to the benefits provided in Article 279 of the Labor Code such as: a. reinstatement without loss of seniority rights and other privileges, b. payment of full backwages, inclusive of allowances, c. reenjoyment of his other benefits. What the employee is entitled to is the separation pay provided in Articles 283 and 284 of the Labor Code if the dismissal is based on an authorized cause enumerated therein. But if the dismissal was for a just cause, the dismissed employee is not entitled to separation pay except as a form of financial assistance on the ground of compassionate justice. As held by the Supreme Court in Philippine Long Distance Telephone Co. vs NLRC and M. Abucay, G.R. No. 80609, August 23, 1988, there should be no question that when it comes to such valid but iniquitous causes as failure to comply with work standards, the grant of separation pay to the dismissed employee may be both just and compassionate, particularly if he has worked for some time with the company. Thus, separation pay shall be allowed as a measure of social justice in those instances where the employee is validly dismissed for causes other than serious misconduct or those reflecting on his moral character. Indeed, termination of employment is a delicate issue. Considering that employment contracts are vested with public interest and labor is a constitutionally-protected social economic force, an employer who wishes to dismiss an employee should see to it that the dismissal is in accordance with labor laws.