Retrenchment Criteria Used in Employee Termination
Retrenchment is one of the authorized causes to dismiss an employee under Article 298 of the Labor Code.
It involves a reduction in the workforce, resorted to when the employer encounters business reverses, losses, or economic difficulties, such as “recessions, industrial depressions, or seasonal fluctuations.” (La Consolacion College of Manila v. Pascua, 828 Phil. 182, 191-192 (2018))
This is usually done as a last recourse when other methods are found inadequate.
A valid retrenchment may only be exercised after the employer has proved compliance with the procedural and substantive requisites of valid retrenchment. Absent any of these, then the dismissal is illegal. (Me-Shurn Corp. v. Me-Shurn Workers Union-FSM, 489 Phil. 37, 45-47 (2005))
The procedural requisites for a valid retrenchment are provided for in the Labor Code:
ARTICLE 298. [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 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.
Thus, the employer must serve a written notice on the employee and the Department of Labor and Employment one month before the date of the dismissal, and pay the required amount of separation pay.
Meanwhile, in La Consolacion College of Manila v. Pascua, the Supreme Court enumerated three
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substantive requisites for a valid retrenchment.
While a legitimate business option, retrenchment may only be exercised in compliance with substantive and procedural requisites.
As to the substantive requisites, an employer must first show “that the 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.” Second, an employer must also show “that [it] 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.” Third, an employer must demonstrate “that [it] used fair and reasonable criteria in ascertaining who would be dismissed and who would be retained among the employees, such as status (i.e., whether they are temporary, casual, regular or managerial employees), efficiency, seniority, physical fitness, age, and financial hardship for certain workers.”
Thus, for a valid retrenchment, the employer must show that: (a) retrenchment was a necessary measure to prevent substantial and serious business losses; (b) it was done in good faith and not to defeat employees’ rights; and (c) the employer was fair and reasonable in selecting the employees who will be retrenched.
For the first requirement, the employer must prove the “existence or imminence of substantial losses” that would warrant the retrenchment. In Lopez Sugar Corporation vs. Federation of Free Workers:
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 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.
However, even if all these documents may suffice to show the company’s business losses and compliance with notice requirements, the employer may still be liable if it fails to show that the employees chosen for retrenchment were selected through fair and reasonable criteria.
As early as 1987, the SC in Asia World Publishing House, Inc. vs. Ople considered seniority, along with efficiency rating and less-preferred status, as a crucial facet of a fair and reasonable criterion for effecting retrenchment. Emcor, Inc. vs. Sienes was categorical, a “[retrenchment scheme without taking seniority into account rendered the retrenchment invalid.”
If records do not show any criterion adopted or used by employer in dismissing respondent, such as without considering seniority, the retrenchment scheme without taking seniority into account renders the retrenchment invalid.
In Philippine Tuberculosis Society, Inc. vs. National Labor Union, the SC quoted held that failure to use seniority as criterion invalidates the retrenchment, as the omission immediately makes the selection process unfair and unreasonable.
Further, in Villena vs. NLRC, the Supreme Court considered the seniority factor an important ingredient for the validity of a retrenchment program. According to the Court, the following legal procedure should be observed for a retrenchment to be valid: (a) one-month prior notice to the employee as prescribed by Article 282 of the Labor Code; and b) use of a fair and reasonable criteria in carrying out the retrenchment program, such as 1) less preferred status (as in the case of temporary employees), 2) efficiency rating, 3) seniority and 4) proof of claimed financial losses.
Indeed, it may have made mathematical sense to dismiss the highest paid employee first. However, appraising the propriety of retrenchment is not merely a matter of enabling an employer to augment financial prospects. It is as much a matter of giving employees their just due.
Employees who have earned their keep by demonstrating exemplary performance and securing roles in their respective organizations cannot be summarily disregarded by nakedly pecuniary considerations. The Labor Code’s permissiveness towards retrenchments aims to strike a balance between legitimate management prerogatives and the demands of social justice. Concern for the employer cannot mean a disregard for employees who have shown not only their capacity, but even loyalty.
The use of fair and reasonable criteria is necessary in a retrenchment program. Failure to do so affects the employees’ substantive rights to get what is their due.
In cases where the employer failed to prove that it used fair and reasonable criteria in carrying out the retrenchment program, and to explain why it included employee, who had already been employed for 10 years, there is noncompliance with the requirements of retrenchment under law and jurisprudence.
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