Retrenchment Due to Existence or Imminence of Substantial Losses

Retrenchment Due to Existence or Imminence of Substantial Losses

Retrenchment is one of the grounds for dismissal under the Labor Code. In the case of Team Pacific Corporation vs. Parente, G.R. No. 206789, July 15, 2020.

The employer claiming “existence or imminence of substantial losses” that would warrant the retrenchment, must prove the same. In Lopez Sugar Corporation v. 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.

In this case, According to the Supreme Court (SC), the Labor Arbiter based its ruling only on the documents respondents submitted, after Team Pacific had refused to receive summons, attend hearings, or file pleadings. Nonetheless, the Labor Arbiter found that the retrenchment was valid because the Termination Letter, citing the global economic crisis as its reason, was served one month prior to respondent’s dismissal. The Labor Arbiter also declared that Parente was bound by her acceptance of separation pay and her execution of a waiver and quitclaim.

The National Labor Relations Commission merely affirmed this ruling, saying that Parente was estopped from questioning her dismissal.

The SC held that the labor tribunals’ factual findings are not sufficient to rule that the retrenchment is valid. Team Pacific did not prove in any way that the company incurred or is about to incur substantial business losses that would warrant retrenchment.

Independently audited financial statements are of high evidentiary value in terms of proving the employer’s serious business losses. Citing Manatad vs. Philippine Telegraph and Telephone

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Corporation, the SC ruled:

The financial statements audited by independent external auditors constitute the normal method of proving the profit and loss performance of a company as enunciated in San Miguel Corporation v. Abella:

Normally, the condition of business losses is shown by audited financial documents like yearly balance sheets, profit and loss statements and annual income tax returns. The financial statements must be prepared and signed by independent auditors failing which they can be assailed as self-serving documents.

No evidence can best attest to a company’s economic status other than its financial statement. We defined the evidentiary weight accorded to audited financial statements in Asian Alcohol Corporation v. National Labor Relations Commission:

The condition of business losses is normally shown by audited financial documents like yearly balance sheets and profit and loss statements as well as annual income tax returns. It is our ruling that financial statements must be prepared and signed by independent auditors. Unless duly audited, they can be assailed as self-serving documents. But it is not enough that only the financial statements for the year during which retrenchment was undertaken, are presented in evidence. For it may happen that while the company has indeed been losing, its losses may be on a downward trend, indicating that business is picking up and retrenchment, being a drastic move, should no longer be resorted to. Thus, the failure of the employer to show its income or loss for the immediately preceding year or to prove that it expected no abatement of such losses in the coming years, may bespeak the weakness of its cause. It is necessary that the employer also show that its losses increased through a period of time and that the condition of the company is not likely to improve in the near future.

That the financial statements are audited by independent auditors safeguards the same from the manipulation of the figures therein to suit the company’s needs. The auditing of financial reports by independent external auditors are strictly governed by national and international standards and regulations for the accounting profession.

In addition, the fact that the financial statements were audited by independent auditors settles any doubt on the authenticity of these documents for lack of signature of the person who prepared it. As reported by SGV & Co., the financial statements presented fairly, in all material aspects, the financial position of the respondent as of 30 June 1998 and 1997, and the results of its operations and its cash flows for the years ended, in conformity with the generally accepted accounting principles.

The SC has likewise ruled that presenting the audited financial statement for the year of retrenchment may not be sufficient. The employer must prove that the losses increased or have been increasing for a period of time and the company’s condition will not improve in the near future.

Jurisprudence requires that the necessity of retrenchment to stave off genuine and significant business losses or reverses be demonstrated by an employer’s independently audited financial statements. Documents that have not been the subject of an independent audit may very well be self-serving. Moreover, it is not enough that it presents its audited financial statement for the year that retrenchment was undertaken for even as it may be incurring losses for that year, its overall financial status may already be improving.

Thus, it must “also show that its losses increased through a period of time and that the condition of the company is not likely to improve in the near future.”

There may be instances when presenting audited financial statements is not necessary, but this does not dispense with the employer’s burden of providing a basis for alleging that it has incurred serious business losses.

In the case of Team Pacific, the Labor Arbiter did not consider any audited financial statement or any other evidence in determining whether there were business losses. He only referred to the Termination Letter, as if its bare allegations are enough to be given full faith and credence. He merely assumed that the global economic crisis affected the company, and thus concluded that the employee was rightfully dismissed.

The SC opined that mere allegations of a global economic crisis are not sufficient. In Me-Shurn Corporation v. Me-Shurn Workers Union-FSM:

The reason invoked by petitioners to justify the cessation of corporate operations was alleged business losses. Yet, other than generally referring to the financial crisis in 1998 and to their supposed difficulty in obtaining an export quota, interestingly, they never presented any report on the financial operations of the corporation during the period before its shutdown. Neither did they submit any credible evidence to substantiate their allegation of business losses.

Basic is the rule in termination cases that the employer bears the burden of showing that the dismissal was for a just or authorized cause. Otherwise, the dismissal is deemed unjustified. Apropos this responsibility, petitioner corporation should have presented clear and convincing evidence of imminent economic or business reversals as a form of affirmative defense in the proceedings before the labor arbiter or, under justifiable circumstances, even on appeal with the NLRC.

However, as previously stated, in all the proceedings before the two quasi-judicial bodies and even before the CA, no evidence was submitted to show the corporation’s alleged business losses. It is only now that petitioners have belatedly submitted the corporation’s income tax returns from 1996 to 1999 as proof of alleged continued losses during those years.

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