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.

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.

In the case of Team Pacific Corporation vs. Parente, the Labor Arbiter based its ruling only on the documents that the employee submitted, after the employer 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 dismissal. The Labor Arbiter also declared that the employee 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 the said employee was estopped from questioning her dismissal.

The labor tribunals’ factual findings are not sufficient to rule that the retrenchment is valid. The company did not prove in any way that it 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. In Manatad vs. Philippine Telegraph and Telephone Corporation.

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 vs. 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. The SC 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.

Learn how to Validly Terminate Employee in the Philippines with this Tutorial Video of Atty. Elvin

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Twin Requirements of Notice and Hearing

Procedural Due Process for Other Types of Employment

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