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.

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(1) 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;

(2) That the employer served written notice both to the employees and to the Department of Labor and Employment at least one month prior to the intended date of retrenchment;

(3) That the employer pays the retrenched employ- ees separation pay equivalent to one month pay or at least 1⁄2 month pay for every year of service, whichever is higher;

(4) That the employer 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; and

(5) That the employer 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,

To justify retrenchment, the employer must prove serious business losses. To justify the employees’ termination of service, the losses must be serious, actual and real, and they must be supported by sufficient and convincing evidence.

Moreover, the employer must prove the requirements for a valid retrenchment by clear and convincing evidence; otherwise, said ground for termination would be susceptible to abuse by scheming employers who might be merely feigning losses or reverses in their business ventures in order to ease out employees.

Sliding incomes or decreasing gross revenues are not necessarily losses, much less serious business losses within the meaning of the law. The bare fact that an employer may have sustained a net loss, such loss, per se, absent any other evidence on its impact on the business, nor on expected losses that would have been incurred had operations been continued, may not amount to serious business losses mentioned in the law.

Clarion Printing House, Inc. v. NLRC teaches that sliding incomes or decreasing gross revenues alone do not necessarily indicate business losses within the meaning of Article 298, for, in the nature of things, the possibility of incurring losses is constantly present in business operations.

The employer must also show that its losses in- creased through a period of time and that the condition of the company will not likely improve in the near future.

The burden clearly falls upon the employer to prove economic or business losses with sufficient supporting evidence. Its failure to prove these reverses or losses necessarily means that the employee’s dismissal was not justified. Any claim of actual or potential business losses must satisfy certain established standards, all of which must concur, before any reduction of personnel becomes legal.

Any less exacting standard of proof would render too easy the abuse of this ground for termination of services of employees.

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Retrenchment 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.

Stated in another way, retrenchment is defined as the termination of employment initiated by the employer through no fault of the employee and without prejudice to the latter, resorted by management during periods of business recession, industrial depression or seasonal fluctuations or during lulls over shortage of materials. It is a reduction in manpower, a measure utilized by an employer to minimize business losses incurred in the operation of its business.

The law recognizes the right of every business entity to reduce its work force if the same is made necessary by compelling economic factors which would endanger its existence or stability. Where appropriate and where conditions are in accord with law and jurisprudence, the Court has authorized valid reductions in the work force to forestall business losses, the hemorrhaging of capital, or even to recognize an obvious reduction in the volume of business which has rendered certain employees redundant.

Retrenchment is used interchangeably with the term “lay-off.”

Simply put, it is an act of the employer of dismissing employees because of losses in the operation of a business, lack of work, and considerable reduction on the volume of his business, a right consistently recognized and affirmed by the courts.

Retrenchment is a management prerogative consistently recognized by the Court.

Nevertheless, while it is true that the exercise of this right is a prerogative of management, there must be faithful compliance with substantive and procedural requirements of the law and jurisprudence, for retrenchment strikes at the very heart of the worker’s employment, the lifeblood upon which he and his family owe their survival.

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The establishment and implementation of criteria are important feature of redundancy to give respect to the employee’s constitutionally enshrined security of tenure.

In one case, the Supreme Court has refused to give credence to the redundancy invoked by the employer inasmuch as the company adopted no criterion in dismissing the employee.

Verily, the absence of criteria and the erroneous implementation of the criterion selected, both render invalid the redundancy because both have the ultimate effect of

In a case, studies for the redundancy program showed to eliminate the “undesirables,” “abusers,” and “worst performers.” It was challenged for being indicia of bad faith. The Supreme Court disagreed and did not put significance to the allusions. It may be argued that the elimination of the so-called “undesirables” was merely incidental to the redundancy program or that past transgressions could have been part of the criteria in determining who among the redundant employees is to be dismissed.

That no other person was holding the same position prior to the termination of one’s services, does not show that his position had not become redundant. Indeed, in any well-organized business enterprise, it would be surprising to find duplication of work and two (2) or more people doing the work of one person.

The fact that the employer hired contractual employees after implementing its redundancy program does not necessarily negate the existence of redundancy. Especially if there is showing that such hiring was intended solely for winding up operations using the old system.

The employer has the recognized right and prerogative to select the persons to be hired and to designate the work as well as the employee or employees to perform it.

This includes the right of the company to determine the employees to be retained or discharged and who among the applicants are qualified and competent for a vacant position. The rationale for this principle is that the employer is in the best position to ascertain what is proper for the advancement of its interest.

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An interesting follow-up inquiry is if that is the case, it seems that saving on labor cost cannot be the basis for redundancy.

Adopting that line of inquiry in an actual case, redundancy was challenged on the ground that the true desire for the program is to save labor costs. The Court held that the law does not prevent employers from saving on labor costs.

The Court has recognized such right. The determination of the need for the phasing out of a department as a labor and cost saving device because it was no longer economical to retain said department is a management prerogative, with which the courts will not interfere.

The phasing out of a department and the consequent redundancy of the position held by the employee is a valid act of the company to save cost in its operations. The company may transfer the function of the

department to another.

So long as the undertaking to save on labor costs is not attended by malice, arbitrariness, or intent on the part of the employer to circumvent the law, courts should not interfere with such endeavor.

Indeed, the management of a company cannot be denied faculty of promoting efficiency and attaining economy by a study of what units are essential for its operation. To it belongs the ultimate determination of whether services should be performed by its personnel or contracted to outside agencies. While there should be mutual consultation, eventually deference is to be made to what management decides.

The employer’s utilization of high technology equipment in its operation such as computers and digital switches necessarily resulted in the reduction of the demand for the services of a Switchman since computers and digital switches can aptly perform the function of several Switchmen. Indubitably, the position of Switchman has become redundant.

In one case, the company phased-out its security section and hired an independent security agency. It was a valid act constituting a legitimate business decision. Consequently, absent proof that management acted in a malicious or arbitrary manner, courts should not interfere with the exercise of judgment by the employer.

When the employer terminated its Water Pump Tenders because of engagement with independent contractors, the employer’s good faith in implementing a redundancy program is not necessarily put in doubt by the availment of the services of an independent contractor.

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Among these grounds are as follows: (See citations in Atty. Elvin’s Book Guide to Valid Dismissal of Employees Second Edition, p. 212)

1. Any union officer who knowingly participates in an illegal strike may be declared to have lost his employment status. In this instance, the union officer must have knowledge that the strike to which he participates in is illegal;
2. Any worker or union officer who knowingly participates in the commission of illegal acts during a strike may be declared to have lost his employment status. This is the case whether the strike is legal or illegal;
3. Strikers, who violate orders, prohibitions and/or injunctions as are issued by the Secretary of Labor and Employment or the NLRC, may be imposed immediate disciplinary action, including dismissal or loss of employment status;
4. Violation of the union security clause stipulated in the CBA pursuant to Article 248 [e] of the

   

   Labor Code may result in termination of employment. The contracting union can demand from the employer the dismissal of an employee who commits a breach of union security arrangement, such as failure to join the union or to maintain his membership in good standing there- in. The contracting union can also demand for the dismissal of a member who commits an act of disloyalty to the union, such as when the member organizes a rival union.

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A worker who overextended his vacation leave cannot be said to have abandoned his job due to the failure of the employer to adduce proof of overt acts on the part of employee showing clearly and unequivocably his intention to abandon his work. However, it is one thing to say that private respondent did not abandon his work. It is quite another to say that he is likewise not guilty of AWOL. For going AWOL, the employee may be subjected to disciplinary action.

Most companies require their employees to file their leave form prior to the taking of vacation leaves.

While it is not generally possible for an employee to anticipate when he will be ill or have to attend to some family problem or emergency, and be able to give prior notice to his employer, he should give such notice when he will be absent for some other cause, such as when he will attend to some other business elsewhere, for such engagements can be properly scheduled by him so as not to interfere with his regular working hours and disrupt the operations of the company in his particular area of assignment. Without prior notice of the employee’s absence, the company is not afforded enough time to get a

temporary replacement for him.

In the following instances, the Supreme Court held that there is abandonment:

1. Failure of employee to work after the expiration of his authorized leave;190
2. Failure to comply with reinstatement order;
3. Deliberate absence without permission to look for work elsewhere;

At some point, the Supreme Court held that the dismissal of employees for abandonment is unjustified since their absence was due to their arrest and detention for seven months for the alleged violation of the Revised Penal Code.

However, an absence to evade arrest and to ward off the long arm of the law is not a valid justification. To do so would be to place an imprimatur on the attempt to derail the normal course of the administration of justice.

Sea based workers are governed by the maritime practice with respect to their conduct while engaged to perform a voyage. Thus, desertion is the common charge against a seaman who jumps ship.

Desertion, in maritime law is the act by which a seaman deserts and abandons a ship or vessel, in which he had engaged to perform a voyage, before the expiration of his time, and without leave. By desertion, in maritime law, is meant, not a mere unauthorized absence from the ship, without leave, but an unauthorized absence from the ship with an intention not to return to her service; or as it is often expressed, animo non revertendi, that is, with an intention to desert.

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