However, there are limitations to the exercise of such right. In general, the only limitations to the exercise of this prerogative are those imposed by labor laws and the principles of equity and substantial justice.

In the case of Lopez Sugar Corporation v. Federation the Supreme Court itemized the limitations as follows:

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 bona fide 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 right of an employer to dismiss an employee differs from and should not be confused with the manner in which such right is exercised. It must not be oppressive and abusive since it affects one’s person and property.

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

Read more on procedural due process discussion by Atty. Elvin:

Read more on procedural due process by Atty. Villanueva:

Twin Requirements of Notice and Hearing

Procedural Due Process for Other Types of Employment

Notice to Explain: Contents and Requirements

An owner of a business enterprise is given considerable leeway in managing his business because it is deemed important to society as a whole that he should succeed.  Our law, therefore, recognizes certain rights as inherent in the management of business enterprises.  These rights are collectively called management prerogatives or acts by which one directing a business is able to control the variables thereof so as to enhance the chances of making a profit. (Homeowners Savings and Loan Association, Inc. vs. National Labor Relations Commission, G.R. No. 97067,  September 26, 1996)

An employer has the right to exercise its management prerogative in dealing with its company’s affairs including its right to dismiss its erring employees. The Court recognized the right of the employer to regulate all aspects of employment, such as the freedom to prescribe work assignments, working methods, processes to be followed, regulation regarding transfer of employees, supervision of their work, lay-off and discipline, and dismissal and recall of workers. In fact, it is a general principle of labor law to discourage interference with an employer’s judgment in the conduct of his business.

Even as the law is solicitous of the welfare of the employees, it also recognizes employer’s exercise of management prerogatives. Thus, for as long as the company’s exercise of judgment is in good faith to advance its interest and not for the purpose of defeating or circumventing the rights of employees under the laws or valid agreements, such exercise will be upheld. (Gaite vs. Filipino Society of Composers, et al., G.R. No. 219324, August 8, 2018)

The courts will decline to interfere in legitimate business decisions of employers. Labor laws discourage interference in employer’s judgment concerning the conduct of their business. (Philippine Industrial Security Agency Corporation vs. Aguinaldo, G.R. No. 149974, June 15, 2005)

Learn how to Validly Terminate Employee in the Philippines with this Tutorial Video of Atty. Elvin In general, the management has prerogative to discipline, free reign to regulate all aspects of employment, prerogative to impose penalties, and prerogative to dismiss. (The Coca-Cola Export Corporation vs. Gacayan, G.R. No. 149433, December 15, 2010)