The Supreme Court (SC) concluded that this constitutes retrenchment by, and not closure of, the enterprise or the company itself as SMC has not totally ceased operations but is still very much an on-going and highly viable business concern.

Retrenchment is a management prerogative consistently recognized and affirmed by this Court. It is, however, subject to faithful compliance with the substantive and procedural requirements laid down by law and jurisprudence.

For retrenchment to be considered valid the following substantial requirements must be met: (a) the losses expected should be substantial and not merely de minimis in extent; (b) the substantial losses apprehended must be reasonably imminent such as can be perceived objectively and in good faith by the employer; (c) the retrenchment must be reasonably necessary and likely to effectively prevent the expected losses; and (d) the alleged losses, if already incurred, and the expected imminent losses sought to be forestalled, must be proved by sufficient and convincing evidence.

In the discharge of these requirements, it is the employer who has the onus, being in the nature of an

affirmative defense.

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.

In the case of SMC, company losses were duly established by financial documents audited by Joaquin Cunanan & Co. showing that the aquaculture operations of SMC’s Agribusiness Division accumulated losses amounting to Php145,848,172.00 in 1992 resulting in the closure of its Calatrava Aquaculture Center in Negros Occidental, PhP11,393,071.00 in 1993 and PhP80,325,608.00 in 1994 which led to the closure of its San Fernando Shrimp Processing Plant in Pampanga and the Bacolod Shrimp Processing Plant in 1995.

SMC has thus proven substantial business reverses justifying retrenchment of its employees.

For termination due to retrenchment to be valid, however, the law requires that written notices of the intended retrenchment be served by the employer on the worker and on the DOLE at least one (1) month before the actual date of the retrenchment, in order to give employees some time to prepare for the eventual loss of their jobs, as well as to give DOLE the opportunity to ascertain the verity of the alleged cause of termination.

Affected employees, however, were merely verbally informed on September 10, 1995 by SMC Prawn Manager Ponciano Capay that effective the following day or on September 11, 1995, they were no longer to report for work as SMC would be closing its operations.

Where the dismissal is based on an authorized cause under Article 283 [now Art. 301] of the Labor Code but the employer failed to comply with the notice requirement, the sanction should be stiff as the dismissal process was initiated by the employer’s exercise of his management prerogative, as opposed to a dismissal based on a just cause under Article 282 [Art. 297] with the same procedural infirmity where the sanction to be imposed upon the employer should be tempered as the dismissal process was, in effect, initiated by an act imputable to the employee.

In light of the factual circumstances of the case at bar, the SC awarded PhP50,000.00 to each complainant as nominal damages.

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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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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.

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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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It is a reduction in manpower, a measure utilized by an employer to minimize business losses incurred in the operation of its business. (Philippine Carpet Employees Association [PHILCEA] vs. Hon. Sto. Tomas, G.R. No. 168719, February 22, 2006)

Retrenchment is normally resorted to by management during periods of business reverses and economic difficulties occasioned by such events as recession, industrial depression, or seasonal fluctuations. (Edge Apparel, Inc. vs. NLRC, G.R. No. 121314 February 12, 1998)

Related topic: Constructive Dismissal Definition and Concept

It is sometimes also referred to as down-sizing. Retrenchment is an authorized cause for termination of employment which the law accords an employer who is not making good in its operations in order to cut back on expenses for salaries and wages by laying off some employees. The purpose of retrenchment is to save a financially ailing business establishment from eventually collapsing. (Sanoh Fulton Philippines, Inc. vs. Bernardo, G.R. No. 187214, August 14, 2013.)

Article 298 of the Labor Code, as amended, provides, that:

“Article 298. 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 termination due to the installation of labor-saving devices or redundancy, the worker affected thereby shall be entitled to a separation pay equivalent to at least his one (1) month pay or to at least one (1) month pay for every year of service, whichever is higher. 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.”

The requirements of a valid retrenchment program are: (International Management Services vs. Logarta, G.R. 163657, 18 April 2012)

(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 employees separation pay equivalent to one month pay or at least ½ 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, efficiency, seniority, physical fitness, age and financial hardship for certain workers.

Based on the above, there can be substantial basis for the planned retrenchment if the company can prove that it suffers significant financial losses over significant period of time. If the company alleges financial losses as ground for retrenchment it must be ready to provide proof of such financial losses. The losses must be demonstrated by the Audited Financial Statements (AFS) for the periods covered by the said losses.

The law states that 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. (Mobilia Product, Inc. vs. Demecillo, G.R. No. 170669, February 4, 2009 citing Guerrero vs. National Labor Relations Commission, G.R. No. 119842, August 30, 1996, 261 SCRA 301, 305.)

Moreover, the employer must prove the requirements for a valid retrenchment by clear and convincing evidence.

In establishing a unilateral claim of actual or potential losses, financial statements (FS) audited by independent external auditors constitute the normal method of proof of profit and loss performance of a company. (TPI Philippines Cement Corporation vs. Cajucom VII, G.R. No. 149138, February 28, 2006, 483 SCRA 494, 503.)

The condition of business losses justifying retrenchment is normally shown by audited financial documents like yearly balance sheets and profit and loss statements as well as annual income tax returns. Financial statements must be prepared and signed by independent auditors, otherwise, they may be assailed as self-serving. (Danzas Intercontinental, Inc. vs. Daguman, G.R. No. 154368, April 15, 2005, 456 SCRA 382.)

The Supreme Court laid down the reasonable criteria in effecting retrenchment, such as, but not limited to: (See Flight Attendants and Stewards Association of the Philip- pines v. Philippines Airlines, Inc., G.R. No. 178083, July 23, 2008, 559 SCRA 252 citing Fernandez, P.V., The Law of Employee Dismissal, pp. 130-131, 1976 Ed.; Asiaworld Publishing House, Inc. v. Ople, G.R. No. L-56398, July 23, 1987, 152 SCRA 219, 225; Asufrin, Jr. v. San Miguel Corporation, G.R. No. 156658, March 10, 2004, 425 SCRA 270, 275.)

(a) Less preferred status (e.g., temporary employee);

(b) Efficiency;

(c) Seniority;

(d) Work skill required and qualities of workers to be retained; and

(e) Work experience.

The most important item in these criteria is the seniority.

As held by the Supreme Court, retrenchment scheme without taking seniority into account renders the retrenchment invalid. (Emcor vs. Sienes, citing Philippine Tuberculosis Society Inc. vs. NLRC, 356 Phil. 63, 72 (1998).)

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