Retrenchment as an authorized cause for termination

In the midst of the Covid-19 pandemic, businesses are understandably looking for ways to protect their bottom-line. Retrenchment of employees is among the first things that would come to their minds. But not so fast. 

According to the Supreme Court, retrenchment is an act of the employer of reducing the work force because of losses in the operation of the enterprise, lack of work, or considerable reduction on the volume of business. It is, in many ways, a measure of last resort when other less drastic means have been tried and found to be inadequate. 

The Labor Code recognizes retrenchment as an authorized cause for terminating employment. It is an option validly available to an employer to address losses in the operation of the enterprise, lack of work, or considerable reduction on the volume of business. 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.

While a legitimate business option, retrenchment may only be exercised in compliance with substantive and procedural requisites.

As to the substantive requisites, an employer must show: 

First, 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;

Second, that it 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

Third, that it 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, and financial hardship for certain workers.

Procedurally, an employer must:

Serve a 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; and

Pay the retrenched employees separation pay equivalent to one month pay or at least 1/2 month pay for every year of service, whichever is higher. (G. R. No. 214744)

Without complying with these requirements, such retrenchment may be considered invalid and tantamount to illegal dismissal, placing the employer into further and much prohibitive financial risks.