RETRENCHMENT is defined as “the termination of employment initiated by the employer through no fault of the employees and without prejudice to the latter, resorted to by management during periods of business recession, industrial depression, or seasonal fluctuations or during lulls occasioned by lack of orders, shortage of materials, conversion of the plant for a new production program or the introduction of new methods or more efficient machinery, or of automation. It is a management prerogative resorted to by employers to avoid or minimize business losses.”
In the Philippines, the law governing retrenchment is found in Article 283 of the Labor Code of the Philippines. It allows retrenchment to prevent losses or the closing or cessation of operation of the establishment or undertaking. The requirements of the law for a valid retrenchment of workers are as follows:
a) necessity of retrenchment to prevent losses and proof of such losses;
b) written notice to the employees and to the Department of Labor and Employment (DOLE) at least one month prior to the intended date of retrenchment; and
c) payment of separation pay equivalent to one month pay or at least ½ month pay for every year of service, whichever is higher.
The employer bears the burden of proving with clear and satisfactory evidence that legitimate business reasons exist to justify retrenchment. The losses must be serious, actual and real. 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.
The employer is also required by law to serve written notices of the intended retrenchment on the worker and on the DOLE at least one (1) month before the actual date of the retrenchment. The purpose of this requirement is to give employees time to prepare for the eventual loss of their jobs, as well as to give DOLE the opportunity to ascertain the veracity of the alleged cause of termination. Nothing in the law gives the employer the option to substitute the required prior written notice with payment of 30 days salary. Indeed, a job is more than the salary it carries. Payment of 30 days salary cannot compensate for the psychological effect or the stigma of immediately finding one’s self laid off from work.
Finally, the retrenched employee must actually receive a separation pay equivalent to one (1) month pay or to 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.(Section 283, Labor Code of the Philippines)