An employer sliding downwards along an arrow signifying business reverses.

When your business falls on hard times, you can validly terminate for authorized causes.

Business reverses happen to everyone. If these become severe enough, an employer may have to consider retrenching employees. But for legal as well as economic reasons, this is not a decision to be made lightly.

Retrenchment in the Philippines is covered by Art 297 (formerly 282) of the Labor Code, the issuances of the Department of Labor, and the decisions of the Supreme Court.

This post should help you understand what retrenchment requires in the Philippine context, its legal grounds, and the correct process to apply.

Definition of Retrenchment

A common conception of retrenchment is that this is when a business cuts its headcount because the company isn’t making money or is in danger of taking serious losses.

That’s fairly accurate.

Retrenchment, as defined by the Supreme Court, 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 this Court. [G.R. 181719, Apr 2014]

A picture showing a written document with the words

Due Process for Retrenchment requires a written notice and separation pay.

As an HR practitioner, it’s important that you know the elements required for lawful retrenchment:

  • Retrenchment can be availed of if: (1) the losses incurred are substantial and not de minimis; (2) the losses are actual or reasonably imminent; (3) the retrenchment is reasonably necessary and is likely to be effective in preventing the expected losses; and (4) the alleged losses, if already incurred, or the expected imminent losses sought to be forestalled, are proven by sufficient and convincing evidence. [G.R. 187214, Aug 2013]
  • the employer exercises its prerogative to retrench in good faith [G.R. 170464, Jul 2010]; and
  • the employer uses fair and reasonable criteria in ascertaining who would be retrenched or retained [G.R. 170464, Jul 2010].

That’s a lot of legalese, but it’s really just saying that you must retrench only for valid and serious reasons and that you’re using fair criteria for choosing who stays and who goes.

Simple enough, right?

A downward arrow showing bankruptcy and employees and employers feeling the pressure to retrench.

Mitsubishi finally decided to retrench after several prior attempts at cost cutting

In addition, retrenchment must also follow two further requirements set by law [G.R. 170464, Jul 2010]:

  • the employer serves written notice both to the employee/s concerned and the DOLE at least one month before the intended date of retrenchment;
  • the employer pays the retrenched employee separation pay in an amount prescribed by the Code.

(An employee is entitled to receive a separation pay equivalent to one-half (1/2) month pay for every year of service, a fraction of at least six (6) months being considered as one (1) whole year)

Retrenchment in Good Faith

Mistubishi was bleeding to the tune of 1.2B pesos in years 1997 and 1998.

To stop the losses, it implemented many cost-cutting measures.

It tried to reduce office supplies use, deferred project implementation, froze hiring, and implemented a 5% cut in managerial salaries among others.

Finally, it decided it would need to permanently retrench.

A picture showing a document, a CLOSED sign, and people in a round table discussing the Retrenchment.

You’ll need a set of criteria uniformly applied to dismiss fairly.

When this was challenged, the Supreme Court upheld the decision in favor of Mitsubishi.

It pointed to all the proof Mistubishi submitted to show that there was a real reason for retrenchment. [G.R. 169780, Feb 2009]

When retrenchment is done for real, pressing reasons and the proof is brought to Court, you present a strong case that protects your company well.

Fair and Reasonable Criteria

When you retrench, you’ve got to decide who to keep and who to let go.

It is a good idea to have a list of criteria and evaluate each employee based on their merits.

This way, decisions are held to be fair and not motivated by personal considerations.

A picture showing a document, a CLOSED sign, and people in a round table discussing the Retrenchment.

You’ll need a set of criteria uniformly applied to dismiss fairly.

Fair and reasonable criteria need to be proved to the Court whenever a retrenchment case is brought before them.

Without this, the Court may hold the retrenchment invalid. [G.R. 178083, Oct 2009]

Examples of Retrenchment

You probably want to lay your hands on some actual stories of retrenchment.

I’ve compiled a list of common situations (not exhaustive!) so as to better show through example what retrenchment is.

A person holding a magnifying glass and closely examining each Retrenchment.

Want to see if your situation is similar? Check the brief list of examples below.

1. Reduction in the volume of work

When a Saudi Aramco contract was reduced by 40%, the Supreme Court upheld that retrenchment was valid. [G.R. 163657, Apr 2012]

2. Retrenchment of workers to prevent anticipated or actual losses.

During the economic downturn, TP Cement was dissolved and its sister company moved from production to marketing Thai based products due to substantial losses. The dismissal was valid. [G.R. 20149138, Feb 2006]

3. Closure of a department or section

Waterfront closed down its casino division but kept the hotel division open as it sustained losses of USD 3.5M. Although employees filed for illegal dismissal, the Court sided with the company. [G.R. 174214, Jen 2012]

4. Reorganization of the company

When Plastimer reorganized, it required the termination of employees to stave off further losses. The Court upheld the dismissals. [G.R. 183390, Feb 2011]

There are others, but this serves as a good place to start and hopefully makes it easier for you to understand what “retrenchment” means in practice.

Retrenchment vs. Redundancy

You’ll often find people are confused between redundancy and retrenchment.

They are similar, but the Court defines them differently.

An upset man with several arrows pointing down to signify redundancy.

Redundancy and retrenchment are often confused but are different from each other.

I’ve summarized from Jardine [G.R. 181719, Apr 2014]:

  • Redundancy is when the services of an employee are in excess of what is needed. It can occur even when the business is doing well if labor is in excess of what the company requires.
  • Retrenchment is when there are losses in the operation of the business.

Another important distinction is that the separation pay awarded to employees is different.

  • Separation pay for redundancy is equivalent to the employee’s one-month pay for every year of service, a fraction of at least six (6) months being considered as one whole year.
  • Separation pay for retrenchment is equivalent to one-half (1/2) month pay for every year of service, a fraction of at least six (6) months being considered as one (1) whole year, if his/her separation from

Thus, aside from a purely legal distinction, the economic effects on the company are different and significantly affect the bottom line.


A girl holding a telephone in one hand, a cell phone on the other, and a coffee beside her, looking confused

Follow due process!

Remember back up top, when I defined retrenchment?

Aside from the legal definition, I listed 5 items.

There was good faith, fair and reasonable criteria, and a definition of the kind of loss that is termed “retrenchment”.

I also mentioned two other requirements:

  • 30-day notice to DOLE and the employee
  • Separation pay of 1 month or ½ month for every year of service, whichever is higher. A fraction of at least 6 months is considered a year.

The calculation is really simple.

It’s just years of service multiplied by the employee’s compensation.

So it is:An infographic showing in detail how to compute the separation pay

Salary from his last pay slip

Plus all regular allowances

Multiplied by Years of service with a fraction of at least 6 months considered a year.

[DOLE 2017 Handbook on Worker’s Statutory Monetary Benefits]

Oh, and note that separation pay is not taxed, as per law.

The 30-day notice is equally simple.

You’ll need to fill out the DOLE form (RKS Form 5) and inform them and the affected employees at least 30 days in advance.

So, if you are contemplating retrenchment remember what we’ve gone through.

Retrenchment, by its nature, is not an easy decision to undertake, but ensuring you understand what it requires will make it much easier for your company and yourself.


  1. Marlon David


    Speaking of retrenchment, can i ask for your help in coming up with the fair retrenchment notice to the affected employee/s?

    Thank you.

    • Lawyers in the Philippines

      Sent an email.

      • Diane

        Hello, Can you send one for me too?

      • Atty. Francesco Britanico

        Sent an email.

        Please note that the best defense depends heavily on the actual situation on the company. It is really very important to go through the documents with legal counsel to ensure that the company is well-defended.

  2. Lilibeth

    hello, I have the same request as Marlon David, Can you send me a fair retrenchment notice to employees? Thank you very much

    • Lawyers in the Philippines

      Hi Lilibeth:

      To create a retrenchment letter, it is necessary to understand the retrenchment strategy.

      A retrenchment strategy must take into account jurisprudance and the laws on retrenchment as well as your company’s particular situation.

      That is why retrenchment letter must work within a larger context.

  3. Rey

    This info material is very helpful. What documents are needed to prove the losses of a company? We have non performing stores thus we need to close them down.

    Thanks again,


    • Atty. Francesco Britancio

      Dear Rey:

      Thank you

      In terms of proof, you should clearly present all helpful proof that will show your losses.

      A common example are financial statements and projected financial statements.

      Still, it is always best to work with your corporate counsel on this to ensure the correct process is followed and to examine what proof is available.

  4. Ernan

    Thank you very much for the simple but precise explanation…

    • Atty. Francesco Britancio

      You are welcome.

  5. Rie-anne

    Speaking of retrenchment, can i ask for your help in coming up with the fair retrenchment notice to the affected employee/s?

    Thank you

    • Atty. Francesco Britanico

      For the actual notice, it would be best first to speak with legal counsel as to the situation. Then he can craft the correct letter for the situation. This step helps ensure that the information is specific to the company and protects the company in the best possible manner.

      Follow the steps outlined in the article for the process.

  6. Eduard

    Hi, This is very informative and very useful. I now, as HR practitioner, know how to do the process without circumventing the Law. And my employer will really understand the process well.

    Thank you very much

    • Atty. Francesco Britanico

      Thank you Eduard.

  7. Gil

    A very informative article of which i learned the difference between the two, I would like to say thank you for sharing your knowledge to us for this kind of subject matter sir/maddam. Have a good day!

    • Atty. Francesco Britanico

      Thank you.

  8. Anonymous

    We are losing a lot of money and no bookings for obvious reason. Now, if the company will asked for more employees to take unpaid leave, do we need to give advance notice, like a week or can it take effect the next day. Can we possibly asked even regular employees to take unpaid leave instead of the probationary employees, if we find the probationary more efficient than the regular employee. Or does it have to be probationary employees first before we asked the regulars.
    if we decide to retrench or redundiate employees, how can we submit our notice to DOLE when the nation is under quarantine. Would our email notice be counted or considered as legal notice equivalent to DOLE for RKS Form 5. Please advise.

    • Atty. Francesco Britanico

      I have sent you an email.

  9. Jeanne

    Hi, sharing your knowledge in this post is much appreciated. May I ask your help with the current pandemic. I belong to a BPO company and as you know this industry rely on the businesses of our clients. We may have clients who will close their businesses, thus lesser projects. Aside from retrenchment or redundancy, are there other means to retain employees – let’s say a period of no pay, but that they remain “inactive” employees so that they can enjoy the HMO benefits? For example, a period of 3 months no pay to give the client a chance to reopen its business. Once client is back, the employee goes to “active status” with pay and allowances. Is this even allowed in the Philippines?

    • Atty. Francesco Britanico

      Sent an email.

  10. Elizabeth

    We are contemplating to retrench employees due to the current situation we are in due to the enhance community quarantine, the company being in a hospitality and tourism industry we expect huge losses for number of months or this year. My question is: is it justified to retrench employees even if actual and probable losses in operation is short period or does it need to be a three-year consecutive losses or at least 20% of equity?

    • Atty. Francesco Britanico

      Sent an email.



  1. 2018 Guide to Terminating Regularized Employees for the Philippine HR - Lawyers in the Philippines - […] Retrenchment to prevent losses or […]

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