Termination Due to Retrenchment
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
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]
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?
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
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.
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
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.
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
I’ve compiled a list of common situations (not exhaustive!) so as to better show through example what retrenchment is.
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
They are similar, but the Court defines them differently.
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.
Process
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:
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.
81 Comments
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Hi,
We’ve been given a timeline that the company is winding down operation in months time however they still gave us projects to generate income. We have asked the management to at least negotiate if we can have some ample time to find new opportunities unfortunately they declined our negotiation and put us to the position of being in service for 100%. I do understand that we are still under employment however i find it really unfair that they are not giving us the benefits to look for other opportunities. Is this something unfair based from the law and DOLE’s labor codes? Thanks
You may rather first consider ensuring that the separation pay and liquidation of benefits are all in order as the company winds down.
Atty. how long that the company can hired of the same position after they retrench an employees?
It dependsnon the facts and whether the dismissal and rehiring was reasonable.
Hi Atty
Pag less than 6 months pa lang sa company, entittled po ba for seperation pay? Thanks
No, unless company practice and policy provides for it. The law does not require separation pay for those employed less than 6 months.
Hi would like to ask if there is a specific criteria by law that me as an employee should be retrenched? Other that financial losses.
Seniority can be a ground for retention, but this really depends on the circumstances.
Hi!! How about PROJECT BASE NON FULL TIME EMPLOYEE’s, are we entitled for RETRENCHMENT?
As a general rule, the employment period for project based employees is only for the duration of the engagement.
Hi Atty. i would like to ask if the 30 days notice is considered paid to the employees even if they don’t work anynore? If yes, is this stated in the law? Hoping for your reply. Thank you!
The general rule is no work, no pay particularly if it is because of the employee’s refusal to continue work. But the employer should not be the one preventing the employee.
Hi! Can we rehire a retrenched staff? Is there a required number of days or months before they can be rehired? We are looking at a possibility of receiving grant for a project and we are thinking of rehiring our former staff. THanks!
There is nothing to prevent a company from rehiring retrenched employees.
How is the computation of tax for retrench employee for hired by employer on the same year? Is the separation pay wil become taxable? Thanks
Separation pay is exempt from tax.
Good Evening Attorney! I received my letter of retrenchment last March 18, 2021. Right then and there they deactivated all of my access to the system. Its effectivity on the letter is April 18, 2021 yet they insisted for me not to report to the office any longer.
To eliminate speculations and false rumor, I made a plea for them to reverse this since I have not even properly discuss it yet to my people.
The company is refusing to pay for the remainder of the 30 days. What should I do?
Filing a complaint with the NLRC is would be the next step if they refused to pay your salary and separation pay.
Is there any provisions sa labor code about rehiring a retrenched employee?
There is nothing to prevent it or to treat it as any different from a new hire unless the CBA might say otherwise.
Sir I’m an Area Supervisor in our Company for almost 13 years. Right now 3 kami sa position but ang remaining branch na open namin is 6 nalang (2 in Metro Manila and 4 Provincial). Ang natitirang branch na hawak ko nalang is yong branch na hawak ko sa SM Manila together with yong isang Area Supervisor dahil puro provincial yong hawak nya. Nakareceived po ako ng retrenchment letter dahil nga po hindi na need ng sobranch daming Area Supervisor and may Operation Manager pa kami which is nakaduty naman sa Clark. Ang tanong ko lang po is, matatawag ba na RETRENCHMENT yong ginawa sa amin or pwede sya pumasok sa REDUNDANCY. Retrenchment letter was received last Friday (january 1) and required kami pumunta sa office on Monday (January 4) para pag-usapan ang retrenchment procedure. Hoping na makatanggap po ako ng sagot sa inyo. Thanks po!
Hi:
Check both the redundancy and retrenchment post.
Go through the company’s documents related to this and then assess it.
It’s important to go through the documents before stating whether this is redundancy or retrenchment as otherwise a false conclusion may be made.
Hi!
Some of our employees was part of retrenched, we carefully select who will stay and retrench but unfortunately some of them doesn’t want to accept the notices despite we gave them already 30 days notices from the date of effectivity and prepared their separation pay in check even id we do not require them for turnover. My question is does employee have the rights to disregard the notice we gave them and still want to continue their employment with us? our company relies on flight, but since no flights available and has no stable income for a year already what should we need to do? are employees have the rights to file complaint to DOLE but we follow the rules in retrenching employees and we also provide notice to dole following 30 days notice.
If employees have already filed at DOLE, it is best that you hire a lawyer to represent the company. He will go through the company documents, handbook and each employee’s situation to help present your side at DOLE. Both company and employees have rights and these must both be heard.
Hello atty.
What if the company did a reorganization and retrenched people. However, after 6 months, business went back to normal and re-organized again to an older structure. Does this make the retrenchment invalid?
And the retrenched person can sue the company?
You can always sue. Be prepared for the effort and time that going to court will take.
As to grounds – it really depends.
Hi!
What if I already received the notice 30 days before its effectivity. During the 30 day period I was asked to render turn over of all duties, tasks, files(hard and soft copies) but unfortunately, it’s not completed. Is that enough reason for the employer to hold the separation pay?
Thank you very much!
Yes, the employee can be obliged to complete the clearance process before final pay is released.
Hi!
We retrenched some of our employees last July because of the Pandemic. Question, when can we hire new employees since the company is already recovering. Also, can we hire contractuals, consultants or on call during this time?
Thank you.
This is possible provided that the earlier retrenchment fulfilled the requirements such as that the employer carried it out in good faith. It is to be expected that a degree of reorganization and restructuring will take place under the circumstances.
Nonetheless, it is important to be able to prove that good faith by demonstrating the actual or imminent losses that the company faced and that the retrenchment measures actually addressed them.
As to the second question, it depends on the nature of the engagement or project as well as the business of the company and line of work of the employees.
Hi! Our school shifted to Online Delivery of Learning, thus there will be no students coming into the school and our enrolment turned our to be at 45% of our last school year’s enrolment. Our School Principal agreed to received only one half of her salary and the other administrative staff is on an indefinite leave thus not receiving salary and is has agreed not to received salary in the coming months. Given the situation that we are in, can we let go of our security and maintenance personnel serving for 20+ years by giving and compensating him with a separation pay? will this be considered retrenchment? i understand that he needs to be paid his separation pay and be given thirty days notice before fully letting him go. thank you
Yes. We discuss other considerations for retrenchment here:
https://lawyerphilippines.org/2020/05/08/covid-and-retrenchment-in-the-philippines/
Hi Sir,
How do we know or compute for the separation pay if 1 month or 1/2 month pay shall be given. I’m confused with the phrase of whichever is higher. Thanks
Retrenchment entitles regular employees a minimum of one month’s pay. (However, they are effectively entitled to an additional one half month’s pay for every year of service beyond the second year of employment.)
Hi Sir,
For the computation of separation pay is it 1/2 month or 1 month salary? Just confuse with the phrase “whichever is higher” I have been in our company for 15 yrs and unfortunately one of the retrenched employees as per HR computation for the separation is 1/2 month salary x yrs of service. Just want to clarify what is mandated by Law and if am getting was is fair and due to me.
Thank you
You are entitled to a minimum of one month’s salary even if you were only employed for a year.
But since your employment was longer than that, the minimum does not apply and you are entitled to 1/2 month salary x yrs of service.
Hi Sir if the employees rendered 4 years and 7 months what will be the total years in service is it only 4 years or 5 years? thanks.
5 years because every fraction of at least 6 months is counted as a full year.
Hi Sir. I’d like to ask if someone was retrenched from the company. Can he not be hired again to that same company? Does this rule apply to all kinds of business? Example is Transport industry. Thanks in advance.
There is nothing to stop the employer and employee from entering into another employment contract in good faith.
Good Morning magtanong lang ako tama ba ang computation ng company nmin sa separation pay na half of monthly salary multiply kong ilang years ka ng service. nagkaroon kasi kami ng retrenchment.
In general, yes.
https://lawyerphilippines.org/2020/05/08/covid-and-retrenchment-in-the-philippines/
Hi,
We’ve been laid off from our employer due to retrenchment or downsizing because our company still incurred losses. Business operations still not recovering since it’s a travel industry. We want to know if we are not really entitled for separation pay? Is there an exemption to this Code
There is separation pay under retrenchment. We discuss that here.
https://lawyerphilippines.org/2020/05/08/covid-and-retrenchment-in-the-philippines/#Separation_pay
Good Morning,
Can i request a sample letter of retrenchment for an employee during this pandemic.
You may find some guidance here:
https://lawyerphilippines.org/2020/05/08/covid-and-retrenchment-in-the-philippines/
Who signs the retrenchment letter, HR or the CEO?
It is usually HR, but either suffices.
Does it make a retrenchment invalid if the company reflected in the retrenchment letter is different from the employer name in the employment contract?
That depends on who the actual employer is. Determining employer-employee relationship can be very involved and depends on the facts of a case.
Hi. We had a meeting last June 8, 2020 informing who will be retrench and retain. Unfortunately, they retrench me. I signed a document indicating that i am no longer connected to the company pre dated May 31, 2020. Instructed me to turnover my work and was done July 1, 2020 as on-call employee and my lastday there too. They did not say anything when i will get my retrenchment pay and papers too, im still waiting up until now.
My question is as per law how long will i wait t for my retrenchment pay and last pay as oncall? Is it from the moment i turnover my work or the paper i sign may31 retrenchment date?
Thank you and hoping for your immediate response.
This should usually be within 30 days, subject to the fair clearance process.
Are those agents under the probationary stage (6mos below) should also get one full month separation pay?
We are planning to do retrenchment because our client did not pay us, and we consider it as serious business losses.
An employee needs to have been employed at least 6 months to be entitled to separation pay.
Who’s in charge of filing in SSS for retrechment benefit ?Is it the company or the employee itself? Thank you
Our company offered only a 1/2 month of salary x lenght of service instead of a month ,what is the correct computation for retrenchement
That is generally the correct computation for retrenchment.
Good afternoon!
May I ask about retrenchment of employees. We are planning to lay-off some of our employees in the library during this time of COVID-19 Pandemic because our enrolees went down. The Reference Section of the Library will not be functional since we will not be having face to face with the elementary students. So is it proper to lay-off the librarian in-charge in this section?
It can be provided the business losses are established and the process is followed.
Thank you very much for the simple but precise explanation…
You are welcome.
What happen if the employer terminated the employee without just cause simply they just fired you. Is there any chance to raise this concern to DOLE or Authorities?
Yes. The DOLE can readily receive any claim and send summons for the parties to talk. It is usually a good idea to exhaust internal processes and remedies first though.
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,
Rey
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.
What must go first: retrenchment letter to DOLE or notice of termination to employees?
About the same, but it is prudent to furnish the DOLE with a copy of the retrenchment notice to the employees.
After I was retrenched from the company do I need to finish my clearance before I can get the separation?
Yes, the company is usually entitled to require that the proper and fair clearances be completed.
I signed my retrenchment notice Nov 3 and stated on the notice that the effectivity of my separation from the company is at nov 30 do i have to finish the turnover up to nov 30..
That would be best, but you could propose or discuss a different accommodation with your employer.
Hi good day, we have been advise by the company that they are no longer need our service. But its almost a month now we still did not get any notice or letter everything was announced verbally only.
can you give us advice or guidance regarding this matter.
You may reach out to the company about this matter first or go directly to the DOLE / NLRC for assistance and they will summon the company to a conference.
hello, I have the same request as Marlon David, Can you send me a fair retrenchment notice to employees? Thank you very much
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.
Hello,
Speaking of retrenchment, can i ask for your help in coming up with the fair retrenchment notice to the affected employee/s?
Thank you.
Sent an email.
i ben retrench. my quistion is what is the total of my computation retrenchment and date of service is 3yrs and 11monthss?
See the computation here: https://lawyerphilippines.org/2020/05/08/covid-and-retrenchment-in-the-philippines/#Separation_pay
Hello, if employer opts to pay 1 month for evry year of service for retrenchment instead of 1/2 month salary since 1 month is higher. Is this possible?
Yes, there is nothing prohibiting a company from doing this.