How to Terminate an Employee on the Ground of Retrenchment


The right of management to dismiss workers on the ground of retrenchment to prevent serious losses is governed by Article 283 of the Labor Code. This is one of the authorized causes of termination of employment. However, before one can dismiss employees on the ground of retrenchment, four elements must be proven. Firstly, the losses expected should be substantial. Secondly, the substantial loss apprehended must be reasonably imminent, and such imminence can be perceived objectively and in good faith by the employer. Thirdly, because of the consequential nature of retrenchment, it must be reasonably and necessary and likely to effectively prevent the expected losses. The employer should have taken other measures prior or parallel to retrenchment to forestall losses such as cutting other costs other than labor cost. Lastly, the alleged losses if already realized, and the expected imminent losses sought to be forestalled, must be proven by sufficient and convincing evidences. It bears emphasis that serious business losses should be proven by financial statements duly audited by an independent external auditor.

If the grounds for retrenchment are not proved, the retrenchment will be declared illegal and of no effect. If the retrenched employee signed quitclaims, they may be declared invalid. Even his acceptance of the retrenchment pay does not amount to estoppel which does not bar him from contesting his separation.

There must be fair and reasonable criteria to be used in selecting employees to be dismissed on account of retrenchment such as (a) less preferred status (i.e. temporary employees); (b) efficiency rating; and (c) seniority. The “last in first out“(LIFO) rule indicates that as between two or more employees affected by a retrenchment program, the last one employed will be the first to go; seniority of the ones hired earlier therefore prevails. Such rule has its merits but its observance is not a statutory duty of the employer.

In accordance with the Labor Code, for a valid implementation of a retrenchment program, the employer must serve written notices on the employees and DOLE at least thirty (30) days prior to the intended date of retrenchment. Specifically, the purpose of such previous notice to DOLE must be to enable it to ascertain the verity of the cause for termination of employment. Finally, the more important aspect in the termination of employment is the payment of the employee’s separation pay equivalent to at least 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 as one (1) whole year.

Thus, the employer must not arbitrarily or speedily implement a retrenchment program. The requirements discussed above must be fully complied with so as to preclude any problems in the future. It bears great emphasis that failure to comply with the requirements mandated by the Labor Code will render the retrenchment invalid and illegal.

This is how to terminate an employee due to retrenchment in the Philippines.

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