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Oct 1, 2003
Law on Retrenchment
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Question: I am engaged in the business of manufacturing and exporting garments. However, due to the global recession, orders from clients outside the Philippines have decreased by almost 40%. Iím now thinking about laying-off some of my employees, most of whom have been in service for at least five (5) years. Can this be done? What are the legal requirements? What benefits would the employees affected be entitled to?

Answer: Under the law, in order that termination of employees may be considered valid, both substantial and procedural due process must be observed.

Retrenchment is defined as the act of the employer of dismissing employees because of losses in the operation of business, lack of work and considerable reduction on the volume of his business. It is one of the authorized causes provided by law for termination of employment. In your case, the economic situation resulting in the substantial decrease in orders from clients would justify the termination of some of your employees on the ground of retrenchment to avoid or minimize business losses. However, your losses, if already realized, and the expected losses sought to be forestalled, must be proven by sufficient and convincing evidence (i.e., financial statements). The existence of a valid ground for retrenchment satisfies substantial due process.

On the other hand, the requirements of procedural due process are the following: (1) written notices served on both the employees and the Department of Labor and Employment (DOLE) at least one month before the intended date of termination; (2) payment of separation pay to the employees, and (3) submission of a monthly report to the DOLE-Regional Office having jurisdiction over the place of work of all dismissals effected by you during the month, specifying therein the names of the dismissed workers, the reasons for their dismissal, the dates of commencement and termination of employment, the positions last held by them and such other information as may be required by the DOLE for policy guidance and statistical purposes.

The requirement of notice to both the employees concerned and the DOLE is mandatory and must be written and given at least one month before the intended date of retrenchment. The purpose of such previous notice to DOLE is to enable it to ascertain the verity of the termination. The submission of financial statements to the DOLE, for the purpose of justifying actual losses or preventing future losses, is not mandatory. However, nothing prevents you from doing so or making the same readily available. This is especially relevant since there is a possibility that certain dismissed employees may take legal action against the Company. The one-month advanced notice to the employees concerned would enable them to look for other means of employment and therefore ease the impact of the loss of their jobs and the corresponding income.

With regard to the benefits the affected employees would be entitled to, the Labor Code provides that the termination of employment of any employee arising from retrenchment to prevent losses shall entitle the employee to separation pay equivalent to one (1) month pay or at least one-half (1/2) month pay for every year of service, whichever is higher. A fraction of six (6) months shall be considered as one whole year.

The employee terminated on the ground of retrenchment is also entitled to the payment of 13th month pay in proportion to the length of time the employee worked during the year, reckoned from the time he started working during the calendar year, up to the time of his termination from service. He may also receive other benefits depending on the rules and regulations of the Company, as well as its policies and practice. Moreover, in case an employee, who has rendered at least one year of service in the Company, is not enjoying vacation leave with pay of at least five (5) days, he shall be entitled to a service incentive leave of five (5) days with pay. The service incentive leave is commutable to its monetary equivalent if not used or exhausted at the end of the year.

Republished with permission from

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