Anticipating the imposition of quarantine measures and work stoppage in the country, the Department of Labor and Employment (“DOLE”) issued on 04 March 2020 its Labor Advisory No. 09, Series of 2020. In the advisory, the DOLE encouraged employers to avail of flexible work arrangements as alternative to the outright termination of its employees while the Philippines is in lockdown.
Flexible work arrangements include telecommuting, work-from-home, reduction of work hours and/or workdays, rotation of workers, and forced leaves, among other similar schemes. The inclination to such alternative working schemes over employment dismissal was reiterated in Labor Advisory No. 17, Series of 2020, or the “Guidelines on Employment Preservation upon Resumption of Business Operation,” issued by the DOLE on 18 May 2020.
Downsizing is indeed a disfavored strategy in workforce management. In a 2018 article, the Harvard Business Review cited various research which explained how lay-offs and retrenchment are considered, in the long run, as futile solutions to the challenges confronting the human resource of an enterprise.
While Filipinos are cautiously optimistic that the recent lifting of the lockdown will bring economic activities back to life, businesses are still confronted with persistent liquidity difficulties. As a guide, we outlined the options available to employers as they balance the need to cut on costs on the one hand and ensuring a healthy and motivated workforce on the other.
A. Renegotiation of Wage and Wage-Related benefits
The DOLE’s Labor Advisory No. 17, Series of 2020 recognized the right of the employers and the employees to negotiate and agree in writing for a temporary adjustment on the employee’s wage and wage-related benefits. The adjustment may include the reduction of wages, withholding of wage-related benefits, and the like. It is understood, however, that the employer cannot bargain away the statutory monetary benefits of its employees such as the minimum wage, holiday pay, social security benefits, among others.
Once the agreement is reached, the adjustment shall take effect no longer than six (6) months (or such period agreed upon in the Collective Bargaining Agreement, if any). After, the employer and its employees shall review their agreement and may extend its effectivity.
B. Temporary Suspension of Operations
Businesses unable to immediately restart their operations are still not compelled to downsize. Instead, these establishments may opt to temporarily cease operations until circumstances warrant financial viability.
Article 301 of the Labor Code allows the suspension of operations for a period not exceeding six (6) months, during which, the employer-employee relationship is merely suspended and not terminated. The employees are deemed to be placed on a “floating status” and are not entitled to salaries and other benefits.
In invoking Article 301 of the Labor Code, the paramount consideration should be the dire exigency of the business that compels the employer to put its employees temporarily out of work. The employer must be able to prove that it is faced with a clear and compelling economic reason which reasonably forces it to temporarily shut down its business operations or a particular undertaking, incidentally resulting in the temporary lay-off of its employees.[1]
The employer is required to notify the employee and the appropriate DOLE field office at least one (1) month before the intended temporary closure. (See: Establishment Report on Covid-19).
After the period of the suspension, the employer shall reinstate the employee to his/her former position, without loss of seniority rights, if the employee indicates his or her desire to resume work not later than one (1) month from the resumption of operations of the employer.
C. Employee Lay-off and Permanent Closure of Business
If temporary closure proves insufficient to salvage the business, employers may be constrained to avail any of the following authorized causes for the termination of employment:
a. Redundancy
Redundancy exists when an employee’s service is more than what is reasonably required by the enterprise. Redundancy results from several factors, such as a decrease in the volume of the business, or the dropping of a line or service previously undertaken by the company. The determination of whether a position will be declared redundant is an exercise of management prerogative.[2]
Article 298 of the Labor Code requires the employer to prove its good faith in abolishing the redundant positions, as well as the existence of fair and reasonable criteria in ascertaining what positions are to be declared redundant. The company must justify the dismissal of the affected employees by proof of the new staffing pattern, feasibility studies/proposals on the viability of the newly created positions, job description, and the approval by the management of the restructuring.
As a matter of procedure, the employer is required to notify the employee and the appropriate DOLE Office of the fact of the termination by redundancy at least thirty (30) days prior to its effectivity. The employer is also mandated to pay the employees affected of separation pay equivalent to one (1) month pay, or one (1) month pay for every year of service, whichever is higher.
b. Retrenchment
Retrenchment is the permanent severance of employment, without the fault of the employee, which management resorts to during (a) business recession, industrial depression, seasonal fluctuations, or (b) during lulls caused by lack of orders or shortage of materials, or (c) the introduction of new methods or more efficient machinery, or of automation.[3]
The three (3) basic requirements of retrenchment are: (a) proof that the retrenchment is necessary to prevent losses or impending losses; (b) service of written notices to the employees and to the DOLE field office at least one (1) month prior to the intended date of retrenchment; and (c) payment of 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.
Case law has set the standards for “losses” which justify retrenchment, to wit:[4]
(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.
(4) the alleged losses, if already incurred, or the expected imminent losses sought to be forestalled, are proven by sufficient and convincing evidence.
c. Permanent Closure
In the unfortunate event that a business can no longer continue operations feasibly, the employer may be compelled to close shop. Closure of business is the reversal of fortune of the employer whereby there is a complete cessation of business operations and/or an actual locking-up of the doors of the establishment, usually due to financial losses. Closure of business aims to prevent further financial drain upon an employer who cannot pay anymore his employees since business has already stopped.[5]
Procedurally, a valid closure of business requires the employer to serve written notices to the employees affected and to the DOLE field office at least one (1) month prior to the intended date of dismissal.
The decision to close one’s business is a management prerogative. Employers can "lawfully close shop at any time," even for reasons of their own. "Just as no law forces anyone to go into business, no law can compel anybody to continue in it."[6]
However, despite this management prerogative, employers closing their businesses must pay the affected workers separation pay equivalent to one-month pay, or to at least one-half-month pay for every year of service, whichever is higher. The only time employers are not required to pay separation pay is when they closed their establishments due to serious business losses or financial reverses. Serious business losses are substantial losses that the business has incurred for a time, that the employer has already perceived, objectively and in good faith, that the business’ financial standing is unlikely to improve in the future.
Closures of businesses which were invalidated have a common and telling characteristic, i.e., there was no genuine closure or cessation of the business. Rather, the closure was a mere simulation making it appear that the enterprise intended to close, when in truth, it had no such intention.
To unmask the true intent of an employer, the Supreme Court considered not only the measures the employer adopted prior to the purported closure but also the actions taken after the fact. For instance, the employer's subsequent acts of suddenly reviving a business it had just closed, or its surreptitious continuance of its operation after announcing a shutdown, are telltale badges that the employer had no genuine intent to close shop and only seeks an excuse to terminate employees capriciously.
We write this short article to provide a broad overview of the options available for distressed employers under the Labor Code and existing DOLE issuances. This article should not be taken as a form of legal advice. Should you need legal assistance on employment concerns in the Philippines, please do not hesitate to shoot us an email at ryan@romanolaw.ph.
[1] Lopez vs. Irvine Construction, G.R. No. 207253, 20 August 2014 [2] Yulo vs. Concentrix, G.R. No. 235873, 21 January 2019 [3] Innodata Knowledge Services, Inc. vs. Inting, et al., G.R. No. 211892, 06 December 2017 [4] Sanoh Fulton Phils., Inc. vs. Bernardo and Taghoy, G.R. No. 187214, 14 August 2013 [5] Sangwoo Philippines, Inc. vs. SPEU-Olalia, G.R. No. 173154, 09 December 2013 [6] G.J.T. Rebuilders vs. Ambos, et al., G.R. No. 174184, 28 January 2015
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