Retrenchment and closure of business

Dear PAO,

Can a company decide to unilaterally close? If the company claims that it is experiencing business losses, may it skip the requirement of notice and avoid the payment of separation pay?

Emong

Dear Emong,

Please be informed of the Supreme Court’s ruling in the case of Keng Hua Paper Products Co., Inc. and James Yu vs. Carlos E. Ainza, Primo dela Cruz, and Benjamin R. Gelicami, GR 224097, Feb. 22, 2023, Ponente: Associate Justice Rodil Zalameda, where it was provided that:

“In Sanoh Fulton Phils., Inc. v. Bernardo, We explained Article 298 and emphasized that retrenchment to prevent losses or the closing or cessation of business operations do not compose one cause for termination of employment. Although they have the same procedural requirements, they have different causes and different requirements for validity, thus:

“Retrenchment to prevent losses and closure not due to serious business losses are two separate authorized causes for terminating the services of an employee. In J.A.T General Services v. NLRC, the Court took the occasion to draw the distinction between retrenchment and closure, to wit:

“Closure of business, on one hand, 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 establishment, usually due to financial losses. Closure of business as an authorized cause for termination of employment aims to prevent further financial drain upon an employer who cannot pay anymore his employees since business has already stopped. On the other hand, retrenchment is reduction of personnel usually due to poor financial returns so as to cut down on costs of operations in terms of salaries and wages to prevent bankruptcy of the company. It is sometimes also referred to as down-sizing. Retrenchment is an authorized cause for termination of employment which the law accords an employer who is not making good in its operations in order to cut back on expenses for salaries and wages by laying off some employees. The purpose of retrenchment is to save a financially ailing business establishment from eventually collapsing.

“The respective requirements to sustain their validity are likewise different.”

Further, the Supreme Court laid down the difference between the closure of businesses and the retrenchment of employees to prevent serious business losses. According to the Supreme Court, the requisites for each are as follows:

“For retrenchment, the three (3) basic requirements 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 Department of Labor and Employment 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. In addition, jurisprudence has set the standards for losses which may justify retrenchment, thus:

“(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.

“On the other hand, in termination, the law authorizes termination of employment due to business closure, regardless of the underlying reasons and motivations therefor, be it financial losses or not. However, to put a stamp to its validity, the closure/cessation of business must be bona fide, i.e., its purpose is to advance the interest of the employer and not to defeat or circumvent the rights of employees under the law or a valid agreement.”

According to the Supreme Court, in cases of either retrenchment or closure of business, the burden of proving the cause is cast on the employer. Furthermore, in either instance, the Labor Code clearly states that the procedural requirements for either instance must still be followed, viz.:

“A cursory reading of Article 298 will readily show that, regardless of cause, there are two procedural requirements for a valid termination of employment: (1) service of a written notice to the employees and to the DOLE at least one month before the intended date thereof; and (2) payment to the employees of termination pay amounting to one month pay or at least one-half month pay for every year of service, whichever is higher. The Labor Code does not provide for exemptions from these two procedural requirements.”

As stated above, a company may decide to close down its business or retrench employees to prevent serious losses, provided it meets the requisites needed for each. Moreover, as stated by the Supreme Court, in either instance, the employer has the burden of proof to provide that the exercise of such prerogative is with bona fide causes. Likewise, the employer must comply with the requisites of notifying the concerned employees and the Department of Labor and Employment at least 30 days in advance, and the employees must be paid their respective separation pay.

We hope that we were able to answer your queries. This advice is based solely on the facts you have narrated and our appreciation of the same. Our opinion may vary when other facts are changed or elaborated on.

Editor’s note: Dear PAO is a daily column of the Public Attorney’s Office. Questions for Chief Acosta may be sent to [email protected]