Published 21 June 2019, The Daily Tribune

When business is on an upswing, companies are generally able to generate and sustain profit growth. However, during business slumps, profits may plunge prompting management to cut costs in an effort to manage the bottom line. Because salaries and wages are such a large expense, many companies consider layoffs first as a cost-cutting measure. However, there are many potential costs associated with firing people – wrongful termination lawsuits included.

Depending on the circumstances, an employer can justify the termination of employment of the affected workers under two authorized causes – redundancy and retrenchment.


Redundancy exists where the services of an employee are in excess of what is reasonably demanded by the actual requirements of the enterprise. Succinctly put, a position is redundant where it is superfluous, and superfluity of a position or positions may be the outcome of a number of factors, such as overhiring of workers, decreased volume of business, or dropping of a particular product line or service activity previously manufactured or undertaken by the enterprise.

Primarily, employers resort to redundancy when the functions of an employee have already become superfluous or duplicitous. Nevertheless, redundancy may also be validly resorted to as a cost-cutting measure. An employer has no legal obligation to keep in its payroll more employees than are necessary for the operation of its business and may thus terminate the concerned employee/s due to redundancy. However, fair and reasonable criteria must exist in ascertaining what positions are to be affected by the termination, such as, but not limited to: nature of work; status of employment; experience; efficiency; seniority; dependability; adaptability; flexibility; trainability; job performance; discipline and attitude towards work. Failure to follow fair and reasonable criteria in selecting who to terminate would render the termination invalid.

Further, the following factors must be present when terminating an employee on account of redundancy: first, two (2) separate written notices must be served on both the affected employee and the DOLE at least one (1) month prior to the intended day of termination. Second, separation pay must also be paid to the affected employee in the amount of one (1) month pay or at least one (1) month pay for every year of service, whichever is higher, with a fraction of at least six (6) months considered as one (1) whole year. Terminating employees based on redundancy without complying with the aforementioned requisites may expose the employer to a potential civil liability in the future.

Retrenchment, on the other hand, is an economic ground resorted to by an employer to terminate employment primarily to avoid or minimize business losses. It is initiated by the employer during periods of business recession, industrial depression, or seasonal fluctuations, or during lulls occasioned by lack of orders, shortage of materials, conversion of the plan for a new production program or the introduction of new methods or more efficient machinery, or of automation. Simply put, it is an act of the employer of dismissing employees because of losses in operation of a business, lack of work, and considerable reduction on the volume of his business, a right consistently recognized and affirmed by the Supreme Court.  Nonetheless, in order for retrenchment to be justified, the employer must comply with certain substantive and procedural requirements, namely:

  1. That retrenchment is necessary to prevent losses and it is proven, by sufficient and convincing evidence such as the employer’s financial statements audited by an independent and credible external auditor, that such losses are substantial and not merely flimsy and actual or reasonably imminent; and that retrenchment is the only effective measure to prevent such imminent losses;
  2. That written notice is served on to the employees and the DOLE at least one (1) month prior to the intended date of retrenchment; and
  3. That the retrenched employees receive 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.
  4. That the employer uses fair and reasonable criteria in ascertaining who will be dismissed or retained among the employees, such as status, efficiency, seniority, physical fitness, age and financial hardship for certain workers.

Assuming that an employer can prove that it will suffer imminent business losses due to the reduction on the volume of its business, particularly; it can justify the reduction of its work force by means of retrenchment. Failure, however, to prove the same will render retrenchment illegal and make your company liable for reinstatement of its employees and payment of full backwages.

In sum, two (2) authorized causes may justify termination of employees as a cost-cutting measure – redundancy and retrenchment. Redundancy merely requires superfluity of position. In contrast, retrenchment requires the presence of business reverses which are serious, actual and real. With respect to separation pay, however, retrenchment merely requires the payment of one (1) month pay or at least one-half (1/2) month pay for every year of service, whichever is higher. On the other hand, redundancy demands the payment of one (1) month pay or at least one (1) month pay for every year of service, whichever is higher.

Employers should be mindful of the legal requisites for cost-cutting measures, otherwise, what are supposed to be cost-cutting measures can become more costly.

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