Published 26 June 2020, The Daily Tribune

Amid the COVID-19 crisis and the imposition of the enhanced community quarantine, a number of businesses — big and small — was crippled the past two and a half months. The reduction, if not a total halt, of business activity has pushed businesses to bare survival. And as business enterprises face today the pressure of economic recession and bare survival, in order to stave off costs, layoffs and downsizing of employees are now commonplace.

True enough, we have witnessed businesses closing down (fully or partially) while others started laying-off employees to streamline business activity. Under our labor laws, retrenchment and redundancy are well-recognized management prerogatives which companies may undertake especially during these economic downturns.

It must be noted, however, that retrenchment and redundancy should not be confused as they are two entirely different grounds and have different legal consequences. As emphasized by the Supreme Court in Arabit, et al. v Jardine Pacific Finance Inc. (G.R. 181719, 21 April 2014), penned by the eminent retired Justice Arturo Brion, these two concepts are not synonymous and should not be used interchangeably.

As further explained by the Supreme Court in Arabit, citing Andrada, et al. v NLRC (G.R. 173231, 28 December 2007) and Sebuguero v NLRC, (G.R. 115394, 27 September 1995), redundancy occurs where the services of an employee are in excess of what is reasonably demanded by the actual requirements of the enterprise. A position is redundant if it is superfluous, and the superfluity may be by reason of over hiring of workers, decreased volume of business, or dropping of a particular product line or service activity previously manufactured or undertaken by the enterprise.

For the implementation of a redundancy program to be valid, the employer must comply with the following requisites: (1) written notice must be served on both the employees and the Department
of Labor and Employment at least one month prior to the intended date of retrenchment; (2) payment of separation pay equivalent to at least one month pay or at least one month pay for every year of service, whichever is higher; (3) good faith in abolishing the redundant positions; and (4) fair and reasonable criteria in ascertaining what positions are to be declared redundant and accordingly abolished.

Retrenchment, on the other hand, is simply the act of the employer of dismissing employees because of losses in the operation of a business, lack of work and considerable reduction on the volume of his business.

The requirements of a valid retrenchment program are: (1) That the retrenchment is reasonably necessary and likely to prevent business losses which, if already incurred, are not merely de minimis, but substantial, serious, actual and real, or if only expected, are reasonably imminent as perceived objectively and in good faith by the employer; (2) That the employer served written notice both to the employees and to the Department of Labor and Employment at least one month prior to the intended date of retrenchment; (3) That the employer pays the retrenched employees separation pay equivalent to one month pay or at least ½ month pay for every year of service, whichever is higher; (4) That the employer exercises its prerogative to retrench employees in good faith for the advancement of its interest and not to defeat or circumvent the employees’ right to security of tenure; and (5) That the employer used fair and reasonable criteria in ascertaining who would be dismissed and who would be retained among the employees, such as status, efficiency, seniority, physical fitness, age and financial hardship for certain workers. (International Management Services v Logarta, G.R. 163657, 18 April 2012)

Too, as instructed by jurisprudence, retrenchment should be a remedy of last resort. Hence, the Company must be able to show, as a sign of good faith, that it resorted to less drastic means before implementing retrenchment, such as reduction of other costs like marketing/advertising costs, reduction of bonuses, reduction of workhours or implementation of other flexible work arrangements, etc. but proved that the means employed are wanting to alleviate the financial condition of the Company. (Andrada vs NLRC, G.R. 173231, 28 December 2007)

From the foregoing requisites set by jurisprudence, I highlight the difference between redundancy and retrenchment cases in terms of (1) the need to prove losses; and (2) the amount of separation pay.

First, proof of losses is necessary in retrenchment cases while the same is not in redundancy cases. In retrenchment based on incurred losses, financial statements duly audited by external auditors are the best proof. (Anabe v Asian Construction, G.R. 183233, 23 December 2009) And generally, it cannot be based on a single financial statement showing losses. The pattern of losses must be established by more than two consecutive years, at the very least, to prove serious business losses. (G.J.T. Rebuilders Machine Shop v Ambos, G.R. 174184, 28 January 2015)

While proof of losses is not necessary in redundancy cases, proof of redundancy, as well as the criteria in the selection of the employees affected, is required. Proof of redundancy consists in the showing of new staffing pattern, feasibility studies/proposal on the viability of the newly-created positions, job description and approval by management of the restructuring. (Ocean East Agency Corporation v Lopez, G.R. 194410, 14 October 2015)

Second, separation pay is lower in retrenchment cases than in redundancy cases. For retrenchment cases, the employer pays retrenched employees separation pay equivalent to one month pay or one-half month pay for every year of service, whichever is higher. In redundancy cases, on the other hand, separation pay is equivalent to at least one month pay or one month pay for every year of service, whichever is higher. Reasonably, since businesses suffer losses as they retrench their employees, separation pay is lower in such cases.

From the foregoing, I hope employees and employers alike are sufficiently informed of their rights and obligations when push comes to shove that downsizing should be resorted to for the business to survive. Whether through redundancy or retrenchment, downsizing can be a real downer.

For comments and questions, please send an email to