Retrenchment or downsizing is an right by an employer that is suffering an actual or anticipated serious financial losses.

The right to retrench or downsize is inherently a management prerogative. It is usually resorted to when there is an actual or expected serious financial losses.

Jurisprudence explains as follows:

Retrenchment or lay-off is the termination of employment initiated by the employer, through no fault of the employees and without prejudice to the latter, during periods of business recession, industrial depression, or seasonal fluctuations, or during lulls occasioned by lack of orders, shortage of materials, conversion of the plant for a new production program or the introduction of new methods or more efficient machinery, or of automation. It is an exercise of management prerogative which the Court upholds if compliant 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.

The employer must prove compliance with all the foregoing requirements. (Eastridge Golf Club, Inc. v. EGCI-Labor Union-Super, G.R. No. 166760, 22 August 2008)

The following discusses disease as a ground for authorized cause separation.

Substantive Due Process: Standards for Retrenchment

In compliance with Due Process, the first aspect of due process is on: substantive due process. It is divided into two: just causes and authorized causes.

For our purposes, we will focus on authorized causes as that is where retrenchment is categorized.

Rule I-A of DOLE D.O. 147-15 provides for the standards which have to be complied in order to be valid:

5.4. Standard on Authorized Causes. An employer may terminate an employee for any of the following grounds:

x x x

1. The retrenchment must be reasonably necessary and likely to prevent business losses;

2. The losses, if already incurred, are not merely de minimis, but substantial, serious, actual and real, or if only expected, are reasonably imminent;

3. The expected or actual losses must be proved by sufficient and convincing evidence;

4. The retrenchment must be in good faith for the advancement of its interest and not to defeat or circumvent the employees’ right to security of tenure; and

5. There must be 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.

x x x

In cases of installation of labor-saving devices, redundancy and retrenchment, the “Last-In, First-Out Rule” shall apply except when an employee volunteers to be separated from employment.

The above standards are the requirements to properly implement an authorized cause separation via installation of labor-saving devices.

Procedural Due Process

The second aspect of due process is on: procedural due process.

Rule I-A of DOLE D.O. 147-15 provides for the procedure to be complied:

5.3. Termination of Employment Based on Authorized Causes. As defined in Articles 298 and 299 of the Labor Code, as amended, the requirements of due process shall be deemed complied with upon service of a written notice to the employee and the appropriate Regional Office of the Department of Labor and Employment (DOLE) at least thirty days [sic] (30) before the effectivity of the termination, specifying the ground or grounds for termination.

Otherwise stated, to properly implement redundancy the following steps have to be followed:

Step 1: 30-Day Notice to the Employee

Step 2: 30-Day Notice to DOLE

Step 3: Separation Pay

The following explains each step.

Step 1: 30-Day Notice to the Employee. – The employee should be provided with a notice regarding his beings separated from employment due to an authorized cause – at least 30 days before the last day of employment.

The current regulation requires that that the notice specify two things: (a) effective date of termination, and (b) the ground/s for the termination.

In practice, it is recommended that a brief description or information regarding the circumstances for the authorized cause be provided to give the concerned employee an idea as to what happened. Further, whenever practicable, the amount of the separation pay should be indicated to communicate well to the employee that the amount will be paid accordingly in compliance with Labor Law.

The purpose of this 30-day notice is to give the employee ample opportunity to prepare. Within this period, the employee may already start considering what he will be doing after the last day – whether to rest for a while, find next gainful employment, do business, study for the time being, attend seminars, or perform any other similar activity.

Step 2: 30-Day Notice to DOLE. – The employer is required to advise DOLE of the separation due to an authorized cause. The current form being used is RKS Form 5 which asks for the relevant information regarding the separation.

The purpose of requiring this 30-day notice to DOLE is so that the regulator will have the opportunity to confirm or verify the existence of the authorized cause. In practice, the DOLE may call for a conference to hear both sides, the employer and the employee. Depending on circumstances, a DOLE personnel may conduct a visit on the establishment to verify the existence of the authorized cause. Whenever everything is good, the DOLE personnel will see to it that the separation pay is paid to the employee.

Step 3: Separation Pay. – Since a separation by authorized cause is not due to a violation by an employee, and in most cases the ground is due to business reasons, the Labor Code requires the employer to pay the employee separation pay. The amount varies depending on the ground.

Rule I-A of DOLE D.O. 147-15 provides for the formula for the separation pay:

5.5. Payment of Separation Pay. Separation pay shall be paid by the employer to an employee terminated due to installation of labor-saving devices, redundancy, retrenchment, closure or cessation of operations not due to serious business losses or financial reverses, and disease.

x x x

An employee terminated due to retrenchment shall be paid by the employer a 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 service is considered as one (1) whole year.

For retrenchment, separation pay is thus: 1 month pay – or – at least ½ month pay for every year of service. If there is a fraction of 6 months, it shall be counted as 1 year.

Whenever practicable, it is recommended that the separation pay be paid together with the Final Pay – after the employee is cleared of all accountabilities.


When a business is excepted to or have actually incurred serious financial losses, Labor Law grants the employer the right to reduce its workforce. The key thing to consider here is that the serious financial losses may be actual or anticipated. For the latter, so long as the employer can prove that there is in the future the strong possibility of serious financial losses, then downsizing may be resorted to by the organization. As with other authorized causes, the corresponding responsibility of the employer is to provide the affected employee with separation pay.

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