What is the Difference Between Retrenchment and Redundancy?
Included as two (2) of the most common authorized causes for dismissal under Article 298 (283) of the Labor Code of the Philippines are Retrenchment and Redundancy. These are causes for dismissal from employment that are not attributable to the employee but falls under the employer’s exercise of management prerogative.
Retrenchment as authorized cause for dismissal is rooted from the principle that losses in the operation of the enterprise, lack of work, or considerable reduction on the volume of business may justify an employer to reduce the work force. However, for retrenchment to be a valid authorized cause for dismissal, the three (3) basic requirements are:
- Proof that the retrenchment is necessary to prevent losses or impending losses;
- 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
- 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 (Sanoh Fulton Phils., Inc. vs. Bernardo 703 SCRA 565, August 14, 2013).
In several cases decided by the Supreme Court, it has been repeatedly held that, while retrenchment is a valid exercise of management prerogative, it is well settled that economic losses as a ground for dismissing an employee is factual in nature, and in order for a retrenchment scheme to be valid, all of the following elements under Article 298 (283) of the Labor Code must concur or be present, to wit:
- That 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;
- 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;
- That the employer pays the retrenched employees separation pay equivalent to one (1) month pay or at least one-half month pay for every year of service, whichever is higher
- 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,
- That the employer uses 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.
The absence of one element renders the retrenchment scheme an irregular exercise of management prerogative. The employer’s obligation to exhaust all other means to avoid further losses without retrenching its employees is a component of the first element enumerated above. To impart operational meaning to the constitutional policy of providing full protection to labor, the employer’s prerogative to bring down labor costs by retrenching must be exercised essentially as a measure of last resort, after less drastic means have been tried and found wanting (Philippine Airlines, Inc. vs. Ligan 792 SCRA 553 , June 08, 2016). Hence, a lull caused by lack of orders or shortage of materials must be of such nature as would severely affect the continued business operations of the employer to the detriment of all and sundry if not properly addressed (Sanoh Fulton Phils., Inc. vs. Bernardo).
Redundancy exists when the service capability of the workforce is in excess of what is reasonably needed to meet the demands of the enterprise. A reasonably redundant position is one rendered superfluous by any number of factors, such as overhiring of workers, decreased volume of business, dropping of a particular product line previously manufactured by the company or phasing out of service activity priorly undertaken by the business. Among the requisites of a valid redundancy program are: (1) the good faith of the employer in abolishing the redundant position; and (2) fair and reasonable criteria in ascertaining what positions are to be declared redundant and accordingly established (Ocean East Agency vs. Allan I. Lopez, G.R. No. 194410, October 14, 2015).
Under Article 298 (283) of the Labor Code, the following are the requirements for dismissal of employment due to Redundancy:
- written notice served on both the employees and the Department of Labor and Employment at least one month prior to the intended date of retrenchment;
- 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;
- good faith in abolishing the redundant positions; and
- fair and reasonable criteria in ascertaining what positions are to be declared redundant and accordingly abolished (Manggagawa ng Komunikasyon sa Pilipinas vs. Philippine Long Distance Telephone Company, Incorporated 823 SCRA 595, April 19, 2017).
In addition to the above, the Supreme Court in the case of American Power Conversion Corporation et al., vs. Jason Yu Lim, G.R. No. 214291, January 11, 2018, explained that, the declaration of redundant positions is a management prerogative, an exercise of business judgment by the employer. It is however not enough for a company to merely declare that positions have become redundant. It must produce adequate proof of such redundancy to justify the dismissal of the affected employees. The following evidence may be proffered to substantiate redundancy:
- New staffing pattern, feasibility studies/proposal, on the viability of the newly created positions, job description and the approval by the management of the restructuring.
- Affidavits executed by the officers of the Company, explaining the reasons and necessities for the implementation of the redundancy program.
Summary of the Differences between Retrenchment and Redundancy
Losses in the operation of the enterprise, lack of work, or considerable reduction on the volume of business
Service capability of the workforce is in excess of what is reasonably needed to meet the demands of the enterprise
Amount of Separation Pay
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
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;
Nevertheless, regardless of the distinction between retrenchment and redundancy, all employers must be reminded that, employment to the common man is his very life and blood, which must be protected against concocted causes to legitimize an otherwise irregular termination of employment (Am-Phil Food Concepts, Inc. vs. Padilla 737 SCRA 339, October 01, 2014). Thus, imagined, falsified or undocumented business losses cannot be used to justify retrenchment and/ or redundancy (International Management Services vs. Logarta 670 SCRA 22, April 18, 2012 and American Power Conversion Corporation et al., vs. Jason Yu Lim).