Requisites of retrenchment

Retrenchment is the termination of employment initiated by the employer through no fault of the employees and without prejudice to the latter, resorted to by management during periods of business recession; industrial depression; or seasonal fluctuations, 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 automation. Retrenchment is a valid management prerogative. It is, however, subject to faithful compliance with the substantive and procedural requirements laid down by law and jurisprudence. In the discharge of these requirements, it is the employer who bears the onus, being in the nature of affirmative defense.[1]

The pertinent provision of the Labor Code on the subject of retrenchment is instructive:

Art. 283. Closure of establishment and reduction of personnel. -The employer may also terminate the employment of any employee due to the installation of labor saving devices, redundancy, retrenchment to prevent losses or the closing or cessation of operation of the establishment or undertaking unless the closing is for the purpose of circumventing the provisions of this Title, by serving a written notice on the worker and the [Department] of Labor and Employment at least one (1) month before the intended date thereof. In case of termination due to the installation of labor saving devices or redundancy, the worker affected thereby shall be entitled to a separation pay equivalent to at least his one (1) month pay or to at least one (1) month pay for every year of service, whichever is higher. In case of retrenchment to prevent losses and in cases of closures or cessation of operations of establishment or undertaking not due to serious business losses or financial reverses, the separation pay shall be 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 at least six (6) months shall be considered as one (1) whole year.

Therefore, for a valid retrenchment, the following requisites must be complied with: 

(a) the retrenchment is necessary to prevent losses and such losses are proven;
(b) written notice to the employees and to the DOLE at least one month prior to the intended date of retrenchment; and
(c) payment of separation pay equivalent to one-month pay or at least one-half month pay for every year of service, whichever is higher.

Likewise, jurisprudence laid down the following standards to justify retrenchment in order to prevent the management from abusing this prerogative. In Ariola v. Philex Mining Corporation,[2] the Supreme Court summarized the requirements for retrenchment, as follows:

Thus, the requirements for retrenchment are: (1) it is undertaken to prevent losses, which 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) the employer serves written notice both to the employees and the DOLE at least one month prior to the intended date of retrenchment; and (3) the employer pays the retrenched employees separation pay equivalent to one month pay or at least 1/2 month pay for every year of service, whichever is higher. The [Supreme] Court later added the requirements that the employer must use fair and reasonable criteria in ascertaining who would be dismissed and x x x retained among the employees and that the retrenchment must be undertaken in good faith. Except for the written notice to the affected employees and the DOLE, non-compliance with any of these requirements renders the retrenchment illegal.[30]

[1] Manatad v. Phil. Telegraphic and Telephone Corporation, 571 Phil. 494, 505 (2008). 
[2] G.R. No. 147756, August 9, 2005.