Termination due to Retrenchment in the Philippines

Termination of Employment due to Retrenchment is classified as an authorized cause of termination which means that the termination of employment is due to necessity and exigency of the business or economic condition. Retrenchment is also known as a "lay-off" or "Downsizing".

Retrenchment may be used as a last resort to cut further losses on the company; It may be a department or the whole business that is not profitable anymore therefore has been forced to closed, the latter which, unfortunately, may not incur separation pay for the benefit of employees.

What is Termination of Employment due to Retrenchment?

The following is the main basis indicated in Presidential Decree No. 442, also known as the Labor Code of the Philippines:

Closure of establishment and reduction of personnel. The employer may also terminate the employment of any employee due to the installation of laborsaving 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 workers and the Ministry 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 one (1) whole year.

Art. 283 of the Labor Code of the Philippines

Temporary Cessation of Business

Temporary lay-offs (or floating status) are issued only if the business is expected to open again or until the situation has normalized. As stated in PPTC v. NLRC, A temporary layoff must not exceed for a period of six months. This would mean that the employee should have already received a notice of retrenchment on the 5th month or a recall order to resume work.

If the period of the temporary lay-off is beyond 6 months, it may be construed as constructive dismissal and would incur heftier fines on the part of the employer.

Elements of a valid retrenchment

Employers have the burden to prove that they have substantial losses to merit the retrenchment of employees. It is important to note that employees must be afforded to due process in the termination of their employment regardless. According to Department of Labor and Employment (DOLE) No. 147, series of 2015, a retrenchment order may only be deemed valid when all of the following has been satisfied by the employer:

  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. Finally, 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.

The following are therefore the steps required to retrench the employee:

  1. Necessity of the retrenchment to prevent losses, and proof of such losses
  2. A written notice to the employee concerned
  3. Furnish a copy of the notice to DOLE at least one (1) month prior to the intended date of retrenchment
  4. Payment of separation pay

For the proof of losses, financial statements audited by independent external auditors are recognized and considered as a normal method of proof of the profit and loss performance of a company.

Due Process in Termination of Employment due to Retrenchment

RETRENCHMENT NOTICE. Employees should be issued a written "Notice of Retrenchment" or other analogous memorandum to inform them that they have been retrenched from their employment.

NOTICE TO DOLE THROUGH ESTABLISHMENT FORM. The Department of Labor and Employment (DOLE) has issued retrenchment guidelines due to the COVID-19 pandemic. In reference to Labor Advisory No. 17, series of 2020 regarding the Establishment Report Form, the employer shall fill-out RKS Form 5, series of 2020 if you are opting for any of the following:

  • Flexible Work Arrangement / Alternative Work Scheme
  • Temporary Closure
  • Retrenchment / Reduction of Workforce
  • Permanent Closure

And for this purpose, you would be either accomplishing the form due to Retrenchment/Reduction of Workforce or Permanent Closure.

WHERE TO DOWNLOAD FORM. You can download a copy of the RKS Form 5, series of 2020 form by clicking this link.

WHERE TO SUBMIT REPORT. The RKS Form 5, series of 2020 may be submitted personally or online to the appropriate DOLE Provincial/Field Office which has jurisdiction over the workplace

SEPARATION PAY. The retrenched employee is entitled to Separation Pay in addition to other pending or due payments to him such as pro-rated 13th Month Pay, unpaid salary, remaining Service Incentive Leaves (SIL) among others.

Payment of the Separation Pay to the retrenched employee is equivalent to either "One month salary of employee" or "At least one-half month pay for every year of service" whichever is higher. A fraction of 6 months is considered one year.


It has been more than six (6) months and yet I am still on floating status, what should happen?

You should have already been notified if you are to be recalled or retrenched. Your company may be found liable if they do not decide on what should happen to your employment.

Is it valid if my employer has given a retrenchment notice but asked me to submit a resignation letter?

A resignation letter is a notice of an employee to the employer that he or she would like to sever the employment on his own volition; this should not be a part of the retrenchment process. Should the employer refuse to give the employee the separation pay, it may be construed by the courts as circumventing the rules issued.

In another point of view, the HR officer may also be referring to the submission of a letter that employees agree to be retrenched and payment of the Separation Pay shall be requested by them and not an actual resignation letter.

Can I be retrenched prior to the six (6) month period of my floating status?

Yes, you can be retrenched even before the six (6) month maximum period. You can even be retrenched if you are not on a floating status. A temporary lay-off or "Floating Status" is not part of the due process for the Termination of Employment due to Retrenchment.

Can I ask my employer if I could be retrenched?

Retrenchment is a management prerogative undertaken by the company. An employee cannot request to be retrenched only because he or she requested it to be paid Separation Pay.

Is it valid if the employer did not give a notice of the retrenchment to the Department of Labor and Employment (DOLE)?

The submission of the written notice to the Regional Office of the Department of Labor and Employment (DOLE) of the Termination of Employment due to retrenchment is part of the due process. The employer may be fined as it is required that the Department of Labor and Employment (DOLE) shall be notified of the notice of retrenchment. In addition, the decision to retrench the employee may be reversed and the employee may be reinstated to the position should there be a legal challenge.

Cessation of Business due to Serious Financial Losses

Separation pay is only mandated when retrenchment has occurred when the business has closed NOT due to serious financial losses. Therefore, If an employer has stated that a permanent cessation of business due to serious financial losses will be declared by the company, employees would NOT be granted separation pay. The above processes shall still be followed with the exception of payment of separation pay.

It is an unfortunate circumstance when this has occurred as it both severely affects employers and employees, the loss of the business and the loss of employment respectively.

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