Authorized Causes for Termination of Employment by Employer

Authorized Causes refer to those instances enumerated under Articles 298 (Closure of Establishment and Reduction of Personnel) and 299 (Disease as a Ground for Termination) of the Labor Code, as amended. These are causes brought by the necessity and exigencies of business (Lopez v. Irvin Construction Corp., G.R. No. 207253, Aug. 20, 2014), changing economic conditions (Cajucom v. TPI Philippines Cement Corp., GR. No. 149090, Feb. 11, 2005) and ill of the employee (Reyes v. RP Guardians Security Agency, Inc., G.R. No. 193756, Apr. 10, 2013).

Authorized cause dismissal is a form of terminating employer-employee relationship with a liability on the part of the employer to pay separation pay as mandated by law. It does not necessarily imply delinquency and culpability on the part of the employee. Instead, the dismissal process is initiated by the employer’s exercise of his management prerogative such as installation of labor-saving devices, closure of business or implementing a retrenchment program (Jaka Food vs. Pacot, G.R. No. 151378, Mar. 28, 2005).

Concept

As distinguished from dismissal due to just causes, in termination due to authorized causes, the employee has not committed any wrongful act. It is valid because the law itself authorizes the termination. Sans any provision of law authorizing the termination, its validity may be properly questioned.

Authorized causes under Article 298

Art. 298. 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 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.

The grounds enumerated as authorized causes under Article 298 are the following:

a. Installation of labor-saving devices

b. Redundancy

c. Retrenchment

d. Closing or cessation of operation of the establishment or undertaking

The above-grounds are exclusive in nature. No other grounds may be invoked by analogy or in lieu or in substitution thereof.

a. Installation of labor-saving devices

It refers to the reduction of the number of workers in any workplace made necessary by the introduction of labor-saving machinery or devices (Philippine Sheet Metal Workers’ Union vs. CIR, 83 Phil 433).

It is a management prerogative to terminate employment relationship by replacing muscle power with machine power in order to effect economy and efficiency in the method of production. The switch from men employment to mechanical employment has economically dislocated many workers. Thus, it is proper for the management to pay the displaced workers in order to tide them over in the meantime while we are looking for other jobs.

Elements of installation of labor-saving devices

To be a valid ground for termination, the following must be present:

1. There must be introduction of machinery, equipment or other devices;

2. The introduction must be done in good faith;

3. The purpose for such introduction must be valid such as to save on cost, enhance efficiency and other justifiable economic reasons;

4. There is no other option available to the employer than the introduction of machinery, equipment or device and the consequent termination of employment of those affected thereby; and

5. There must be fair and reasonable criteria in selecting employees to be terminated.

Due process requirement

Written notice should be served on both the affected employees and the Department of Labor and Employment (DOLE) at least 1 month prior to the intended date of termination.

Separation pay

The affected employee 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.

b. Redundancy

It is a condition when the services of an employee are in excess of what is reasonably demanded by the actual requirements of the enterprise or superfluous (Wiltshire File Co. vs. NLRC, G.R. No. 82249, Feb. 7, 1991).

A position is redundant where it is superfluous, and the superfluity of a position may be the outcome of a number of factors, such as overhiring of workers, decreased volume of business, or dropping of a particular product line or service activity previously manufactured or undertaken by the enterprise (De Ocampo vs NLRC, G.R. No. 101539, Sep. 4, 1992). Bona fide implementation of a redundancy program is not destroyed by the availment of the services of an independent contractor to replace the services of terminated employees (Ibid).

Redundancy in an employer’s personnel force does not necessarily or even ordinarily refer to duplication of work, and that no other person was holding the same position that the employee held prior to termination of his services does not show that his position had not become redundant (Wiltshire File Co. vs. NLRC, G.R. No. 82249, Feb. 7, 1991). An employer has no legal obligation to keep more employees than are necessary for the operation of its business (Almodiel vs. NLRC, G.R. No. 100641, Jun. 14, 1993).

Redundancy may also be validly resorted to as a cost-cutting measure and to streamline operations so as to make them viable. Positions which overlapped each other, or which are in excess of the requirements of the service, may be declared redundant (Maya Farms Employees Organization vs. NLRC, G.R. No. 106256, Dec. 28, 1994).

Elements of redundancy

To be a valid ground for termination, the following must be present:

1. There must be superfluous positions or services of employees.

2. The positions or services are in excess of what is reasonably demanded by the actual requirements of the enterprise to operate in an economical and efficient manner.

3. There must be good faith in abolishing redundant positions.

4. There must be fair and reasonable criteria in selecting the employees to be terminated.

5. There must be an adequate proof of redundancy such as but not limited to the 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.

Due process requirement

Written notice should be served on both the affected employees and the Department of Labor and Employment (DOLE) at least 1 month prior to the intended date of termination.

Separation pay

The affected employee 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.

Some principles on redundancy

The wisdom, soundness or characterization of service as redundant by the employer is not subject to review. The only exception is when there is a showing that the same was done in violation of law or attended with arbitrary and malicious action (Smart Communications, Inc vs. Astorga, G.R. No. 148132, Jan. 28, 2008). Elimination of undesirables, abusers and worst performers through redundancy is not an indication of bad faith (Dole Philippines, Inc. vs. NLRC, G.R. No. 120009, Sep. 13, 2001). The act of the employer in hiring replacements was not deemed an indication of bad faith since the positions have no similar job descriptions (Santos vs. CA, G.R. No. 141947, Jul. 5, 2001).

Redundancy was held valid under the following: to save on labor costs (De Ocampo vs. NLRC, G.R. No. 101539, Sep. 4, 1992); redundancy resulting from use of high technology equipment (Soriano Jr. vs. NLRC, G.R. No. 165594, Apr. 23, 2007); abolition of positions or departments (San Miguel Corporation vs. NLRC, G.R. No. 99266, Mar. 2, 1999); reorganization (Dole Philippines, Inc. vs. NLRC, G.R. No. 120009, Sep. 13, 2001); contracting out of abolished positions to independent contractors (Serrano vs. NLRC, G.R. No. 117040, Jan. 27, 2000); and hiring of casuals or contractual employees after redundancy (Dole Philippines, Inc. vs. NLRC, G.R. No. 120009, Sep. 13, 2001).

c. Retrenchment

It refers to the economic ground for dismissing employees and is resorted to primarily avoid or minimize business losses (Atlantic Gulf and Pacific Company of Manila, Inc. vs. NLRC, G.R. No. 127516, May 28, 1999).

Retrenchment is a reduction of personnel usually due to poor financial returns so as to cut down on costs of operations in terms of salaries and wages to prevent bankruptcy of the company. It is something referred to as downsizing. The purpose of retrenchment is to save a financially ailing establishment from eventually collapsing (Asian Alcohol Corporation vs. NLRC, G.R. No. 131108, Mar. 25, 1999).

The law therefore recognizes the right of every business entity to reduce its workforce if the same is made necessary by compelling economic factors which would endanger its existence or stability. In spite of overwhelming support granted by the social justice provisions of our Constitution in favor of labor, the fundamental law itself guarantees, even during the process of tilting the scales of social justice toward workers and employees, “the right of enterprises to reasonable returns of investment and to expansion and growth”. To hold otherwise would not only be oppressive and inhuman, but also counterproductive and ultimately subversive of the nation’s thrust toward a resurgence in our economy which would ultimately benefit the majority of our people (Balbalec vs. NLRC, G.R. No. 107756, Dec. 19, 1995).

The phrase “to prevent losses” means in its ordinary connotation that the retrenchment or termination of the services of some employees is authorized to be undertaken by the employer sometime before the anticipated losses are actually sustained or realized, and that it is not the intention of the lawmaker to compel the employer to stay his hand and keep all his employees until after losses have in fact materialized; otherwise, if such an intent were expressly written into law, that law may well be vulnerable to constitutional attack as unduly taking property from one man to be given to another (Revidad vs. NLRC, G.R. No. 111105, Jun. 27, 1995).

Elements of retrenchment

To be a valid ground for termination, the following must be present:

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.

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.

Due process requirement

Written notice should be served on both the affected employees and the Department of Labor and Employment (DOLE) at least 1 month prior to the intended date of termination.

Separation pay

The affected employee shall be entitled to 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 at least six (6) months shall be considered one (1) whole year.

Some principles on retrenchment

Employer bears the burden of proof to show business losses or financial reverses (Emco Plywood Corporation vs. Abelgas, G.R. No. 148532, Apr. 14, 2004). The audited financial statements is the best evidence of losses (Composite Enterprises, Inc. vs. G.R. No. 159919, Aug. 8, 2007). Audited financial statements should be presented before the Labor Arbiter or the NLRC but not belatedly before the Court of Appeals or Supreme Court (FASAP vs. PAL, G.R. No. 178083, Jul. 22, 2008).

A mere decline in gross income cannot in any manner be considered as serious business losses. It should be substantial, sustained and real (Lambert Pawnbrokers and Jewelry Corp. vs. Binamira, G.R. No. 170464, Jul. 12, 2010).

d. Closing or cessation of operation of the establishment or undertaking

It refers to the complete or partial cessation of the operations and/or shutdown of the establishment of the employer.

Closure of business is the reversal of fortune of the employer whereby there is a complete cessation of business operations and/or an actual locking-up of the doors of establishment, usually due to financial losses. It is an authorized cause for termination of employment which aims to prevent further financial drain upon an employer who cannot pay anymore his employees since business has already stopped (J.A.T. Gen. Service vs. NLRC, G. R. No. 148340, Jan. 26, 2004).

An employer may however close or cease his business operations or undertaking even if he is not suffering from serious business losses or financial reverses, as long as he pays his employees their termination pay in the amount corresponding to their length of service, and it would be stretching the intent and spirit of the law if we were to unjustly interfere in the management’s prerogative to close or cease its business operations just because said business operation or undertaking is not suffering from any loss (Catatista vs. NLRC, G.R. No. 102422, Aug. 3, 1995).

The right to close the entire establishment and cease operations due to adverse economic conditions includes the right to close a part thereof to minimize expenses and overcapitalization (Dangan vs. NLRC, G.R. Nos. 63127-28, Feb. 20, 1984). However, such partial closure is treated as retrenchment (CDCP vs. Hon. Leogardo, G.R. Nos. L-64207-08, Nov. 25, 1983).

Likewise, the authorized closure or cessation of operation of an establishment or undertaking not due to serious business losses or financial reverses, includes both the complete cessation of operations and the cessation of only part of a company’s activities (Coca-Cola Bottlers, Inc. vs. NLRC, G.R. Nos. 93530-36, Feb. 27, 1991).

Elements of closure or cessation of operation

To be a valid ground for termination, the following must be present:

1. There must be a decision to close or cease operation of the enterprise by the management.

2. The decision was made in good faith.

3. There is no other option available to the employer except to close or cease operations.  

Due process requirement

Written notice should be served on both the affected employees and the Department of Labor and Employment (DOLE) at least 1 month prior to the intended date of termination.

Separation pay

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.

However, no separation pay if the termination is due to closure or cessation of business due to serious economic reverses or losses (Jaka Food vs. Pacot, G.R. No. 151378, Mar. 28, 2005).

Some principles on closure and cessation of operation

Employer may close its business whether it is suffering from business losses or not; the Court cannot order employer to continue its business (Penafrancia Tours and Travel Transport, Inc. vs. Sarmiento, G.R. No. 178397, Oct. 10, 2010). Principle of closure under Article 283 (now 298) applies in cases of both total and partial closure or cessation of business operations. Management may choose to close only a branch, a department, a plant, or a shop (Edge Apparel, Inc. vs. NLRC, G.R. No. 121314, Feb. 12, 1998).

Audited financial statements is necessary only in closure due to losses (Danzas Intercontinental, Inc. vs. Daguman, G.R. No. 154368, Apr. 15, 2005).   

Standards to be followed in selecting employees to be dismissed based on any of the above authorized causes

In selecting who to be dismissed, there should be reasonable and fair criteria to be followed such as: nature of work, status of employment (whether casual, temporary or regular), experience, efficiency rating, seniority; among other considerations; dependability, adaptability, flexibility, trainability, job performance, discipline and attitude towards work.

Even if there is a seniority rule, such as the Last In, First Out (LIFO) rule, the nature of work and experience of the employees should still be taken into account by the employer (Maya Farms Employees Organization vs. NLRC, G.R. No. 106256, Dec. 28, 1994). But, when there are two employees occupying the same position in the company affected by the retrenchment program, the last one employed will necessarily be the first to go (Ibid.). The LIFO rule has no basis in law (Asian Alcohol Corporation vs. NLRC, G.R. No. 131108, Mar. 25, 1999). Hence, the LIFO rule is not controlling as employer has the prerogative to choose who to terminate (De la Salle University vs. De la Salle University Employees Association, G.R. No. 109002, Apr. 12, 2000).

Authorized causes under Article 299

Art. 299. Disease as Ground for Termination. An employer may terminate the services of an employee who has been found to be suffering from any disease and whose continued employment is prohibited by law or is prejudicial to his health as well as to the health of his co-employees: Provided, That he is paid separation pay equivalent to at least one (1) month salary or to one-half (1/2) month salary for every year of service, whichever is greater, a fraction of at least six (6) months being considered as one (1) whole year.

Elements of disease as a ground of termination

To be a valid ground for termination, the following must be present:

1. The employee must be suffering from any disease.

2. The continued employment of the employee is prohibited by law or prejudicial to his/her health as well as to the health of his/her co-employees.

3. There must be a certification by a competent public health authority that the disease is incurable within a period of 6 months even with proper medical treatment.

Due process requirement

Written notice should be served on both the affected employees and the Department of Labor and Employment (DOLE) at least 1 month prior to the intended date of termination.

Separation pay

The affected employee shall be entitled to 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 at least six (6) months shall be considered one (1) whole year.

Some principles on disease

If the disease or ailment can be cured within the period of 6 months with proper medical treatment, the employer should not terminate the employee but merely ask him to take a leave of absence. The employer should reinstate him to his former position immediately upon the restoration of his normal health (Sevillana vs. I.T. Corp., G.R. No. 99047, Apr. 16, 2001).

In case the employee unreasonably refuses to submit to medical examination or treatment upon being requested to do so, the employer may terminate his services on the ground of insubordination or willful disobedience by the employee of the lawful order of his employer or representative in connection with his work.

A company physician is not a competent public health authority. A medical certificate issued by a company’s own physician is not an acceptable certificate for purposes of terminating an employment based on Article 284 (now 299), it having been issued not by a competent public health authority, the person referred to in the law (Cebu Royal Plant vs. Deputy Minister of Labor, G.R. No. 58639, Aug. 12, 1987).

A competent public health authority refers to a government doctor whose medical specialization pertains to the disease being suffered by the employee. For instance, an employee who is sick of tuberculosis should consult a government-employed pulmonologist who is competent to make an opinion thereon. If the employee has cardiac symptoms, the competent physician in this case would be a cardiologist.

References:

- Article 298. Closure of Establishment and Reduction of Personnel, PD No. 422, as amended and renumbered per DOLE Department Advisory No. 1, Series of 2015.

- Article 299. Disease as Ground for Termination, PD No. 422, as amended and renumbered per DOLE Department Advisory No. 1, Series of 2015.

- Department Order No. 147-15, Series of 2015, Amending the Implementing Rules and Regulations of Book VI of the Labor Code of the Philippines, as amended.

- Poquiz, Labor Relations Law, 2005.

- Supreme Court Decisions