Issues on seperation pay

Dear PAO,

I am working in a representative office of a Singapore-based company here in the Philippines. It has only two employees and is being funded by the head office in Singapore. The head office decided to close our office due to the high cost in maintaining it. Are the employees entitled to a separation pay? How will it be computed? The two employees have been working with the company for nine years and four months, and eight months, respectively. The employee working with the company for nine years and four months accepted the company’s offer to work in the head office in Singapore. Is she still entitled to a separation pay?
Vilma

Dear Vilma,

The services of an employee may be terminated by the employer even if the employee hasn’t done anything wrong to the employer. The employer’s right to reduce personnel or close down his business for economic reasons has been recognized even before the enactment of the Labor Code of the Philippines (Ungos, Jr., Ungos III, Labor Code of the Philippines (Vol. 2), 3rd Edition, page 592). In the case of Gregorio Araneta Employees Union vs. Roldan, the Supreme Court (97 Phil. 304) held that an employer has the perfect right to reduce its personnel in order to minimize expenses and ensure stability of the business and even to close his business. To hold otherwise would be oppressive and inhuman.

You said in your letter that the representative office where you are working is being closed down by the head office due to the high cost in maintaining it. As stated, an employer may validly terminate the services of an employee for economic reasons such as to minimize the costs of maintaining their business.
This employer’s right to terminate the services of an employee can be found in Article 283 of the Labor Code of the Philippines:

Article 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 workers and the Department of Labor and Employment at least one (1) month before the intended date thereof. xxx

Our labor law allows the employers to reduce the number of their employees especially if the existence of the company is endangered due to the high costs in maintaining it. In legal parlance, this reduction of personnel is called retrenchment or downsizing. Employers usually resort to retrenchment due to poor financial returns so as to cut down on costs or operations in terms of salaries and wages to prevent bankruptcy of the company. The purpose of it is to save a financially ailing establishment from eventually collapsing (J.A.T. Gen. Services vs. NLRC, G.R. No. 148340, January 26, 2004). For retrenchment to be valid, following standards have to observed:

1. The losses expected should be substantial and not merely de minimis in extent;

2. The substantial loss apprehended must be reasonably imminent, and such imminence can be perceived objectively and in good faith by the employer;

3. It must be reasonably necessary and likely to effectively prevent the expected losses. The employer, then, should have taken other measures prior or parallel to retrenchment to forestall losses; and

4. The alleged losses if already realized, and the expected imminent losses sought to be forestalled, must be proven by sufficient and convincing evidence (Azucena, Everyone’s Labor Code, 2006 Edition, page 347)

Since in retrenchment, the employers terminate the employment of the employees and retain the services of some, the former are expected to adopt fair and reasonable criteria in selecting the employees to be retrenched. The most common of these criteria is the LIFO rule or the “last in first out rule.” Under this rule, if the retrenchment program will affect two or more employees, the last one employed by the company will be the first to go. The seniority of the employees hired first will prevail over those hired later.
It would seem that your employer has followed this criterion in selecting the employee to be retrenched since according to you, the other employee who has been in service for nine years and four months will continue to be employed in the company’s head office in Singapore. In order for the retrenchment of the other employee to be valid, the employer should have served a written notice to the employee and the Department of Labor and Employment at least one (1) month before the intended date of retrenchment (Article 283, Labor Code of the Philippines). The employee whose employment is terminated shall likewise receive a separation pay from the employer. It is given to an employee to provide a wherewithal during the period that he is looking for another job (A Prime Security Services, Inc. vs. NLRC, 220 SCRA 142. It is a form of allowance paid to an employee which is usually based on his length of service. The amount of separation pay shall be equivalent to one (1) month pay or at least one-half (1/2) pay for every year of service, whichever is higher. In computing the amount, a fraction of at least six months will be considered as one (1) whole year. On the other hand, the employee who accepted the company’s offer to work in the head office in Singapore is not entitled to receive separation pay. Such employee is not separated or severed from service and is only deemed to have been reassigned or transferred in the company’s head office.

Finally, we wish to remind you that this advice is solely based on your narration of facts and our appreciation may vary if other facts are added or elaborated. –Persida Acosta, Manila Times

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