Downsizing: A last-ditch effort
While within the ambit of management prerogative, it must be well-intentioned, done with great caution and in strict compliance with the law.
Published in Daily Tribune on September 04, 2020
by: Migmar Bernped S. Francisco
It has been almost six months since the number of confirmed COVID-19 cases soared and put tremendous pressure on the economy. To address health concerns caused by the pandemic, government measures were imposed including lockdowns, quarantine protocols, implementation of skeleton workforce or cessation of business operations, which led to the decline in economic activity.
To alleviate this pressure, employers resorted to adopting flexible work arrangements as recommended by the Department of Labor and Employment (DoLE). These include work from home or telecommuting, alternative work schemes such as transfer of employees, assignment of other functions, reduction of normal workdays, job rotation, partial closure, and other feasible arrangements.
These measures may not be enough, however, as when the exigencies of the business require a more drastic course of action. Rather than closing the business altogether, businesses may downsize their workforce via redundancy or retrenchment, both authorized causes for terminating employment under the Labor Code.
The law recognizes that an employer is not required to maintain a workforce more than what is necessary to run its business. Under DoLE Department Order No. 147-15, a valid redundancy program is predicated on the fact that a business has more employees than what the business actually requires to operate efficiently and economically.
Redundancy does not require a business to suffer losses before it can be implemented. For example, a business during this pandemic may be allowed to scale down its operations in proportion to the decrease in the demand of its products or services.
The Labor Code provides that an employee terminated by reason of redundancy is entitled to one month pay or at least one month pay for every year of service, whichever is higher, with a fraction of at least six months considered as one whole year.
Retrenchment, conversely, is available when the enterprise is already suffering or is in impending risk of suffering serious business losses. The same DoLE Department Order requires that retrenchment, to be valid, must be reasonably necessary and likely to prevent business losses. If based on losses already incurred, such must be substantial (not merely de minimis) and, if losses are only expected, they must be reasonably imminent.
In retrenchment, the employee is entitled to one month pay or at least one-half pay for every year of service, whichever is higher, with a fraction of at least six months considered as one whole year.
The separation pay received by the employee due to either retrenchment or redundancy is exempt from income tax pursuant to the Tax Code. However, a request for tax exemption of the separation benefits must first be filed with the Bureau of Internal Revenue.
The law requires that the decision to terminate employment for either of these authorized causes must be made in good faith and that fair and reasonable criteria be used in determining which positions to abolish or choosing the employees to dismiss.
Procedurally, both redundancy and retrenchment must comply with the notice requirement, that is, the employee concerned and the appropriate DoLE Regional Office should be furnished with written notice at least thirty days before the intended effectivity date of the termination indicating the ground for termination.
As the number of unemployed grows because of the pandemic, these draconian measures must only be resorted to as a last-ditch effort and with the purpose of lessening not only business losses but also the risk of further unemployment. While within the ambit of management prerogative, it must be well-intentioned, done with great caution and in strict compliance with the law. After all, true economic resilience means holistic sustainability for both the employer and employee.
