Terminating Employees due to Financial Distress (Part 2 of the Authorized Causes)

Christian Andrew Labitoria Gallardo[1] and Atty Juan Miguel de Leon[2]

“We are at war against a vicious and invisible enemy. One that cannot be seen by the naked eye. In this extraordinary war, we are all soldiers” – President Rodrigo Roa Duterte, 16th of March 2020.

It might be sounding overdramatic, but for those gravely affected by the pandemic, it is an understatement to the reality that they had to, or have to continually, face everyday. With the lockdown that went on in the Metro for almost 6 months, many businesses were closed, and several employees had to be terminated due to lack of funds. The big question therefore is that, is it legal?

In the previous article, we discussed two (2) of the authorized causes for termination. In this article, we shall be discussing three (3) more, all of which are highly relevant to the economic losses being suffered by businesses due to the "new normal"

Retrenchment or Downsizing

This refers to the reduction of workers due to economic reasons, that is, to avoid or minimize business losses.[3] Similar to the other authorizes causes, there must also be a fair and reasonable criteria in determining the employees to be retained.[4] To justify termination, the losses must be substantial and actual, or at the very least, reasonably imminent, as proven by sufficient and convincing evidence such as externally audited financial statements.[5] A sharp drop in income per se without showing that it will continue is not a ground to justify retrenchment, as the loss contemplated herein must be substantial, sustained and real.[6] In an enterprise which has several branches nationwide, profitable operations in some will not affect the validity of retrenchment if overall, the financial condition thereof reflects losses.[7]

Note that this is the only ground for termination which requires proof of loss.[8] The mere fact of an economic crisis besetting the country as a whole is not sufficient to justify retrenchment.[9] Applying it by analogy, the mere existence of a pandemic ravaging the entire world does not amply justify the retrenchment of an employee without a concrete proof that such a plague detrimentally affected the finances of the company. Note that an Income Tax Return or an affidavit of loss, being self-serving, does not meet the standard required for proving losses.[10]

Closure of Cessation of Operation

This refers to the termination of workers due to the cessation of operations and/or shutting down of the business, completely or partially.[11] It must be made in good faith however, after the management decided to cease operations.[12] Note that the closure of the establishment may be made whether or not there is a serious financial reversal, as the courts cannot order the employer to continue its business despite its refusal to do so.[13] However, in case it was resorted to despite the fact that there is no serious business losses, the employer is mandated to provide separation pay to employees.[14] Adversely, if the closure was due to serious financial reverses, the employees need not be paid any separation pay. The closure however does not need to involve the entire business, but may involve only a branch, department, plant or shop.[15] A more common example of this is closure to merger or consolidation with another company.[16]


The disease contemplated as an authorized cause for termination is not just any form of disease, due to which an employee may absent himself for treatment on an occasional basis. The disease referred here must be one by which continued employment is deemed prohibited by law or prejudicial to his life as well as that of his/her co-employees. Furthermore, there must be a certification by a competent public health authority that the disease is incurable within a period of six (6) months even with proper medical treatment.[17] The “competent public health authority” contemplated is a government doctor whose specialization pertains to the disease being suffered by the employee. A company physician, for the purpose of this ground of termination, is not competent to assess the ability of the sick employee to continue working.[18] The employer is the one bound to have the sick employee assessed by a competent public health authority. If the employee however refuses to submit to a medical examination, the employer may terminate his services on the ground of insubordination or willful disobedience of a lawful order.[19]

If it is in fact curable, albeit it will take a significantly long period such as three (3) months, the employee must be merely given a leave of absence without pay, and be restored to his former position upon recovery.[20] As per jurisprudence however, the allegedly ailing employee sought to be dismissed must be given the opportunity to present countervailing evidence in the form of medical certificates to prove that the dismissal is not proper as the ailment is, in fact, not serious or can be easily treated.[21] Under a special law, an employee may not be dismissed due to contraction of HIV/AIDS.[22]

Well, there we go. It turns out that terminating an employee for business losses can be legal, provided that the minimum safeguards provided by law has been observed. The next question therefore would be: what is the procedure for it? Stay tuned as we discuss it on our next article. Meanwhile, please do join our free facebook group for free legal advice.


Photo from: freepik.com

[1]Christian Andrew Labitoria Gallardo is a recent graduate of the Ateneo School of Law with a Juris Doctor degree, and is currently an associate of the Sangalan and Gaerlan, Business Lawyers, a law firm specializing in labor, corporate and business law. You may reach him at andrew.gallardo@paladinslaw.org [2]Atty. Juan Miguel E. De Leon is a graduate of the Far Eastern University - Institute of Law. A member of the Tau Kappa Phi fraternity of FEU-Law and the Knights of Rizal, a civic and patriotic organization duly established under Republic Act No. 646. He is currently a Senior Associate Lawyer of of the Sangalang and Gaerlan, Business Lawyers, a law firm specializing in labor, corporate and business law. You may reach him at migs.deleon@paladinslaw.org [3] Section 4 (r), DO 147-15. [4] Section 5.4 (c), DO 147-15. [5] Section 5.4 (b), DO 147-15 [6] Lambest Pawnbrokers and Jewelry Corp v Binamira, G.R. No. 170464 (2010). [7] Manatad v Philippine Telegraph and Telephone Company, G.R. No. 172363 (2006). [8] Precision Electronics Corporation v NLRC, G.R. No. 86657 (1989). [9] Central Azucarrera dela Carlota v NLRC, [10] Casimiro v Stem Real Estate Inc, G.R. No 162233 (2006). [11] Section 4 (c), DO 147-15. [12] Section 5.4 (d), DO 147-15. [13] Penafrancia Tours and Travel Inc v Sarmiento, G.R. No. 178397 (2010). [14] North Davao Mining Corp v NLRC, G.R. No. 112546 (1996). [15] AISFB-ALU v Hon CA and PICOP, G.R. No. 140150 (2005). [16] Espina v CA, G.R. No. 164582 (2007). [17] Section 5.4 (e), DO 147-15. [18] Cebu Royal Plant v Hon Deputy Ministry of Labor, G.R. No. 58639 (1987). [19] Article 297 (a), Labor Code. [20] Section 8 Rule I Book VI, Rules to Implement the Labor Code. [21] Fuji Television Network v Arlene Espiritu, G.R. No. 204944-45 (2014). [22] RA 8504, Philipine AIDS Prevention and Control Act of 1998.

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