Retrenchment vs. closure of business


A country club, offering various sports and recreational facilities to its members, decided to conduct a study on the profitability of its food and beverage department (F&B Department). An audit was conducted to study the financial statements for the years 1989-1993. The results showed that the F&B Department incurred serious substantial losses amounting to P8,727,135.

Realizing that the F&B Department was no longer profitable, management found it best to have a concessionaire run its own food and beverage business within the club. After finding a contractor for the F&B Department, the Country Club wrote individual letters to the F&B Department employees to inform them that in one month’s time, their services will be terminated. The employees would also receive separation pay equivalent to 125% of their monthly salary for every year of service. Unhappy with the turn of events, the employees collectively filed a case of illegal dismissal against their employer, alleging that there was no justification for their retrenchment.

Both the Labor Arbiter and National Labor Relations Commission (NLRC) found that management prerogatives allow an employer to retrench its workers in order to prevent further losses incurred by its business. Moreover, an employer may reduce its work force if compelling economic factors so necessitate. The Court of Appeals, however, overturned the NLRC’s decision finding that retrenchment was not proper.

The Supreme Court (SC) reverted back to the ruling of the NLRC that the employees were dismissed for authorized cause. It clarified, however, that the proper ground for reducing employees in this case was due to closure of a business undertaking and not retrenchment. The SC distinguished both causes –

Retrenchment is the reduction of personnel for the purpose of cutting down on costs of operations in terms of salaries and wages resorted to by an employer because of losses in operation of a business occasioned by lack of work and considerable reduction in the volume of business.

Closure of a business or undertaking due to business losses is the reversal of fortune of the employer whereby there is a complete cessation of business operations to prevent further financial drain upon an employer who cannot pay anymore his employees since business has already stopped.

In addition, while the Labor Code provides for the payment of separation pay in case of retrenchment to prevent losses, it does not obligate the employer give separation pay if there is closure of business due to serious losses.

The SC further validated the Country Club’s right to close the F&B Department under Art. 283 of the Labor Code, even if the closure was not sufficiently proven to be due to serious business losses. The closure of operation of an establishment or undertaking not due to serious business losses or financial reverses contemplates both the complete cessation of operations and the cessation of only part of a company’s activities –

For any bona fide reason, an employer can lawfully close shop anytime. Just as no law forces anyone to go into business, no law can compel anybody to continue the same . . . Management’s exercise of its prerogative to close a section, branch, department, plant or shop will be upheld as long as it is done in good faith to advance the employer’s interest and not for the purpose of defeating or circumventing the rights of employees under the law or a valid agreement (Alabang Country Club v. NLRC, G.R. No. 157611, 9 August 2005, J. Carpio Morales).


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