Declaring redundancy or retrenchment isn’t just tough—it’s heart-wrenching. After all, it affects people’s livelihoods. No business leader or HR manager wants to face the reality that they might have to let some of their team members go. But sometimes, the survival of the business is on the line. If that’s the case, reducing your workforce is a bitter pill you must swallow.
In the Philippines, labor law protects employees so they get fair compensation and tenure security, especially in challenging situations like redundancy and retrenchment. So, to avoid adding labor disputes to your list of headaches, it’s crucial to comply with the Department of Labor and Employment’s (DOLE) retrenchment policy.
This article will guide you through the aspects of retrenchment and redundancy, as well as their processes.
Redundancy vs. Retrenchment (as Defined by DOLE)
Both terms refer to lawful ways to terminate employment but apply to different scenarios and have separate implications. Understanding the distinction between redundancy and retrenchment is crucial for employers and employees in the Philippines.
Redundancy
Redundancy occurs when a position becomes surplus in relation to the requirements of the business, usually to streamline operations. Specific roles can become unnecessary when the business installs labor-saving devices or adopts new technologies. It isn’t about the employee’s performance; the role is just no longer needed.
Under Article 298 of the Labor Code, redundancy is explicitly recognized as a legitimate ground for terminating employment. For instance, if a company automates its payroll system, the roles of manual payroll processors would become redundant.
Retrenchment
Retrenchment involves scaling down the workforce due to economic pressures. When a business faces financial difficulties like ongoing losses, a significant downturn in revenue, or economic challenges such as recessions or industrial depression, retrenchment can prevent further losses for employers.
It’s considered a last resort only after other cost-saving measures have become insufficient. Article 298 of the Labor Code also covers retrenchment, recognizing it as a valid reason to reduce personnel to safeguard the business’s viability.
To summarize, redundancy is about the job no longer being needed due to changes in company operations, while retrenchment is about reducing the number of employees to keep the business afloat during tough economic times.
What Is the Process of Declaring a Position Redundant?
Here’s how declaring redundancy works.
1. Establish good faith in abolishing the position
Your decision to declare a position redundant must be in good faith. This choice means the redundancy should be due to operational needs, like automation or reorganization, rather than any hidden agenda against the employee.
2. Utilize fair and reasonable criteria for selection
You must use fair and reasonable criteria to select which employees are affected by the redundancy. These criteria include employment status (temporary vs. permanent), efficiency, and seniority. Instead of arbitrary judgment or personal bias, you should decide based on objective parameters like evaluation scores and key performance indicators.
3. Notice requirement
According to the law, you must provide a one-month prior notice to the affected employee and the DOLE Regional Office. This notice period is crucial for allowing the employee time to prepare for the transition and for DOLE to ensure the process is legal and proper.
What Is the Process of Implementing Retrenchment in the Philippines?
Next is retrenchment, and its process is almost similar to redundancy, with slight differences.
1. Declaration to prevent substantial losses
You must retrench to avert significant, serious, and actual losses. These deficits shouldn’t be minor but must be substantial and real. For instance, your business is in danger of sinking because the cash reserves left are good for only six months.
2. Notice requirement
Like redundancy, you must provide written notice to the affected employees and DOLE at least one month before the planned retrenchment date.
3. Separation pay
Retrenched employees must receive separation pay equivalent to either one month’s salary or at least half a month’s pay for every year of service, whichever amount is higher.
4. Fair and reasonable criteria
Determining which employees will be retrenched must be based on fair and reasonable criteria. You must show that the decision was transparent and justifiable.
5. Good faith
The decision to retrench employees must be in good faith, without any ulterior motives or prejudices.
What Are Retrenched and Redundant Employees Entitled To?
Employees terminated due to redundancy or the installation of labor-saving devices must receive separation pay equivalent to either one month’s salary or one month’s salary for every year of service, whichever is higher.
For employees retrenched to prevent losses, or in cases where a business closes or ceases operations not due to severe losses or financial reverses, the separation pay is equivalent to either one month’s salary or half a month’s pay for every year of service, whichever amount is higher.
If an employee worked for at least six months, it’s counted as a whole year when computing separation pay.
Sample Computations of Separation Pay
For redundancy:
An employee worked for five years and earns ₱30,000 per month.
One month’s pay: ₱30,000
One month’s pay for every year of service: ₱30,000 x 5 = ₱150,000
In this case, the employee receives the redundancy pay in the Philippines of ₱150,000 since it is higher than one month’s pay.
For retrenchment:
An employee worked for seven and a half years and has a monthly salary of ₱20,000.
One month’s pay: ₱20,000
Half month’s pay for every year of service: (₱20,000 / 2) x 8 (since 7.5 years is considered eight years) = ₱80,000
Here, the employee gets ₱80,000, which is higher than one month’s pay.
Trust the Process
Understanding and performing the correct processes of redundancy and retrenchment are critical for keeping a workplace in the Philippines legal and compliant. By following the outlined steps, employers can make these tough decisions with integrity and respect for their employees’ rights.
Whether giving proper notice periods, fair selection criteria, or appropriate separation pay, adherence to these guidelines helps protect the business and its workforce when times get tough.
If you need help finding top talent in the Philippines, look no further than Manila Recruitment. We’re a recruitment agency in the Philippines that strives to connect you with the right professionals to keep your company going strong.
Contact us today for more information.
DISCLAIMER: The information in this webpage / blog / article / infographic we have published and the associated commentary are presented as general information and is not a substitute for obtaining legal advice in this area. Manila Recruitment does not accept liability for any action taken based on the information presented or for any loss suffered as a result of reliance on the information provided.
