Legality of Retrenchment for Employee Transfer to a Sister Company in the Philippines

Executive summary

“Retrenchment to prevent losses” is a specific authorized cause for terminating employment under the Labor Code. It is not a catch-all label for corporate reorganizations or for moving people to an affiliate. If an employer invokes retrenchment but the real plan is to transfer employees to a sister company—or to “spin off” a unit—the retrenchment will be invalid unless the strict legal requisites are met. A lawful transfer, on the other hand, generally requires employee consent, or a different authorized cause (e.g., redundancy or closure) with full compliance and payment of separation pay by the original employer.

Below is a complete, practice-oriented guide in the Philippine context.

1) Legal bases and concepts

A. Authorized causes vs. just causes

Authorized causes (e.g., retrenchment, redundancy, installation of labor-saving devices, closure/cessation of business, disease) are management prerogatives grounded on business or health exigencies.
Just causes (e.g., serious misconduct) are employee-fault grounds.
Transfers to a sister company are not, by themselves, an authorized cause for termination. They are corporate structuring choices that must be implemented without violating security of tenure.

B. Separate juridical personalities

A “sister company” is a separate employer. An employee cannot be compelled to work for another juridical entity without consent. Attempting to force such a move risks constructive dismissal.

C. Security of tenure

An employee may only be dismissed for (a) a just cause after due process, or (b) an authorized cause with statutory notice and pay. Absent these, a termination is illegal even if the employee is offered a new role with an affiliate.

2) What counts as valid retrenchment to prevent losses

Retrenchment is a cost-cutting measure to avert or minimize genuine business losses. Philippine jurisprudence has consistently required the employer to prove all of the following:

Necessity: Retrenchment is reasonably necessary and likely to prevent or minimize losses; not a mere device to ease out employees or to change headcount for convenience.
Losses are real: Losses are actual and serious, or imminent and reasonably certain; not conjectural.
Proof quality: Losses are shown by independent, credible evidence, typically audited financial statements and other objective data (declining sales, canceled orders, cost projections). Bare assertions are insufficient.
Good faith: The employer acts transparently and not to circumvent the law, break unions, or discriminate.
Fair selection criteria: If not a full shutdown, the employer uses reasonable and consistently applied criteria (e.g., efficiency ratings, seniority, special skills, status).

If employees are simultaneously being hired or absorbed by a sister company (especially at similar or higher headcount/cost), that fact can undermine the claim that retrenchment was necessary “to prevent losses,” unless the employer can show a credible, unit-specific business case (e.g., permanent loss of a line of business at Company A while Company B, a different entity, continues other unrelated operations).

3) Procedure and monetary entitlements for retrenchment

A. Notice

30 days’ prior written notice to each affected employee and to the Department of Labor and Employment (DOLE).
Payment in lieu of notice is not a perfect substitute; failure to observe notice typically results in nominal damages even if the authorized cause is proven.

B. Separation pay (statutory minimum)

For retrenchment (and closure not due to serious losses): One (1) month pay or one-half (1/2) month pay per year of service, whichever is higher. (A fraction of at least six months counts as one whole year.)
For redundancy or installation of labor-saving devices (if those causes are used instead): One (1) month pay per year of service or one (1) month pay, whichever is higher.

The original employer that terminates employment for an authorized cause is the one liable to pay statutory separation pay, even if the employee is later hired by a sister company. If there is truly no termination (i.e., the employee stays employed by the same juridical employer), separation pay does not arise.

C. Other amounts typically due

Pro-rata 13th month pay;
Cash conversion of unused leave, if company policy or practice;
Any amounts under a CBA or separation plan.
Tax: Separation benefits due to retrenchment (a cause beyond the employee’s control) are generally tax-exempt, subject to revenue rules in force at payout time.

4) Transfers and “absorption” by a sister company

A. Transfers require consent

A move from Employer A to Employer B (sister/affiliate) is a novation of the employment contract. It requires the employee’s voluntary consent, typically memorialized in a new contract with Employer B.
Unilateral orders to report to an affiliate under materially different terms (lower pay, demotion, distant worksite) may amount to constructive dismissal.

B. How “absorption” interacts with retrenchment

Scenario 1: Retrenchment at A + optional job offer from B

Employer A proves valid retrenchment, pays separation pay, and properly serves 30-day notices.
Employer B may offer new employment. The employee may accept or decline. Years of service with A do not automatically carry over to B unless agreed in writing (e.g., for retirement or tenure credit).

Scenario 2: Seamless transfer with continuity (no break in service)

If the parties structure the transaction as a secondment or intra-group assignment where Employer A remains the employer of record, no termination occurs—so no separation pay—but this must be genuine (payroll, supervision, risk, discipline) and not labor-only contracting.
If Employer B will be the new employer, obtain written consent and execute a Deed of Transfer/Absorption addressing tenure crediting, benefits portability, data privacy, and liabilities. Avoid mislabeling this as “retrenchment.”

Scenario 3: Closure/spin-off of a business unit

If Employer A closes a unit or ceases operations (not due to serious losses), it may terminate for closure with notice + separation pay. Whether or not an affiliate later hires the people is immaterial to A’s statutory obligations.
If the “closed” unit’s operations continue substantially at Employer B, A must be ready to show a bona fide corporate separation (assets, liabilities, control) and that jobs at A truly ceased.

5) Red flags that make “retrenchment for transfer” unlawful

No audited proof of losses, or vague “cost optimization” claims.
Backfilling the same roles soon after “retrenchment,” or simultaneous expansion that negates necessity.
Selection criteria that target unionists, whistleblowers, or protected classes.
Failure to serve 30-day dual notice (employee + DOLE).
Conditioning separation pay on signing a quitclaim that waives statutory rights or conceals the real reason for termination.
Forced acceptance of employment with a sister company under inferior terms as a condition for receiving separation pay.

Consequences can include illegal dismissal findings, reinstatement with full backwages (or separation pay in lieu of reinstatement) plus damages and attorney’s fees, and solidary liability if corporate veils are pierced due to bad faith.

6) Practical compliance pathways (choose the right one)

Path A — Genuine retrenchment

Develop a business case with unit-level numbers and alternatives considered.
Obtain and keep audited financials and supporting data.
Define fair selection criteria; document application per employee.
Serve 30-day notices to employees and DOLE.
Compute and pay statutory separation pay and final pay on time.
Offer placement assistance or referral to sister company without conditioning statutory entitlements.

Path B — Closure of a unit (not due to serious losses)

Board resolution and documentary trail of closure.
30-day dual notice;
Pay closure-based separation pay (same minimum as retrenchment).
If the affiliate will hire, treat it as new employment; do not offset separation pay.

Path C — Redundancy (if the business continues but roles are excess)

Organizational study showing bona fide elimination of specific positions;
30-day dual notice;
Higher separation pay scale (one month per year of service);
Objective selection criteria where only some positions in a classification are removed.

Path D — Secondment/assignment (no termination)

Keep Employer A as employer of record; execute a Secondment Agreement (A ↔ B ↔ employee).
Preserve compensation and rank; define supervision and discipline; comply with data privacy and OSHS rules across worksites.
Ensure this is not a disguised labor-only contracting arrangement.

Path E — Voluntary transfer/novation

Secure written, informed consent to move to Employer B.
Execute new contract with B and a tripartite deed on tenure crediting, benefits, and liabilities.
No separation pay because there is no termination by A—unless the parties voluntarily agree otherwise.

7) Documentation checklist

Board/management resolutions (retrenchment, redundancy, closure, transfer).
Audited financial statements + management reports (for retrenchment).
Organizational study and position matrices (for redundancy).
Written selection criteria and application worksheets per affected employee.
30-day notices to each employee and to DOLE (retain proofs of service/receipt).
Separation pay computations; payroll proofs; Certificate of Employment.
Secondment/Absorption/Transfer agreements, as applicable.
Data privacy notices/consents when sharing personnel data with a sister company.
Release, Waiver and Quitclaim (only after statutory and agreed amounts are paid; ensure voluntariness and reasonable consideration).

8) Employees’ rights and typical remedies

Challenge the termination via DOLE Single Entry Approach (SEnA) mediation or file a complaint for illegal dismissal before the Labor Arbiter.
Seek reinstatement without loss of seniority rights and with full backwages, or separation pay in lieu of reinstatement if reinstatement is no longer feasible.
Claim nominal damages for procedural defects in authorized-cause terminations.
Invalidate quitclaims that were signed under duress or for grossly inadequate consideration.
Pursue claims for differentials, 13th month, leave conversions, and damages for bad faith.

9) Frequently asked practical questions

Q1: Can we “retrench” and then require employees to accept jobs at the sister company? No. Retrenchment ends the original employment. You may offer roles at the sister company, but acceptance must be voluntary, and separation pay from the original employer remains due.

Q2: If employees are absorbed seamlessly by the sister company, do we still owe separation pay? If the original employer does not terminate (i.e., a true secondment or novation with consent and continuity), no separation pay is triggered by law. But if the original employer terminates employment under an authorized cause, statutory separation pay is due regardless of absorption.

Q3: Is “lack of budget” enough to retrench? Not by itself. You need objective proof of actual or imminent losses and a rational nexus between retrenchment and loss avoidance.

Q4: Can we use “redundancy” instead, if we’re reorganizing for efficiency? Yes—if a bona fide study shows certain positions are superfluous, and you follow redundancy rules (including the higher separation pay scale).

Q5: Do we have to follow “Last-In, First-Out”? Not strictly, but your criteria must be fair, consistently applied, and job-related. Document the rationale.

10) Key takeaways for lawful practice

Do not label a transfer to an affiliate as “retrenchment.” Choose the correct legal pathway and comply fully.
If invoking retrenchment, be prepared with audited proof, 30-day dual notice, and separation pay.
For intercompany mobility you want to encourage, use secondment or voluntary novation with informed consent—and keep terms equal or better to avoid constructive dismissal.
Treat absorption by a sister company as separate from the original employer’s statutory obligations.
Keep documentation meticulous; procedure is as important as substance.

Disclaimer

This article provides a comprehensive overview for general information and compliance planning. Specific situations can turn on facts, CBAs, company policies, or evolving jurisprudence. For high-stakes decisions, obtain advice tailored to your documents, numbers, and timelines.