Legality of Retrenchment for Transfer to Affiliated Company in the Philippines

Introduction

In the Philippine labor landscape, retrenchment serves as one of the authorized causes for termination of employment under the Labor Code. It is often invoked by employers during economic downturns or operational restructuring to prevent or minimize financial losses. However, the practice of retrenching employees only to transfer them—or offer them positions—in an affiliated company raises significant legal questions. This maneuver can blur the lines between legitimate business decisions and potential circumvention of labor rights, such as security of tenure, collective bargaining obligations, or avoidance of higher labor costs.

This article examines the legality of such practices within the Philippine legal framework, drawing from the Labor Code of the Philippines (Presidential Decree No. 442, as amended), Department of Labor and Employment (DOLE) regulations, and relevant Supreme Court jurisprudence. It explores the conditions under which retrenchment is valid, the implications of transfers to affiliated entities, potential violations, and remedies available to affected employees. The discussion underscores the constitutional mandate under Article XIII, Section 3 of the 1987 Philippine Constitution, which guarantees full protection to labor and promotes security of tenure.

Retrenchment as an Authorized Cause for Termination

Under Article 298 (formerly Article 283) of the Labor Code, retrenchment is permissible to prevent losses. It is distinct from redundancy, which involves superfluous positions due to automation, reorganization, or other efficiency measures. Retrenchment specifically addresses financial distress, such as declining sales, market competition, or economic crises.

For retrenchment to be valid, employers must satisfy stringent requirements established by law and jurisprudence:

Substantial Losses or Imminent Losses: The employer must prove serious and actual losses, not merely anticipated ones. These losses should be substantiated by audited financial statements or other credible evidence. Mere allegations of economic hardship are insufficient; the Supreme Court in cases like Asian Alcohol Corporation v. NLRC (G.R. No. 131108, March 25, 1999) emphasized that losses must be "imminent, substantial, and reasonably foreseeable."
Fair and Reasonable Criteria in Selection: Employees to be retrenched must be selected based on objective standards, such as least seniority (last-in, first-out or LIFO principle), efficiency, or performance ratings. Arbitrary selection can render the retrenchment illegal, as seen in Wiltshire File Co., Inc. v. NLRC (G.R. No. 82249, February 7, 1991), where the Court invalidated retrenchment due to lack of fair criteria.
Notice Requirements: Employers must serve written notices to the affected employees and the DOLE at least one month prior to the intended retrenchment date. The notice to employees should detail the reasons, criteria, and separation pay computation. Failure to comply, as in Serrano v. NLRC (G.R. No. 117040, January 27, 2000), may result in the dismissal being deemed illegal, entitling employees to reinstatement and backwages.
Separation Pay: Retenched employees are entitled to separation pay equivalent to at least one month's pay or one-half month's pay for every year of service, whichever is higher. This is non-negotiable unless a more favorable company policy or collective bargaining agreement (CBA) exists.
Good Faith: The retrenchment must be exercised in good faith, not as a subterfuge to defeat labor rights. The burden of proof lies with the employer to demonstrate that retrenchment was a last resort after exploring alternatives like cost-cutting or reduced work hours.

Affiliated Companies and Corporate Structures

In the Philippines, affiliated companies refer to entities under common ownership, control, or management, often forming part of a conglomerate or holding company structure. Under the Corporation Code (Batas Pambansa Blg. 68, as amended by Republic Act No. 11232), affiliates may share resources, including personnel, through legitimate arrangements like service agreements or outsourcing.

However, labor laws scrutinize inter-company transfers to prevent abuse. Department Order No. 174-17 (Rules Implementing Articles 106 to 109 of the Labor Code on Contracting and Subcontracting) distinguishes between legitimate job contracting and prohibited labor-only contracting. In the latter, the contractor merely supplies workers without substantial capital or equipment, effectively making the principal employer liable as the direct employer.

Transfers to affiliates can occur via:

Voluntary Transfer: Employees may be offered positions in the affiliate with consent, preserving continuity of service.
Outsourcing or Subcontracting: Core functions may be delegated to affiliates, but this must comply with DOLE regulations to avoid being classified as labor-only contracting.
Corporate Reorganization: Mergers, consolidations, or spin-offs under Sections 76 to 80 of the Revised Corporation Code may involve employee transfers, but these must not prejudice labor rights.

Legality of Retrenchment Followed by Transfer to Affiliated Company

The crux of the issue is whether retrenchment can be used as a mechanism to facilitate transfers to an affiliated company. Philippine jurisprudence generally views this practice with suspicion, as it may constitute illegal dismissal or circumvention of labor protections.

Valid Scenarios

Retrenchment followed by transfer may be legal if:

Genuine Economic Necessity: If the original company is facing verifiable losses, and the transfer to an affiliate is part of a bona fide restructuring to save jobs. For instance, in Manila Broadcasting Company v. NLRC (G.R. No. 170270, April 3, 2007), the Court upheld retrenchment during a corporate spin-off where employees were offered positions in the new entity, provided separation pay was given and the process was transparent.
Employee Consent and Continuity: If employees voluntarily accept the transfer, with recognition of their seniority, accrued benefits, and no diminution of wages. Under Article 100 of the Labor Code, non-diminution of benefits is a cardinal rule.
Compliance with CBA: If a CBA governs, any transfer must align with its provisions on job security and relocation.

Invalid Scenarios

Conversely, such practices are illegal when:

Sham Retrenchment: If retrenchment is a pretext to move employees to an affiliate to evade union obligations, higher wages, or regularization. In San Miguel Corporation v. NLRC (G.R. No. 119653, July 31, 1997), the Court pierced the corporate veil, holding affiliates jointly liable for illegal dismissal when the transfer was designed to bust a union.
Labor-Only Contracting Disguise: If the affiliate acts as a mere labor supplier without independent operations, it violates DOLE Order No. 174-17. Employees may claim regular status with the principal employer, as in DOLE Philippines, Inc. v. Esteva (G.R. No. 161115, November 30, 2006).
No Real Losses: Absent proof of losses, retrenchment is invalid. In International Hardware, Inc. v. NLRC (G.R. No. 80770, August 10, 1989), the Court ruled against retrenchment claimed for efficiency when it was actually to transfer operations to a sister company.
Discriminatory or Bad Faith Motive: If targeted at union members or specific groups, it contravenes Article 248 on unfair labor practices.

The Supreme Court has consistently applied the "piercing the corporate veil" doctrine in labor cases involving affiliates. In Concept Builders, Inc. v. NLRC (G.R. No. 108734, May 29, 1996), the Court treated sister companies as a single employer when they shared premises, management, and operations, holding them solidarily liable for backwages and reinstatement.

Jurisprudence and DOLE Guidelines

Key Supreme Court decisions illuminate this topic:

F.F. Marine Corporation v. NLRC (G.R. No. 152039, April 8, 2005): Upheld retrenchment in a closure scenario but stressed that transfers to affiliates must not be coercive.
Ariza v. NLRC (G.R. No. 126638, April 29, 1999): Invalidated retrenchment where employees were forced into an affiliate with reduced benefits, awarding damages for illegal dismissal.
Alabang Country Club, Inc. v. NLRC (G.R. No. 170287, February 14, 2008): Emphasized that corporate separateness does not shield from labor liabilities if abuse is evident.

DOLE issuances, such as Advisory No. 01-20 (Guidelines on Employment Preservation and Recovery amid COVID-19), reinforce that retrenchment should be a last resort, encouraging alternatives like work rotation or temporary transfers. For affiliates, DOLE requires registration of contractors and periodic inspections to ensure compliance.

Remedies for Affected Employees

Employees aggrieved by unlawful retrenchment may file:

Illegal Dismissal Complaints: Before the NLRC, seeking reinstatement, full backwages, and damages under Article 294 (formerly 279).
Money Claims: For unpaid separation pay or benefits.
Unfair Labor Practice Charges: If union-related, before the NLRC or DOLE.
Criminal Actions: For violations of labor standards, potentially under Article 288 of the Labor Code.

Prescription periods are three years for money claims and one year for illegal dismissal. Successful claimants may also pierce the corporate veil to enforce judgments against affiliates.

Conclusion

The legality of retrenchment for transfer to an affiliated company in the Philippines hinges on good faith, compliance with procedural and substantive requirements, and absence of ulterior motives. While employers enjoy management prerogative to reorganize, this is tempered by the state's policy to protect labor. Employers must tread carefully, ensuring transparency and fairness to avoid costly litigation. Employees, in turn, should be vigilant of their rights, consulting labor unions or DOLE for guidance. Ultimately, such practices must align with the social justice imperatives of Philippine labor law, balancing business viability with worker welfare.