Dear Attorney,

I recently received a notice of termination from my employer. The notice states that my separation from the company is due to “retrenchment,” but the circumstances do not appear to involve any financial losses or an actual need to reduce the workforce. In fact, the company has not ceased operations nor shown evidence of downturns that would typically justify retrenchment. Instead, it seems like a situation more akin to “redundancy” rather than “retrenchment.”

I am also concerned because the separation pay offered may be less than what I believe I am entitled to under the correct classification of my termination. I want to know: How long do I have to file a complaint or claim against my employer for an alleged misclassification of the termination and the corresponding reduction in my separation pay? Is it necessary for me to hold off on receiving the offered separation pay in order to preserve my right to file a complaint, or can I accept it “under protest” and still pursue a claim later?

I greatly appreciate any guidance you can provide on these concerns.

Sincerely,
A Concerned Employee

[LEGAL ARTICLE]

As one of the most fundamental areas of Philippine labor law, understanding the distinction between retrenchment and redundancy, as well as the corresponding entitlements and procedural requirements, is crucial for both employees and employers. Misclassification of the cause of termination can have significant implications on the amount of separation pay due to the employee, the employer’s liability for potential labor claims, and the proper course of legal action. This article aims to comprehensively discuss the legal principles, statutory provisions, administrative regulations, and jurisprudential standards governing authorized causes of termination—specifically retrenchment and redundancy—and the remedies available to employees who believe they have been improperly terminated or short-changed in their separation pay.

I. Legal Framework Governing Authorized Causes of Termination

Under the Labor Code of the Philippines (Presidential Decree No. 442, as amended), employers may lawfully terminate employment for authorized causes, subject to due process and proper compensation. Two commonly encountered authorized causes are retrenchment (also called reduction of personnel) and redundancy.

Retrenchment (Article 298 [formerly Article 283] of the Labor Code)
Retrenchment is a cost-cutting measure resorted to by an employer to prevent or minimize losses. The essential requisites for a valid retrenchment include:
- The employer must be suffering from substantial business losses, or at least anticipate imminent losses if no corrective measures are taken;
- The retrenchment must be done in good faith for the purpose of preventing losses;
- Fair and reasonable criteria must be used in selecting employees to be retrenched (e.g., efficiency, seniority, performance); and
- The employer must serve a written notice to both the affected employees and the Department of Labor and Employment (DOLE) at least one (1) month before the intended date of termination.
Under retrenchment, the affected employee is generally entitled to separation pay equivalent to at least one-half (1/2) month’s pay for every year of service, with a fraction of at least six months treated as one whole year.
Redundancy (Article 298 [formerly Article 283] of the Labor Code)
Redundancy occurs when a position is superfluous or no longer necessary for the operations of the company. This could stem from factors such as reorganization, adoption of labor-saving devices, or changes in the volume or nature of business operations.

To justify redundancy, the employer must prove:
- A written notice served to the affected employees and the DOLE at least one (1) month before the intended date of termination;
- The redundancy is made in good faith and not merely as a subterfuge to circumvent labor laws;
- Criteria for selecting which positions are redundant (e.g., job functions have become unnecessary or duplicated); and
- Payment of separation pay equivalent to at least one (1) month pay per year of service, or such greater amount as may be stipulated in the employment contract or collective bargaining agreement.
The key distinction lies in the reason and the financial justification. Redundancy need not be triggered by actual or imminent losses; it simply hinges on the superfluity of a position. Thus, employees separated on account of redundancy are entitled to a higher separation pay compared to those separated due to retrenchment.

II. Determining Whether the Proper Authorized Cause Was Applied

If an employer labels a termination as retrenchment but cannot show evidence of substantial losses or good-faith cost-cutting measures, such classification may be inappropriate. Conversely, if the termination is due to technological changes, reorganization, or other reasons that render an employee’s position unnecessary without the element of business losses, redundancy may be the correct classification. Employers must carefully justify their chosen classification, as mislabeling can expose them to legal claims.

In numerous Supreme Court decisions, employers have been admonished to prove the factual and legal bases for the chosen mode of termination. For instance, if an employer states “retrenchment” but fails to produce financial statements showing declining revenues or a business slowdown, an employee may successfully argue that the termination was not based on actual or potential losses and was, therefore, not a valid retrenchment. The employee may claim the difference in separation pay that would have been due had the termination been correctly classified as redundancy.

III. Rights and Remedies of Employees Faced with Misclassification

Filing a Complaint with the National Labor Relations Commission (NLRC)
Employees who believe they have been wrongfully terminated or underpaid in terms of separation benefits may file a complaint before the NLRC. The NLRC is the primary quasi-judicial body tasked with resolving labor disputes, including claims for illegal dismissal or underpayment of separation pay.

A. Venue and Procedure
The complaint is generally filed at the NLRC Regional Arbitration Branch having jurisdiction over the place where the employee last worked. The employee will submit a complaint form or a verified position paper, setting out the facts and legal grounds for the claim. The employer will be required to answer and present evidence justifying the chosen mode of termination and showing compliance with procedural due process.

B. Burden of Proof
In illegal dismissal cases, the employer bears the burden of proving that the termination was for a valid cause and that procedural requirements were met. When a claim involves misclassification (e.g., the employer alleging retrenchment but no substantial losses were proven), the employer must justify the choice of authorized cause. Should the employer fail to substantiate claims of financial distress or other conditions justifying retrenchment, the termination may be declared illegal or reclassified, entitling the employee to the correct separation pay and other remedies under the law.
Prescriptive Periods for Filing Complaints
Under Article 305 (formerly Article 291) of the Labor Code, money claims arising from employer-employee relations, including claims for underpayment or non-payment of separation pay, must be filed within three (3) years from the time the cause of action accrued. If the employee was terminated on a particular date and given an incorrect amount of separation pay, the prescriptive period for filing a complaint to recover the proper separation pay begins from the date of termination or from the time the cause of action arose.

Although the Labor Code sets a three-year prescriptive period for money claims, it is advisable for employees to file as soon as possible, given that evidence and documentation may become harder to obtain as time passes. Additionally, early filing helps ensure that the employee can thoroughly present factual and legal arguments while the events are still fresh.
Accepting Separation Pay “Under Protest”
A common dilemma is whether an employee should refrain from receiving the offered separation pay if they intend to challenge its amount or the grounds for termination. In principle, acceptance of separation pay does not automatically preclude the employee from filing a complaint, especially if the acceptance is made with reservations or under protest.

To protect one’s rights, an employee may:
- Send a written protest letter to the employer stating that while they are receiving the offered amount, they do so without waiving their right to seek the correct amount of separation pay through legal channels.
- Refrain from signing quitclaims or releases that waive the right to file a complaint. If the employer insists on a quitclaim, the employee should carefully read and, if possible, seek independent legal advice before signing. Quitclaims and releases are often interpreted strictly against the party who drafted them, especially if the employee can show that they were executed under duress or without full understanding of their rights.
Philippine jurisprudence has repeatedly stressed that not all quitclaims are valid. The Supreme Court has ruled that for a quitclaim to effectively bar future claims, it must be shown that the employee executed it voluntarily, with full understanding of its consequences, and for a valuable consideration. If the employee can prove that they accepted the pay merely due to economic necessity, or that they were misled about their entitlements, the quitclaim may not bar a subsequent claim.

IV. Procedural Considerations and Strategic Steps

Documenting the Circumstances of Termination
Employees should carefully preserve all documentation related to the termination, including the termination notice, any communications explaining the reason for termination, financial documents (if accessible), and any other records that may help establish that the termination was not truly a case of retrenchment but should have been classified as redundancy.
Conciliation and Mediation at the DOLE and the NCMB
Before or during the filing of a formal complaint at the NLRC, the parties may opt for conciliation or mediation services offered by the National Conciliation and Mediation Board (NCMB) or DOLE offices. These processes aim to resolve disputes amicably and speedily, often resulting in a settlement that provides the employee with a more favorable separation pay package than initially offered. However, employees must be careful during these negotiations to ensure they are not pressured into signing unfavorable quitclaims.
Reinstatement, Full Backwages, and Separation Pay in Illegal Dismissal Cases
If the NLRC or the courts find that the termination was not legally justified by either retrenchment or redundancy, and is thus illegal, the employee may be entitled to reinstatement (if feasible) and full backwages. If reinstatement is no longer desirable due to strained relations or the cessation of the employer’s operations, the employee might be awarded separation pay in lieu of reinstatement, computed at one (1) month’s pay per year of service (or more, depending on the cause found valid and other factors). This scenario typically arises when the employer cannot prove a valid authorized cause or fails to comply with due process.
Appeals to the NLRC and the Court of Appeals
If either party is dissatisfied with the Labor Arbiter’s decision, they may appeal to the NLRC. Subsequent recourse may be taken to the Court of Appeals and even the Supreme Court under exceptional circumstances. The appeals process may prolong the resolution of the dispute, but it provides a mechanism to ensure the just and proper application of labor laws.

V. Significance of Proper Classification and Good Faith Compliance

Employers must be cognizant of the distinct requirements and consequences of selecting retrenchment versus redundancy. Failing to properly justify the chosen mode can expose the employer to liability for illegal dismissal claims and higher separation pay awards. Conversely, employees must be aware that not all losses claimed by the employer justify retrenchment, and the mere invocation of redundancy does not automatically validate the termination. The law seeks to maintain a balance: Employers have the prerogative to reorganize or streamline their operations, but they must do so in good faith, with due process, and with adequate compensation for affected workers.

VI. Settlements, Quitclaims, and Legal Representation

Because labor disputes can become complex, employees are advised to seek independent legal counsel. An experienced lawyer can help assess the merits of the claim, quantify potential entitlements, and strategize the best approach to dispute resolution. Legal counsel can also review any proposed settlement or quitclaim to ensure that the employee’s rights are not unduly compromised.

Employers, on the other hand, should also secure proper legal advice to ensure full compliance with legal requirements and to properly document the grounds for termination. By doing so, they minimize the risk of protracted litigation and the associated costs of defending against illegal dismissal claims.

VII. The Interaction Between Procedural and Substantive Requirements

Even if the employer’s chosen cause of termination (e.g., redundancy) is substantively valid, failure to comply with procedural requirements—such as the one-month notice to the employee and to the DOLE—may render the termination flawed. While procedural lapses may not always invalidate the termination itself if the substantive cause is sound, they often lead to the award of nominal damages to the employee. This underscores the importance of meticulous compliance with both substantive and procedural aspects of authorized causes of termination.

In the case of alleged retrenchment, employers must not only present final or audited financial statements showing actual or imminent losses but must also prove that the retrenchment is proportionate and implemented in good faith. On the other hand, redundancy requires a well-structured presentation of how and why a position became superfluous, supported by organizational charts, job descriptions, and other documentary evidence.

VIII. Conclusion

In the Philippines, the law affords employees significant protection against improper termination, ensuring they receive fair compensation and due process. Employees faced with questionable terminations—particularly where the authorized cause does not align with the employer’s stated reasons—have legal avenues to contest the misclassification and seek the correct separation pay.

To reiterate key points:

Distinguishing Retrenchment from Redundancy:
Retrenchment requires proof of business losses, while redundancy is based on positions becoming unnecessary. Separation pay differs accordingly, with redundancy generally providing more generous compensation.
Prescriptive Period:
Employees typically have three (3) years from the date the cause of action accrued (i.e., the date of termination or when payment was due) to file a complaint regarding underpayment or misclassification of separation pay.
Acceptance of Payment Does Not Always Waive Rights:
Employees may accept separation pay under protest and still file a complaint, provided they do not sign a quitclaim that unequivocally waives their right to file future claims.
Legal and Equitable Considerations:
If employers fail to prove the chosen authorized cause, employees may be entitled to additional compensation, including the difference between the retrenchment pay and the redundancy pay that should have been received, or even reinstatement and backwages if termination is found to be illegal.
Seeking Legal Counsel:
Both parties benefit from consulting experienced labor lawyers to ensure that terminations are carried out lawfully and that employees’ rights are adequately protected.

By fully understanding the legal framework, remedies, and procedural guidelines, employees can confidently assert their rights, and employers can ensure compliance with Philippine labor laws. Through careful legal analysis, timely action, and appropriate documentation, employees who have been improperly terminated or underpaid in their separation benefits can seek the justice they deserve.