Beralde vs. Lapanday Agricultural and Development Corporation

Retrenchment is valid when the employer proves substantial, serious, actual, and real losses through audited financial statements prepared by independent external auditors, serves written notice to affected employees and the DOLE at least one month prior to the intended date of retrenchment, and pays the required separation pay. The employer's continued business operations and subsequent rehiring of retrenched or new employees do not negate the validity of the retrenchment, provided the retrenchment was lawful from the outset.

Lapanday Agricultural and Development Corporation is engaged in banana plantation operations and export. Petitioners were employees of the corporation, working on land covered by the Comprehensive Agrarian Reform Program (CARP). Between 1992 and 1994, Lapanday retrenched certain employees in a downsizing effort and allegedly re-hired some with a promise that the land would eventually be turned over to them under CARP. In 1999, Lapanday again retrenched its employees, but the land was not turned over as promised because the Department of Agrarian Reform issued an order dated February 8, 1999 exempting the land from CARP coverage. On March 29, 1999, Lapanday and the employees signed a new employment contract. The employees filed a petition to revoke the DAR's exemption order. These events form the backdrop of the employment relationship that eventually culminated in the 2008 retrenchment at issue.

Lapanday Agricultural and Development Corporation is engaged in banana plantation operations and the export of bananas to clientele abroad. Petitioners were employees of the corporation, working on land covered by the Comprehensive Agrarian Reform Program (CARP). Between 1992 and 1994, Lapanday retrenched and paid separation pay to some of its employees in a downsizing effort. Thereafter, Lapanday allegedly re-hired some of its former employees with a promise that the land they worked on would eventually be turned over to them under CARP. The employees, including several of the petitioners, agreed to be retrenched and re-hired. Sometime in 1999, Lapanday again retrenched all its employees and offered separation pay. The land, however, was not turned over as promised, because the Department of Agrarian Reform issued an order dated February 8, 1999 exempting the land from CARP coverage. On March 29, 1999, Lapanday and the employees, including petitioners, signed a new employment contract. Upon learning of the DAR's exemption order, the employees filed a petition to revoke it.

By 2006, Lapanday claimed to have been beset with financial reverses due to very low productivity, banana diseases, the adverse effects of an aerial spraying ban, the reduction of leased areas due to CARP, the refusal of landowners to renew lease contracts, increased production costs, and extraordinary fluctuations in foreign exchange. Lapanday averred that it had implemented numerous saving measures, but its financial condition continued to decline, prompting the implementation of a retrenchment program. Lapanday consulted with the employees' union, Samahan Manggagawa ng Lapanday Guihing (SAMALAG), and filed the required notice with the Department of Labor and Employment before implementing the program. On January 4, 2008, Lapanday issued a Notice of Termination to all its employees, including petitioners, stating that the company was instituting a retrenchment program pursuant to Section 5, Article 1 of the Collective Bargaining Agreement to prevent losses resulting from dramatically increased production costs and lower productivity. The termination date was set for February 4, 2008. Several employees signed the notice in hopes of receiving separation pay and other benefits. Petitioners, however, claimed that their separation pay was not given to them and that those who refused to sign were not allowed to enter the work premises unless they signed. Lapanday maintained that separation pay was offered to all employees despite its financial predicament.

Petitioners filed complaints for illegal dismissal. Emmanuel Beralde et al. filed their complaint on February 5, 2008, while Presco Fuentes and Brian Taub filed theirs on October 6, 2008. The Labor Arbiter in the Beralde case found the retrenchment valid and ordered payment of separation pay, while the NLRC reversed and declared the dismissal illegal. In the Fuentes and Taub case, the Labor Arbiter found the dismissal illegal, but the NLRC ultimately dismissed the complaint for lack of merit. The Court of Appeals consolidated the two cases and granted Lapanday's petitions, reinstating the Labor Arbiter's ruling that the retrenchment was valid. Petitioners elevated the matter to the Supreme Court. The audited financial statements prepared by SGV & Co. showed that Lapanday suffered a net loss of ₱26,297,297 in 2006 compared to a net income of ₱14,128,589 in 2005, and that the net loss ballooned to ₱72,363,879 in 2007. Revenue from banana sales dropped from ₱724,200,596 in 2005 to ₱607,186,264 in 2006, and further to ₱539,979,711 in 2007.

• Illegal Dismissal: Petitioners insisted that they were illegally dismissed, arguing that the retrenchment program was a mere ploy to ease them out of employment.
• Non-Cessation of Operations: Petitioners argued that their dismissal was illegal because Lapanday did not actually cease its operations, had re-hired some of the dismissed employees, and had hired new employees to replace the retrenched ones.
• Non-Payment of Separation Pay: Petitioners claimed that their separation pay was not given to them, and that those who refused to sign the notice of termination were not allowed to enter the work premises unless they signed.
• NLRC Grave Abuse of Discretion (in CA proceedings): In the proceedings before the Court of Appeals, Lapanday raised the issue of whether the NLRC committed grave abuse of discretion in concluding that the retrenchment was a ploy; petitioners, conversely, challenged the appellate court's reversal of the NLRC findings.

• Financial Losses: Lapanday claimed that in 2006, it was beset with financial reverses due to very low productivity, banana diseases, the adverse effects of the aerial spraying ban, the reduction of leased areas due to CARP, the refusal of landowners to renew lease contracts, increased production costs, and extraordinary fluctuations in foreign exchange.
• Saving Measures: Lapanday averred that it had implemented numerous saving measures before resorting to retrenchment, but its financial condition continued to decline.
• Compliance with Requirements: Lapanday maintained that it consulted with the employees' union (SAMALAG) and filed the required notice with the DOLE before implementing the retrenchment program, and that it was willing to comply with the payment of separation pay.
• Separation Pay Offered: Lapanday claimed that despite its financial predicament, separation pay was offered to its employees.

• Validity of Retrenchment: Whether the retrenchment program implemented by Lapanday was valid, given the employer's claimed financial losses and compliance with statutory requirements.
• Evidentiary Weight of Audited Financial Statements: Whether the audited financial statements prepared by an independent external auditor (SGV & Co.) sufficiently established the existence of serious and actual business losses to justify retrenchment.
• Effect of Continued Operations and Rehiring: Whether Lapanday's continued business operations and subsequent rehiring of retrenched employees or hiring of new employees negated the validity of the retrenchment.
• Entitlement to Backwages and Separation Pay: Whether petitioners, having been found to have been lawfully retrenched, were entitled to backwages and separation pay.

• Validity of Retrenchment: Yes. The retrenchment was valid, Lapanday having proven serious and actual financial losses over multiple fiscal years through audited financial statements prepared by an independent external auditor, and having complied with the written notice requirements to employees and the DOLE at least one month prior to the intended date.
• Evidentiary Weight of Audited Financial Statements: Yes. Audited financial statements prepared and signed by independent external auditors such as SGV & Co. are accorded evidentiary weight and cannot be whimsically assailed as self-serving; no evidence can better attest to a company's economic status than its financial statements.
• Effect of Continued Operations and Rehiring: No, continued operations and rehiring do not negate validity. The fact that an employer chose to continue its business does not automatically make the retrenchment illegal; the goal of retrenchment is to prevent impending losses or further business reversals and does not require actual closure of the business.
• Entitlement to Backwages and Separation Pay: Petitioners are not entitled to backwages, as backwages may be granted only when there is a finding of illegal dismissal. Petitioners are entitled to separation pay equivalent to one month pay or at least one-half month pay for every year of service, whichever is higher, pursuant to Article 283 of the Labor Code.

• Validity of Retrenchment: Retrenchment is a valid management prerogative, subject to faithful compliance with substantive and procedural requirements laid down by law and jurisprudence. The employer bears the onus of proving compliance, as retrenchment is in the nature of an affirmative defense. The requisites for valid retrenchment are: (a) the retrenchment is necessary to prevent losses, which are not merely de minimis but substantial, serious, actual, and real, or if only expected, are reasonably imminent as perceived objectively and in good faith by the employer; (b) written notice to the employees and the DOLE at least one month prior to the intended date of retrenchment; (c) payment of separation pay equivalent to one month pay or at least one-half month pay for every year of service, whichever is higher; (d) the employer must use fair and reasonable criteria in ascertaining who would be dismissed and retained; and (e) the retrenchment must be undertaken in good faith. In this case, Lapanday's audited financial reports conclusively showed serious financial losses for the years 2006 and 2007, with net losses of ₱26,297,297 and ₱72,363,879 respectively, following a net income of ₱14,128,589 in 2005. The one-month written notice requirement was satisfied: Lapanday filed the notice with DOLE on December 27, 2007 and served Notices of Termination on workers on January 4, 2008, to take effect on February 4, 2008. Copies were sent through registered mail on January 8, 2008 to employees who refused to receive them. Lapanday likewise demonstrated willingness to pay separation pay. All requisites were met.

• Evidentiary Weight of Audited Financial Statements: The condition of business losses is normally shown by audited financial documents such as yearly balance sheets, profit and loss statements, and annual income tax returns. Financial statements must be prepared and signed by independent auditors; unless duly audited, they can be assailed as self-serving. It is not enough that only the financial statements for the year during which retrenchment was undertaken are presented; the employer must also show that its losses increased through a period of time and that the condition of the company is not likely to improve in the near future. In this case, SGV & Co., a firm of reputable independent external auditors, prepared and signed the financial statements, which showed a consistent downward trend in revenue and escalating net losses across 2005, 2006, and 2007. The fact that the financial statements were audited by independent auditors settled any doubt on Lapanday's financial condition.

• Effect of Continued Operations and Rehiring: The law acknowledges the right of every business entity to reduce its workforce if such measure is made necessary or compelled by economic factors. A firm may choose to close all or part of its business to avoid further losses. When Lapanday continued its operations and eventually re-hired some retrenched employees and hired new ones, it was merely exercising its right to continue its business and to streamline operations. The goal of retrenchment is to prevent impending losses or further business reversals; it does not require actual closure of the business. When the employer satisfactorily proved economic losses with sufficient supporting evidence and complied with all legal requirements, subsequent acts of rehiring or hiring new employees do not constitute bad faith. It would have been different if the retrenchment was illegal from the beginning and the employer subsequently hired new employees, as that would constitute bad faith. The rehiring of retrenched employees does not necessarily negate the presence or imminence of losses which prompted the retrenchment.

• Entitlement to Backwages and Separation Pay: The payment of separation pay is due when a dismissal is on account of an authorized cause, and the amount depends on the ground for termination. When termination is due to retrenchment to prevent losses, separation pay is equivalent to one month pay or at least one-half month pay for every year of service, whichever is higher, with a fraction of at least six months considered as one whole year. Because the retrenchment was found valid, petitioners are not entitled to backwages, which may be granted only when there is a finding of illegal dismissal. Petitioners are nevertheless entitled to separation pay as provided under Article 283 of the Labor Code, and to other benefits they may be entitled to under the retrenchment program.

• Requirements for Valid Retrenchment — Retrenchment is a valid management prerogative subject to faithful compliance with substantive and procedural requirements: (1) the retrenchment is necessary to prevent losses that are not merely de minimis but substantial, serious, actual, and real, or if only expected, are reasonably imminent as perceived objectively and in good faith by the employer; (2) the employer serves written notice to both employees and the DOLE at least one month prior to the intended date; (3) the employer pays separation pay equivalent to one month pay or at least one-half month pay for every year of service, whichever is higher; (4) the employer uses fair and reasonable criteria in ascertaining who would be dismissed and retained; and (5) the retrenchment is undertaken in good faith. Except for the written notice, non-compliance with any of these requirements renders the retrenchment illegal. In this case, all requisites were satisfied, and the retrenchment was upheld.

• Evidentiary Weight of Audited Financial Statements — Financial statements must be prepared and signed by independent auditors; unless duly audited, they can be assailed as self-serving documents. It is not enough to present financial statements only for the year of retrenchment; the employer must also show that losses increased through a period of time and that the condition of the company is not likely to improve in the near future. No evidence can best attest to a company's economic status other than its financial statement. The Court relied on SGV & Co.'s audited reports showing escalating net losses across 2005–2007 to uphold the retrenchment.

• Effect of Continued Operations and Rehiring on Retrenchment Validity — The fact that an employer continues its business operations and rehires retrenched employees or hires new ones does not automatically make the retrenchment illegal, provided the retrenchment was valid from the outset. Retrenchment aims to prevent impending losses or further business reversals and does not require actual closure of the business. Rehiring does not necessarily negate the presence or imminence of losses. Bad faith would attach only if the retrenchment was illegal from the beginning and the employer subsequently hired replacements.

• "Retrenchment is a valid management prerogative. It is, however, subject to faithful compliance with the substantive and procedural requirements laid down by law and jurisprudence. In the discharge of these requirements, it is the employer who bears the onus, being in the nature of affirmative defense." — This passage frames the analytical structure for evaluating retrenchment, establishing that the employer carries the burden of proving compliance with all requisites.

• "We cannot ignore the audited financial reports of independent and reputable external auditors such as Sycip Gorres Velayo & Co., as no evidence can best attest to a company's economic status other than its financial statement." — This statement articulates the evidentiary standard for proving business losses in retrenchment cases, emphasizing the primacy of independently audited financial statements.

• "The fact that Lapanday chose to continue its business does not automatically make the retrenchment illegal. We reiterate that in retrenchment, the goal is to prevent impending losses or further business reversals — it therefore does not require that there is an actual closure of the business." — This passage defines the relationship between continued operations and retrenchment validity, clarifying that the preventive purpose of retrenchment does not demand total cessation of business.

• Ariola vs. Philex Mining Corporation, G.R. No. 147756, August 9, 2005 — Followed as the controlling authority enumerating the complete requirements for valid retrenchment, including the later-added requisites of fair and reasonable criteria in selecting employees for dismissal and good faith in undertaking the retrenchment.

• Asian Alcohol Corporation vs. National Labor Relations Commission, 364 Phil. 912 (1999) — Followed for the doctrine that financial statements must be prepared and signed by independent auditors to be accorded evidentiary weight, and that the employer must show losses increased over a period of time and that improvement is unlikely in the near future.

• Caffco International Limited vs. Office of the Minister-Ministry of Labor and Employment, G.R. No. 76966, August 7, 1992 — Cited for the proposition that management may choose to close a branch, department, plant, or shop in response to economic pressures, supporting the employer's prerogative to streamline operations.

• Manatad vs. Philippine Telegraphic and Telephone Corporation, 571 Phil. 494 (2008) — Cited for the definition of retrenchment and the principle that it is a valid management prerogative subject to substantive and procedural requirements.

• Lambert Pawnbrokers vs. Helen Binamira, 639 Phil. 1 (2010) — Cited for the proposition that when the Labor Arbiter and the NLRC render conflicting findings, the Court of Appeals in the exercise of its certiorari jurisdiction may determine which findings are more in conformity with the evidentiary facts.

• Article 283, Labor Code — Governs closure of establishment and reduction of personnel. Authorizes termination due to retrenchment to prevent losses, requiring written notice to the worker and the DOLE at least one month before the intended date, and payment of separation pay equivalent to one month pay or at least one-half month pay for every year of service, whichever is higher, with a fraction of at least six months considered as one whole year. Applied to uphold the retrenchment and to determine the separation pay due to petitioners.

Presbitero J. Velasco, Jr. (Chairperson), Martin S. Villarama, Jr., Bienvenido L. Reyes, and Francis H. Jardeleza concurred.