FASAP vs. Philippine Airlines, Inc.

For retrenchment to be valid as an authorized cause under Article 283 of the Labor Code, the employer must prove: (1) the retrenchment is reasonably necessary to prevent substantial, serious, actual, and real losses or reasonably imminent losses as perceived objectively and in good faith; (2) written notice was served on the employees and the Department of Labor and Employment at least one month prior; (3) separation pay equivalent to one month pay or at least one-half month pay for every year of service, whichever is higher, was paid; (4) the prerogative was exercised in good faith for the advancement of the employer's interest and not to defeat or circumvent the employees' right to security of tenure; and (5) fair and reasonable criteria were used in selecting employees to be dismissed, such as status, efficiency, seniority, physical fitness, age, and financial hardship. The employer bears the burden of proving these requirements through sufficient and convincing evidence, specifically audited financial statements for the relevant periods, and must treat retrenchment as a measure of last resort after exhausting less drastic alternatives.

In 1998, the Philippines was experiencing the effects of the Asian financial crisis. Philippine Airlines (PAL), the national flag carrier, claimed to be suffering from severe financial distress with liabilities of P90 billion against assets of P85 billion. The airline industry faced a downturn, and PAL was placed under corporate rehabilitation by the Securities and Exchange Commission (SEC) in June 1998. The company implemented various cost-cutting measures, including a proposed reduction of its aircraft fleet and workforce, to allegedly prevent further losses and avoid bankruptcy.

• On June 15, 1998, PAL retrenched 5,000 employees, including more than 1,400 cabin crew personnel (flight attendants and stewards), effective July 15, 1998, allegedly to cut costs and mitigate huge financial losses due to the Asian financial crisis and a pilots' strike.
• PAL adopted "Plan 14" which involved reducing its fleet from 54 to 14 aircraft, requiring only 654 cabin crew personnel, but later abandoned this for "Plan 22" (22 aircraft) and recalled retrenched employees starting November 1998.
• PAL determined efficiency ratings based solely on individual performance for the year 1997, disregarding previous years of service, using criteria including: excess sick leaves, physical overweight condition, seniority, and previous suspensions or warnings.
• Prior to the mass retrenchment, PAL terminated 140 probationary cabin attendants in early 1998 but rehired them in April 1998 as permanent and regular employees.
• PAL was placed under corporate rehabilitation per SEC Order dated June 23, 1998.
• On September 4, 1998, PAL offered to transfer shares to employees and grant board seats conditioned on the suspension of all Collective Bargaining Agreements (CBAs) for 10 years; when rejected, PAL ceased operations on September 23, 1998, resuming only after employees ratified the proposal in October 1998.
• On June 22, 1998, FASAP filed a complaint for unfair labor practice and illegal retrenchment before the Labor Arbiter.
• The Labor Arbiter found the retrenchment illegal and ordered reinstatement with backwages; the NLRC reversed this and dismissed the complaint; the Court of Appeals affirmed the NLRC.

• PAL failed to adopt less drastic cost-cutting measures before resorting to retrenchment, which is an indispensable requirement for valid retrenchment.
• PAL arbitrarily used only the year 1997 as reference for efficiency ratings, totally disregarding employees' performance during prior years, resulting in unreasonable and unfair retrenchment of flight pursers and attendants with impeccable service records.
• Seniority was totally disregarded in the selection of employees to be retrenched, violating Section 112 of the PAL-FASAP Collective Bargaining Agreement.
• PAL maliciously represented that it could only operate 14 planes to justify retrenchment, but evidence showed it operated 22 planes and subsequently recalled retrenched employees and hired new ones.
• PAL did not use fair and reasonable criteria in effecting retrenchment; the criteria were applied arbitrarily and discriminatorily.
• PAL used retrenchment to veil union-busting motives by retrenching seven of FASAP's twelve officers and demoting three others.

• PAL was suffering severe financial losses reaching P90.6 billion in liabilities against P85.1 billion in assets, necessitating immediate retrenchment to prevent bankruptcy caused by the Asian financial crisis and the pilots' strike.
• The retrenchment was based on "Plan 14" which required only 654 cabin crew personnel, and the criteria used (efficiency rating and seniority under Section 112 of the CBA) were fair and reasonable.
• Consultations were conducted with FASAP before implementation.
• The recall of employees starting November 1998 demonstrated good faith and showed the retrenchment was necessary and valid.
• Proof of actual financial losses is not a condition sine qua non for retrenchment; the company's good faith and honest belief in impending losses suffices.
• The stock offer to employees and subsequent resumption of operations were legitimate business decisions.

• Procedural Issues: Whether the Supreme Court should review the factual findings despite the general rule that it is not a trier of facts, given that the Labor Arbiter and NLRC had conflicting findings.
• Substantive Issues: Whether PAL's retrenchment of over 1,400 cabin crew personnel was justified as an authorized cause under Article 283 of the Labor Code considering: (a) the existence of substantial and imminent losses; (b) good faith in implementing the retrenchment; and (c) the use of fair and reasonable criteria in selecting employees for retrenchment.

• Procedural: The Supreme Court may review the factual findings where the findings of the Labor Arbiter differ from those of the NLRC, as in this case, to determine which findings are supported by substantial evidence.
• Substantive: The retrenchment was illegal. PAL failed to prove by sufficient and convincing evidence, specifically audited financial statements for the years 1997-1999, that it was suffering from substantial, serious, actual, and imminent losses justifying the retrenchment of over 1,400 employees. PAL also failed to exhaust less drastic measures before retrenchment, acted in bad faith by rehiring probationary employees as permanent before retrenching permanent staff and arbitrarily implementing "Plan 14" then switching to "Plan 22," and used unfair criteria by evaluating performance based solely on 1997 ratings while disregarding seniority and past service. The quitclaims executed by the employees are invalid as they were obtained through fraud or mistake. Respondent Patria Chiong is not personally liable as she acted without malice or bad faith.

• Five-fold Requirements for Valid Retrenchment — Retrenchment is valid only if: (1) it is reasonably necessary to prevent substantial, serious, actual, and real losses; (2) written notice is served on employees and DOLE one month prior; (3) separation pay is provided; (4) it is exercised in good faith; and (5) fair and reasonable criteria are used. The employer bears the burden of proving compliance.
• Retrenchment as Measure of Last Resort — Retrenchment is justified only when all other less drastic means have been tried and found insufficient, such as cost reduction, salary reductions, improved efficiency, and trimming marketing costs.
• Proof of Losses Through Audited Financial Statements — Alleged losses must be proved by sufficient and convincing evidence, preferably audited financial statements prepared by independent auditors for the relevant periods. Self-serving affidavits and unilateral claims are insufficient.
• Good Faith Requirement — The employer must not use retrenchment to defeat or circumvent the employees' right to security of tenure. Hiring new employees or rehiring retrenched employees while retrenching others constitutes bad faith, as does arbitrary application of retrenchment criteria.
• Fair and Reasonable Criteria — Criteria for retrenchment must include seniority, status, efficiency, and other relevant factors. Considering only one year's performance (1997) while disregarding cumulative service records violates the requirement of fair criteria.
• Distinction Between Right to Retrench and Manner of Retrenchment — While the right to retrench is a management prerogative, the actual implementation is subject to scrutiny for compliance with substantive and procedural requirements.

• "Retrenchment is only a measure of last resort, when other less drastic means have been tried and found to be inadequate."
• "The burden clearly falls upon the employer to prove economic or business losses with sufficient supporting evidence. Its failure to prove these reverses or losses necessarily means that the employee's dismissal was not justified."
• "A Statement of Profit and Loss submitted to prove alleged losses, without the accompanying signature of a certified public accountant or audited by an independent auditor, is nothing but a self-serving document which ought to be treated as a mere scrap of paper devoid of any probative value."
• "The right of an employer to dismiss an employee differs from and should not be confused with the manner in which such right is exercised."
• "Security of tenure is a right guaranteed to employees and workers by the Constitution and should not be denied on the basis of mere speculation."

• Lopez Sugar Corporation v. Federation of Free Workers — Cited for the principle that retrenchment must be a measure of last resort after less drastic means have been tried, and that losses must be substantial and reasonably imminent.
• Central Azucarera de la Carlota v. National Labor Relations Commission — Cited for the rule that general economic setbacks in an industry do not justify retrenchment without specific proof of substantial losses affecting the particular employer.
• EMCO Plywood Corporation v. Abelgas — Cited for the requirement that employers must exhaust other cost-cutting measures before retrenchment.
• Philippine Tuberculosis Society, Inc. v. National Labor Union — Cited for the principle that failure to consider seniority in retrenchment renders the retrenchment invalid.
• Trendline Employees Association-Southern Philippines Federation of Labor v. NLRC — Cited for the rule that quitclaims executed due to employer's bad faith in representing financial losses are invalid.
• Uichico v. National Labor Relations Commission — Cited for enumerating the five requirements for valid retrenchment.

• Article 283 of the Labor Code (Closure of establishment and reduction of personnel) — The statutory basis for retrenchment to prevent losses, requiring proof of losses, written notice, and payment of separation pay.
• Article 261 of the Labor Code — Cited to distinguish violations of CBA (gross vs. non-gross) and unfair labor practice, holding that non-gross violations are not unfair labor practice.
• Section 112 of the PAL-FASAP Collective Bargaining Agreement — Provided for retrenchment based on efficiency rating and seniority, which PAL claimed to follow but allegedly violated by disregarding seniority.