In Re: Letters of Atty. Estelito P. Mendoza Re: G.R. No. 178083—Flight Attendants and Stewards Association of the Philippines vs. Philippine Airlines, Inc. (PAL)

An employer's retrenchment program is illegal if the employer fails to satisfy its burden of proving, with sufficient and convincing evidence like audited financial statements, that the retrenchment was necessary to prevent substantial and imminent business losses, and if the criteria used for selecting employees for dismissal are not fair, reasonable, and applied in good faith.

In the wake of the 1997 Asian financial crisis, Philippine Airlines, Inc. (PAL) claimed to be suffering from severe financial distress, with liabilities allegedly amounting to P90 billion against assets of P85 billion. To mitigate these purported losses and avert bankruptcy, PAL decided to implement a massive cost-cutting program. This program included a drastic reduction of its aircraft fleet and the retrenchment of 5,000 employees, which set the stage for a major labor dispute with its cabin crew union, FASAP, over the legality of the dismissal of more than 1,400 of its members.

• On June 15, 1998, PAL announced the retrenchment of 5,000 employees, including over 1,400 cabin crew personnel represented by FASAP, effective July 15, 1998, citing massive financial losses due to the Asian financial crisis.
• The retrenchment was premised on PAL's "Plan 14," which involved reducing its aircraft fleet from 54 to 14, thereby requiring the services of only 654 cabin crew personnel.
• PAL unilaterally determined the criteria for retrenchment, which included efficiency ratings based solely on performance in 1997, excess sick leaves, being overweight, seniority, and previous suspensions or warnings.
• Before the mass retrenchment, PAL terminated 140 probationary cabin attendants but rehired them as permanent employees in April 1998.
• In June 1998, PAL was placed under corporate rehabilitation by the Securities and Exchange Commission (SEC).
• After the retrenchment, PAL abandoned "Plan 14" and implemented "Plan 22," retaining 22 aircraft, which meant it had retrenched more employees than necessary.
• Starting in November 1998, just five months after the retrenchment, PAL began recalling some of the dismissed cabin crew members.
• PAL failed to submit its audited financial statements for the years preceding and during the 1998 retrenchment to the Labor Arbiter to prove its claimed financial losses.
• PAL only submitted its audited financial statements for the years 2002, 2003, and 2004 when the case was already on certiorari proceedings before the Court of Appeals.

• PAL failed to prove the existence of substantial business losses, as it did not present audited financial statements to the Labor Arbiter.
• The retrenchment was not a measure of last resort, as PAL did not attempt other less drastic cost-cutting measures.
• The criteria used for selecting employees were unfair and unreasonable, as PAL arbitrarily based its efficiency assessment only on the year 1997, completely disregarding seniority and an employee's entire service record.
• PAL acted in bad faith by initially claiming it would operate only 14 aircraft ("Plan 14") but later retaining 22 ("Plan 22"), thereby proving the mass retrenchment was excessive and not well-considered.
• The retrenchment constituted union-busting because it targeted a significant number of FASAP's officers.

• The retrenchment was a valid exercise of management prerogative to prevent further substantial losses which were a matter of public knowledge and evidenced by its corporate rehabilitation.
• The company was suffering from severe financial distress, with liabilities of P90 billion against assets of P85 billion, necessitating drastic measures to survive.
• The criteria used for retrenchment were fair and reasonable, based on efficiency and seniority as provided in the Collective Bargaining Agreement (CBA).
• The reduction in personnel was directly correlated to the planned reduction of its aircraft fleet under "Plan 14," which would result in significant monthly savings.
• Proof of actual financial losses through audited statements is not an indispensable condition for a valid retrenchment.

• Procedural Issues:
• Whether the Supreme Court can review the factual findings of the labor tribunals when the findings of the Labor Arbiter differ from those of the NLRC and the Court of Appeals.
• Substantive Issues:
• Whether PAL's retrenchment of more than 1,400 cabin crew members was legally valid.
• Whether PAL successfully proved with substantial evidence the substantive requirements for a valid retrenchment, particularly the existence of imminent and substantial losses.
• Whether PAL exercised its prerogative to retrench in good faith and used fair and reasonable criteria in selecting the employees to be dismissed.
• Whether the quitclaims executed by the retrenched employees are valid.
• Whether the retrenchment constituted an unfair labor practice.

• Procedural:
• The Supreme Court held that it has the authority to review the factual findings of the lower tribunals because a clear conflict existed between the findings of the Labor Arbiter and those of the NLRC, creating an exception to the general rule that the Court is not a trier of facts.
• Substantive:
• The petition was granted, and the retrenchment was declared illegal. PAL failed to discharge its burden of proving that the retrenchment was necessary to prevent substantial losses, as it did not submit its audited financial statements for the relevant period to the Labor Arbiter. The fact of corporate rehabilitation alone does not automatically justify retrenchment.
• PAL was found to have acted in bad faith. Its abrupt shift from "Plan 14" to "Plan 22" without adequate explanation, the rehiring of probationary employees while terminating permanent ones, and the quick recall of retrenched employees demonstrated that the mass dismissal was arbitrary and not well-studied.
• The criteria used for retrenchment were unfair and unreasonable. Relying solely on 1997 performance evaluations disregarded the employees' entire service history, loyalty, and seniority. The use of "other reasons" as a ground for dismissal was baseless and disallowed.
• The quitclaims signed by the employees were annulled, as their consent was vitiated by the illegal retrenchment program, and the law looks with disfavor upon releases signed under pressure.
• The Court found no basis for the claim of unfair labor practice, ruling that the illegal dismissal was a result of a flawed retrenchment scheme rather than a deliberate act of union busting.

• Requisites for Valid Retrenchment — The Court reiterated the five essential elements for a valid retrenchment: (1) losses are substantial and not de minimis; (2) the retrenchment is reasonably necessary to prevent such losses; (3) written notice is served to employees and DOLE; (4) separation pay is given; and (5) the employer uses fair and reasonable criteria and acts in good faith. The Court found that PAL failed to satisfy the first, second, and fifth requisites.
• Burden of Proof in Retrenchment Cases — This doctrine places the onus on the employer to prove that a dismissal is for a valid cause. In this case, PAL failed to carry this burden because it did not present audited financial statements or other convincing evidence to the Labor Arbiter to substantiate its claim of severe financial losses.
• Retrenchment as a Measure of Last Resort — This principle requires an employer to exhaust all other less drastic means to alleviate losses before resorting to retrenchment. The Court found no proof that PAL engaged in other cost-cutting measures, thus belying its claim of good faith.
• Management Prerogative — While the law recognizes an employer's right to manage its business, including reducing its workforce, this prerogative is not absolute. The Court ruled that this right must not be exercised in a manner that is oppressive, abusive, or in circumvention of the employees' right to security of tenure.

• "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."
• "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. It must not be oppressive and abusive since it affects one's person and property."

• Lopez Sugar Corporation v. Federation of Free Workers — Cited to establish the stringent standards for proving business losses, which must be substantial, reasonably imminent, and proven by sufficient and convincing evidence, and to emphasize that retrenchment must be a last resort.
• EMCO Plywood Corporation v. Abelgas — Referenced to underscore the requirement that an employer must first resort to other less drastic measures before implementing retrenchment.
• Saballa v. National Labor Relations Commission — Used to support the conclusion that a labor tribunal's finding of business reverses is arbitrary if not supported by specific evidence, primarily audited financial statements.
• Indino v. National Labor Relations Commission — Cited for the principle that employers cannot be arbitrary in termination decisions and must present convincing evidence of serious financial problems, as security of tenure is a constitutionally protected right.

• Article 283 of the Labor Code — This is the primary legal provision authorizing retrenchment to prevent losses. The Court's ruling centered on PAL's failure to comply with the substantive requirements implicitly and explicitly required by this article.
• Article 261 of the Labor Code — Cited by the Court to dismiss the unfair labor practice charge, explaining that violations of a CBA, unless gross in character and related to economic provisions, are to be resolved as grievances, not as unfair labor practices.
• Section 112 of the PAL-FASAP CBA — This provision outlined the agreed-upon criteria for reduction in force (efficiency and seniority). The Court found that PAL's implementation of these criteria was unfair and arbitrary, particularly its exclusive reliance on 1997 performance data.