A 2008 Supreme Court decision involving the national flag carrier, Philippine Airlines (PAL), provides lessons to shaky companies that are considering the retrenchment of its employees. It’s also a guide to labor unions and employees to detect forms of illegal dismissal.
Feeling the heat of the 1997 Asian financial crisis, the Philippine Airlines (PAL) in June 1998 reduced its fleet from 54 to 14. It meant the retrenchment of 5,000 employees in exchange for a monthly savings of P24 million.
According to PAL, the retrenchment was necessary to cut cost and mitigate huge financial losses as a result of the downturn in the airline industry. The company claimed that in the same period, it incurred P90 billion in liabilities when its assets stood at P85 billion. The strike staged by its pilots supposedly worsened the situation.
Out of the total retrenched PAL employees, 1,400 cabin crew—flight attendants and stewards—filed a complaint against PAL’s decision on the grounds of unfair labor practice and illegal retrenchment. Represented by the Flight Attendants and Stewards Association of the Philippines (FASAP). They sought reinstatement and payment of salaries and back wages, among others.
The court battle took a decade. It passed the Labor Arbiter to the National Labor Relations Commission to the Court of Appeals and, finally, to the Supreme Court. But in the end FASAP won. The Supreme Court on July 22, 2008 issued a decision finding PAL guilty of “illegal dismissal.” It ordered the company to reinstate the cabin crew personnel without loss of seniority rights and to pay them back wages. If reinstatement is no longer feasible, the retrenched employee shall be paid back wages and separation pay.
“In sum, we find that PAL had implemented its retrenchment program in an arbitrary manner and with evident bad faith, which prejudiced the tenurial rights of the cabin crew personnel,” said the SC decision penned by Associate Justice Consuelo Ynares Santiago.
Lesson to companies
Beset with another financial crisis, the Supreme Court case against PAL provides lessons to shaky companies that are considering the retrenchment of some employees, warned lawyer Cesario Azucena Jr. of the Ateneo de Manila Law School labor law department.
Azucena recently spoke in a conference organized by the Deming Management Systems for the country’s top human resource managers.
“Please read the PAL case. You will get so many pointers. Be careful when you have to lay off,” he told them.
The case also provides lessons to employees and labor unions to detect cases of illegal dismissal.
Two issues were highlighted in the case. When can a company justify retrenchment and how do you select the employees to retrench. PAL erred in both.
When is retrenchment justified?
There are two legal grounds to retrench workers—preventive or curative. Either the company already incurred losses or it is expecting to incur losses if it does not take action. PAL failed to prove either.
PAL could not prove that its retrenchment was based on either ground because, in the first place, it was not able to present audited financial statements as proof. Without them, the court said PAL could not have been aware of its “actual financial position.”
“PAL’s assertion—that its finances were gravely compromised as a result of the 1997 Asian financial crisis and the pilots’ strike—lacks basis due to the non-presentation of its audited financial statements to prove actual or imminent losses.
“PAL failed to substantiate its claim of actual and imminent substantial losses which would justify the retrenchment of more than 1,400 of its cabin crew personnel. Although the Philippine economy was gravely affected by the Asian financial crisis, however, it cannot be assumed that it has likewise brought PAL to the brink of bankruptcy. Likewise, the fact that PAL underwent corporate rehabilitation does not automatically justify the retrenchment of its cabin crew personnel,” the decision said.
PAL’s change of plans proved this further. Five months after retrenching its employees, PAL recalled some of them because instead of downsizing its fleet to 14 it decided to keep 22.
“It was unfair for PAL to have made such a move; it was capricious and arbitrary, considering that several thousand employees who had long been working for PAL had lost their jobs, only to be recalled but assigned to lower positions, and, worse, some as new hires, without due regard for their long years of service with the airline.”
“This proves that PAL was not aware of the true state of its finances,” the court decision said. “It embarked on the mass dismissal without first undertaking a well-considered study on the proposed retrenchment scheme.”
“The claim that PAL saved P24 million monthly due to the implementation of the retrenchment program does not prove anything; it has not been shown to what extent or degree such saving benefited PAL, vis-à-vis its total expenditures or its overall financial position. Likewise, it’s claim that its liabilities reached P90 billion, while its assets amounted to P85 billion only—or a debt ratio of more than 1:1—may not readily be believed, considering that it did not submit its audited financial statements. All these allegations are self-serving,” the decision said.
PAL later submitted its 2003 to 2004 audited financial statements to the Court of Appeals but the Supreme Court said it should have been provided to the labor arbiter. It also said that the financial statements covering the years 1997 to 1999 should have been provided.
That PAL registered a net income of P44.2 million in March 2000, P419 million in March 2001, and P295 million in March 2003 “could not have proved that retrenchment was necessary to prevent further losses.” Another proof is that in December 1998, a “stand alone” rehabilitation amount of US$200 million was invested directly into PAL by way of additional capital infusion for its operations.
Who is the first to go?
The labor law expressly protects seniority. The first in will be the last one out. PAL’s retrenchment scheme was found to have been “capricious” because it only looked into the employees’ performance in the year 1997.
“In assessing the overall performance of each cabin crew personnel, PAL only considered the year 1997. This makes the evaluation of each cabin attendant’s efficiency rating capricious and prejudicial to PAL employees covered by it.
“By discarding the cabin crew personnel’s previous years of service and taking into consideration only one year’s worth of job performance for evaluation, PAL virtually did away with the concept of seniority, loyalty and past efficiency, with no one more senior that the other,” the decision said.
Legal standards for retrenchment
The court decision identified five basic standards before any reduction of personnel become legal.
1. The retrenchment is reasonably necessary and likely to prevent business losses
2. That the employer served written notice both to the employees and to the Department of Labor and Employment at least one month before effectivity
3. That the employer pays the retrenched employees separation pay equivalent to one month pay or at least one-half month pay for every year in service, whichever is higher
4. That the employer exercises its prerogative to retrench employees in good faith
5. That the employer used fair and reasonable criteria in ascertaining would be dismissed and who would be retained among the employees.