Case Title: PHILIPPINE AIRLINES, INC. VS. ISAGANI DAWAL, et al.

CITATION: G.R. No. 173921 & 173952, Feb. 24, 2016

SUBJECT: LABOR LAW

DOCTRINE: For there to be a valid retrenchment, the employer must exercise its management
prerogative “in good faith for the advancement of its interest and not to defeat or
circumvent the employees’ right to security of tenure.”

FACTS:

On 1 Sept. 2000, PAL severed the employment of Isagani Dawal, Lorna Concepcion, and Bonifacio
Sinobago. Until their dismissal from work, they were regular rank-and-file employees of PAL and “bona
fide members” of the Philippine Airlines Employees’ Association (PALEA).

When PAL was privatized in 1993, the new owners acquired PAL’s alleged aging fleet and overly manned
workforce. PAL sought to expand its business through a five-year re-fleeting program. It began
implementing the re-fleeting program in July 1993. In 1997, the Asian Financial Crisis devalued the peso
against the dollar. PAL claims that this strained its financial resources. It counts its losses to P750 million
in December 1997 alone.

In addition, the Airline Pilots Association of the Philippines (ALPAP) staged a three-week strike on June 5,
998. PAL claims that this caused the “further deterioration of the company’s financial condition.” PAL
implemented a massive retrenchment program on June 15, 1998. PAL then filed for corporate
rehabilitation before the Securities and Exchange Commission (SEC). A year after, PAL President and
Chief Operating Officer Avelino L. Zapanta allegedly wrote to PALEA, informing the latter of the “new
management’s plan to sell” the Maintenance and Engineering Department.

On June 7, 1999, the SEC approved PAL’s Amended and Restated Rehabilitation Plan (Rehabilitation
Plan). The Rehabilitation Plan stated that PAL’s “noncore activities . . . have the potential to be sold off.”
These included the Catering and the Maintenance and Engineering Departments.

On February 2000, PALEA held a general election for its new officers. Headed by PALEA President Jose T.
Peñas III, the newly proclaimed officers included Dawal as Secretary. However, the result of the election
was contested. On March 24, 2000, the new union leadership informed PAL of the election result and
requested a courtesy call visit. However, PAL refused to meet with them in light of pending election
protests.

Meanwhile, Lufthansa Technik Philippines, Inc. (Lufthansa) expressed its desire to purchase PAL’s
Maintenance and Engineering Department. The SEC approved the sale to Lufthansa on March 24, 2000.
Under Article XXIV, Section 4 of the 1995-2000 PALPALEA Collective Bargaining Agreement and the
Memorandum of Agreement dated November 2, 1996, “[i]n case PAL deems it necessary to reorganize
its corporate structure for the viability of its operations by forming joint ventures and spin-offs, PAL shall
do so only after proper consultation with PALEA within 45 days before implementation of said
reorganization.”
No consultation meeting was held within 45 days prior to September 1, 2000. When PAL turned down
the courtesy call visit of the newly elected PALEA officers, the latter refused to commence the
consultation meeting “until PAL management respects” their alleged election.

To make up for this, PAL issued primers to “address questions regarding the spin-off.” The primers
stated that the spin-off aimed to reduce PAL’s costs, improve its performance and efficiency, and prepay
its creditors, among others. PAL also allegedly conducted ugnayan sessions with its employees to inform
them of the spin-off. According to Dawal, et al., PAL announced the planned spin-off informally and
belatedly, reaching them sometime in April 2000. PALEA members signed and executed Resolution No.
01-1, Series of 2000, rejecting the spin-off.

Under the spin-off program, those from the Maintenance and Engineering Department (MED), and
those from Logistics and Purchasing, Financial Services, and Information Services Departments doing
purely maintenance and engineering-related tasks, whose work would be absorbed by Lufthansa.

After signing a Release, Waiver, and Quitclaim, Dawal, Concepcion, Sinobago, and other affected
employees were given generous separation packages less their outstanding obligations or
accountabilities. Dawal received P590,511.90, Concepcion received P588,575.75, and Sinobago received
P411,539.98. PAL also offered work for the employees who were not absorbed by Lufthansa.

On July 20, 2000, PAL issued a Notice of Separation (NS) to all the affected employees, containing either
of the following letters: (1) offer of new employment from Lufthansa, should it choose to hire the
affected employees; or (2) PAL’s offer of employment for a lower rank or job grade and for a lesser
salary, should Lufthansa not choose to hire the affected employees. Concepcion and Sinobago were able
to receive the NS more than one month prior to the effective date of separation (1 Sept. 2000), except
for Dawal who only received it on 29 Aug. 2000, 29 days short of what the law requires.

On September 1, 2000, in light of the spin-off of PAL’s MED and the scheduled start of operations of
Lufthansa, all affected employees were relieved from their positions.

After the spin-off, PAL created a new engineering department, called the Technical Services Deparment
(TSD), allegedly “in compliance with aviation regulations requiring airline companies to maintain an
engineering department.”

In a letter dated September 7, 2000, the (protested) new PALEA President Jose T. Peñas III submitted a
list of economic and noneconomic proposals for the renewal of the 1995 Collective Bargaining
Agreement, which would expire on September 30, 2000. PALEA and Dawal, et al. filed before the LA a
Complaint dated January 31, 2001 for ULP and illegal dismissal. Their labor suit was consolidated with a
similar complaint filed against PAL.

ISSUE: Whether or not the termination of the employment of Dawal, et al. was due to an authorized
cause, and could be justified as redundancy or retrenchment.

RULING: NO.

Retrenchment is the employer’s cutting down of personnel to reduce the costs of business operations
and avert business losses.
Among others, the following are the four (4) criteria that the employer must meet:

Firstly, the losses expected should be substantial and not merely de minimis in extent. If the
loss purportedly sought to be forestalled by retrenchment is clearly shown to be insubstantial
and inconsequential in character, the bona fide nature of the retrenchment would appear to be
seriously in question. Secondly, the substantial loss apprehended must be reasonably
imminent, as such imminence can be perceived objectively and in good faith by the employer.
There should, in other words, be a certain degree of urgency for the retrenchment, which is
after all a drastic recourse with serious consequences for the livelihood of the employees retired
or otherwise laid off. Because of the consequential nature of retrenchment, it must, thirdly, be
reasonably necessary and likely to effectively prevent the expected losses. Lastly, but certainly
not the least important, alleged losses if already realized, and the expected imminent losses
sought to be forestalled, must be proved by sufficient and convincing evidence. The reason for
requiring this quantum of proof is readily apparent: any less exacting standard of proof would
render too easy the abuse of this ground for termination of services of employees.

The employer has the burden of showing by clear and satisfactory evidence that there are existing or
imminent substantial losses, and that “legitimate business reasons justify . . . retrenchment.” Mere
showing of incurred or expected losses does not automatically justify retrenchment. The business losses
must be “substantial, serious, actual, and real,” not merely de minimis.

Here, there is no showing that PAL “resorted to less drastic and less permanent cost-cutting measures”
prior to the so-called retrenchment. In 1998, PAL already retrenched about 5,000 employees. Two years
later, it again turned to cutting off its employees’ livelihood. PAL has not shown proof that retrenchment
was indeed the remedy of last resort, and that it sought for retrenchment only after it had pursued all
viable options to no avail.

Likewise, PAL has “failed to explain how the rehiring of the affected employees in the spin-off could
possibly alleviate PAL’s financial difficulty.” For there to be a valid retrenchment, the employer must
exercise its management prerogative “in good faith for the advancement of its interest and not to defeat
or circumvent the employees’ right to security of tenure.” That PAL gave separation pay way beyond
what the law requires is not challenged by the parties. However, this sheds doubts on PAL’s alleged
“dire financial condition.” PAL’s job offer is unmistakably for lower positions, “with substantially
diminished salaries and benefits[,]” and conditioned on their being considered as new employees. Thus,
instead of providing utmost security and reward to PAL’s enduring and loyal employees, PAL’s acts
effectively circumvented their security of tenure and seniority rights.

There is no reasonable necessity for the retrenchment to “prevent any substantial and actual losses.”
Moreover, PAL failed to prove “any degree of urgency to implement such retrenchment.” Indeed, if
retrenchment were really necessary to forestall serious business losses, PAL should not have offered to
rehire the dismissed employees, especially after it had already given them generous separation benefits.

Considering that PAL acted in bad faith and that the grounds for termination were “not sufficiently and
convincingly established,” its dismissal of Dawal, et al.’s services is therefore unjustified, illegal, and of
no effect.