Note: This is a 20-year long case ; mao grabe ka taas ang digest ani.

There is a an update on this

case [2018 ruling] reversing the decision on July 22, 2008.

Flight Attendants and Steward Association of the Philippines (FASAP) v. Philippine Airlines,
G.R. No. 178083, G.R. No. 178083, July 22, 2008

Facts:

Petitioner FASAP is the duly certified collective bargaining representative of PAL flight
attendants and stewards, or collectively known as PAL cabin crew personnel. Respondent PAL is
a domestic corporation organized and existing under the laws of the Republic of the Philippines,
operating as a common carrier transporting passengers and cargo through aircraft.

On June 15, 1998, PAL retrenched 5,000 of its employees, including more than 1,400 of its cabin
crew personnel, to take effect on July 15, 1998. PAL adopted the retrenchment scheme allegedly
to cut costs and mitigate huge financial losses as a result of a downturn in the airline industry
brought about by the Asian financial crisis. During said period, PAL claims to have incurred P90
billion in liabilities, while its assets stood at P85 billion.

In implementing the retrenchment scheme, PAL adopted its so-called Plan 14 whereby PALs
fleet of aircraft would be reduced from 54 to 14, thus requiring the services of only 654 cabin
crew personnel. PAL admits that the retrenchment is wholly premised upon such reduction in
fleet, and to the strike staged by PAL pilots since this action also translated into a reduction of
flights.

PAL claims that the scheme resulted in savings x x x amounting to approximately P24 million per
month savings that would greatly alleviate PALs financial crisis.

On June 22, 1998, FASAP filed a Complaint against PAL and Patria T. Chiong (Chiong) for unfair
labor practice, illegal retrenchment with claims for reinstatement and payment of salaries,
allowances and backwages of affected FASAP members, actual, moral and exemplary damages
with a prayer to enjoin the retrenchment program then being implemented.

Meanwhile, months after the June 15, 1998 mass dismissal of its cabin crew personnel, PAL
began recalling to service those it had previously retrenched. Thus, in November 1998 and up to
March 1999 several of those retrenched were called back to service. To date, PAL claims to have
recalled 820 of the retrenched cabin crew personnel. FASAP, however, claims that only 80 were
recalled as of January 2001.

Issue:

Whether or not the Philippine Airline’s retrenchment scheme was justified.

Ruling:

No. Under the Labor Code, retrenchment or reduction of employees is authorized as follows:

ART. 283. Closure of establishment and reduction of personnel. - The employer may also
terminate the employment of any employee due to the installation of labor-saving devices,
redundancy, retrenchment to prevent losses or the closing or cessation of operation of the
establishment or undertaking unless the closing is for the purpose of circumventing the
provisions of this Title, by serving a written notice on the workers and the Ministry of Labor and
Employment at least one (1) month before the intended date thereof. In case of termination
due to the installation of labor-saving devices or redundancy, the worker affected thereby shall
be entitled to a separation pay equivalent to at least his one (1) month pay or to at least one (1)
month pay for every year of service, whichever is higher. In case of retrenchment to prevent
losses and in cases of closures or cessation of operations of establishment or undertaking not
due to serious business losses or financial reverses, the separation pay shall be equivalent to
one (1) month pay or at least one-half (1/2) month pay for every year of service, whichever is
higher. A fraction of at least six (6) months shall be considered one (1) whole year.

The law recognizes the right of every business entity to reduce its work force if the same is
made necessary by compelling economic factors which would endanger its existence or stability.
Where appropriate and where conditions are in accord with law and jurisprudence, the Court
has authorized valid reductions in the work force to forestall business losses, the hemorrhaging
of capital, or even to recognize an obvious reduction in the volume of business which has
rendered certain employees redundant.

Nevertheless, while it is true that the exercise of this right is a prerogative of management,
there must be faithful compliance with substantive and procedural requirements of the law and
jurisprudence, for retrenchment strikes at the very heart of the workers employment, the
lifeblood upon which he and his family owe their survival. 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
employees dismissal was not justified. Any claim of actual or potential business losses must
satisfy certain established standards, all of which must concur, before any reduction of
personnel becomes legal.

These are:
(1) That retrenchment is reasonably necessary and likely to prevent business losses which, if
already incurred, 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) That the employer served written notice both to the employees and to the Department
of Labor and Employment at least one month prior to the intended date of retrenchment;

(3) That the employer pays the retrenched employees separation pay equivalent to one (1)
month pay or at least one-half (1/2) month pay for every year of service, whichever is higher;

(4) That the employer exercises its prerogative to retrench employees in good faith for the
advancement of its interest and not to defeat or circumvent the employees right to security of
tenure; and,

(5) That the employer used fair and reasonable criteria in ascertaining who would be
dismissed and who would be retained among the employees, such as status, efficiency,
seniority, physical fitness, age, and financial hardship for certain workers.

In view of the facts and the issues raised, the resolution of the instant petition hinges on a
determination of the existence of the first, fourth and the fifth elements set forth above, as well
as compliance therewith by PAL, taking to mind that the burden of proof in retrenchment cases
lies with the employer in showing valid cause for dismissal: that legitimate business reasons
exist to justify retrenchment.

FIRST ELEMENT:

The employers prerogative to layoff employees is subject to certain limitations.

The law speaks of serious business losses or financial reverses. Sliding incomes or decreasing
gross revenues are not necessarily losses, much less serious business losses within the meaning
of the law. The fact that an employer may have sustained a net loss, such loss, per se, absent
any other evidence on its impact on the business, nor on expected losses that would have been
incurred had operations been continued, may not amount to serious business losses mentioned
in the law. The employer must show that its losses increased through a period of time and that
the condition of the company will not likely improve in the near future, or that it expected no
abatement of its losses in the coming years. Put simply, not every loss incurred or expected to
be incurred by a company will justify retrenchment.

The employer must also exhaust all other means to avoid further losses without retrenching its
employees. Retrenchment is a means of last resort; it is justified only when all other less drastic
means have been tried and found insufficient. Even assuming that the employer has actually
incurred losses by reason of the Asian economic crisis, the retrenchment is not completely
justified if there is no showing that the retrenchment was the last recourse resorted to. Where
the only less drastic measure that the employer undertook was the rotation work scheme, or
the three-day-work-per-employee-per-week schedule, and it did not endeavor at other
measures, such as cost reduction, lesser investment on raw materials, adjustment of the work
routine to avoid scheduled power failure, reduction of the bonuses and salaries of both
management and rank-and-file, improvement of manufacturing efficiency, and trimming of
marketing and advertising costs, the claim that retrenchment was done in good faith to avoid
losses is belied.

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 is readily
apparent: any less exacting standard of proof would render too easy the abuse of this ground
for termination of services of employees; scheming employers might be merely feigning
business losses or reverses in order to ease out employees.

In establishing a unilateral claim of actual or potential losses, financial statements audited by

independent external auditors constitute the normal method of proof of profit and loss
performance of a company. 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.

In the instant case, 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.
To prove that PAL was financially distressed, it could have submitted its audited financial
statements but it failed to present the same with the Labor Arbiter. Instead, it narrated a litany
of woes without offering any evidence to show that they translated into specific and substantial
losses that would necessitate retrenchment.

Interestingly, PAL submitted its audited financial statements only when the case was the subject
of certiorari proceedings in the Court of Appeals by attaching in its Comment a copy of its
consolidated audited financial statements for the years 2002, 2003 and 2004. However, these
are not the financial statements that would have shown PALs alleged precarious position at the
time it implemented the massive retrenchment scheme in 1998. PAL should have submitted its
financial statements for the years 1997 up to 1999; and not for the years 2002 up to 2004
because these financial statements cover a period markedly distant to the years in question,
which make them irrelevant and unacceptable.

FOURTH ELEMENT:

Concededly, retrenchment to prevent losses is an authorized cause for terminating employment

and the decision whether to resort to such move or not is a management prerogative. However,
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.

On the requirement that the prerogative to retrench must be exercised in good faith, we have
ruled that the hiring of new employees and subsequent rehiring of retrenched employees
constitute bad faith; that the failure of the employer to resort to other less drastic measures
than retrenchment seriously belies its claim that retrenchment was done in good faith to avoid
losses; and that the demonstrated arbitrariness in the selection of which of its employees to
retrench is further proof of the illegality of the employers retrenchment program, not to
mention its bad faith.

When PAL implemented Plan 22, instead of Plan 14, which was what it had originally made
known to its employees, it could not be said that it acted in a manner compatible with good
faith. It offered no satisfactory explanation why it abandoned Plan 14; instead, it justified its
actions of subsequently recalling to duty retrenched employees by making it appear that it was
a show of good faith; that it was due to its good corporate nature that the decision to consider
recalling employees was made. The truth, however, is that 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 (i.e., demoted), and, worse, some as new hires, without due regard for their long years
of service with the airline.

The irregularity of PALs implementation of Plan 14 becomes more apparent when it rehired 140
probationary cabin attendants whose services it had previously terminated, and yet proceeded
to terminate the services of its permanent cabin crew personnel.

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.

FIFTH ELEMENT:

In selecting employees to be dismissed, fair and reasonable criteria must be used, such as but
not limited to: (a) less preferred status (e.g., temporary employee), (b) efficiency and (c)
seniority.

In the implementation of its retrenchment scheme, PAL evaluated the cabin crew personnels
performance during the year preceding the retrenchment (1997), based on the following set of
criteria or rating variables found in the Performance Evaluation Form of the cabin crew
personnels Grooming and Appearance Handbook:

A. INFLIGHT PROFICIENCY EVALUATION 30%

B. JOB PERFORMANCE 35%

Special Award +5
Commendations +2
Appreciation +1
 Disciplinary Actions Reminder (-3), Warning/Admonition & Reprimands (-5), Suspension (-
20), Passenger Complaints (-30), Appearance (-10)

C. ATTENDANCE 35%
Perfect Attendance +2
Missed Assignment -30
Sick Leaves in excess of allotment and other leaves in excess of allotment -20
Tardiness -10 [93]

The appellate court held that there was no need for PAL to consult with FASAP regarding
standards or criteria that the airline would utilize in the implementation of the retrenchment
program; and that the criteria actually used which was unilaterally formulated by PAL using its
Performance Evaluation Form in its Grooming and Appearance Handbook was reasonable and
fair. Indeed, PAL was not obligated to consult FASAP regarding the standards it would use in
evaluating the performance of the each cabin crew. However, the criteria utilized by PAL in the
actual retrenchment were not reasonable and fair.

Indeed, the NLRC made a detailed listing of the retrenchment scheme based on the ICCD
Masterank and Seniority 1997 Ratings. It found the following:

1. Number of employees retrenched due to inverse seniority rule and other reasons -- 454
2. Number of employees retrenched due to excess sick leaves -- 299
3. Number of employees who were retrenched due to excess sick leave and other reasons
-- 61
4. Number of employees who were retrenched due to other reasons -- 107
5. Number of employees who were demoted -- 552

Total -- 1,473.4

Prominent from the above data is the retrenchment of cabin crew personnel due to other
reasons which, however, are not specifically stated and shown to be for a valid cause. This is not
allowed because it has no basis in fact and in law.

Moreover, in assessing the overall performance of each cabin crew personnel, PAL only
considered the year 1997. This makes the evaluation of each cabin attendants efficiency rating
capricious and prejudicial to PAL employees covered by it. By discarding the cabin crew
personnels previous years of service and taking into consideration only one years worth of job
performance for evaluation, PAL virtually did away with the concept of seniority, loyalty and
past efficiency, and treated all cabin attendants as if they were on equal footing, with no one
more senior than the other.

In sum, PALs retrenchment program is illegal because it was based on wrongful premise (Plan
14, which in reality turned out to be Plan 22, resulting in retrenchment of more cabin
attendants than was necessary) and in a set of criteria or rating variables that is unfair and
unreasonable when implemented. It failed to take into account each cabin attendants
respective service record, thereby disregarding seniority and loyalty in the evaluation of overall
employee performance.

UPDATE: 2018 RULING – (REVERSING THE DECISION MADE ON JULY 22, 2008)

The SC granted PAL’s Motion for Reconsideration of the Resolution of October 2, 2009 and
Second Motion for Reconsideration of the Decision of July 22, 2008 filed by PAL and Chiong;
and DENY the Motion for Reconsideration [Re: The Honorable Court’s Resolution dated 13
March 2012] of FASAP,

Accordingly, the SC reversed the July 22, 2008 decision and the October 2, 2009 resolution; and
affirmed the decision promulgated on August 23, 2006 by the CA.

Retrenchment or downsizing is a mode of terminating employment initiated by the employer

through no fault of the employee and without prejudice to the latter, resorted to by
management during period of business recession, industrial depression or seasonal fluctuations
or during lulls over shortage of materials. It is a reduction in manpower, a measure utilized by
an employer to minimize business losses incurred in the operation of its business.

Accordingly, the employer may resort to retrenchment in order to avert serious business losses.
To justify such retrenchment, the following conditions must be present, namely: 1. The
retrenchment must be reasonably necessary and likely to prevent business losses; 2. The losses
if already incurred, are not merely de minimis, but subtanstial, serious, actual and real, or, if
only expected, are reasonably imminent. 3. The expected or actual losses must be proved by
sufficient and convincing evidence 4. The retrenchment must be in good faith for the
advancement of its interest and not to defeat or circumvent the employee’s right to security of
tenure; and 5. There must be fair and reasonable criteria in ascertaining who would be
dismissed and who would be retained among the employees, such as status, efficiency,
seniority, physical fitness, age, and financial hardship for certain workers.

The SC held further that it is quite notable that the matter of PAL’s financial distress had
originated from the complaint filed by FASAP whereby it raised the sole issue of “Whether or
not respondents committed Unfair Labor Practice. FASAP believed that PAL, in terminating the
1,400 cabin crew members, had violated Section 23, Article VII and Section 31, Article IX of the
1995-2000 PAL-FASAP CBA. FASAP averred in its position paper therein that it was not opposed
to the retrenchment program because it understood PAL’s financial troubles; and that it was
only questioning the manner and lack of standard in carrying out the retrenchment.

Evidently, FASAP’s express recognition of PAL’s grave financial situation meant that such
situation no longer needed to be proved, the same having become a judicial admission in the
context of the issues between the parties. As a rule, indeed admissions made by the parties in
the pleadings, or in the course of the trial or other proceedings in the same case are conclusive,
and do not require further evidence to prove them. By FASAP’s admission of PAL’s severe
financial woes, PAL was relieved of its burden to prove its dire financial condition to justify the
retrenchment. Thusly, PAL should not be taken to task for the non-submission of its audited
financial statements in the early part of the proceedings inasmuch as the non-submission had
been rendered irrelevant.

Yet, the July 22, 2008 decision ignored the judicial admission and unfairly focused on the lack of
evidence of PAL’s financial losses. The Special Third Division should have realized that PAL had
been discharged of its duty to prove its precarious fiscal situation in the face of FASAP’s
admission of such situation. Indeed, PAL did not have to submit the audited financial
statements because its being in financial distress was not in issue at all.

The July 22, 2008 decision recognized that PAL underwent corporate rehabilitation. In seeming
inconsistency, however, the Special Third Division refused to accept that PAL had incurred
serious financial losses. Indeed, that a company undergoes rehabilitation sufificiently indicates
its fragile financial condition.

After having been placed under corporate rehabilitation and its rehabilitation plan having been
approved by the SEC on June 23, 2008, PAL’s dire financial predicament could not be doubted.
Incidentally, the SEC’s order of approval came a week after PAL had sent out notices of
termination to the affected employees. It is thus difficult to ignore the fact that PAL had then
been experiencing difficulty in meeting its financial obligations long before its rehabilitation.

The presentation of the audited financial statements should not be the sole means by which to
establish the employer’s serious financial losses. The presentation of audited financial
statements, although convenient in proving the unilateral claim of financial losses, is not
required for all cases for retrenchment. The evidence required for each case of retrenchment
really depends on the particular circumstances obtaining. To require a distressed corporation
placed under rehabilitation or receivership to still submit its audited financial statements may
become unnecessary or superfluous.

The employer is burdened to observe good faith in implementing a retrenchment program.

Good faith on its part exists when the retrenchment is intended for the advancement of its
interest and is not for the purpose of defeating or circumventing the rights of the employee
under special laws under valid agreements.

The records also show that the parties met on several occasions to explore cost-cutting
measures, including the implementation of the retrenchment program. PAL likewise manifested
that the retrenchment plan was temporarily shelved while it implemented other measures (like
termination of probationary cabin attendant, and work-rotations).
As between maintaining the number of its flight crew and PAL’s survival, it was reasonable for
PAL to choose the latter alternative. The Court cannot legitimately force PAL as a distressed
employer to maintain its manpower despite its dire financial condition. To be sure, the right of
PAL as the employer to reasonable returns on its investments and to expansion and growth is
also enshrined in the 1987 Constitution. Thus, although labor is entitled to the right to security
of tenure, the State will not interfere with the employer’s valid exercise of its management
prerogative.

JUNE 15, 1998

Philippine Airlines lays off a total of 5,000 employees, including 1,400 cabin crew
personnel, as part of its cost-cutting measure after the company allegedly incurred P90
billion in liabilities during the 1997 Asian financial crisis.

JUNE 22, 1998

The Flight Attendants and Stewards Association of the Philippines (FASAP) files with
the National Labor Relations Commissions (NLRC) a complaint of illegal retrenchment
against PAL and Patria Chiong, assistant vice president for cabin services.

JULY 21, 2000

Labor arbiter Jovencio Mayor rules in favor of FASAP, ordering PAL to reinstate the
employees.

MAY 31, 2004

After PAL has filed an appeal, NLRC reverses its previous decision. FASAP brings the
case to the Court of Appeals.

AUGUST 23, 2006

Court of Appeals (CA) affirms the NLRC's 2004 decision, which said PAL didn't have to
consult FASAP for its criteria for its retrenchment program.
MAY 29, 2007

CA denies FASAP's motion for reconsideration. The case goes to the Supreme Court.

JULY 22, 2008

The Supreme Court special 3rd division rules in favor of FASAP and orders PAL to
reinstate 5,000 employees retrenched in 1998.

AUGUST 20, 2008

PAL files motion for reconsideration.

OCTOBER 2, 2009

The SC’s 3rd division affirms the 2008 decision, which declared illegal the retrenchment
of the FASAP members.

The high court denies the motion for reconsideration filed by PAL for lack of merit. It
also does not accept PAL’s justification for the retrenchment that it was suffering from
financial distress after a pilots’ strike in 1998.

“We find this argument untenable. The strike was a temporary occurrence that did not
necessitate the immediate and sweeping retrenchment of 1,400 cabin or flight
attendants,” the SC says in its decision.

NOVEMBER 3, 2009

PAL files motion for reconsideration for the October 2009 decision and second motion
for reconsideration for the 2008 decision. The FASAP case is raffled off to SC second
division because members of the special 3rd division have retired.

SEPTEMBER 7, 2011

The SC second division dismisses PAL’s second motion for reconsideration.

SEPTEMBER 2011

PAL lawyer Estelito Mendoza sends a series of letters to the Supreme Court's Clerk of
Court regarding the case. He sent a total of 4 letters.

In one letter, Mendoza points out a “misapplication of the rules.” He cites Section 4(3),
Article VIII, of the Constitution, which states that cases “heard by a division shall be
decided or resolved with the concurrence of a majority of the Members who actually
took part in the deliberations on the issues in the case and voted thereon, and in no
case without the concurrence of at least three of such members.”

OCTOBER 4, 2011

The Supreme Court en banc recalls the second division’s decision which junked PAL’s
motion.

The decision comes after the court took cognizance of a letter submitted by Mendoza,
PAL’s legal counsel.

Then spokesperson (and now court administrator) Jose Midas Marquez says the SC
committed an "honest mistake” because the case should have been handled by the high
court’s special 3rd division, not the second division.

OCTOBER 17, 2011

In a motion for reconsideration, FASAP asks the Supreme Court to set aside its October
4, 2011, resolution.

MARCH 26, 2018

The SC en banc affirms the 2006 decision by the Court of Appeals that validated the
retrenchment implemented by PAL, setting aside two existing decisions which were in
favor of FASAP.