Posted By perez on March 4, 2009

By Raymond Alvin Garcia & Jan Ralph Y. Perez

This is part one of a series discussing measures for coping with the turbulence of the global recession of 2009. This part involves a discussion of the possible alternatives that entrepreneurs and businessmen who are considering cost-cutting measures on labor should undertake. While primarily intended for management, this article should also be read by the employees of a company, so that they will be aware of their rights and procedures of due process required by law to effect such alternatives.

When various American financial institutions collapsed from investments in “toxic” sub-prime mortgages during the middle of 2008, the world economy felt the stirrings of what would later be recognized and forecasted as a global recession. Numerous institutions, such as the Lehman Brothers and the AIG insurance company, collapsed due to the bad investments. This cast a domino effect on other companies worldwide, prompting a concerted effort among the G7 state members to come up with bailout plans and coping policies to avert the international collapse. Thus, industrial giants such as the Ford Motor Company and the Citicorp group of companies sought financial aid from the US Congress to prevent their own shut-down.

Indeed, times appear bleak not only in America but also around the world. In Germany alone, which has the biggest economy among the members of the European Union, leaders met last Dec. 14, 2008, to assess and prevent the extent of the financial crisis. Countries in Asia that maintain a heavy trade relationship with USA are worried about the American recession’s impact on their export sales. As an example, Toyota Motor Co. estimates a 40% drop in sales due to the recession.

Our very own Philippines is very much affected by this crisis, as 17% of our exports are sold in US markets. Ask any of our manufacturers and exporters here in Cebu and they will report that they are hurting from a drop in the demand of products. By the last quarter of 2008, a reported 3,000 workers from the Mactan Economic Zone were laid off, while around 27,000 workers in Mandaue and Lapu-lapu were asked to work fewer hours or go on leave.

Normally, in times of low demand, businesses turn to banks and other financial institutions for short- and mid-term liquidity assistance to bridge the payment of operating costs from bad times to good times. However, because the nature of this recession involves an attack on banks and financial institutions, understandably, these companies would hold on more tightly to their liquidity reserves and have stricter security requirements for loans.

Thus today’s businessmen, particularly those who are engaged in export industries, are hard-pressed to come up with cost-saving solutions. As the levels of sales drop, would there be enough to cover the company’s fixed costs? Unfortunately and understandably, one of the first cost-centers that companies would reduce would be that of its labor costs, resulting in either massive lay-offs, or at the very least, labor-saving measures such as shorter working hours or long furloughs.

This series of articles seeks to inform businessmen and employees on the alternatives that may be undertaken on the matter of labor-cost minimization, including its legal bases and procedures.

1. Reduction of Wages

One area often queried into is whether or not businessmen may legally reduce existing wage rates, say for example if a regular employee may have his wages reduced from P8,000 a month to only P7,000 a month. That move, however, runs counter to Art. 100 of our Labor Code, which prohibits the diminution of workers’ benefits. Simply stated, an employee’s wages and other labor benefits, once granted, become vested rights and cannot be arbitrarily reduced by the employer. The Labor Code does not provide for any exceptions to the rule.

However, this rule applies only to existing employees. In other words, there is nothing in the Labor Code which prevents the company from hiring new employees at wages lower than those received by existing employees. Of course, if they find out about this situation, these new employees could complain that they are receiving a lesser amount of money for substantially the same amount of work rendered by senior employees. However, if the company has an existing policy regarding benefits vested by length of tenure and employment, then this would justify the better pay received by the senior employees. Such policy should be made prior to the hiring of new employees at the lower rate.

2. Paying Less than Minimum Wage

The law mandates payment of minimum wages for all employees. In the cities of Carcar, Cebu, Danao, Lapulapu, Mandaue, Naga and Talisay, and the Municipalities of Compostela, Consolacion, Cordova, Liloan, Minglanilla, and San Fernando (or expanded Metro Cebu), minimum wage is currently pegged at P267 per day.

However, there are certain situations where the law allows companies to pay less than minimum wage, depending on the criteria provided by the region’s local Regional Tripartite Wage Productivity Board (RTWPB). For Central Visayas, businesses which are duly licensed Barangay Micro Business Enterprises, as evidenced by a Certificate of Authority, are exempted from the payment of minimum wage.

To qualify for this license, Republic Act No. 9178 and its implementing rules require that any business (whether sole proprietorship, partnership, cooperative or corporation) must (1) have an asset size of not more than three million pesos (P3,000,000.00) excluding land, and (2) be engaged in the production, processing or manufacturing of products or commodities, including agro-processing, trading and services. Registration for the same is made with the Office of the Treasurer of each city or municipality having jurisdiction over the principal place of business of the company.

Note however, that this license is prospective in application, meaning that it exempts the company from paying less than minimum wage for the period after the said license is availed, and not prior to that. Furthermore, businesses with employees being paid at minimum wage and above cannot use this license to reduce existing wage levels, otherwise it would run counter to Art. 100 of the Labor Code, as explained above.

3. Outsourcing and Automation

Companies may also consider outsourcing certain jobs and departments to independent contractors. For example, the company’s bookkeeping could be handled by independent accountants, or the human resource functions could be handled by HR firms, and the like. Often, the cost of having a monthly retainer for the services of these firms comes out at a fraction of the cost of hiring employees to handle the job, with less of the hassle. Independent contractors do not have to be paid with SSS, Philhealth, and other government-imposed withholding fees.

However, such services should always be covered under a written contract providing that the said independent contractors are not subject to the control of the company. Furthermore, the company should ensure that the contractors have duly paid any and all labor benefits of the employees assigned to handle the company work, because under the Labor Code, the company is considered as an indirect employer of the contractors’ employees. Thus, in the event that the independent contractor has been remiss in paying his employees’ labor benefits, the contractual employees are given recourse to demand payment of these benefits from the company, to the extent of the work done under the contract.

Another consideration that the company may undertake would be to automate certain functions of the company. There are many software programs which could be bought off the counter, or developed through the numerous IT companies in Cebu. These programs automate back office functions, such as bookkeeping, payroll, or inventory management. Where a company would normally need 3 or 4 clerks to maintain a manual system for these functions, it takes only 1 person to operate and manage a fully-automated system. The disadvantage of implementing automated systems however is that this necessarily involves a level of change on how certain functions are being run. Often, making such changes will initially be met with confusion and resistance from the end-users of the company.

At any rate, when employees are terminated due automation, this instance falls under what the law calls as “installation of labor saving devices.” By analogy, our opinion is that this situation would also cover employees terminated due to the outsourcing of work. In such an instances, the terminated employees are entitled to a separation pay equivalent to one (1) month pay for every year of service, or at least one (1) month pay, whichever is higher. To effect such termination, a written notice must be served on both the employee to be terminated, and the local branch of the Department of Labor and Employment (DOLE) one month prior to the date of termination.

4. Removing Redundant Positions

A company should also look at redundant functions in the organization. For instance, are three people doing the same functions that one person can effectively do alone? Are the company’s work procedures structured in such a way that creates labor inefficiency? Can it be simplified so that less effort and labor cost is exerted?

In instances where redundancy exists, the Labor Code requires that the employee terminated should be given a separation pay equivalent to one (1) month pay for every year of service, or at least one (1) month pay, whichever is higher. To effect such termination, a written notice must be served on both the employee to be terminated, and the local branch of the Department of Labor and Employment (DOLE), one month prior to the date of termination.

5. Retrenchment

Of all the options available to the company, this is the least desirable, as it involves a mass lay-off of workers. Nevertheless, retrenchment has been ongoing in many of the companies situated in MEPZ.

For a business to justify retrenchment, the Supreme Court has established that four standards be met, namely: (1) That the company is suffering substantial financial losses; (2) That the said losses are imminent; (3) That the company should have taken other measures prior to reduction in work hours to forestall these losses; (4) That the said losses must be proven by sufficient and convincing evidence, such as through the company’s financial statements.

The procedure for retrenchment simply requires that a written notice must be served on both the employee to be terminated, and the local branch of the Department of Labor and Employment (DOLE), one month prior to the date of termination. Furthermore, the law requires that the employee must be given a separation pay equivalent to one-half (1/2) month pay for every year of service, or at least one (1) month pay, whichever is higher.

A question arises as to whom among the employees will be retrenched. Supreme Court rulings simply state that a fair and reasonable criteria be used in selecting employees to be retrenched, such as but not limited to (a) less preferred status, (b) efficiency rating, and (c) seniority.

6. Reduction of Working Hours

Lately, companies in Cebu have been resorting to a reduction of working hours in order to save up on labor costs. Whether through shorter working hours, or through the placing of some of the workers on forced leave for a determinate number of days, this option gives a win / win solution to both labor and management.

However, as of the time of the writing of this article, time reduction is not covered by the Labor Code nor by rules issued by the Department of Labor. Hence, there is no clear legal basis which authorizes or prohibits time reduction. Our opinion is, however, that such a business decision is covered under management prerogative, a broad principle which is recognized by the Supreme Court. Hence, the same is legally permissible, provided that it be made under the same standards as that of retrenchment: (1) That the company will suffer substantial financial losses; (2) That the said losses are imminent; (3) That the employer should have taken other measures prior to reduction in work hours to forestall losses; (4) The said losses must be proven by sufficient and convincing evidence;

It is further submitted that, in the absence of any definitive rule on the matter, a company should follow the same procedure as that followed by retrenchment, namely that a written notice must be served on both the employee to be terminated, and on the local branch of the Department of Labor and Employment (DOLE), one month prior to the date of the reduction of work hours.

7. Temporary suspension of business operations

In dire circumstances due to serious business losses, the company may also consider a temporary suspension of all business operations. If the suspension of operations does not exceed six (6) months, then effectively, the employees are considered as temporarily terminated from employment, and will be free to seek work with other companies. However, since they are effectively terminated, it is at the employees’ option whether or not they will renew their employment with the old company when it resumes operations, or if they will permanently sever their employment with the company, provided that the suspension. Upon resumption of operations, the employee must communicate his desire to resume his work within one (1) month from the date of resumption. Failure to do so would mean that the employee has opted to sever ties with the company. Failure of the company to rehire the said employee after he has communicated his intent to go back to work would be tantamount to illegal termination.

If the suspension of business operations exceeds six (6) months, then the employees are deemed terminated from work and are entitled to the payment of their separation fees, under the rules on retrenchment. If the company resumes operations after the six (6) month period, it would have the discretion whether or not to rehire or to sever ties with any employee that seeks reemployment with the company.

To justify the temporary suspension of operations due to serious business losses, the Supreme Court requires that these losses must be real and duly proved by sufficient and convincing evidence, such as the company’s financial statements. Furthermore, the Labor Code requires the company to provide a minimum one (1) month notice to the employees to be terminated and to the DOLE, prior to the day of termination. In one case, the Supreme Court has clarified that these notices must be personally served to the employees, and not merely announced through the company’s bulletin board.

(Next in the series: the rights of the workers affected by these labor-cost saving options)

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Atty. Raymond Alvin N. Garcia is the Head Legal Officer of the Sunstar Group of Companies, and an associate lawyer of the J.P. Garcia law office (www.jpgarcialaw.com). For further inquiries, please send all e-mail correspondence to this address.

Atty. Jan Ralph Y. Perez is the Head Legal Officer of Altair Solutions & Concepts Integrated, Inc. (ASCII), and a senior partner of Perez Go & Cimafranca law office (http://pgclaw.ph).

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