Managing Employment Contracts in the Time of COVID-19

Martin Luigi G. Samson

The coronavirus disease 2019 (COVID-19) forced many companies to temporarily close or drastically reduce production and/or services. While restrictions are slowly being lifted, not all establishments have been allowed to operate at full capacity, if at all. Furthermore, people are still discouraged to go out and engage in non-essential activities. This, in turn, affects businesses.

Establishments have been facing difficult decisions with respect to employees considering that employees’ salaries and benefits constitute a significant expense. In deliberating what to do in order to survive, companies must be guided by the principles of law.

For businesses that manage to keep their head above water, the determination may simply be limited to whether or not to adopt a work-from-home or implement a telecommuting arrangement which is highly encouraged by the Department of Labor and Employment (DoLE).

The DoLE also suggests the adoption of any or a combination of the following as an alternative to the termination of employment or closure of business:

  1. Transfer of employees to another branch or outlet;
  2. Assignment of employees to another function or position in the same or other branch or outlet;
  3. Reduction of normal work hours per day or work days per week;
  4. Job rotation alternately providing workers with work within the workweek or within the month;
  5. Partial closure of the establishment; and
  6. Other feasible work arrangements.

The transfer or reassignment of employees to other branches and/or functions will allow management to allocate resources pursuant to the business requirements.

Other options suggested by the DoLE are the reduction of workdays and/or work hours, as well as job rotation. Under these options, the employees will continue to receive their salaries and benefits which are reduced in proportion to the actual days or hours worked. The unworked or reduced hours or days shall not be paid under the principle of “no work, no pay.”

Even with the above-mentioned alternatives, some businesses may have to consider additional means to reduce costs such as the reduction of wages and wage-related benefits. Any reduction must be voluntarily agreed upon in writing by the employer and the employee, and must not exceed six months or the period provided by the collective bargaining agreement, if any. After such a period, the employer and the employee may renew the agreement after review.

Under normal circumstances, all these alternatives may be interpreted as an act of diminution of benefit and/or constructive dismissal for which an employer may be held liable. However, considering the extraordinary circumstance, even the DoLE is advocating for these alternatives in lieu of termination. Thus, the DoLE mandates that the alternatives are temporary and must only be implemented during the Public Health Crisis.

For businesses that are allowed to operate after the lifting of restrictions, but predict that the demand or sales cannot possibly cover operating expenses, an option to consider is Article 301 of the Labor Code which allows the temporary suspension of work due to bona fide suspension of business operations or undertaking for a period not exceeding six months. During this period, employees are placed on a “floating status” and are not entitled to any salary or financial benefit. After the lapse of six months, the employer has the option of recalling the employees back to work, or permanently retrenching them. Failure to exercise any of these options would be tantamount to illegal dismissal for which the employer may be held liable. If recalled back to work, the employer is required to reinstate the employees to their former positions without loss of seniority rights provided they exercise such right not later than one month from resumption of operations.

The most extreme measure to be considered is retrenchment. Retrenchment is the termination of employment initiated by the employer through no fault of and without prejudice to the employees. It is resorted to during periods of business recession, industrial depression, seasonal fluctuations or during lulls occasioned by lack of orders, shortage of materials, conversion of the plant for a new production program or the introduction of new methods, or more efficient machinery or of automation. It is an act of the employer of dismissing employees because of losses in the operation of a business, lack of work, and considerable reduction in the volume of his business.

The prevention of losses sufficiently justifies retrenchment provided that the following requirements are observed:

  1. Retrenchment is undertaken to prevent losses, which 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. The employer serves written notices both to the employees and the DoLE at least one month prior to the intended date of retrenchment;
  3. The employer pays the retrenched employees separation pay equivalent to one month pay, or at least half month pay for every year of service, whichever is higher;
  4. The employer must use fair and reasonable criteria in ascertaining who would be dismissed and retained among the employees; and
  5. The retrenchment must be undertaken in good faith.

In a perfect world, all establishments will be able to get back on their feet without resorting to any extraordinary measure affecting employees. However, for most companies, the difficulties arising out of the COVID-19 pandemic do not allow for a perfect scenario. Taking decisive action now may be critical to the survival of the enterprise. Hopefully, the continued existence of business will allow them to survive, thrive, and take care of employees in the future. We cannot allow perfect to be the enemy of good.

The views and opinions expressed in this article are those of the author. This article is for general informational and educational purposes only and not offered as and does not constitute legal advice or legal opinion.

Martin Luigi G. Samson is a Senior Associate of the Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW), Davao Branch.

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