Redundancy: Understanding One of the Authorized Causes of Termination in the Philippines

Declaring a position redundant is one of the weightiest decisions a business can make, one that affects real livelihoods and demands strict legal compliance in equal measure. In this article, we break down the essential requisites of a valid redundancy program, the due process every employer must observe, and the tax treatment of separation benefits, equipping employers and HR professionals with the clarity and confidence to handle redundancy correctly and lawfully.

• Redundancy and its Requisites
• Observance of Due Process
• Separation Benefits are Tax Exempt
• Frequently Asked Questions

Redundancy and its Requisites

Redundancy is one of the authorized causes for terminating the services of an employee under Article 298 (formerly Article 283) of the Labor Code of the Philippines. It arises from the necessities and exigencies of the business and allows an employer to terminate an employee whose position or services have become unnecessary or superfluous. Simply put, redundancy exists when the service of an employee is in excess of what is reasonably demanded by the actual requirements of the business (HCL Technologies Philippines, Inc. v. Guarin, Jr., G.R. No. 246793, March 18, 2021).

For a redundancy program to be valid, the employer must be able to establish that all elements below are present:

1. There must be superfluous positions or services of employees;
2. The positions or services are in excess of what is reasonably demanded by the actual requirements of the enterprise to operate in an economical and efficient manner;
3. There must be good faith in abolishing redundant positions;
4. There must be fair and reasonable criteria in selecting employees to be terminated; and
5. There must be an adequate proof of redundancy such as but not limited to the new staffing pattern, feasibility studies/proposal on the viability of the newly created positions, job description and the approval by the management of the restructuring (Section 5.4 (b), Department Order No. 147-15).

To satisfy the requirement of adequate proof of redundancy, the employer must present substantial evidence. Such evidence may further include a comparison of the old and new staffing patterns, a description of the abolished and newly created positions, and proof of the set business targets and failure to attain the same which necessitated the reorganization or streamlining.

This requirement was emphasized in Teletech Customer Care Management Philippines, Inc. v. Gerona, Jr., where the Supreme Court ruled that the company should have presented any document to prove the decline in the volume of calls for the past months, or affidavits of the [company’s or their client’s] officers who determined that business was slowing down and their basis thereof (G.R. No. 219166, November 10, 2021). It also explained that the company’s new table of organization and certification from its human resources department attesting that the position held by a certain employee is redundant are insufficient evidence to support a claim of redundancy.

The employer must also demonstrate that the redundancy program was implemented in good faith. For example, good faith was found where an employee’s position became redundant because the account to which the employee had been assigned to was terminated. Since the very reason for the employee’s position had ceased to exist, the abolition of the position was considered justified (HCL Technologies Philippines, Inc. v. Guarin, Jr., G.R. No. 246793, March 18, 2021).

Likewise, the employer must adopt fair and reasonable standards in determining which employees will be affected. As a general rule, the “Last-In, First-Out Rule” shall apply except when an employee volunteers to be separated from employment (Section 5.4, Department Order No. 147-15).

Observance of Due Process

The employer must also comply with the procedural requirements prescribed by law. To validly implement a redundancy program, the employer must:

1. Serve written notices to both the employees and the Department of Labor and Employment (DOLE) at least one month prior to the intended date of termination; and
2. Pay separation pay equivalent to at least one (1) month pay or at least one (1) month pay for every year of service, whichever is higher, a fraction of six (6) months service is considered as one (1) whole year (Article 298 (formerly Article 283) of the Labor Code of the Philippines; Department Order No. 147-15).

It is well-settled that the written notice to employees concerned is mandatory. The purpose of the one-month notice period gives the employees the opportunity to look for other means of employment and ease the impact of the loss of their jobs and the corresponding income (Sebuguero v. National Labor Relations Commission as cited in Serrano v. National Labor Relations Commission, G.R. No. 117040, May 4, 2000). Similarly, notice to DOLE enables the same to ascertain the verity of the alleged authorized cause of termination.

Moreover, under the recent Labor Advisory No. 17-A, in relation to Labor Advisory No. 17, employers implementing redundancy are now required to accomplish the RKS Form 5 of 2020 which must be submitted either personally or online to the appropriate DOLE Provincial or Field Office which has jurisdiction over the principal place of business. The same report is likewise required in cases involving Flexible Work Arrangements or Alternative Work Schemes, Temporary Closure, and Permanent Closure.

Separation Benefits are Tax Exempt

Employees who receive separation benefits due to redundancy are exempt from income tax, and consequently, from withholding tax on compensation (Section 32(B)(6)(b) of the National Internal Revenue Code of 1997). The exemption also covers separation benefits received by employees or his/her heirs as a result of their separation from employment due to death, sickness or other physical disability as well as for any cause beyond the control of said employee, which includes retrenchment, redundancy, installation of labor-saving devices, or due to closure of the business. To facilitate the processing of requests for tax exemption of separation benefits, Bureau of Internal Revenue Memorandum (BIR) Revenue Memorandum Order No. 66-2016 requires that a letter request and its supporting documents must be submitted to Revenue District Office or appropriate Large Taxpayers Office where the employer is originally registered.