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LIGHT ATTENDANTS AND G.R. No. 178083

STEWARDS ASSOCIATION OF
THE PHILIPPINES (FASAP),
Petitioner, Present:

Ynares-Santiago, J. (Chairperson),
- versus - Austria-Martinez,

PHILIPPINE AIRLINES, INC.,

PATRIA CHIONG and COURT Promulgated:
OF APPEALS,
Respondents. July 22, 2008

YNARES-SANTIAGO, J.:

 Fair and reasonable criteria

 Actual/imminent business losses

FACTS:

 Petitioner FASAP is the duly certified collective bargaining representative of PAL

cabin crew personnel. Respondent PAL is a domestic corporation 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 cut costs and mitigate huge financial losses as a result of
a downturn in the airline industry brought about by the Asian financial crisis.

 In implementing the retrenchment scheme, PAL adopted its so-called:

 “Plan 14” whereby PAL’s fleet of aircraft would be reduced from 54 to
14, requiring the services of only 654 cabin crew personnel.

 PAL determined the cabin crew personnel efficiency ratings through an evaluation of
the individual cabin crew member’s overall performance for the year 1997 alone
 On June 22, 1998, FASAP filed a Complaint1[24] against PAL 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

 On July 15, 1998, however, PAL carried out the retrenchment of its more than 1,400
cabin crew personnel.
 On September 23, 1998, PAL ceased its operations and sent notices of termination to
its employees.
 Instead of a position paper, respondents filed a Motion to Dismiss

1[24] Docketed as FASAP v. Philippine Airlines & Chiong, NLRC-NCR Case No. 06-05100-98; rollo, p. 87.
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LA

 Denied respondents’ motion to dismiss;

 Granted a writ of preliminary injunction against PAL’s implementation of its
retrenchment program with respect to FASAP members;
 set aside the respective notices of retrenchment addressed to the cabin crew;
 directed respondents to restore the said retrenched cabin crew to their positions and
PAL’s payroll until final determination of the case;

NLRC

 reversed the decision of the Labor Arbiter.

 The NLRC directed the lifting of the writ of injunction and to vacate the directive
setting aside the notices of retrenchment and reinstating the dismissed cabin crew to
their respective positions and in the PAL payroll.
1. Reinstate the cabin attendants retrenched and/or demoted to their previous positions;
2. Pay the concerned cabin attendants their full backwages from the time they were illegally
dismissed/retrenched up to their actual reinstatements;
3. Pay moral and exemplary damages in the amount of Five Hundred Thousand Pesos (P500,000.00); and
4. Ten (10%) per cent of the total monetary award as and by way of attorney’s fees.

Respondents appealed to the NLRC.

 Meanwhile, FASAP moved for the implementation of the reinstatement aspect of the
Labor Arbiter’s decision.
 the Labor Arbiter issued a writ of execution with respect to the reinstatement directive
in his decision.
 Respondents moved to quash the writ, but the Labor Arbiter denied the same. Again,
respondents took issue with the NLRC.

FASAP moved for reconsideration but it was denied; hence it filed an appeal to the
Court of Appeals which was denied in the herein assailed Decision.

FASAP’s motion for reconsideration was likewise denied; hence, the instant petition
raising the following issues:

ISSUE: These issues boil down to the question of whether PAL’s retrenchment scheme
was justified.

RILING: Under the Labor Code, retrenchment or reduction of employees is authorized as

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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,
o 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

Retrenchment is only a measure of last resort, when other less drastic means have been
tried and found to be inadequate.2[42]

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 employee’s dismissal was not justified.3[43] 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.4[44]
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;

2[42] Polymart Paper Industries, Inc. v. National Labor Relations Commission, 355 Phil. 592, 602 (1998).
3[43] F.F. Marine Corporation v. National Labor Relations Commission, G.R. No. 152039, April 8, 2005, 455 SCRA 154, 166-167.
4[44] Uichico v. National Labor Relations Commission, supra note 40 at 43.
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(3) That the employer pays the retrenched employees separation pay equivalent to
one (1) month pay or at least one-half (½) 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.

FIRST ELEMENT: 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.

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,5[49] or that it expected

5[49] Philippine Carpet Employees Association v. Sto. Tomas, supra note 45 at 145.
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no abatement of its losses in the coming years.6[50] Put simply, not every loss incurred or
expected to be incurred by a company will justify retrenchment.7[51]

 The employer must also exhaust all other means to avoid further losses without
retrenching its employees.8[52]

Retrenchment is a means of last resort; it is justified only when all other less drastic means
have been tried and found insufficient.9[53]

the retrenchment is not completely justified if there is no showing that the retrenchment was
the last recourse resorted to.10[54]

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.11[57]

The condition of business losses justifying retrenchment is normally shown by audited

financial documents like yearly balance sheets and profit and loss statements as well as
annual income tax returns.

Financial statements must be prepared and signed by independent auditors;

The audited financial statements should be presented before the Labor Arbiter who is
in the position to evaluate evidence.

the mere citation by the employer of the economic setback suffered by the sugar
industry as a whole cannot, in the absence of adequate, credible and persuasive evidence,
justify its retrenchment program,12[64] thus:

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

6[50] Oriental Petroleum and Minerals Corp. v. Fuentes, G.R. No. 151818, October 14, 2005, 473 SCRA 106, 116.
7[51] Polymart Paper Industries, Inc. v. National Labor Relations Commission, supra note 42 at 600, 602.
8[52] Id. at 602.
9[53] Id.
10[54] F.F. Marine Corporation v. National Labor Relations Commission, supra note 43 at 171.
11[57] TPI Philippines Cement Corporation v. Cajucom VII, G.R. No. 149138, February 28, 2006, 483 SCRA 494, 503.
12[64] Id. at 596.
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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, thus:

The Labor Arbiter’s finding that PAL “amply satisfied the rules imposed by law and
jurisprudence that sustain retrenchment,” is without basis, absent the presentation of
documentary evidence to that effect.

PAL’s assertion – that its finances were gravely compromised as a result of the 1997
Asian financial crisis and the pilots’ strike – lacks basis due to the non-presentation of its
audited financial statements to prove actual or imminent losses. Law and jurisprudence
require that alleged losses or expected imminent losses must be proved by sufficient and
convincing evidence.

it was grave error for the Labor Arbiter, the NLRC and the Court of Appeals, to have
simply assumed that PAL was in grievous financial state, without requiring the latter to
substantiate such claim. It bears stressing that in retrenchment cases, the presentation of
proof of financial difficulties through the required documents, preferably audited financial
statements prepared by independent auditors, may not summarily be done away with.

The foregoing principle holds true with respect to PAL’s claim in its Comment that
the only issue is the manner by which its retrenchment scheme was carried out because the
validity of the scheme has been settled in its favor.13[83] Respondents might have confused
the right to retrench with its actual retrenchment program, treating them as one and the
same. The first, no doubt, is a valid prerogative of management; it is a right that exists for all
employers. As to the second, it is always subject to scrutiny in regard to faithful compliance
with substantive and procedural requirements which the law and jurisprudence have laid
down.

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.14[84]

FOURTH ELEMENT: 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

13[83] Rollo, pp. 1403-1404.

14[84] Remerco Garments Manufacturing v. Minister of Labor and Employment, G.R. Nos. L-56176-77, February 28, 1985, 135
SCRA 167, 176.
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security of tenure.

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.15[85]

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 PAL’s 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: 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 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.16[90]

15[85] AHS/Philippines Employees Union (FFW) v. National Labor Relations Commission, G.R. No. L-73721, March 30, 1987, 149
SCRA 5, 14; Remerco Garments Manufacturing v. Minister of Labor and Employment, supra note 84.
16[90] Fernandez, P.V., The Law of Employee Dismissal, pp. 130-131, 1976 Ed.; Asiaworld Publishing House, Inc. v. Ople, G.R. No.
L-56398, July 23, 1987, 152 SCRA 219, 225; Asufrin, Jr. v. San Miguel Corporation, G.R. No. 156658, March 10, 2004, 425 SCRA
270, 275.
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the Court held that the implementation of a retrenchment scheme without taking
seniority into account rendered the retrenchment invalid

PAL was not obligated to consult FASAP regarding the standards it would use in
evaluating the performance of the each cabin crew.

This Court has repeatedly enjoined employers to adopt and observe fair and
reasonable standards to effect retrenchment. This is of paramount importance because an
employer’s retrenchment program could be easily justified considering the subjective nature
of this requirement. The adoption and implementation of unfair and unreasonable criteria
could not easily be detected especially in the retrenchment of large numbers of employees,
and in this aspect, abuse is a very distinct and real possibility. This is where labor tribunals
should exercise more diligence; this aspect is where they should concentrate when placed in
a position of having to judge an employer’s retrenchment program.

In sum, PAL’s 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 attendant’s
respective service record, thereby disregarding seniority and loyalty in the evaluation of
overall employee performance.

With respect to moral damages, we have time and again held that as a general rule, a
corporation cannot suffer nor be entitled to moral damages. A corporation, being an artificial
person and having existence only in legal contemplation, has no feelings, no emotions, no
senses; therefore, it cannot experience physical suffering and mental anguish. Mental
suffering can be experienced only by one having a nervous system and it flows from real ills,
sorrows, and griefs of life – all of which cannot be suffered by an artificial, juridical
person.17[98] The Labor Arbiter’s award of moral damages was therefore improper.

WHEREFORE, the instant petition is GRANTED.

The assailed Decision of the Court of Appeals in CA-G.R. SP No. 87956 dated August
23, 2006, which affirmed the Decision of the NLRC setting aside the Labor Arbiter’s
findings of illegal retrenchment and its Resolution of May 29, 2007 denying the motion for
reconsideration, are REVERSED and SET ASIDE and a new one is rendered:

1. FINDING respondent Philippine Airlines, Inc. GUILTY of illegal

dismissal;

2. ORDERING Philippine Air Lines, Inc. to reinstate the cabin crew

17[98] LBC Express, Inc. v. Court of Appeals, G.R. No. 108670, September 21, 1994, 236 SCRA 602, 607.
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personnel who were covered by the retrenchment and demotion scheme

of June 15, 1998 made effective on July 15, 1998, without loss of
seniority rights and other privileges, and to pay them full backwages,
inclusive of allowances and other monetary benefits computed from the
time of their separation up to the time of their actual reinstatement,
provided that with respect to those who had received their respective
separation pay, the amounts of payments shall be deducted from their
backwages. Where reinstatement is no longer feasible because the
positions previously held no longer exist, respondent Corporation shall
pay backwages plus, in lieu of reinstatement, separation pay equal to one
(1) month pay for every year of service;

3. ORDERING Philippine Airlines, Inc. to pay attorney’s fees equivalent to

ten percent (10%) of the total monetary award.

Costs against respondent PAL.

SO ORDERED.