COVID-19 Need Not Cause Layoffs
COVID-19 has brought about an unprecedented global economic, political, and social standstill. “This is a crisis like no other”, according to International Monetary Fund’s Managing Director, Kristalina Georgieva, moments before she declared that the global economy is now in a recession “worse” than the global financial crisis of 2008.
Layoffs often follow in the wake of economic crises. On the one hand, the Philippine Constitution affords full protection to labor. On the other hand, management prerogative and business judgment will be upheld by Philippines absent an abuse of discretion. While retaining the workforce during economic crises then seems counterintuitive, deciding to retrench workers depends on a variety of factors and not labor costs alone. This essay briefly examines business cases that may be revealing of longer-term negative consequences of layoffs, many of which are unaccounted for in the layoff calculus. In discussions that follow, we present legal options which Philippine entrepreneurs can consider in managing the adverse economic impact of COVID-19.
Finnish tech giant Nokia was the mobile phone industry’s undisputed leader in 1999. A decade later, it fought for mere market relevance against competitors like Apple. Nokia’s fall is traceable to decisions fixated on short-term gains untethered to long-term strategic thinking. During the 2008 crisis, Nokia reacted with a mass layoff and manufacturing plant closure in Germany. The decisions appeared timely and prudent. Nokia’s immediate losses included around €700 million in sales loss; approximately 2,300 employees; bad publicity; boycotts; and a vastly diminished German market share. Such staggering losses contributed to Nokia’s global mobile market share plunge from 50% in 2007 to 1% by 2019.
Nokia’s case is not isolated. A Harvard Business Review article, citing a 2012 study, indicates that layoffs have a neutral to negative effect on stock prices, workplace morale, personnel development investment, and company profitability at least up to three years. In light of today’s context, resorting to a layoff driven by COVID-19 might be the next logical step, if not an instinctive business judgment, but it could also amount to be an unnecessary, self-inflicted, and irreversible injury with longer term adverse effects on a business.
In the Philippines, layoffs have also produced mixed, if not convoluted, results. For instance, Philippine Airlines (“PAL”) won a lawsuit concerning the legality of its layoffs, but only after experiencing multiple losses to court cases which initially declared the layoffs illegal and after appeals spanning two major global financial crises, taking two decades, from 1998 to 2018. The Supreme Court eventually ruled in favor of PAL because, among others, PAL had been undergoing corporate rehabilitation under insolvency laws.
Philippine law authorizes “layoffs” only as a “last resort”. Technically known as “retrenchment” and classified as an “authorized cause for termination”, a layoff is defined as “the termination of employment initiated by the employer through no fault of the employees and without prejudice to the latter, resorted to by management during periods of business recession; industrial depression; or seasonal fluctuations.” A layoff is a recognized management prerogative, subject to an employer’s faithful compliance to substantive and procedural legal requirements.
If an employer resorts to a layoff, the employer must produce a comprehensive retrenchment plan (among other legal requirements) and provide evidentiary proof of either actual losses or expected losses. Such losses may be proven by corporate rehabilitation, audited financial statements, and cost-cutting measures. Aside from statutory procedural requirements, the layoff must also follow criteria that is fair and reasonable in selecting employees for dismissal.
Employers can also choose a “temporary layoff”, rather than a permanent one, placing employees in “floating status”, provided the employer can prove the need for a bona fide suspension of business operations for a period not exceeding six (6) months. Needless to say, failure to provide proper proof exposes employers to liability for constructive dismissal.
Legal requirements (and their costs), however, form only one aspect of the entire COVID-19 layoff equation. Filipino businesses and employees must consider loss of time invested in trained personnel; reputational costs in light of social media; current financial capacity; practical ability to resume normal operations upon lifting of the Enhanced Community Quarantine (“ECQ”); global, regional, and local supply chain considerations; medical expenses; and loan payments. Truly, a COVID-19 layoff is driven by multiple independent and interrelated factors, each carrying different weight. Difficulty at quantifying these factors, nevertheless, is not a reason to exclude those factors from the decision-making criteria.
Case studies on the last two global major financial crises offer some insight: Layoffs, when merely reactive, tend to become regressive business acts with potentially regretful, lasting, and industry-defining fiscal and legal consequences. There may be, indeed, profound wisdom in the consistent verdict in Philippine jurisprudence that retrenchment ought to be the very last resort.
In the face of COVID-19 and as governments around the world work hard to “flatten the curve”, what meaningful choices can business owners and C-suite professionals make? Amidst lingering economic uncertainty, what options do businesses have as a “first resort”?
The Philippine government has taken great strides to provide a repertoire of relief measures to help businesses arrive at creative solutions, and exhausting them first, if only to avoid knee-jerk mass layoffs. We summarize the more important ones, as follows.
The “Bayanihan to Heal as One Act”, or Republic Act №11469, (“Bayanihan Act”) has provided the national and local governments with additional funds and broad powers aimed at stimulating the economy, assisting health workers, and even extending statutory deadlines for filing and submission of documents for the payment of taxes, fees, and charges.
As of April 07, 2020, the National Government possesses a formidable fund of PhP 600 billion to aid in economic relief. It is expected that new and additional measures will be passed as our COVID-19 recovery unfolds.
Agencies and departments appear aligned. The Bangko Sentral ng Pilipinas has twice reduced interest rates on the overnight lending and deposit facilities with a view to relax private lending.
As of date, low-income households have begun receiving amounts from PhP 5,000.00 to PhP 8,000.00 through the Department of Social Welfare and Development’s Social Amelioration Program under the Bayanihan Act.
The COVID-19 Adjustment Measures Program, or “CAMP”, is available for employers for their employees to claim financial assistance from the Department of Labor and Employment (“DOLE”). DOLE Department Order №209 dated 17 March 2020 provides that all employees with reduced pay may be entitled to a one-time, lump sum, and non-conditional direct financial assistance equivalent to PhP 5,000.00. CAMP is clearly supportive of the government’s objective of encouraging private enterprises to retain their workforce.
Department of Trade and Industry Memorandum Circular №20–12 dated 04 April 2020 provides guidelines for the grant of a 30-day grace period for residential and commercial rent falling due under the duration of the ECQ for lessee-owners of Micro, Small, and Medium Enterprises (“MSMEs”). It likewise implores lessors to consider total or partial waiver of commercial rent; provide for discounts; allow renegotiation of lease agreement terms; and avoid eviction for failure to pay said rent within a 30-day period after the lifting of the ECQ.
On the local government front, 14 cities, including Makati City and Pasig City, have extended deadlines for payment of local taxes.
Outside of emergency legislation, the private sector has taken its own initiative, and on voluntary basis, to mitigate the adverse commercial impact of COVID-19. The Ayala Group of Companies, Robinsons Land Corporation, and SM Group of Companies all have respective emergency response packages consisting of loan deferments, wages, and rental fee waivers for its employees and lessees. The Jollibee Foods Corporation, Golden Arches Development Corporation (McDonalds), and the Pangilinan Group of Companies likewise extended relief efforts.
Panic induced by the uncertainties of a pandemic can cloud the business judgment of even the most seasoned entrepreneurs. Businesses may rush to the conclusion that laying off employees is the only way to save a business. The more prudent response would be to consider a broader basket of factors, many of which can be intangible but are no less relevant. Case studies show that the consequences of layoffs are not straightforward and that mass dismissals may cause greater, long-term costs that outweigh all short-term financial benefits. In fact, businesses may end up letting go of workers and executives whom they would have relied upon for the right path to recovery.
Miguel Luigi L. Calayag is a Junior Associate at Gorriceta Africa Caution & Saavedra (www.gorricetalaw.com). He is a member of its Litigation and Labor, Data Privacy, and Corporate Departments. Miguel holds a bachelor’s degree in Political Science (with honors), with a minor in Chinese Studies, from the Ateneo de Manila University. He earned a Juris Doctor from the Ateneo Law School and was a member of the Board of Editors of the Ateneo Law Journal. Miguel is also an alumnus of Sun Yat-Sen University and the National University of Singapore. His essay was originally published in: https://medium.com/@miguelluigicalayag/covid-19-need-not-cause-layoffs-54c5046bb067?fbclid=IwAR1TJj6cbB6Ij1Gv61-3fhXo-N3gindl071onAbGsu9sKTrojxqB1tUJMDY.
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