In Hilario v. National Labor Relations Commission, the Supreme Court addressed the legality of an employee’s dismissal due to retrenchment. The Court ruled that while employers have the right to retrench employees for valid economic reasons, this right must be exercised in good faith. If retrenchment is found to be a mere pretext for terminating an employee, especially when the company’s financial status doesn’t justify it, the dismissal can be deemed illegal, entitling the employee to backwages and separation pay. This decision underscores the importance of proving genuine financial difficulties and fair treatment of employees during retrenchment.

Hilario’s Hiring and Firing: Was Reynolds’ Retrenchment Justified?

Nescito C. Hilario was hired as a personnel manager by Reynolds Philippines, Inc. However, after a short period, he was terminated due to alleged financial losses. Hilario contested this, claiming illegal dismissal, which led to a legal battle reaching the Supreme Court. The central question was whether Reynolds genuinely faced financial difficulties justifying Hilario’s retrenchment, or if the termination was a pretext masking other motives. This case examines the fine line between an employer’s right to manage its business and an employee’s right to job security.

The factual backdrop reveals that Hilario was hired in December 1984 and terminated in January 1986. During this time, he was moved from the Cavite plant to the Head Office, which raised suspicions about the real reasons for his dismissal. The Labor Arbiter initially dismissed Hilario’s complaint but ordered Reynolds to pay his unpaid salary, Christmas bonus, and separation pay. On appeal, the National Labor Relations Commission (NLRC) reversed this decision, finding Hilario’s dismissal illegal. The NLRC noted irregularities in the timing of Hilario’s termination and questioned the company’s claim of financial distress, citing evidence suggesting otherwise.

The NLRC highlighted that Reynolds had placed a “Want-Ad” for a personnel manager, luring applicants only to retrench them shortly after being hired. The court saw this as misrepresentation and bad faith. Moreover, the NLRC pointed out that Hilario’s salary had increased shortly before his termination, and his replacement received a higher salary, contradicting the claim of severe financial difficulties. The NLRC also referenced a Securities and Exchange Commission (SEC) order stating that Reynolds, despite its liabilities, generated a substantial net operating cash flow, indicating that the company was viable. As the NLRC stated:

“Among the other considerations, RPC (Reynolds) itself declares that, while its liabilities exceeds its assets, it believes that its true going concern value in fact exceeds its liabilities, RPC is a viable going concern as it generates a net operating cash flow of about five million pesos a month from sales of thirty million pesos per month. x x x.’ (Records, pp. 129-130)”

The Supreme Court addressed the issue of backwages, reaffirming the principle established in Mercury Drug Co. Inc. v. Court of Industrial Relations. According to this principle, prior to the amendment of the Labor Code by Republic Act No. 6715, backwages for illegally dismissed employees were limited to a three-year period without deduction or qualification. The Court stated:

“Prior to the amendment introduced by Section 34 of Republic Act No. 6715 to Article 279 of the Labor Code on March 21, 1989, the award of backwages to an illegally dismissed employee was limited to a three-year period, without modification or deduction, following the doctrine laid down in Mercury Drug Co. Inc. v. Court of Industrial Relations as refined by Feati University Faculty Club v. Feati University.”

The Court clarified that while Republic Act No. 6715 amended the Labor Code to provide full backwages for illegally dismissed employees, this amendment does not apply retroactively. Therefore, Hilario, whose illegal dismissal occurred before March 21, 1989, was entitled to backwages limited to three years without any deduction. This ruling ensures that employees unjustly terminated receive fair compensation for the period they were unlawfully deprived of their employment. Additionally, Hilario was entitled to his unpaid salary for December 1985 and his Christmas bonus, further emphasizing the employer’s obligation to fulfill its contractual obligations.

Concerning reinstatement, the Court recognized that ordering reinstatement at this stage would be impractical, especially given the strained relationship between Hilario and Reynolds. The Court stated:

“if the relationship between employer and employee has been unduly strained by reason of their respective imputations of bad faith to each other, as is quite evident from the vehement and consistent stand of private respondent in refusing to reinstate petitioner, it would be prudent not to order the same.”

The decision not to order reinstatement reflects the reality that managerial positions require trust and confidence, which had been irreparably damaged in this case. In lieu of reinstatement, the Court ordered Reynolds to pay Hilario separation pay equivalent to one month’s salary for his roughly one year of service. This award acknowledges Hilario’s contribution to the company and provides him with financial support during his transition to new employment.

Regarding the moral and exemplary damages, the Court addressed the grounds for awarding such damages in labor cases. The Labor Code itself does not explicitly provide for damages in cases of unjust termination. However, the Court has consistently held that employers may be liable for damages if they acted in an anti-social or oppressive manner, abusing their right to investigate and dismiss employees. The Court referred to Article 1701 of the Civil Code, which prohibits oppression by either capital or labor against the other.

In CLLC E.G. Gochangco Workers Union v. NLRC, the Court elaborated on the conditions under which moral and exemplary damages may be awarded:

“As for moral damages, we hold the said respondent liable therefor under the provisions of Article 2220 of the Civil Code providing for damages for ‘breaches of contract where the defendant acted fraudulently or in bad faith.’ We deem just and proper the sum of P5,000.00 each in favor of the terminated workers, in the concept of such damages.

We likewise grant unto said workers another P5,000.00 each to answer for exemplary damages based on the provision of Articles 2229 and 2231 and/or 2232 of the Civil Code. For ‘act[ing] in gross and evident bad faith in refusing to satisfy the [petitioners’] plainly valid, just and demandable claim[s], x x x.”

After examining the records, the Court found that Reynolds did not act in a wanton or oppressive manner against Hilario. While the NLRC found bad faith in the company’s termination of Hilario on the ground of retrenchment, the Court held that this did not amount to gross bad faith or an oppressive act. Therefore, the Court reduced the award of moral damages to P20,000.00, deeming it sufficient compensation under the circumstances.

FAQs

What was the key issue in this case?	The key issue was whether the retrenchment of Nescito Hilario by Reynolds Philippines Corporation was valid or constituted illegal dismissal. The Court had to determine if the company genuinely faced financial difficulties justifying the retrenchment.
What is retrenchment in labor law?	Retrenchment is the termination of employment initiated by the employer to reduce costs due to economic difficulties. It must be based on real and substantial losses, and the employer must prove its financial distress.
What are backwages, and how were they applied in this case?	Backwages are the wages an employee would have earned if they had not been illegally dismissed. In this case, Hilario was entitled to three years’ worth of backwages, without deduction, because his illegal dismissal occurred before the amendment of the Labor Code by R.A. 6715.
Why was Hilario not reinstated to his former position?	Reinstatement was deemed impractical due to the strained relationship between Hilario and Reynolds. The Court recognized that his managerial position required trust and confidence, which had been irreparably damaged.
What is separation pay, and when is it awarded?	Separation pay is a monetary benefit awarded to an employee whose employment is terminated for authorized causes, such as retrenchment. In this case, Hilario received separation pay equivalent to one month’s salary for his service.
What factors did the NLRC consider in determining that Hilario’s dismissal was illegal?	The NLRC considered the timing of Hilario’s termination shortly after being hired, the company’s continued hiring activities, and evidence contradicting their claim of financial distress. These factors suggested that the retrenchment was a pretext.
What is the significance of Republic Act No. 6715 in relation to backwages?	Republic Act No. 6715 amended the Labor Code to provide full backwages for illegally dismissed employees, but this amendment does not apply retroactively. Thus, employees dismissed before the amendment are entitled to only three years of backwages.
Under what circumstances can an employer be liable for moral and exemplary damages in a termination case?	An employer can be liable for moral and exemplary damages if they acted in an anti-social or oppressive manner, abusing their right to investigate and dismiss employees. This includes instances of fraud or bad faith.
What was the final outcome of the case?	The Supreme Court modified the NLRC decision, ordering Reynolds to pay Hilario three years’ backwages, his unpaid salary for December 1985, his Christmas bonus, separation pay, and reduced moral damages to P20,000.00.

In conclusion, the Hilario v. NLRC case reinforces the principle that while employers have the right to retrench employees due to economic constraints, this right must be exercised in good faith and with due consideration for the employees’ rights. The case serves as a reminder that the courts will scrutinize retrenchment claims to ensure they are genuine and not a pretext for unlawful termination.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Nescito C. Hilario vs. National Labor Relations Commission, G.R. No. 119583, January 29, 1996