G.R. No. 157611 . August 9, 2005
ALABANG COUNTRY CLUB INC., ET AL., Petitioners, vs. NATIONAL LABOR RELATIONS COMMISSION, ALABANG COUNTRY CLUB INDEPENDENT EMPLOYEES UNION, ET AL., Respondents.

FACTS

Petitioner Alabang Country Club Inc. (ACCI) decided to cease the operations of its allegedly unprofitable Food and Beverage (F&B) Department and contract it out to La Tasca Restaurant Inc. Consequently, ACCI terminated the employment of the 63 respondent union members effective January 1, 1995, offering separation pay and informing them that La Tasca had agreed to absorb them as regular employees. The Union filed a complaint for illegal dismissal, arguing the retrenchment was invalid as the F&B Department was actually profitable based on audited financial statements. ACCI defended its decision as a legitimate exercise of management prerogative to prevent losses, relying on an internal audit report that allocated undistributed operating costs to show losses.
The Labor Arbiter dismissed the complaint, finding the termination valid. The National Labor Relations Commission (NLRC) affirmed. The Court of Appeals, however, reversed the NLRC, ordering reinstatement with full backwages. It found that ACCI failed to prove the requisite actual or imminent substantial losses required by law to justify retrenchment.

ISSUE

Whether the termination of the employees on the ground of retrenchment due to alleged losses was valid.

RULING

No, the termination was illegal. The Supreme Court affirmed the Court of Appeals’ decision. Retrenchment to prevent losses is a recognized management prerogative, but it is not an absolute right. The employer bears the burden of proving, by clear and convincing evidence, the existence of actual or imminent substantial losses that justify the drastic measure of dismissing employees. The Court found ACCI’s evidence insufficient. The primary basis for the alleged losses was an internal audit report that deviated from the standard accounting practice used in the audited financial statements prepared by Sycip Gorres Velayo & Co. (SGV). The SGV statements, which deducted general costs from total club income, did not show the F&B Department operating at a loss. The internal report’s re-allocation of these general expenses to the department was not substantiated as a proper accounting method. Therefore, ACCI failed to discharge its burden of proving the factual basis for retrenchment. The termination, being illegal, entitles the employees to reinstatement without loss of seniority rights and full backwages.