Decoding PAL Labor Woes

Déjà Vu?

Special Report
October 8, 2009

Introduction

The Philippine Supreme Court decision in the case Flight Attendants and Stewards Association of the Philippines (FASAP) vs. Philippine Airlines Inc.(PAL) will have far ranging implications to the airline's finances even if the case covers only 1,400 FASAP members because in reality the decision will benefit 5,000 employees that were illegally retrenched by the airline in 1998.

The court, in ruling with finality, declared that there was no compelling reason submitted by PAL to changed its July 22, 2008 decision that decreed Philippine Airlines (PAL) guilty of illegal dismissal and consequently ordered to reinstate or pay the backwages and separation benefits of FASAP members whose total monetary award is estimated at about P2.3 billion.

What really happened?

Philippine Airlines, Inc. (PAL) employed close to 8,000 employees before it adopted the retrenchment scheme allegedly to cut costs and mitigate huge financial losses as a result of a downturn in the airline industry brought about by the 1997 Asian financial crisis. In the fiscal year that ended on March 31, the company had a loss of $184 million based on its financial report. During said period, PAL claims to have incurred P90 billion in liabilities, while its assets stood at P85 billion.

On June 15, 1998, PAL decided to retrenched 5,000 of its employees, including more than 1,400 of its cabin crew personnel belonging to the Flight Attendants and Stewards Association of the Philippines (FASAP), to take effect on July 15, 1998.

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, thus requiring the services of only 654 cabin crew personnel. PAL admits that the retrenchment is wholly premised upon such reduction in fleet, and to "the strike staged by PAL pilots since this action also translated into a reduction of flights." PAL claims that the scheme resulted in "savings x x x amounting to approximately P24 million per month - savings that would greatly alleviate PAL's financial crisis."

Before PAL decided to retrenched its cabin crews on June 15, a series of consultations and meetings were conducted between FASAP and PAL to explored all possibilities of cushioning the impact of the impending reduction in cabin crew personnel. However, the parties failed to agree on how the scheme would be implemented.

Thus PAL unilaterally resolved to utilize the criteria set forth in Section 112 of the PAL-FASAP Collective Bargaining Agreement (CBA) in retrenching cabin crew personnel, that is, that retrenchment shall be based on the individual employee's efficiency rating and seniority.

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. Their respective performance during previous years with PAL was not considered. The factors taken into account on whether the cabin crew member would be retrenched, demoted or retained were: 1) the existence of excess sick leaves; 2) the crew member's being physically overweight; 3) seniority; and 4) previous suspensions or warnings imposed.

In the meantime, PAL began implementing its retrenchment program by initially terminating the services of 140 probationary cabin attendants. They were subsequently rehired in April of 1998. Moreover, their employment status was made permanent and regular.

What caused the Cessation of Operation?
In June of 1998, PAL was placed under corporate rehabilitation and a rehabilitation plan was approved by the Securities and Exchange Commission (SEC) on June 23, 1998 under SEC Case No. 06-98-6004.

On September 4, 1998, Lucio Tan made an offer to transfer shares of stock to its employees and three seats in its Board of Directors, on the condition that all the existing Collective Bargaining Agreements (CBAs) with its employees would be suspended for 10 years, but it was rejected by the employees. Philippine Airlines Employees Association (PALEA) voted 1,371 to 1,055 to reject the offer to swap a 10-year suspension of collective bargaining rights for a 20% stake in the airline.

On September 17, 1998, PAL informed its employees that it was shutting down its operations effective September 23, 1998 despite the previous SEC approval of its rehabilitation plan.

On September 23, 1998, PAL ceased its operations and sent notices of termination to all its employees.

On September 25, 1998, Philippine Airlines Employees Association (PALEA) board, sought the intervention of then President Joseph E. Estrada on its proposed counter-offer which includes a 10-year moratorium on strikes, waiver of some of the economic benefits in the existing CBA as well as a 20% stake at the airline. But Lucio Tan rejected this counter-offer as being unreasonable.

On September 27, 1998, the PALEA board amended the terms and wrote President Estrada for intercession on their proposal the following terms and conditions, subject to ratification by the general membership:

1. Each PAL employee shall be granted 60,000 shares of stock with a par value of P5.00, from Mr. Lucio Tan's shareholdings, with three (3) seats in the PAL Board and an additional seat from government shares as indicated by His Excellency;

2. Likewise, PALEA shall, as far as practicable, be granted adequate representation in committees or bodies which deal with matters affecting terms and conditions of employment;

3. To enhance and strengthen labor-management relations, the existing Labor-Management Coordinating Council shall be reorganized and revitalized, with adequate representation from both PAL management and PALEA;

4. To assure investors and creditors of industrial peace, PALEA agrees, subject to the ratification by the general membership, (to) the suspension of the PAL-PALEA CBA for a period of ten (10) years, provided the following safeguards are in place:

1. PAL shall continue recognizing PALEA as the duly certified bargaining agent of the regular rank-and-file ground employees of the Company;

2. The `union shop/maintenance of membership' provision under the PAL-PALEA CBA shall be respected.

3. No salary deduction, with full medical benefits.

5. PAL shall grant the benefits under the 26 July 1998 Memorandum of Agreement forged by and between PAL and PALEA, to those employees who may opt to retire or be separated from the company.

6. PALEA members who have been retrenched but have not received separation benefits shall be granted priority in the hiring/rehiring of employees.

7. In the absence of applicable Company rule or regulation, the provisions of the Labor Code shall apply.

In a referendum conducted on October 2, 1998, PALEA members ratified the above proposal and Tan agreed to a share swap deal.

On October 7, 1998, PAL resumed 12 domestic destinations and, two months after, 10 international flights were re-launched.

On November 1998, PAL began recalling to service those it had previously retrenched. To date, PAL claims to have recalled 820 of the retrenched cabin crew personnel. FASAP, however, claims that only 80 were recalled as of January 2001.

In December 1998, PAL submitted a "stand-alone" rehabilitation plan to the SEC by which it undertook a recovery on its own while keeping its options open for the entry of a strategic partner in the future. Accordingly, it submitted an amended rehabilitation plan to the SEC with a proposed revised business and financial restructuring plan, which required the infusion of US$200 million in new equity into the airline.

On May 17, 1999, the SEC approved the proposed "Amended and Restated Rehabilitation Plan" of PAL and appointed a permanent rehabilitation receiver for the latter.

On June 7, 1999, the SEC issued an Order confirming its approval of the "Amended and Restated Rehabilitation Plan" of PAL with the cash infusion of US$200 million made by Lucio Tan on June 4, 1999.

What does the law say?
Under the Labor Code, retrenchment or reduction of employees is authorized as 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, 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 least six (6) months shall be considered one (1) whole year.

According to the Supreme Court, the law recognizes the right of PAL to reduce its work force if the same is made necessary by compelling economic factors such as the Asian financial crisis which would endanger its existence or stability. Where appropriate and where conditions are in accord with law and jurisprudence, the Court has authorized valid reductions in the work force to forestall business losses.

While exercise of this right is a management prerogative, there must be faithful compliance with substantive and procedural requirements.

The first requirement is that the employer should 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.

For Business losses, Any claim of actual or potential losses must satisfy certain established standards, all of which must concur, before any reduction of personnel becomes legal. 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; (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.

It simply meant that not every loss incurred or expected to be incurred by a company will justify retrenchment. The fact that an employer may have sustained a net loss for the year 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.

Retrenchment should and only be a measure of last resort.The employer must also exhaust all other means to avoid further losses without retrenching its employees.

What went wrong?

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.

Records show that PAL was not even aware of its actual financial position when it implemented its retrenchment program. It initially decided to cut its fleet size to only 14 ("Plan 14") and based on said plan, it retrenched more than 1,400 of its cabin crew personnel. Later on, however, it abandoned its "Plan 14" and decided to retain 22 units of aircraft ("Plan 22"). Unfortunately, it has retrenched more than what was necessary.

The 2.3 Billion mistake?

To prove that PAL was financially distressed, it could have submitted its audited financial statements but it failed to present the same with the Labor Arbiter. The fact that PAL was placed under receivership did not excuse it from submitting to the labor authorities copies of its audited financial statements to prove the urgency, necessity and extent, of its retrenchment program. PAL should have presented its audited financial statements for the years immediately preceding and during which the retrenchment was carried out.

When PAL implemented Plan 22, instead of Plan 14, which was what it had originally made known to its employees, it could not be said that it acted in a manner compatible with good faith. It offered no satisfactory explanation why it abandoned Plan 14.

Instead, it justified its actions of subsequently recalling to duty retrenched employees by making it appear that it was a show of good faith; that it was due to its good corporate nature that the decision to consider recalling employees was made.

Why was PAL Guilty of Illegal Dismissal?
The truth, however, is that 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.

Will the airline make the same mistake again?
The 1998 retrenchment of PAL employees including the flight attendants was caused primarily by dwindling passenger traffic and currency devaluation brought by the Asian financial crisis. Yet the employees never understood the severity of financial trouble their employer was all because PAL cannot determined with certainty how much it lost in the first place.

In 2009 , PAL is again reducing headcount to cut costs. The airline is offering early retirement packages to its employees until end-October as it plans to reduce its 8,000-strong workforce by at much as 10% this year. Presently, manpower accounts for 18% of the company's total expenses.

"We are currently reviewing our entire organizational set-up. We want to make PAL lean and mean so it will be agile and flexible enough to adapt to the new economic climate," PAL Holdings President Jaime Bautista previously told reporters during its recent annual stockholders meeting.

In a notice sent to the PAL union early this month, Bautista said services to be initially outsourced on November include catering, passenger handling, ramp handling, and cargo-handling operations to prevent the company from incurring further losses.

"We now have lower capacity, so we need to reduce manpower," Bautista added with the hope that they comply all the conditions that the law require this time around.

But that would be another story should they err again.