Loss of Trust and Confidence: When Can an Employer Terminate a Managerial Employee in the Philippines

The Supreme Court recently clarified when an employer may validly terminate a managerial employee on the ground of loss of trust and confidence. In East Asia Utilities Corp. v. Arenas (G.R. No. 211443, December 1, 2021), the Court ruled that a shift superintendent who failed to immediately report a subordinate's theft of company property was validly dismissed, even though his delay caused no actual loss to the company. The case is a useful reminder that managerial employees are held to a higher standard of fidelity and accountability.

The Facts of the Case

Joselito Z. Arenas was a Shift Superintendent at East Asia Utilities Corp. (EAUC), a power distributor in Lapu-Lapu City. He was the second-highest ranking officer at the plant, next only to the Plant Manager. On August 3, 2010, Arenas caught a subordinate, Romeo Cabili, cutting a scrapped retainer ring using an electric cutting disc. Arenas ordered Cabili to return the item, but later saw Cabili welding the ring back together and painting over the cut so the damage would not show.

Arenas told his co-shifters about the incident but did not submit a written report. He explained that he had already reprimanded Cabili, that the item was scrap material, that he pitied Cabili who had many children, and that he feared retaliation. The company only learned of the incident through an anonymous text message to the Plant Manager. When asked, Arenas submitted a written explanation seven days after the incident.

The company formed an Employee Behavior Action Review Panel, which recommended Arenas's dismissal for: (1) failure to report or late reporting of the incident; (2) tolerating the wrongdoing; and (3) covering up the infraction. Arenas was dismissed on September 2, 2010.

The Legal Issue

The central question was whether Arenas, a managerial employee, was validly dismissed on the ground of loss of trust and confidence under Article 297(c) of the Labor Code.

The Ruling of the Supreme Court

The Court initially sided with Arenas, but on reconsideration, it reversed itself and upheld the dismissal as valid.

The Court reiterated the two requisites for a valid dismissal based on loss of trust and confidence: (1) the employee must hold a position of trust and confidence; and (2) there must be an act that justifies the loss of that trust.

The first requisite was easily satisfied. As Shift Superintendent, Arenas held a top-level managerial position and was the highest-ranking officer on duty during his shift. He was entrusted with safeguarding the company's assets.

The second requisite was also met. The Court emphasized that the degree of proof required differs between managerial and rank-and-file employees. For rank-and-file employees, the employer must prove the employee's involvement in the alleged events. For managerial employees, proof beyond reasonable doubt is not required — the mere existence of a basis for believing that the employee breached the employer's trust suffices.

Applying this standard, the Court found that Arenas's failure to immediately report the theft was an act inimical to the company's interests. His explanations were untenable: telling co-shifters about the incident was not enough because their knowledge was mere hearsay. He had no authority to impose corrective action on Cabili or to exonerate him. His conflicting reasons for the delay — shifting schedule, pity for Cabili, fear of retaliation — showed that he had no intention of reporting the incident until confronted.

The Court also noted that the matter would have gone unnoticed but for the anonymous text message. Given the trust reposed in him, Arenas was expected to be on top of any situation at the plant, including safeguarding company assets. His failure to do so justified the company's loss of confidence in him.

Practical Takeaways

• Managerial employees face a lower bar for dismissal. For loss of trust and confidence, employers need only show a reasonable basis for believing the manager breached their trust — not proof beyond reasonable doubt.
• Immediate written reporting is critical. A manager who witnesses wrongdoing by a subordinate should submit a written incident report promptly. Verbal discussions with colleagues are not a substitute.
• Managers cannot take corrective action on their own. Unless expressly authorized, a manager who disciplines a subordinate instead of reporting the matter may be seen as tolerating or covering up the offense.
• Conflicting explanations can be fatal. Giving shifting or inconsistent reasons for a delay in reporting may be treated as evidence of bad faith or concealment.
• No actual loss is required. The Court found that even though the company suffered no actual loss, the manager's conduct was enough to erode trust and justify termination.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.