Three test to determine employer-employee relationship

There are three test commonly used to determine the existence of

employer-employee relationship, viz.:

1. Four-fold test
2. Economic reality test
3. Two-tiered test (or Multi-factor test)

Four-fold test elements

The usual test used to determine the existence of employer-employer

relationship is the so-called four-fold test. In applying this test, the
following elements are generally considered:

1. Right to hire or to the selection and engagement of the employee.

2. Payment of wages and salaries for services.
3. Power of dismissal or the power to impose disciplinary actions.
4. Power to control the employee with respect to the means and
methods by which the work is to be accomplished. This is known
as the right-of-control test.

Right of control test is considered as the most important element in

determining the existence of employment relation.
Of the above-mentioned elements, the right of control test is
considered as the most important element in determining the existence
of employment relation. The control test initially found application in
the case of Viaña vs. Al-Lagadan and Piga, where the court held that
there is an employer-employee relationship when the person for whom
the services are performed reserves the right to control not only the
end achieved but also the manner and means used to achieve that end.

Control test thus refers to the employer’s power to control the

employee’s conduct not only as to the result of the work to be done but
also with respect to the means and methods by which the work is to be
accomplished.

In applying this test, it is the existence of the right, and not the actual
exercise thereof, that is important.

Economic reality test

In view of today’s highly specialized workforce, the court are often

faced with situations where the right-of-control-test alone can no
longer adequately determine the existence of employer-employer
relationship. Subsequently, another test has been devised to fill the
gap, known as the economic reality test.

In Sevilla v. Court of Appeals, the Court observed the need to consider

the existing economic conditions prevailing between the parties, in
addition to the standard of right-of-control, to give a clearer picture in
determining the existence of an employer-employee relationship based
on an analysis of the totality of economic circumstances of the worker.

Economic realities of the employment relations help provide a

comprehensive analysis of the true classification of the individual,
whether as employee, independent contractor, corporate officer or
some other capacity.

Under economic reality test, the benchmark in analyzing whether

employment relation exists between the parties is the economic
dependence of the worker on his employer. That is, whether the
worker is dependent on the alleged employer for his continued
employment in the latter’s line of business.

Applying this test, if the putative employee is economically dependent

on putative employer for his continued employment in the latter’s line
of business, there is employer-employee relationship between them.
Otherwise, there is none.
Two-tiered test (or Multi-factor test)

The economic reality test is not meant to replace the right of control
test. Rather, these two test are often use in conjunction with each
other to determine the existence of employment relation between the
parties. This is known as the two-tiered test, or multi-factor test. This
two-tiered test involves the following tests:

 The putative employer’s power to control the employee with respect

to the means and methods by which the work is to be accomplished;
and
 The underlying economic realities of the activity or relationship.

References

1. Francisco vs. NLRC, G.R. No. 170087 August 31, 2006

2. Religious of the Virgin Mary vs. NLRC, G.R. No. 103606, October
13, 1999
3. Viaña vs. Al-Lagadan and Piga, 99 Phil. 408 (1956).
4. Sevilla v. Court of Appeals, G.R. Nos. L-41182-3, April 15, 1988.

Last Edited: Sunday, March 20, 2011

5. Francisco vs. NLRC, G.R. No. 170087 August 31, 2006

The core issues to be resolved in this case are (1) whether there
was an employer-employee relationship between petitioner and private
respondent Kasei Corporation; and if in the affirmative, (2) whether
petitioner was illegally dismissed.

Considering the conflicting findings by the Labor Arbiter and the

National Labor Relations Commission on one hand, and the Court of
Appeals on the other, there is a need to reexamine the records to
determine which of the propositions espoused by the contending
parties is supported by substantial evidence.1[17] 

We held in Sevilla v. Court of Appeals2[18] that in this jurisdiction,

there has been no uniform test to determine the existence of an
employer-employee relation. Generally, courts have relied on the so-
called right of control test where the person for whom the services are
performed reserves a right to control not only the end to be achieved
but also the means to be used in reaching such end. In addition to the
standard of right-of-control, the existing economic conditions prevailing
between the parties, like the inclusion of the employee in the payrolls,
can help in determining the existence of an employer-employee
relationship.

However, in certain cases the control test is not sufficient to give a

complete picture of the relationship between the parties, owing to the
complexity of such a relationship where several positions have been
held by the worker. There are instances when, aside from the
employers power to control the employee with respect to the means
and methods by which the work is to be accomplished, economic
realities of the employment relations help provide a comprehensive
analysis of the true classification of the individual, whether as
employee, independent contractor, corporate officer or some other
capacity.

The better approach would therefore be to adopt a two-tiered

test involving: (1) the putative employers power to control the
employee with respect to the means and methods by which the work is
to be accomplished; and (2) the underlying economic realities of the
activity or relationship.

 
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 This two-tiered test would provide us with a framework of
analysis, which would take into consideration the totality of
circumstances surrounding the true nature of the relationship between
the parties. This is especially appropriate in this case where there is no
written agreement or terms of reference to base the relationship on;
and due to the complexity of the relationship based on the various
positions and responsibilities given to the worker over the period of the
latters employment. 

The control test initially found application in the case of Viaa v. Al-
Lagadan and Piga,3[19] 99 Phil. 408 (1956). and lately in Leonardo v. Court
of Appeals,4[20] G.R. No. 152459, June 15, 2006. where we held that there is an
employer-employee relationship when the person for whom the
services are performed reserves the right to control not only the end
achieved but also the manner and means used to achieve that end.
 
In Sevilla v. Court of Appeals,5[21] we observed the need to
consider the existing economic conditions prevailing between the
parties, in addition to the standard of right-of-control like the inclusion
of the employee in the payrolls, to give a clearer picture in determining
the existence of an employer-employee relationship based on an
analysis of the totality of economic circumstances of the worker. 

Thus, the determination of the relationship between employer

and employee depends upon the circumstances of the whole economic
activity,6[22] such as: (1) the extent to which the services performed
are an integral part of the employers business; (2) the extent of the
workers investment in equipment and facilities; (3) the nature and
degree of control exercised by the employer; (4) the workers
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opportunity for profit and loss; (5) the amount of initiative, skill,
judgment or foresight required for the success of the claimed
independent enterprise; (6) the permanency and duration of the
relationship between the worker and the employer; and (7) the degree
of dependency of the worker upon the employer for his continued
employment in that line of business.7[23]

The proper standard of economic dependence is whether the

worker is dependent on the alleged employer for his continued
employment in that line of business.8[24] In the United States, the
touchstone of economic reality in analyzing possible employment
relationships for purposes of the Federal Labor Standards Act is
dependency.9[25] By analogy, the benchmark of economic reality in
analyzing possible employment relationships for purposes of the Labor
Code ought to be the economic dependence of the worker on his
employer. 

By applying the control test, there is no doubt that petitioner is an

employee of Kasei Corporation because she was under the direct
control and supervision of Seiji Kamura, the corporations Technical
Consultant. She reported for work regularly and served in various
capacities as Accountant, Liaison Officer, Technical Consultant, Acting
Manager and Corporate Secretary, with substantially the same job
functions, that is, rendering accounting and tax services to the company
and performing functions necessary and desirable for the proper
operation of the corporation such as securing business permits and
other licenses over an indefinite period of engagement.

Under the broader economic reality test, the petitioner can

likewise be said to be an employee of respondent corporation because

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she had served the company for six years before her dismissal,
receiving check vouchers indicating her salaries/wages, benefits, 13 th
month pay, bonuses and allowances, as well as deductions and Social
Security contributions from August 1, 1999 to December 18, 2000. 10[26]
When petitioner was designated General Manager, respondent
corporation made a report to the SSS signed by Irene Ballesteros.
Petitioners membership in the SSS as manifested by a copy of the SSS
specimen signature card which was signed by the President of Kasei
Corporation and the inclusion of her name in the on-line inquiry system
of the SSS evinces the existence of an employer-employee relationship
between petitioner and respondent corporation.11[27]

It is therefore apparent that petitioner is economically dependent

on respondent corporation for her continued employment in the latters
line of business.

In Domasig v. National Labor Relations Commission,12[28] we held

that in a business establishment, an identification card is provided not
only as a security measure but mainly to identify the holder thereof as a
bona fide employee of the firm that issues it. Together with the cash
vouchers covering petitioners salaries for the months stated therein,
these matters constitute substantial evidence adequate to support a
conclusion that petitioner was an employee of private respondent.

We likewise ruled in Flores v. Nuestro13[29] that a corporation

who registers its workers with the SSS is proof that the latter were the

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formers employees. The coverage of Social Security Law is predicated
on the existence of an employer-employee relationship.

Furthermore, the affidavit of Seiji Kamura dated December 5,

2001 has clearly established that petitioner never acted as Corporate
Secretary and that her designation as such was only for convenience.
The actual nature of petitioners job was as Kamuras direct assistant
with the duty of acting as Liaison Officer in representing the company
to secure construction permits, license to operate and other
requirements imposed by government agencies. Petitioner was never
entrusted with corporate documents of the company, nor required to
attend the meeting of the corporation. She was never privy to the
preparation of any document for the corporation, although once in a
while she was required to sign prepared documentation for the
company.14[30]

The second affidavit of Kamura dated March 7, 2002 which

repudiated the December 5, 2001 affidavit has been allegedly
withdrawn by Kamura himself from the records of the case. 15[31]
Regardless of this fact, we are convinced that the allegations in the first
affidavit are sufficient to establish that petitioner is an employee of
Kasei Corporation.

Granting arguendo, that the second affidavit validly repudiated

the first one, courts do not generally look with favor on any retraction
or recanted testimony, for it could have been secured by considerations
other than to tell the truth and would make solemn trials a mockery
and place the investigation of the truth at the mercy of unscrupulous
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witnesses.16[32] A recantation does not necessarily cancel an earlier
declaration, but like any other testimony the same is subject to the test
of credibility and should be received with caution.17[33]

Based on the foregoing, there can be no other conclusion that

petitioner is an employee of respondent Kasei Corporation. She was
selected and engaged by the company for compensation, and is
economically dependent upon respondent for her continued
employment in that line of business. Her main job function involved
accounting and tax services rendered to respondent corporation on a
regular basis over an indefinite period of engagement. Respondent
corporation hired and engaged petitioner for compensation, with the
power to dismiss her for cause. More importantly, respondent
corporation had the power to control petitioner with the means and
methods by which the work is to be accomplished.  

The corporation constructively dismissed petitioner when it

reduced her salary by P2,500 a month from January to September
2001. This amounts to an illegal termination of employment, where the
petitioner is entitled to full backwages. Since the position of petitioner
as accountant is one of trust and confidence, and under the principle of
strained relations, petitioner is further entitled to separation pay, in lieu
of reinstatement.18[34]

A diminution of pay is prejudicial to the employee and amounts to

constructive dismissal. Constructive dismissal is an involuntary
resignation resulting in cessation of work resorted to when continued
employment becomes impossible, unreasonable or unlikely; when

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there is a demotion in rank or a diminution in pay; or when a clear
discrimination, insensibility or disdain by an employer becomes
unbearable to an employee.19[35] In Globe Telecom, Inc. v. Florendo-
Flores,20[36] we ruled that where an employee ceases to work due to a
demotion of rank or a diminution of pay, an unreasonable situation
arises which creates an adverse working environment rendering it
impossible for such employee to continue working for her employer.
Hence, her severance from the company was not of her own making
and therefore amounted to an illegal termination of employment.

In affording full protection to labor, this Court must ensure equal

work opportunities regardless of sex, race or creed. Even as we, in
every case, attempt to carefully balance the fragile relationship
between employees and employers, we are mindful of the fact that the
policy of the law is to apply the Labor Code to a greater number of
employees. This would enable employees to avail of the benefits
accorded to them by law, in line with the constitutional mandate giving
maximum aid and protection to labor, promoting their welfare and
reaffirming it as a primary social economic force in furtherance of social
justice and national development.

WHEREFORE, the petition is GRANTED. The Decision and

Resolution of the Court of Appeals dated October 29, 2004 and October
7, 2005, respectively, in CA-G.R. SP No. 78515 are ANNULLED and SET
ASIDE. The Decision of the National Labor Relations Commission dated
April 15, 2003 in NLRC NCR CA No. 032766-02, is REINSTATED. The case
is REMANDED to the Labor Arbiter for the recomputation of petitioner
Angelina Franciscos full backwages from the time she was illegally
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terminated until the date of finality of this decision, and separation pay
representing one-half month pay for every year of service, where a
fraction of at least six months shall be considered as one whole year.

SO ORDERED.

 Hence, based on the finding above and the doctrine that if doubt exists
between the evidence presented by the employer and the employee, the scales of
justice must be tilted in favor of the latter, 21[24] the Court of Appeals reversed the
resolution of the NLRC and reinstated the decision of the Labor Arbiter with
modification. Even if the Court of Appeals was remiss in not stating it in definite
terms, it is implied that the Court of Appeals found that the NLRC gravely abused
its discretion in finding that no employer-employee relationship existed between
petitioner and respondent based on the evidence on record

ESAR C. LIRIO, doing business G.R. No. 169757

under the name and style of
CELKOR AD SONICMIX,  

Petitioner, Present:

   

   
VELASCO, JR., J., Chairperson,
  PERALTA,
ABAD,
  PEREZ,* and
MENDOZA, JJ.
- versus -  
  Promulgated:
   
 
21

* and
   November 23, 2011

WILMER D. GENOVIA,

Respondent.

x----------------------------------------------------------------------------------------x

We now proceed to the main issue raised before this Court: Whether or not
the decision of the Court of Appeals is in accordance with law, or whether or not
the Court of Appeals erred in reversing and setting aside the decision of the NLRC,
and reinstating the decision of the Labor Arbiter with modification.

In petitions for review, only errors of law are generally reviewed by this
Court. This rule, however, is not ironclad.22[25] Where the issue is shrouded by a
conflict of factual perceptions by the lower court or the lower administrative body,
in this case, the NLRC, this Court is constrained to review the factual findings of
the Court of Appeals.23[26]

Before a case for illegal dismissal can prosper, it must first be established
that an employer-employee relationship existed between petitioner and
respondent.24[27]

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The elements to determine the existence of an employment relationship are:

(a) the selection and engagement of the employee; (b) the payment of wages; (c)
the power of dismissal; and (d) the employers power to control the employees
conduct. The most important element is the employers control of the employees
conduct, not only as to the result of the work to be done, but also as to the means
and methods to accomplish it.25[28]

It is settled that no particular form of evidence is required to

prove the existence of an employer-employee relationship. 26[29] Any
competent and relevant evidence to prove the relationship may be
admitted.27[30]
 

In this case, the documentary evidence presented by respondent to prove

that he was an employee of petitioner are as follows: (a) a document denominated
as "payroll" (dated July 31, 2001 to March 15, 2002) certified correct by
petitioner,28[31] which showed that respondent received a monthly salary of
P7,000.00 (P3,500.00 every 15th of the month and another P3,500.00 every 30th of
the month) with the corresponding deductions due to absences incurred by

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respondent; and (2) copies of petty cash vouchers,29[32] showing the amounts he
received and signed for in the payrolls.  

The said documents showed that petitioner hired respondent as

an employee and he was paid monthly wages of P7,000.00. Petitioner
wielded the power to dismiss as respondent stated that he was verbally
dismissed by petitioner, and respondent, thereafter, filed an action for
illegal dismissal against petitioner. The power of control refers merely
to the existence of the power.30[33] It is not essential for the employer
to actually supervise the performance of duties of the employee, as it is
sufficient that the former has a right to wield the power. 31[34]
Nevertheless, petitioner stated in his Position Paper that it was agreed
that he would help and teach respondent how to use the studio
equipment. In such case, petitioner certainly had the power to check on
the progress and work of respondent.
 

On the other hand, petitioner failed to prove that his relationship with
respondent was one of partnership. Such claim was not supported by any written
agreement. The Court notes that in the payroll dated July 31, 2001 to March 15,
2002,32[35] there were deductions from the wages of respondent for his absence
from work, which negates petitioners claim that the wages paid were advances for
respondents work in the partnership. In Nicario v. National Labor Relations
Commission,33[36] the Court held:

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  if doubts exist between the evidence
presented by the employer and the employee
It is a well-settled doctrine, that if doubts exist between the
evidence presented by the employer and the employee, the scales of
justice must be tilted in favor of the latter. It is a time-honored rule that
in controversies between a laborer and his master, doubts reasonably
arising from the evidence, or in the interpretation of agreements and
writing should be resolved in the formers favor. The policy is to extend
the doctrine to a greater number of employees who can avail of the
benefits under the law, which is in consonance with the avowed policy
of the State to give maximum aid and protection of labor. This rule
should be applied in the case at bar, especially since the evidence
presented by the private respondent company is not convincing. x x
x34[37] Nicario v. National Labor Relations Commission, [G.R. No. 125340. September
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17, 1998] [36] the Court held:

 
 

Based on the foregoing, the Court agrees with the Court of Appeals that the
evidence presented by the parties showed that an employer-employee relationship
existed between petitioner and respondent.

In termination cases, the burden is upon the employer to show by substantial

evidence that the termination was for lawful cause and validly made. 36[38] Article
277 (b) of the Labor Code37[39] puts the burden of proving that the dismissal of an

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employee was for a valid or authorized cause on the employer, without distinction
whether the employer admits or does not admit the dismissal. 38[40] For an
employees dismissal to be valid, (a) the dismissal must be for a valid cause, and (b)
the employee must be afforded due process.39[41] Procedural due process requires
the employer to furnish an employee with two written notices before the latter is
dismissed: (1) the notice to apprise the employee of the particular acts or omissions
for which his dismissal is sought, which is the equivalent of a charge; and (2) the
notice informing the employee of his dismissal, to be issued after the employee has
been given reasonable opportunity to answer and to be heard on his defense. 40[42]
Petitioner failed to comply with these legal requirements; hence, the Court of
Appeals correctly affirmed the Labor Arbiters finding that respondent was illegally
dismissed, and entitled to the payment of backwages, and separation pay in lieu of
reinstatement.

WHEREFORE, the petition is DENIED. The Decision of the Court of

Appeals in CA-G.R. SP No. 88899, dated August 4, 2005, and its Resolution dated
September 21, 2005, are AFFIRMED.

No costs.
 

 
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CONSUELO YNARES-SANTIAGO
Associate Justice
 

WE CONCUR:

ARTEMIO V. PANGANIBAN

Chief Justice

Chairperson