Handouts for Adamson Labor Standards Class Introduction and Employer-Employee Relationship Atty. Ada D.

Abad

INTRODUCTION, EMPLOYER-EMPLOYEE RELATIONSHIP, AND INDEPENDENT CONTRACTING ARRANGEMENTS

. ATTY. ADA D. ABAD
Managing Associate, Antonio H. Abad & Associates Law Offices Former Vice-Dean, Lyceum College of Law

A. INTRODUCTION: BASIC ASSUMPTIONS IN LABOR RELATIONS LAW

1. Labor relations law has, for the most part, a HUMAN ELEMENT which is its basic element. It presupposes a relationship between the capitalist management and its workers. 1.1. Labors interest: While labor recognizes the right of management to its profits, it contends that since management cannot earn profit without labors efforts, they should likewise share in the profits. 1.2. Managements interest: The employer is allowed to control the variables in business operations, to enhance the chances of making a profit otherwise termed as the elbow room in the quest for profits.1 The Supreme Court, in a multitude of cases, has thus held that management is free to regulate, according to its own discretion and judgment, all aspects of employment, including hiring, work assignments, working methods, time, place and manner of work, processes to be followed, supervision of workers, working regulations, transfer of employees, work supervision, layoff of workers and discipline, dismissal, and recall of workers. 2 2. The law recognizes the INHERENT INEQUALITY of the status between management and worker,. 3. Because of this inherent inequality, the State, in the exercise of its police power and in consonance with the concept of social justice, INTERVENES in the relationship between management and labor by: (a) the promulgation of laws relative to labor standards and labor relations; and (b) balancing the conflicting yet interrelated and closely intertwined interests of both management and labor.3 3.1 Burden of proof is always upon employer to show validity of its exercise of management prerogatives, especially as regards termination of employment. 3.2 Interpretation in favor of labor. Where the contract of employment, being a contract of adhesion, is ambiguous, any ambiguity therein should be construed strictly against the party who prepared it. Price vs. Innodata Phils.,
567 SCRA 122 [2008]

3.3 But management prerogatives are likewise to be equally protected when circumstances show the validity of the exercise.

1 2

Chu vs. NLRC, 232 SCRA 764 Manila Jockey Club Employees Labor Union-PGTWO vs. Manila Jockey Club, G.R. No. 1667760, 07 March 2007; See also: Rural Bank of Cantilan vs. Julve, G.R. No. 169750, 27 February 2007). 3 Cebu Institute of Technology vs. Ople, 156 SCRA 620 (1987). Ponente: J. Irene Cortes. 1

Handouts for Adamson Labor Standards Class Introduction and Employer-Employee Relationship Atty. Ada D. Abad

SMART Communications vs. Astorga, G.R. 148132, 28 Jan 2008. Indeed, out of our concern for those lesser circumstanced in life, this Court has inclined towards the worker and upheld his cause in most of his conflicts with his employer. This favored treatment is consonant with the social justice policy of the Constitution. But while tilting the scales of justice in favor of workers, the fundamental law also guarantees the right of the employer to reasonable returns for his investment. In this light, we must acknowledge the prerogative of the employer to adopt such measures as will promote greater efficiency, reduce overhead costs and enhance prospects of economic gains, albeit always within the framework of existing laws. Sorreda vs. Cambridge Electronics Corporation, G.R. No. 172927, 11 February 2010. -- While the employee has security of tenure, management has the right to terminate an employee for just or authorized cause. Hence, the Supreme Court had even ruled that a contract of perpetual employment is contrary to public policy and good customs, insofar as it unjustly forbids an employer from terminating the services of an employee despite the existence of just or authorized cause, or the attainment of the mandatory retirement age.

MANAGEMENT
Capital Profit Management prerogatives - hiring, employee classification, working methods, regulations

VS.
Work

LABOR

Equitable share in the profits Workers rights - minimum standards - constitutional rights security of tenure, unionize and to collective bargaining, strike

STATE
Police power/social justice Interpretation in favor of labor

B. EMPLOYER-EMPLOYEE RELATIONSHIP (Azucena Volume I, pp. 16-27; Fernandez, pp. 61-97)

1. Employer defined: Art. 212 (e), LC - includes any person acting in the interest of an employer, directly or indirectly. The term shall not include any labor organization or any of its officers or agents, except when acting as an employer. - one for whom employees work for in consideration of wages or salaries. An employer may be a natural or juridical person.

2. Employee defined: Art. 212 (f), LC

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Handouts for Adamson Labor Standards Class Introduction and Employer-Employee Relationship Atty. Ada D. Abad

- includes any person in the employ of an employer. The term shall not be limited to the employees of a particular employer, unless the Codee explicitly states. It shall include any individual whose work has ceased as a result of or in connection with any current labor dispute, or because of any unfair labor practice if he has not obtained any other substantially equivalent and regular employment. 3. Employer relationship as matrix 3.1 Concept of employer-employee relationship The employer-employee relationship is contractual in character. It arises from the agreement of the parties, e.g., for one to render services to another in exchange for remuneration or compensation. However, such relationship is so impressed with the public interest that labor contracts must yield to the common good (Civil Code Art. 1700), in cognizance of the inherent inequality of the status between labor and management. Thus, employment contracts are subject to laws on minimum standards of wages, hours of work, etc., right to unionization, collective bargaining, strikes, picketing and other collective actions. Labor relations laws generally require for their application or operation to a particular situation the existence of an employment relationship. Said relationship may be actual or presumptive, or proximate or otherwise. The existence of the employer-employee relationship is a condition sine qua non for the application of labor laws. Thus, where there is no employer-employee relationship, there can be no obligation on the part of the employer to collectively bargain; nor of the employee to enforce his rights under the Labor Code. In short, the Labor Code will not apply, and labor courts will not have jurisdiction. The determination of rights and obligations in the relationship which is not one of employer-employee, will be governed by civil laws, and which ordinary courts of justice would have jurisdiction. 3.2 "Reasonable causal connection rule." Under this rule, if there is a reasonable causal connection between the claim asserted and the employer-employee relations, then the case is within the jurisdiction of our labor courts.

.
SMART Communications vs. Astorga, G.R. 148132, 28 Jan 2008. -- An employers demand for the payment of the market value of the car, or in the alternative, the surrender of a car, is not a labor dispute but a civil one. Hence, this demand properly falls within the jurisdiction of the civil courts. No reasonable causal connection between the claim to the issue of an employer-employee relationship. 3.2 TESTS TO DETERMINE THE EXISTENCE OF EMPLOYER - EMPLOYEE RELATIONSHIP
(MNEMONIC: SOUTH WEST DISASTER CONTROL)

In considering the applicability of labor laws to a particular case, one has to determine, at the very outset, whether the facts of the case would give rise to an employer-employee relationship. This calls for the application of several tests:

a.

SELECTION and hiring

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Handouts for Adamson Labor Standards Class Introduction and Employer-Employee Relationship Atty. Ada D. Abad

b. c. d.

Payment of WAGES Power of DISMISSAL CONTROL TEST

Of these four tests, the most important factor to consider would be the CONTROL TEST. The control test has been simply defined as the power to control the employees conduct. More specifically, an employer-employee relationship is deemed to exist 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 achieving such end. (LVN Pictures vs. Phil. Musicians Guild, 1 SCRA 132). Thus, if a worker is hired by a person, and such person pays him wages, and has the right to fire him, and the power to control the result of the work, as well as the manner and method by which the work is to be done, then in all probability, there exists an employer-employee relationship. In such instance, the Labor Code will apply and the labor courts have jurisdiction over the case.

C. WHO ARE NOT YOUR EMPLOYEES

THE CONCEPTS OF VALID JOB CONTRACTING VS. LABOR-ONLY CONTRACTING 1. General Rule: Employees of an independent contractor are not your employees. (Example: Security guards of a security agency)

2.

Elements: Article 106, Labor Code; Impl Rules and Reg, S8R8B3. There is a job-contracting permissible by law where the contractor/agency carries on an INDEPENDENT business and undertakes the contract work on his ACCOUNT, under his own RESPONSIBILITY, using his own MANNER AND METHODS, FREE from the control of the principal in all matters connected with the performance of work excepting the results thereof. He has his own CAPITAL in the form of TOOLS, EQUIPMENT, MACHINERY, WORK PREMISES, and that the agreement between the contractor and principal assures the formers employees of ALL RIGHTS AND BENEFITS under the law.

3. Effect:

If labor only contracting: illegal. The employer is deemed the DIRECT employer and is made liable to the employees of the contractor for a more comprehensive purpose. The labor-only contractor is deemed merely an agent.

If job-contracting: legal. The employer is considered an INDIRECT EMPLOYER, and is made liable to the employees of the contractor for a more limited purposes, viz.: payment of unpaid wages and other monetary claims.

4. SALIENT FEATURES OF DEPARTMENT ORDER NO. 18-02, SERIES 2002.

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Handouts for Adamson Labor Standards Class Introduction and Employer-Employee Relationship Atty. Ada D. Abad

MANDATORY REGISTRATION OF INDEPENDENT CONTRACTORS (D.O. 18, S11) - Establishment of a registration system to govern contracting arrangements. Registration of the contractors and sub-contractors shall be necessary for purposes of establishing an effective labor market information and monitoring. Failure to register shall give rise to a presumption that contractor is engaged in LABOR ONLY CONTRACTING

REQUIREMENTS FOR REGISTRATION (per DOLE Application Form) Name and business address of contractor Names and addresses of the officers of the contractor Nature of the contractors business, and the industry where the contractor seeks to operate Number of regular workers; list of clients, if any; number of personnel assigned to each client and the services provided to the client Description of the phases of the contract, and number of employees covered in each phase, when appropriate Copy of audited financial statements (companies/partnership/cooperative or union), or ITR (sole proprietorship) Certified copy of the certificate of registration of firm or business name from the Securities and Exchange Commission, Department of Trade and Industry, Cooperative Development Authority or from the DOLE Certified copy of the license or business permit issued by the local government unit or units where the contractor or subcontractor operates. The application shall be verified, and shall contain an undertaking that the contractor or sub-contractor shall abide by all applicable labor laws and regulations OTHER OBLIGATIONS OF INDEPENDENT CONTRACTOR: Duty to produce copy of the contract between the principal and the contractor, if required during regular inspection; also, the contractor of employment of the contractual employee Annual reporting of the registered contractors not later than 15th of January of every year. Report shall include: (a) list of contracts entered with principal during the subject reporting period; (b) number of workers covered by each contract with principal; and sworn undertaking that the mandatory government-imposed benefits (SSS, HDMF, Philhealth, ECC and withholding taxes) due the contractual employees have been made during the subject reporting period. EFFECT OF NON-COMPLIANCE DELISTING OF CONTRACTORS 5. SYNTHESIS AND CLARIFICATION PREVIOUS DOCTRINES: OF DOLE CERTIFICATION AND

5.1 Contracting out is valid as an exercise of management prerogative for as long as it complies with the limits and standards provided by the Labor Code. -- Essentially, there must be proof of capitalization, and of control over his employees on the part of the independent contractor. In the case of COCA-COLA BOTTLERS VS. DELA CRUZ ET AL, G.R. No. 184977, 07 December 2009 (BRION, J), the Supreme Court said: Contracting and sub-contracting are "hot" labor issues for two reasons. The first is that job contracting and labor-only contracting are technical Labor Code concepts that are easily misunderstood. For one, there is a lot of lay misunderstanding of what kind of contracting the Labor Code prohibits or allows. The second, echoing the cry from the labor sector, is
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Handouts for Adamson Labor Standards Class Introduction and Employer-Employee Relationship Atty. Ada D. Abad

that the Labor Code provisions on contracting are blatantly and pervasively violated, effectively defeating workers right to security of tenure. This Court, through its decisions, can directly help address the problem of misunderstanding. The second problem, however, largely relates to implementation issues that are outside the Courts legitimate scope of activities; the Court can only passively address the problem through the cases that are brought before us. Either way, however, the need is for clear decisions that the workers, most especially, will easily understand and appreciate. We resolve the present case with these thoughts in mind. The law allows contracting and subcontracting involving services but closely regulates these activities for the protection of workers. Thus, an employer can contract out part of its operations, provided it complies with the limits and standards provided in the Code and in its implementing rules. xxx In strictly laymans terms, a manufacturer can sell its products on its own, or allow contractors, independently operating on their own, to sell and distribute these products in a manner that does not violate the regulations. From the terms of the above-quoted D.O. 18-02, the legitimate job contractor must have the capitalization and equipment to undertake the sale and distribution of the manufacturers products, and must do it on its own using its own means and selling methods.xxx Temic Automotive Phils. Vs. Temic Automotive Phils Inc. Employees Union FFW, G.R. No. 186965, 23 December 2009. Company is engaged in the manufacture of electronic brake systems and comfort body electronics for automotive vehicles. Union members are regular rank-and-file employees working in warehouse receiving section, raw materials, and finished goods section. Management however contracts out forwarding, packing, loading of raw materials and finished goods to independent contractors. Issue raised on validity of contracting out of said jobs, to the detriment of the regular workers. The Supreme Court ruled in this manner: As forwarders they act as travel agents for cargo. They specialize in arranging transport and completing required shipping documentation of respondent's company's finished products. They provide custom crating and packing designed for specific needs of respondent company. These freight forwarders are actually acting as agents for the company in moving cargo to an overseas destination. These agents are familiar with the import rules and regulations, the methods of shipping, and the documents related to foreign trade. They recommend the packing methods that will protect the merchandise during transit. Freight forwarders can also reserve for the company the necessary space on a vessel, aircraft, train or truck. Significantly, both the voluntary arbitrator and the CA recognized that the petitioner was within its right in entering the forwarding agreements with the forwarders as an exercise of its management prerogative. The petitioner's declared objective for the arrangement is to achieve greater economy and efficiency in its operations a universally accepted business objective and standard that the union has never questioned. In Meralco v. Quisumbing,25 we joined this universal recognition of outsourcing as a legitimate activity when we held that a company can determine in its best judgment whether it should contract out a part of its work for as long as the employer is motivated by good faith; the contracting is not for purposes of circumventing the law; and does not involve or be the result of malicious or arbitrary action.
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Handouts for Adamson Labor Standards Class Introduction and Employer-Employee Relationship Atty. Ada D. Abad

While the voluntary arbitrator and the CA saw nothing irregular in the contracting out as a whole, they held otherwise for the ancillary or support services involving clerical work, materials handling and documentation. They held these to be the same as the workplace activities undertaken by regular company rank-and-file employees covered by the bargaining unit who work under company control; hence, they concluded that the forwarders employees should be considered as regular company employees. Our own examination of the agreement shows that the forwarding arrangement complies with the requirements of Article 10626 of the Labor Code and its implementing rules. 27 To reiterate, no evidence or argument questions the companys basic objective of achieving "greater economy and efficiency of operations." This, to our mind, goes a long way to negate the presence of bad faith. The forwarding arrangement has been in place since 1998 and no evidence has been presented showing that any regular employee has been dismissed or displaced by the forwarders employees since then. No evidence likewise stands before us showing that the outsourcing has resulted in a reduction of work hours or the splitting of the bargaining unit effects that under the implementing rules of Article 106 of the Labor Code can make a contracting arrangement illegal. The other requirements of Article 106, on the other hand, are simply not material to the present petition. Thus, on the whole, we see no evidence or argument effectively showing that the outsourcing of the forwarding activities violate our labor laws, regulations, and the parties CBA, specifically that it interfered with, restrained or coerced employees in the exercise of their rights to self-organization as provided in Section 6, par. (f) of the implementing rules.

5.2

The law and its implementing rules recognize that management may rightfully exercise its prerogatives in determining what activities may be contracted out, regardless of whether such activity is peripheral or core in nature. (Alviado et. al. vs. Procter & Gamble, and Promm Gemm, G.R. No. 160506, 09 March 2010). In the said case of Alviado vs. Proctor & Gamble (supra.), the Supreme Court noted that the company Procter & Gamble was principally engaged in the manufacture and production of different consumer and health products, which it sells on a wholesale basis to various supermarkets and distributors. To enhance consumer awareness and acceptance of the products, P&G entered into contracts with Promm-Gem and SAPS for the promotion and merchandising of its products. In denying the claims by the complainants that they were employees of Procter & Gamble, and not of the job contractors, the Supreme Court ruled: Clearly, the law and its implementing rules allow contracting arrangements for the performance of specific jobs, works or services. Indeed, it is management prerogative to farm out any of its activities, regardless of whether such activity is peripheral or core in nature. However, in order for such outsourcing to be valid, it must be made to an independent contractor because the current labor rules expressly prohibit labor-only contracting. Xxx.
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Handouts for Adamson Labor Standards Class Introduction and Employer-Employee Relationship Atty. Ada D. Abad

In the instant case, the financial statements of PrommGem show that it has authorized capital stock of P1 million and a paid-in capital, or capital available for operations, of P500,000.00 as of 1990.27 It also has long term assets worth P432,895.28 and current assets of P719,042.32. Promm-Gem has also proven that it maintained its own warehouse and office space with a floor area of 870 square meters. 28 It also had under its name three registered vehicles which were used for its promotional/merchandising business.29Promm-Gem also has other clients30 aside from P&G.31 Under the circumstances, we find that Promm-Gem has substantial investment which relates to the work to be performed. These factors negate the existence of the element specified in Section 5(i) of DOLE Department Order No. 18-02. The records also show that Promm-Gem supplied its complainant-workers with the relevant materials, such as markers, tapes, liners and cutters, necessary for them to perform their work. Promm-Gem also issued uniforms to them. It is also relevant to mention that Promm-Gem already considered the complainants working under it as its regular, not merely contractual or project, employees. This circumstance negates the existence of element (ii) as stated in Section 5 of DOLE Department Order No. 18-02, which speaks of contractual employees. This, furthermore, negates on the part of Promm-Gem bad faith and intent to circumvent labor laws which factors have often been tipping points that lead the Court to strike down the employment practice or agreement concerned as contrary to public policy, morals, good customs or public order. (Alviado et. al. vs. Procter & Gamble, and Promm Gemm, G.R. No. 160506, 09 March 2010; citations omitted. Emphasis supplied.) It was further reiterated by the Supreme Court in the same case of Alviado that where labor-only contracting exists, the Labor Code itself establishes an employer-employee relationship between the employer and the employees of the labor-only contractor." The statute establishes this relationship for a comprehensive purpose: to prevent a circumvention of labor laws. The contractor is considered merely an agent of the principal employer and the latter is responsible to the employees of the labor-only contractor as if such employees had been directly employed by the principal employer. 5.3 Reiteration of elements of labor only contracting; PHILIPPINE AIRLINES VS. LIGAN, 548 SCRA 181 (2008). Synergy is a labor-only contractor. For labor-only to exist, Sec. 5 OF Department Order No. 18-02 requires any two of the elements to be present, viz.: (a) The contractor has NO SUFFICIENT CAPITAL, and the employees supplied to the COMPANY are performing work which are DIRECTLY RELATED to the principal business business of the socalled Indirect employer; OR (b) The employer has NO CONTROL over the conduct of the work to be done by the contractor and/or his employees.
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Handouts for Adamson Labor Standards Class Introduction and Employer-Employee Relationship Atty. Ada D. Abad

5.4

Whether DOLE Certification that one is a legitimate job-contractor sufficient. General Rule: The DOLE certification simply gives rise to a presumption that the contractor is a legitimate one. In the absence of evidence to the contrary presented by the complainants, then the Supreme Court had ruled that in the case of RAMY GALLEGO VS. BAYER PHILS. G.R. No. 179807, 31 July 2009 that (T)he DOLE certificate having been issued by a public officer, it carries with it the presumption that it was issued in the regular performance of official duty. Petitioners bare assertions fail to rebut this presumption. Further, since the DOLE is the agency primarily responsible for regulating the business of independent job contractors, the Court can presume, in the absence of evidence to the contrary, that it had thoroughly evaluated the requirements submitted by PRODUCT IMAGE before issuing the Certificate of Registration. In this case, the Supreme Court found Product Image to be a independent contractor as it had shown proof of substantial capitalization and control over the employees. Exception: However, apart and separate from the existence of said DOLE certification, and especially in instances where there are contradictory findings between the Court of Appeals and the NLRC/Labor Arbiter, the Supreme Court may consider other factors in the determination of whether or not a contractor complies with the requisite elements of a legitimate sub-contracting as enumerated in the Labor Code and the Dept. Order No. 18-02. Thus, in the cases of COCA COLA BOTTLERS VS. RICKY DELA CRUZ, ET AL. (G.R. No. 184977, 07 December 2009) and COCA COLA BOTTLERS VS. AGITO ET AL (G.R. 179546, 13 Feb 2009), the Supreme Court reviewed the records and found that the so-called independent contractors had no substantial capitalization and investment, and that the workers supplied by it were performing activities which were necessary and desirable in the usual trade or business of the employer.