Principles of Employment Contracts

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  • P.D. 442, otherwise known as the Labor Code, Republic Act No. 386, otherwise known as the Civil Code, and Supreme Court Decisions, are the legal bases.
  • Employment contracts are consensual.
  • Principle of autonomy applies to employment contracts.
  • Employment contracts are imbued with public interest.
  • Regular employment is the default status of an employee.
  • Burden of proof is on the employer to prove that an employee is a non-regular.
  • The law determines the nature of employment, and not the parties.
  • Involuntary servitude is prohibited.
  • When in doubt, employment contracts are interpreted in favor of the employee.

Legal basis

The following are the legal bases:

  • Presidential Decree No. 442, a.k.a. Labor Code;
  • Omnibus Rules Implementing the Labor Code; and
  • Supreme Court Decisions.

Concept

An employment contract is an agreement whereby an employee would render services in exchange for compensation to be paid by the employer.

Consensual contract

An employment contract is consensual. Meaning, mere consent by the employer and the employee will form an employment relationship.

The law does not require a written employment contract to prove an employer-employee relationship.

By way of exception, DOLE Department Order No. 174, series of 2017, requires that contractors and subcontractors provide for a written employment contract to their deployed personnel.

Notwithstanding the fact that an employment contract is consensual, it is strongly recommended to have a written employment contract. The reason being is that an employment is presumed to be regular employment unless proven otherwise via a written employment contract. Meaning, an employee is presumed to be a regular employee unless there is a written employment contract showing that he is a non-regular employee, such a probationary, casual, project, seasonal, or fixed-term. Without proof via a written employment contract that an employee is a non-regular, he/she shall be presumed as a regular employee.

In addition, the written employment contract will be a reference to the stipulations that the employer and the employee agreed on during the job offer, such as compensation, benefits, bonuses, incentives, commissions, and similar thereto.

The law determines nature of employment, not the parties

Under the Labor Code, it is the law that determines the nature of the employment, regardless of any agreement expressing otherwise. Thus, even if the parties stipulate to a casual employment contract to hide the fact that the employee is doing work of a regular employee, the law will consider such arrangement as a regular employment contract from the beginning.

“The employment status of a person is defined and prescribed by law and not by what the parties say it should be. Equally important to consider is that a contract of employment is impressed with public interest such that labor contracts must yield to the common good. Thus, provisions of applicable statutes are deemed written into the contract, and the parties are never at liberty to insulate themselves and their relationships from the impact of labor laws and regulations by simply entering into contracts with each other.” (Innodata Knowledge Services, Inc. v. Inting, G.R. No. 211892, 06 December 2017)

“Clearly, therefore, the nature of the employment does not depend solely on the will or word of the employer or on the procedure for hiring and the manner of designating the employee. Rather, the nature of the employment depends on the nature of the activities to be performed by the employee, considering the nature of the employer’s business, the duration and scope to be done, and, in some cases, even the length of time of the performance and its continued existence.” (Universal Robina Sugar Milling Corporation v. Acibo, G.R. No. 186439, 15 January 2019)

“At the outset, we should note that the nature of the employment is determined by law, regardless of any contract expressing otherwise. The supremacy of the law over the nomenclature of the contract and the stipulations contained therein is to bring to life the policy enshrined in the Constitution to afford full protection to labor. Labor contracts, being imbued with public interest, are placed on a higher plane than ordinary contracts and are subject to the police power of the State.” (GMA Network, Inc. v. Pabriga, G.R. No. 176419, 27 November 2013)

Similarly, in case of independent contractors or talents who are provided with independent contractor contracts or consultancy agreement, it is possible that they may be classified as a regular employee by the law depending on the circumstances. For more detailed discussions, refer to Independent Contractors.

Four-fold test

“To ascertain the existence of an employer-employee relationship jurisprudence has invariably adhered to the four-fold test, to wit: (1) the selection and engagement of the employee; (2) the payment of wages; (3) the power of dismissal; and (4) the power to control the employee’s conduct, or the so-called ‘control test.’ Of these four, the last one is the most important. The so-called ‘control test’ is commonly regarded as the most crucial and determinative indicator of the presence or absence of an employer-employee relationship. Under the control test, an employer-employee relationship exists where the person for whom the services are performed reserves the right to control not only the end achieved, but also the manner and means to be used in reaching that end.” (Atok Big Wedge Company, Inc. v. Gison, G.R. No. 169510, 08 August 2011)

Payment of wages

“… the Court held that the fact that a worker was not reported as an employee to the SSS is not conclusive proof of the absence of employer-employee relationship. Otherwise, an employer would be rewarded for his failure or even neglect to perform his obligation.

Nor does the fact that (the employee’s) name does not appear in the payrolls and pay envelope records submitted by (the employer) negate the existence of employer-employee relationship. For a payroll to be utilized to disprove the employment of a person, it must contain a true and complete list of the employee.” (South East International Rattan, Inc. v. Coming, G.R. No. 186621, 12 March 2014)

Control

“Not every form of control is indicative of employer-employee relationship. A person who performs work for another and is subjected to its rules, regulations, and code of ethics does not necessarily become an employee. As long as the level of control does not interfere with the means and methods of accomplishing the assigned tasks, the rules imposed by the hiring party on the hired party do not amount to the labor law concept of control that is indicative of employer-employee relationship.” (Royal Homes Marketing Corporation v. Alcantara, G.R. No. 195190, 28 July 2014)

“Logically, the line should be drawn between rules that merely serve as guidelines towards the achievement of the mutually desired result without dictating the means or methods to be employed in attaining it, and those that control or fix the methodology and bind or restrict the party hired to the use of such means. The first, which aim only to promote the result, create no employer-employee relationship unlike the second, which address both the result and the means used to achieve it.” (Insular Life Assurance Co., Ltd v. National Labor Relations Commission, 259 Phil. 65, 70-71 (1989))

“From jurisprudence, an important lesson that the first Insular Life case teaches us is that a commitment to abide by the rules and regulations of an insurance company does not ipso facto make the insurance agent an employee. Neither do guidelines somehow restrictive of the insurance agent’s conduct necessarily indicate ‘control’ as this term is defined in jurisprudence. Guidelines indicative of labor law ‘control,’ as the first Insular Life case tells us, should not merely relate to the mutually desirable result intended by the contractual relationship; they must have the nature of dictating the means or methods to be employed in attaining the result, or of fixing the methodology and of binding or restricting the party hired to the use of these means. In fact, results-wise, the principal can impose production quotas and can determine how many agents, with specific territories, ought to be employed to achieve the company’s objectives. These are management policy decisions that the labor law element of control cannot reach. Our ruling in these respects in the first Insular Life case was practically reiterated in Carungcong. Thus, as will be shown more fully below, Manulife’s codes of conduct, all of which do not intrude into the insurance agents’ means and manner of conducting their sales and only control them as to the desired results and Insurance Code norms, cannot be used as basis for a finding that the labor law concept of control existed between Manulife and Tongko.” (Tongko v. The Manufacturers Life Insurance Co. (Phils.), G.R. No. 167622, 29 June 29, 2010)

“As the party claiming the existence of employer-employee relationship, it behooved upon (the employee) to prove the elements thereof, particularly (the Company’s) power of control over the means and methods of accomplishing the work. He, however, failed to cite specific rules, regulations or codes of ethics that supposedly imposed control on his means and methods of soliciting sales and dealing with prospective clients. On the other hand, this case is replete with instances that negate the element of control and the existence of employer-employee relationship. Notably, (the employee) was not required to observe definite working hours. Except for soliciting sales, (the Company) did not assign other tasks to him. He had full control over the means and methods of accomplishing his tasks as he can ‘solicit sales at any time and by any manner which (he may) deem appropriate and necessary.’ He performed his tasks on his own account free from the control and direction of (the Company) in all matters connected therewith, except as to the results thereof.” (Royal Homes Marketing Corporation v. Alcantara, G.R. No. 195190, 28 July 2014)

“Neither does the repeated hiring of (the complainant) prove the existence of employer-employee relationship… The continuous rehiring of (the complainant) simply signifies the renewal of his contract with (the Company), and highlights his satisfactory services warranting the renewal of such contract.” (Royal Homes Marketing Corporation v. Alcantara, G.R. No. 195190, 28 July 2014)

“Nor does the exclusivity clause of contract establish the existence of the labor law concept of control… (the complainant) was not prohibited from engaging in any other business as long as he does not sell projects of (the Company’s) competitors. He can engage in selling various other products or engage in unrelated businesses.” (Royal Homes Marketing Corporation v. Alcantara, G.R. No. 195190, 28 July 2014)

“… the fact that the appointment required (the complainant) to solicit business exclusively for (the Company) did not mean that (the Company) exercised control over the means and methods of (the complainant’s) work as the term control is understood in labor jurisprudence. Neither did it make (the complainant) an employee of (the Company). (The Company) did not prohibit (the complainant) from engaging in any other business, or from being connected with any other company, for as long as the business (of the) company did not compete with (the Company’s) business.” (Consulta v. Court of Appeals, 493 Phil. 842, 848 (2005))

Economic realty test

“Aside from the control test, the Supreme Court has also used the economic reality test in determining whether an employer-employee relationship exists between the parties. Under this test, the economic realities prevailing within the activity or between the parties are examined, taking into consideration the totality of circumstances surrounding the true nature of the relationship between the parties. This is especially appropriate when, as in this case, there is no written agreement or contract on which to base the relationship. In our jurisdiction, the benchmark of economic reality in analyzing possible employment relationships for purposes of applying the Labor Code ought to be the economic dependence of the worker on his employer. In the instant case, as shown by the resume of (the complainant), he concurrently held consultancy positions with the Manila International Airport Authority (from 04 March 2001 to September 2003 and from 01 November 2004 up to the present) and the Anti-Terrorist Task Force for Aviation and Air Transportation Sector (from 16 April 2004 to 30 June 2004) during his stint with the Eye Referral Center (from 01 August 2003 to 29 April 2005). Accordingly, it cannot be said that the (complainant) was wholly dependent on (respondent) company.” (Reyes v. Glaucoma Research Foundation, Inc., G.R. No. 189255, 17 June 2015)

“… 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 employer’s 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 employer’s 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.

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 latter’s employment.” (Francisco v. NLRC, Kasei Corporation, G.R. No. 170087, 31 August 2006)

“Thus, the determination of the relationship between employer and employee depends upon the circumstances of the whole economic activity, such as: (1) the extent to which the services performed are an integral part of the employer’s business; (2) the extent of the worker’s investment in equipment and facilities; (3) the nature and degree of control exercised by the employer; (4) the worker’s 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.

“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. In the United States, the touchstone of economic reality in analyzing possible employment relationships for purposes of the Federal Labor Standards Act is dependency. 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 corporation’s 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 she had served the company for six years before her dismissal, receiving check vouchers indicating her salaries/wages, benefits, 13th month pay, bonuses and allowances, as well as deductions and Social Security contributions from August 1, 1999 to December 18, 2000.  When petitioner was designated General Manager, respondent corporation made a report to the SSS signed by Irene Ballesteros. Petitioner’s 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.

It is therefore apparent that petitioner is economically dependent on respondent corporation for her continued employment in the latter’s line of business.” (Francisco v. NLRC, Kasei Corporation, G.R. No. 170087, 31 August 2006)

Principle of autonomy applies

The principle of autonomy in contracts state that parties may free stipulate on whatever term and conditions they would agree on provided they are contrary to laws, morals, good customs, or public policy. This principle is applicable in employment contracts as well.

Accordingly, the employer and the employee may free stipulate on the terms of employment provided they do are not contrary to laws, morals, good customs, or public policy. For instance, the employer and the employee cannot stipulate that there shall be no overtime pay or holiday pay when these are required by the Labor Code.

Imbued with public interest


“The relations between capital and labor are not merely contractual. They are so impressed with public interest that labor contracts must yield to the common good. Therefore, such contracts are subject to the special laws on labor unions, collective bargaining, strikes and lockouts, closed shop, wages, working conditions, hours of labor and similar subjects.” (Article 1701, Civil Code)

“The supremacy of the law over the nomenclature of the contract and its pacts and conditions is to bring life to the policy enshrined in the Constitution to afford full protection to labor. Thus, labor contracts are placed on a higher plane than ordinary contracts since these are imbued with public interest and, therefore, subject to the police power of the State.” (Innodata Knowledge Services, Inc. v. Inting, G.R. No. 211892, 06 December 2017)

Circumvention of labor law

“Any obvious circumvention of the law cannot be countenanced. The fact that respondent workers have agreed to be employed on such basis and to forego the protection given to them on their security of tenure, demonstrate nothing more than the serious problem of impoverishment of so many of our people and the resulting unevenness between labor and capital. A contract of employment is impressed with public interest. The provisions of applicable statutes are deemed written into the contract, and ‘the parties are not at liberty to insulate themselves and their relationships from the impact of labor laws and regulations by simply contracting with each other.’” (Basan v. Coca-Cola Bottlers Philippines, G.R. No. 174365-66, 04 February 2015)

“… if it is apparent from the circumstances of the case ‘that periods have been imposed to preclude acquisition of tenurial security by the employee,’ such project or fixed term contracts are disregarded for being contrary to public policy, as in this case.” University of Santo Tomas v. Samahan ng Manggagawa ng UST, G.R. No. 184262, 24 April 2017)

Default status of employment is regular

Regular employment is the default employment status unless proven otherwise by the employer. Otherwise stated, it is the employer who has the burden of proof that the employee is not a regular employee. This is done through showing of documentation, such as the employment contract.

No involuntary servitude

“No contract which practically amounts to involuntary servitude, under any guise whatsoever, shall be valid.” (Article 1703, Civil Code)

When in doubt, interpreted in favor of the employee

“In case of doubt, all labor legislation and all labor contracts shall be construed in favor of the safety and decent living for the laborer.” (Article 1702, Civil Code)

References

  • Presidential Decree No. 442, a.k.a. Labor Code;
  • Omnibus Rules Implementing the Labor Code; and
  • Jurisprudence or Supreme Court Decisions