Employment Contract, Employer Employee Relationship
Employment Contract, Employer Employee Relationship
Employer Employee
Relationship
Dealing with Employment Contract and Employment Relationship.
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Contrary to popular belief, the employment contract is not the sole indicator of
an employer employee relationship. So how do you establish an employer
employee relationship?
And in the case of Victor Meteoro et. al. vs Creative Creatures, Inc., the court
stated that to establish the 4 elements of employer employee relationship, any
competent and relevant evidence may be considered including but not limited
to:
Identification Cards;
Cash Vouchers;
Social Security Registration;
Appointment Letters;
Employment Contracts;
Payrolls;
Organization Charts; and
Personnel List.
However, as seen in the case of Royale Homes Marketing Corporation vs. Fidel
P. Alcantara, not every form of control is indicative of an employer-
employee relationship. The subjection of the service provider to the client’s
rules, regulations, and code of ethics does not make the service provider an
employee when the level of control does not dictate the methodology in
performing the tasks. The client has the right to establish guidelines towards
the achievement of a mutually desired result.
It is the employer’s duty to ensure that terms and conditions of employment are
in compliance with the Labor Code of the Philippines. Employment terms and
conditions that are in violation of the Labor Code shall be unlawful and deemed
null and void even when both the employer and employee mutually consented
to it. Moreover, any doubts, uncertainties, ambiguities and insufficiencies shall
be resolved in favor of labor.
Tests of Employment Relations
The determination of whether employer-employee relation exists between the parties is very important.
For one, entitlement to labor standards benefits such as minimum wages, hours of work, overtime pay,
etc., or to social benefits under laws such as social security law, workmen’s compensation law, etc., or to
termination pay, or to unionism and other labor relations provisions under the Labor Code, are largely
dependent on the existence of employer-employee relationship between the parties.
Another thing is that the existence of employer-employee relationship between the parties will determine
whether the controversy should fall within the exclusive jurisdiction of labor agencies or not. If for
example the parties are not employer-employee of each other, respectively, but perhaps partners or
associates, then any dispute between them will be not be covered by the jurisdiction of labor agencies but
by regular courts.
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
Just causes are blameworthy acts on the part of the employee such as serious misconduct, willful disobedience,
gross and habitual neglect of duties, fraud or willful breach of trust, commission of a crime and other
analogous causes (Art. 282, Labor Code).
Authorized causes are of two types – business reasons and disease. The business reasons are installation of
labor-saving devices, redundancy, retrenchment and closure or cessation of operation (Art. 283, Labor Code).
Before the employer can terminate employment on the ground of disease, he must obtain from a competent
public health authority a certification that the employee’s disease is of such a nature and at such a stage that it
can no longer be cured within a period of six months even with medical attention (Art. 284, Labor Code;
Implementing Rules of Book VI, Labor Code).
Those hired on a temporary basis, that is, for a “term” or “fixed period” are not regular employees, but are
“contractual employees.” Consequently, there is no illegal dismissal when their services are terminated by
reason of the expiration of their contracts. Lack of notice of termination is of no consequence, because a
contract for employment for a definite period terminates by its own term at the end of such period.
Procedurally, (1) if the dismissal is based on a just cause under Art. 282 of the Labor Code, the employer must
give the employee two written notices and a hearing or opportunity to be heard before terminating the
employment, that is, a notice specifying the grounds for which dismissal is sought and, after hearing or
opportunity to be heard, a notice of the decision to dismiss; and (2) if the dismissal is based on authorized
causes under Arts. 283 and 284 of the Labor Code, the employer must give the employee and the Department
of Labour and Employment written notices 30 days prior to the effectivity of the separation.
In the first situation, the dismissal is undoubtedly valid and the employer will not incur any liability, save for
separation pay when the dismissal is for an authorized cause.
In the second and third situations, where the dismissals are illegal, Art. 279 of the Labor Code mandates that
the employee is entitled to reinstatement without loss of seniority rights and other privileges and full
backwages, inclusive of allowances, and other benefits or their monetary equivalent computed from the time
the compensation was not paid up to the time of actual reinstatement.
In the fourth situation, the dismissal should be upheld. While the procedural infirmity cannot be cured, it
should not invalidate the dismissal. However, the employer should be held liable for nominal damages for non-
compliance with the procedural requirements of due process. If the dismissal is for an authorized cause, the
employee is also entitled to separation pay.
Compulsory arbitration of illegal dismissal cases is conducted by the Labour Arbiters of the National Labour
Relations Commission and their decisions are appealable to the Commission (Arts. 217 and 218, Labor Code).
In view of the stated preference for voluntary modes of settling labour disputes under Art. 13 (3) of the
Constitution and Art. 211of the Labor Code, voluntary arbitration of illegal dismissals is recognized on the
basis of mutual agreement between the parties (Art. 262, Labor Code).
Compulsory arbitration is both the process of settlement of labour disputes by a government agency which has
the authority to investigate and issue an award binding on all the parties, as well as a mode of arbitration where
the parties are compelled to accept the resolution of their dispute through arbitration by a third party.
While a voluntary arbitrator is not part of the labour department, he or she renders arbitration services provided
for under labour laws. Generally, the voluntary arbitrator is expected to decide only questions that are
expressly delineated by the submission agreement. However, since arbitration is the final resort for the
adjudication of disputes, the arbitrator can assume that he or she has the power to make a final settlement.
Thus, assuming that the submission agreement empowers the arbitrator to decide whether an employee was
discharged for just cause, the arbitrator can reasonably assume that his or her powers extend beyond giving a
mere yes-or-no answer and include the authority to reinstate with or without back pay.
1. Reinstatement without loss of seniority rights, or separation pay if reinstatement is not possible;
2. Full backwages, inclusive of allowances and other benefits or their monetary equivalent from the time
compensation was withheld from him or her up to the time of reinstatement;
3. Damages and attorney’s fees if the dismissal was done in bad faith.
Reinstatement
Reinstatement means restoration of the employee to the position from which he or she has been unjustly
removed.
Reinstatement without loss of seniority rights means that the employee, upon reinstatement, should be treated
in matters involving seniority and continuity of employment as though he or she had not been dismissed from
work.
When a Labor Arbiter rules for an illegal dismissal, reinstatement is immediately executory even pending
appeal.
Full Backwages
Full backwages refer to all compensations, including allowances and other benefits with monetary equivalent,
that should have been earned by the employee but was not collected by him or her because of unjust dismissal.
It includes all the amounts he or she could have earned starting from the date of dismissal up to the time of
reinstatement.
In cases of illegal dismissal, a dismissed employee who has found another job may still be entitled to collect
full backwages from his or her former employer. Full backwages is a form of penalty imposed by law on an
employer who illegally dismisses his or her employee. The fact that the dismissed employee may already be
employed and earning elsewhere does not extinguish the penalty.
Separation Pay
In authorized cause terminations, separation pay is the amount given to an employee terminated due to
retrenchment, closure, or cessation of business or incurable disease. The employee is entitled to receive the
equivalent of one month pay or one-half month pay, whichever is higher, for every year service.
In just cause terminations, separation pay is also the amount given to employees who have been dismissed
without just cause and could no longer be reinstated.
Transfer is a lateral movement that does not amount to a promotion. It constitutes a valid exercise of
management prerogative, unless it is done to defeat an employee’s right to self-organization, to get rid of
undesirable workers, or to penalize an employee of his or her union activities. If done in good faith,
management’s decision to transfer an employee may not be questioned. An employee’s refusal to transfer may
constitute willful disobedience, a just cause for his or her dismissal.
The employer, however, may extend the period of suspension provided that the employee is paid his or her
wages and other benefits during the extension. If the employer decides to dismiss the employee after
completion of the investigation, the employee is not bound to reimburse the amount paid to him or her during
the extended period. The employer is required to immediately notify the employee in writing of a decision to
dismiss him or her stating clearly the reasons for the dismissal.
Preventive suspension is not a disciplinary measure, and should be distinguished from suspension imposed as a
penalty.
If the shutdown is for a period of not more than six months such as may occur in equipment check or repair,
stock inventory, or lack of raw materials, the employee is only temporarily laid off and, therefore, employer-
employee relationship is not severed. If it will last for a period of more than six months and is of an indefinite
character, it may be considered as equivalent to closure of the establishment leading to termination of
employment. In such a case, the requirements of the law and rules on employee dismissals must be observed.