Employment Contract,

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?

 Employer Employee Relationship

 4 Elements of Employer Employee Relationship
 Control Test Labor Law
 Employment Contract Philippines
 Labor Disputes in the Philippines

Employer Employee Relationship

The agreement binding both the employer and the employee is known as an
employment contract. However, the absence of an employment contract
does not indicate an absence of an employer employee relationship.
When the existence of the employer employee relationship is in question, the
court has generally applied the four fold test.
If the employer employee relationship can be established, the employer may
not terminate the service of the employee without a just or authorized cause.

4 Elements Of Employer Employee Relationship

Therefore, to determine the existence of an employer-employee relationship,
the four fold test is usually applied:

1. the selection and engagement of the employee;

2. the payment of wages;
3. the power of dismissal; and,
4. the employer’s power to control the employee on the means and methods
by which the work is accomplished.

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.

Control Test Labor Law

Of the 4 elements of employer employee relationship, the control test is
generally regarded as the most crucial and determinative indicator of the
presence or absence of an employer-employee relationship. Under this test, an
employer-employee relationship is said to exist where the person for whom the
services are performed reserves the right to control not only the end result but
also the manner and means utilized to achieve the same.

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.

Employment Contract Philippines

An employment contract is not just a legally binding agreement between the
employer and employee. It is also one that is imbued with public interest and
therefore is subject to the police power of the state.

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

 The underlying economic realities of the activity or relationship.

Termination of Employment in the Philippines

Terminating an employee in the Philippines is taken VERY seriously and can be a complex process, especially
after the employee is regularized. The Philippine Constitution says, no involuntary servitude in any form shall
exist except as punishment for a crime whereof the party shall have been duly convicted. In view of the
prohibition on involuntary servitude, an employee is given the right to resign under Art. 285 of the Labor
Code. The provision recognizes two kinds of resignation – without cause and with cause. If the resignation is
without cause, the employee is required to give a 30-day advance written notice to the employer, to enable the
employer to look for a replacement to prevent work disruption. If the employee fails to give a written notice,
he or she runs the risk of incurring liability for damages. The same provision also indicates the just causes for
resignation (with cause):

 Serious insult to the honor and person of the employee;

 Inhuman and unbearable treatment;
 Crime committed against the person of the employee or any of the immediate members of the
employee’s family; and
 Other analogous causes.
In this second type of resignation, the employee need not serve a written notice. Forced resignation is not
allowed and is considered “constructive” dismissal – a dismissal in disguise. Employee retirement is either
voluntary or compulsory under Art. 287 of the Labor Code.
Dismissal of an Employee in the Philippines
An equality of rights exists between employer and employee. While the employer cannot force the employee to
work against his or her will, neither can the employee compel the employer to continue giving him or her work
if there is a lawful reason not to do so. Thus, the employer may terminate the services of an employee for just
or authorized causes after following the procedure laid down by law, but the employer has the burden of
proving the lawfulness of the employee’s dismissal in the proper forum.

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.

An Illegal Strike can be cause for Termination of

Employment
Employment is not deemed terminated when there is a bona fide suspension of the operations of a business or
undertaking for a period not exceeding six months, or when the employee fulfills a military or civic duty (Art.
286, Labor Code). Under the Corporation Code (sec. 80), the surviving or consolidated entity in a merger or
consolidation automatically assumes all rights and obligations, assets and liabilities of the combining entities.
This includes obligations or liabilities under valid agreements, like labour contracts. The surviving or
consolidated entity must, therefore, recognize the security of tenure and length of service of the workers of the
merging or consolidating corporations. By the fact of merger or consolidation, a succession of employment
rights and obligations occurs.

Notice and prior procedural safeguards

As stated above, dismissals based on just causes contemplate acts or omissions attributable to the employee
while dismissals based on authorized causes involve grounds – business or health – allowing the employer to
terminate. A termination for an authorized cause requires payment of separation pay. When the termination of
employment is declared illegal, reinstatement and full backwages are mandated under Art. 279 of the Labor
Code. If reinstatement is no longer possible where the dismissal was unjust, separation pay may be granted.

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.

Severance pay with Termination

As already noted, separation pay is required to be paid to the employee when there is termination of
employment by the employer for an authorized cause, the amount of which depends on the cause. If the
termination is due to the installation of labour-saving devices or redundancy, the separation pay is one month’s
pay for every year of service or one month pay, whichever is higher (Art. 283, Labor Code). If the termination
is due to retrenchment to prevent losses, or closure or cessation of operation of the establishment not due to
serious business losses, or due to disease, the separation pay is one-half month’s pay for every year of service
or one month pay, whichever is higher (Arts. 283 and 284, Labor Code). However, there is no requirement for
separation pay if the closure is due to serious business losses.

Avenues for redress

From the foregoing, four possible situations may be derived: (1) the dismissal is for a just cause under Art. 282
of the Labor Code, or for an authorized cause – business reason under Art. 283 or health reason under Art. 284
– and due process was observed; (2) the dismissal is without just or authorized cause but due process was
observed; (3) and there no process; (4) for a not observed.

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.

Difference between a Just and Authorized Cause of

Termination
Just cause refers to a wrong doing committed by the employer or employee on the basis of which the aggrieved
party may terminate the employer-employee relationship. Authorized cause refers to a cause brought about by
changing economic or business conditions of the employer.

Causes for Termination by the Employer

1. Serious misconduct;
2. Willful disobedience of employer’s lawful orders connected with work;
3. Gross and habitual neglect of duty;
4. Fraud or breach of trust;
5. Commission of a crime or offense against the employer, employer’s family, or representative; and
6. Other analogous causes.

Just Causes for Termination by the Employee

1. Serious insult by the employer or his or her representative on the honor and person of the employee;
2. Inhuman and unbearable treatment accorded the employee by the employer or his or her
representative;
3. Commission of a crime by the employer or his or her representative against the person of the
employee or any of the immediate members of his or her family; and
4. Other analogous causes.

Authorized Causes for Termination

1. Installation of labor-saving devices;
2. Redundancy;
3. Retrenchment to prevent losses;
4. Closure or cessation of business; and
5. Disease not curable within six months as certified by competent public authority, and continued
employment of the employee is prejudicial to his or her health or to the health of his or her co-
employees.

Due Process in the Context of Termination of

Employment
Due process means the right of an employee to be notified of the reason for his or her dismissal and, in case of
just causes, to be provided the opportunity to defend himself or herself.

Components of Due Process in Termination Cases

In a termination for a just cause, due process involves the two-notice rule:
 1. A notice of intent to dismiss specifying the ground for termination, and giving to said employee
reasonable opportunity within which to explain his or her side;
2. A hearing or conference where the employee is given opportunity to respond to the charge, present
evidence, or rebut the evidence presented against him or her;
3. A notice of dismissal indicating that upon due consideration of all the circumstances, grounds have
been established to justify the termination.
In a termination for an authorized cause, due process means a written notice of dismissal to the employee
specifying the grounds given, at least 30 days before the date of termination. A copy of the notice shall be
furnished by the Regional Office of the Department of Labor and Employment of the Philippines (DOLE).

An Employee may Question the Legality of his or her

Dismissal
The legality of the dismissal may be questioned before the Labor Arbiter of the National Labor Relations
Commission (NLRC) of the Philippines, through a complaint for illegal dismissal. In establishments with a
collective bargaining agreement (CBA), the dismissal may be questioned through the grievance machinery
established under the CBA. If the issue is not resolved at this level, it will be submitted to voluntary
arbitration.

Proving the Dismissal is Legal

In a case of illegal dismissal, the employer has the burden of proving that the dismissal is legal.

Grounds for an Employee to Question his or her

Dismissal
An employee may question his or her dismissal based on substantive or procedural grounds. The Substantive
aspect pertains to the absence of a just or authorized cause supporting the dismissal. The Procedural aspect
refers to the notice of termination or the opportunity to present an explanation.

What are the rights afforded to an unjustly dismissed

employee?
An employee who is dismissed without just cause is entitled to any or all of the following:

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.

Forms in which reinstatement be effected

Reinstatement may be actual or payroll in nature, at the option of the employer.

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.

The former position of the employee no longer exists at

the time of reinstatement
In that case, the employee shall be given a substantially equivalent position in the same establishment without
loss of seniority rights and to backwages from the time compensation was withheld up to the time of
reinstatement.

Employee Benefits when the Establishment no longer

exists
When an establishment no longer exists at the time an order for reinstatement is made, the employee can claim
benefits. The employee is entitled to a separation pay equivalent to at least one-month pay or at least one-
month pay for every year of service whichever is higher. A fraction of at least six months shall be considered
as one whole year. The period of service is deemed to have lasted up to the time of closure of the
establishment. He or she may also claim backwages to cover the period between dismissal from work and the
closure of the establishment.

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.

Reinstatement is not possible so that separation pay

shall be given to an illegally dismissed employee
1. When company operations have ceased;
2. When the employee’s position or an equivalent thereof is no longer available;
3. When the illegal dismissal case has engendered strained relations between the parties, in cases of just
causes and usually when the position involved requires the trust and confidence of the employer; and
4. When a substantial amount of years have lapsed from the filing of the case to its finality.

Exception for an employee dismissed for just cause be

entitled to separation pay
As a rule, no. But in instances where the just cause for dismissal is other than serious misconduct or moral
turpitude, the employee may be awarded Financial Assistance in the amount of one month’s pay as a form of
compassionate justice.

Proof of Financial Losses is Necessary to Justify

Retrenchment
Yes. Proof of actual or imminent financial losses that are substantive in character must be proven to justify
retrenchment.

Proof of Financial losses is NOT necessary to justify

redundancy
In redundancy, the existing manpower of the establishment is in excess of what is necessary to run its
operation in an economical and efficient manner.

Other Conditions before an Employee may be

Dismissed on the Ground of Redundancy
It must be shown that:
 Good faith in abolishing redundant position;
 There is fair and reasonable criteria in selecting the employees to be dismissed, such as but not limited
to less preferred status (e.g. temporary employee), efficiency, and seniority; or
 A one-month prior notice is given to the employee as prescribed by law.

Failure to Comply with the Due Process Requirements

Failure to comply with the due process requirements will NOT invalidate a dismissal with an otherwise
established just or authorized cause. The employee, however, will be entitled to backwages from the time of
termination till finality of the decision confirming the presence of a just or authorized cause.

Difference between Transfer and Promotion

Promotion is the advancement of an employee from one position to another with an increase in duties and
responsibilities, and is usually accompanied by an increase in salary. Promotion is a privilege and as such may
be declined by the employee.

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.

An Employer Transferring an Employee to another

place of work without prior notice
Generally, an employer cannot transfer an employee to another place of work without prior notice. But if the
urgency of the service requires a transfer, and such transfer is exercised in good faith for the advancement of
the employer’s interest and will not adversely affect the rights of the employee, the transfer may be undertaken
even without the employee’s consent.

Non-union member availing of the grievance

machinery in case of termination
If a non-union member belonging to an appropriate bargaining unit of the recognized bargaining agent and
pays agency fees to the union and accepts the benefits under the collective agreement, said non-union members
may avail of the grievance machinery. On the other hand, if the non-union member is not part of the
appropriate bargaining unit of the recognized bargaining agent and is expressly excluded in the collective
agreements, said employee cannot avail of the grievance machinery.

Reasonable period for an Employee subjected to

Dismissal to answer charges against him or her by the
Employer
A reasonable period should be provided wherein the employee can answer all the charges against him or her,
gather evidence, and confront the witnesses against him or her. It should include the opportunity to secure the
assistance of a representative who could be a union officer. Reasonableness of the period should be based,
among others, on the gravity of the charges against the employee.
An employee charged with an offense may be placed
under preventive suspension while he or she is
preparing to answer charges filed against him or her by
the employer
Only on grounds that his or her continued presence inside the company premises poses a serious imminent
threat to the life or property of the employer or his or her co-workers, and only for a period of 30 days may be
placed under preventive suspension. After 30 days, the employee should be reinstated to his or her former
position or in a substantially equivalent position.

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.

Validity of the Employer’s Decision on Termination

A dismissed employee may still question the validity or legality of his or her dismissal by filing a complaint
for illegal or unjust dismissal before the Arbitration Branch of NLRC. In such a case, the burden of proving
that the dismissal is for a valid or authorized cause rests on the employer.

During the pendency of the termination case, an

employee may be be retained in his or her work
An employee may be retained in his or her work even during the pendency of a termination case under the
following circumstances:

1. Upon serving the preventive suspension period of 30 days; and

2. Upon management prerogative allowing the employee to be retained at work and his or her continued
employment poses no serious nor imminent threat to the life or property of the employer or his or her
co-employees.

The Effects of Termination may be Suspended Pending

Resolution of the Case
The Secretary of Labor of the Philippines may provisionally order a reinstatement in the event of prima facie
finding that the dismissal may cause a serious labor dispute as in a strike or lock-out, or is in implementation
of mass lay-off.

Services of an Employee Terminated due to Disease

The employer may terminate employment on ground of disease only upon the issuance of a certification by a
competent public health authority that the disease is of such nature or at such stage that it cannot be cured
within a period of six months even with proper medical treatment.

Suspending Operations of a Business

If the period of suspension of operations do not exceed six months, the workers shall be reinstated to their
respective positions without loss of seniority rights if they indicated their desire to resume work not later than
one month from the resumption of operations of business.

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.