The Supreme Court, in Herma Shipyard, Inc. vs. Danilo Oliveros, et al., held that employees hired under project-based employment contracts do not automatically become regular employees simply because they perform tasks essential to the employer’s business and are repeatedly rehired. The Court emphasized that the key determinant is whether the employment was fixed for a specific project, the completion of which was determined at the time of engagement. This ruling clarifies the distinctions between project-based and regular employment, preventing the circumvention of labor laws while providing businesses flexibility in managing project-specific workforce needs.

Navigating Murky Waters: How Definite is ‘Project-Based’ When Shipyards Continuously Rehire?

Herma Shipyard, a shipbuilding and repair company, faced a labor dispute when several employees claimed they were illegally dismissed and sought regularization. The employees argued that despite being hired under fixed-term contracts as project-based workers, the continuous nature of their work and its necessity to the company’s operations effectively made them regular employees. The central legal question was whether the repeated rehiring of project-based employees for different projects, performing tasks essential to the business, transformed their employment status to regular, thereby entitling them to security of tenure and other benefits.

The Supreme Court anchored its decision on Article 280 (now Article 294) of the Labor Code, which distinguishes between regular and project employment. The article stipulates that employment is deemed regular when the employee performs activities necessary or desirable to the employer’s usual business, unless the employment is fixed for a specific project or undertaking, the completion or termination of which has been determined at the time of engagement.

Art. 280. Regular and Casual Employment. – The provisions of written agreement to the contrary notwithstanding and regardless of the oral agreement of the parties, an employment shall be deemed to be regular where the employee has been engaged to perform activities which are usually necessary or desirable in the usual business or trade of the employer, except where the employment has been fixed for a specific project or undertaking the completion or termination of which has been determined at the time of the engagement of the employee or where the work or service to be performed is seasonal in nature and the employment is for the duration of the season.

The Court emphasized the importance of informing employees of their project-based status at the time of hiring, with the period of employment knowingly and voluntarily agreed upon. In this case, the employees signed contracts stating they were hired for specific projects with defined start and end dates. The Court found no evidence of coercion or misrepresentation in the signing of these contracts, thereby validating the project-based employment agreements.

Building on this principle, the Court clarified that performing tasks necessary to the business does not automatically result in regularization. While the respondents’ roles as welders, pipe fitters, and laborers were essential to Herma Shipyard’s operations, the Court distinguished between project employment and regular employment based on the nature and scope of the work. Project-based employees may perform tasks that are usually necessary, but their employment is tied to specific, distinct projects with determined durations.

In distinguishing project-based employment from regular employment, the Supreme Court cited the case of ALU-TUCP v. National Labor Relations Commission, emphasizing that a ‘project’ could refer to a particular job within the regular business of the employer, distinct and separate from other undertakings, with determined start and end times. Alternatively, a ‘project’ could refer to a job not within the regular business of the corporation but still identifiably separate. The shipbuilding and repair contracts of Herma Shipyard fall under the first definition, as each project is a distinct undertaking with its own timeline.

The Court then addressed the issue of repeated rehiring, clarifying that it does not, by itself, qualify project-based employees as regular employees. Length of service is not the controlling determinant; rather, it is whether the employment has been fixed for a specific project with its completion determined at the time of engagement. Even with successive rehirings, if each engagement is for a specific project, the employees remain project-based.

This approach contrasts with the typical rule that long-term temporary employees may become permanent due to their length of service. However, this rule does not apply to project-based employees because construction and similar industries cannot guarantee work beyond the life of each project. The Court referenced Villa v. National Labor Relations Commission to support this, stating that project employees remain so regardless of the number of projects they work on.

Furthermore, the Court noted that Herma Shipyard’s business is not continuous vessel production for sale but rather accepting specific shipbuilding and repair contracts. This nature of business necessitates hiring workers only when such contracts exist, making project-based employment appropriate. The completion of each project automatically terminates the employment, requiring only a termination report to the Department of Labor and Employment (DOLE).

Moreover, the Supreme Court addressed the Court of Appeals’ concern about a clause in the employment contract that allowed for extensions. The appellate court had viewed paragraph 10 of the employment contract, which allowed for extending employment periods, as undermining the project-based nature of the employment. The Supreme Court clarified that this provision was intended to ensure the successful completion of specific tasks and did not change the project-based nature of the employment. If a project was delayed, extending the employment until its completion was in line with the original agreement.

The Supreme Court concluded that the lower courts erred in disregarding the project employment contracts. The Labor Arbiter and the NLRC, with their expertise in labor law, correctly determined that the employees were project-based, supported by substantial evidence. The Supreme Court thus reinstated the decisions of the Labor Arbiter and the NLRC, affirming that the employees were validly terminated upon completion of their respective projects.

FAQs

What was the key issue in this case?	The primary issue was whether employees hired under project-based contracts by Herma Shipyard had become regular employees due to the continuous nature of their work and repeated rehiring. The Court clarified that despite performing necessary tasks and being repeatedly rehired, their status remained project-based.
What is project-based employment?	Project-based employment is when an employee is hired for a specific project or undertaking, with the completion date determined at the time of hiring. The employment terminates automatically upon the project’s completion.
Does performing necessary tasks automatically make an employee regular?	No, performing tasks that are necessary for the business does not automatically make an employee regular. The critical factor is whether the employment is tied to a specific project with a determined duration.
Does repeated rehiring change an employee’s status?	Repeated rehiring does not automatically change a project-based employee’s status to regular. The Supreme Court clarified that the nature of each engagement as tied to a specific project is what defines the employment status.
What did the employment contracts say?	The employment contracts clearly stated that the employees were hired for specific projects with defined start and end dates. They were informed of their project-based status, and their employment was to terminate upon completion of the project.
Why was the clause allowing extensions not a problem?	The clause allowing extensions was not problematic because it was designed to ensure projects were completed. The extension was tied to the original project’s needs, not to continuous employment beyond the project.
What kind of business does Herma Shipyard conduct?	Herma Shipyard engages in shipbuilding and repair contracts rather than continuous vessel production. This nature of business makes project-based employment a logical and suitable arrangement.
What was the Supreme Court’s final ruling?	The Supreme Court reversed the Court of Appeals’ decision, reinstating the decisions of the Labor Arbiter and the NLRC. The Court affirmed that the employees were project-based and validly terminated upon completion of their projects.

In conclusion, the Herma Shipyard case provides essential clarity on the boundaries between project-based and regular employment in the Philippines. The decision emphasizes that the nature of the engagement and the specificity of the project, rather than the necessity of the tasks or the duration of service, determine the employment status. This ruling allows companies to manage their workforce efficiently for project-specific needs while protecting employees’ rights under the Labor Code.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: HERMA SHIPYARD, INC. vs. DANILO OLIVEROS, G.R. No. 208936, April 17, 2017