Determining Employer-Employee Relationship: The Control Test

G.R. No. 114733, January 02, 1997

Many businesses in the Philippines engage workers under various arrangements, sometimes blurring the lines between regular employment and independent contracting. Misclassifying an employee as an independent contractor can deprive workers of essential labor rights and benefits. The Supreme Court case of Aurora Land Projects Corp. v. National Labor Relations Commission (NLRC) provides critical guidance on how to distinguish between these relationships, emphasizing the importance of the “control test.” This article explains the key elements of this test and its implications for both employers and employees.

The Four Pillars of Employer-Employee Relationship

Philippine labor law provides significant protections to employees, including minimum wage, social security, and security of tenure. However, these protections generally do not extend to independent contractors. Therefore, determining the true nature of a working relationship is crucial. The Supreme Court has consistently applied a four-fold test to ascertain the existence of an employer-employee relationship:

• Selection and engagement of the employee
• Payment of wages
• Power of dismissal
• Employer’s power to control the employee’s conduct (the “control test”)

Of these, the “control test” is the most crucial. It focuses on whether the employer controls or has the right to control not only the result of the work but also the means and methods by which it is accomplished. This means an employer directs how the job should be done, not just what the outcome should be.

Relevant Legal Provisions

Article 280 of the Labor Code defines regular employment:

“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…“

This highlights that if the activities performed by the employee are necessary for the business, they are likely considered a regular employee, and thus entitled to full benefits. This is in contrast to project-based or independent contractors, who are hired for a specific task.

The Story of Honorio Dagui: From Maintenance Man to Regular Employee

Honorio Dagui was hired in 1953 by Doña Aurora Suntay Tanjangco to maintain her apartments and residential buildings, performing carpentry, plumbing, electrical, and masonry work. After Doña Aurora’s death in 1982, her daughter, Teresita Tanjangco Quazon, took over and continued Dagui’s employment. In 1991, Quazon abruptly terminated Dagui’s services, leading him to file a complaint for illegal dismissal.

The Labor Arbiter ruled in favor of Dagui, finding that he was indeed an employee and had been illegally dismissed. This decision was appealed to the NLRC, which affirmed the Labor Arbiter’s decision but modified the amount of separation pay. Aurora Land Projects Corporation and Teresita Quazon then elevated the case to the Supreme Court.

Key Arguments and the Court’s Reasoning

The petitioners argued that Dagui was not an employee but an independent contractor, specifically a “job contractor.” They claimed he was hired only as needed for specific tasks, such as unclogging pipes. However, the Supreme Court disagreed, citing the following:

• Dagui’s low daily wage (P180.00) made it improbable that he possessed the substantial capital or investment required of a legitimate job contractor.
• The company failed to prove Dagui was a job contractor.

The Court emphasized the presence of all four elements of an employer-employee relationship:

• Selection and Engagement: Dagui was hired by Doña Aurora and later continued by Teresita Quazon.
• Payment of Wages: Dagui was paid a daily wage, not based on profits.
• Power of Dismissal: The Tanjangcos clearly had the power to dismiss Dagui.
• Control: The Court found that the right to control existed, stating, “It is not essential for the employer to actually supervise the performance of duties of the employee; it is enough that the former has a right to wield the power.“

The Court also highlighted the failure of Aurora Land Projects to submit termination reports to the Public Employment Office, which is required for project employees. This further supported the conclusion that Dagui was not a project employee but a regular employee.

As the Supreme Court stated, “The bare allegation of petitioners, without more, that private respondent Dagui is a job contractor has been disbelieved by the Labor Arbiter and the public respondent NLRC. Dagui, by the findings of both tribunals, was an employee of the petitioners. We are not inclined to set aside these findings.”

Practical Implications for Employers and Employees

This case reinforces the importance of correctly classifying workers. Employers must understand that simply labeling someone an independent contractor does not make it so. The actual nature of the relationship, particularly the degree of control exercised by the employer, is the determining factor.

Key Lessons

• Control is Key: Focus on the extent of control you exert over the worker’s methods and processes.
• Substance Over Form: Written agreements are not the sole determinant. The actual practice dictates the relationship.
• Compliance Matters: Properly document the termination of project employees with the Public Employment Office.
• Due Process is Essential: Always provide written notice and a hearing before terminating an employee.

Frequently Asked Questions

Q: What is the most important factor in determining if someone is an employee or an independent contractor?

A: The “control test” is the most important. It examines whether the employer controls or has the right to control not only the result of the work but also the means and methods by which it is accomplished.

Q: Can a written agreement stating someone is an independent contractor override the actual working relationship?

A: No. The Supreme Court looks at the substance of the relationship, not just the form. If the employer exercises significant control, the worker is likely an employee, regardless of what the written agreement says.

Q: What are the consequences of misclassifying an employee as an independent contractor?

A: Employers can be liable for unpaid wages, benefits, and damages for illegal dismissal. They may also face penalties from regulatory agencies.

Q: What is separation pay?

A: Separation pay is a monetary benefit paid to an employee who is terminated for authorized causes, or in some cases of illegal dismissal where reinstatement is not feasible. It is intended to help the employee during the transition to new employment.

Q: What is backwages?

A: Backwages refers to the compensation an employee is entitled to receive from the time of their illegal dismissal up to the time of their reinstatement or, if reinstatement is not possible, up to the finality of the court’s decision.

Q: How does Republic Act No. 6715 affect backwages?

A: Republic Act No. 6715, which took effect on March 21, 1989, amended the Labor Code to include full backwages, inclusive of allowances and other benefits, without deducting earnings derived elsewhere during the period of illegal dismissal.

Q: Can a company be held liable for the actions of its officers?

A: Yes, in certain cases, a corporate officer can be held jointly and severally liable with the corporation, especially if they acted with evident malice and bad faith in terminating an employee’s employment.

ASG Law specializes in labor law and employment disputes. Contact us or email hello@asglawpartners.com to schedule a consultation.