The Supreme Court has affirmed that a company can be held liable for the unpaid separation pay of employees from its subsidiary if it obligated itself to fund the subsidiary’s retirement fund, or if it is considered an indirect employer. This ruling clarifies the extent of a parent company’s responsibility towards the employees of its subsidiaries, especially when operations cease and employees are terminated. It highlights the importance of clearly defining financial obligations in operational agreements and understanding potential liabilities under labor laws.

The Light Rail’s Retirement Promise: Who Pays When the Ride Stops?

The Light Rail Transit Authority (LRTA), a government-owned corporation, had a ten-year operations and management (O&M) agreement with Meralco Transit Organization, Inc. (MTOI). LRTA later acquired MTOI, renaming it Metro Transit Organization, Inc. (METRO), but maintained it as a separate entity. When the O&M agreement ended, METRO ceased operations, leading to the termination of its employees, including Romulo Mendoza, Francisco Mercado, Roberto Reyes, Edgardo Cristobal, Jr., and Rodolfo Roman. These employees received only half of their separation pay and sought the remainder from LRTA, arguing that LRTA was obligated to cover the full amount. This case examines whether LRTA is responsible for the remaining separation pay of METRO’s employees, despite the absence of a direct employer-employee relationship.

LRTA argued that it had no employer-employee relationship with the respondents and that the National Labor Relations Commission (NLRC) had no jurisdiction over the case. They cited the case of LRTA v. Venus, Jr., stating that as a government-owned and controlled corporation, disputes should be under the Civil Service Commission’s jurisdiction. However, the Supreme Court disagreed, emphasizing that the issue was not about the respondents’ employment with LRTA, but about LRTA’s liability for the money claims. The Court referenced Phil. National Bank v. Pabalan, noting that by engaging in business through a corporation, the government subjects itself to the rules governing private corporations.

The Supreme Court found LRTA liable for the unpaid separation pay based on two primary reasons. First, LRTA had obligated itself to fund METRO’s retirement fund, which included provisions for separation benefits. The O&M agreement between LRTA and METRO stipulated that LRTA would reimburse METRO for operating expenses. A letter from the Acting Chairman of the METRO Board of Directors, Wilfredo Trinidad, confirmed that funding for the retirement fund had always been considered an operating expense. Furthermore, LRTA Board Resolution No. 00-44, issued on July 28, 2000, demonstrated LRTA’s intent to update the Metro, Inc., Employee Retirement Fund to ensure it fully covered all retirement benefits payable to METRO’s employees.

Secondly, the Court determined that LRTA was solidarily liable as an indirect employer for the respondents’ separation pay. Under Article 107 of the Labor Code, an indirect employer is any entity that contracts with an independent contractor for the performance of work. Article 109 of the Labor Code mandates that every employer or indirect employer shall be responsible with its contractor or subcontractor for any violation of the Labor Code. Department Order No. 18-02, s. 2002, implementing Articles 106 to 109 of the Labor Code, provides that the principal shall be solidarily liable if the contract is preterminated for reasons not attributable to the contractor or subcontractor.

In this case, the non-renewal of the O&M agreement was solely at the behest of LRTA, making them responsible for the adverse effects on METRO’s employees. While it was a non-renewal rather than a pretermination, the effect on the workers—the involuntary loss of their employment—was the same. The court reinforced its stance by quoting relevant articles from the Labor Code, illustrating the extent of an indirect employer’s liability. Specifically, Article 109 states that:

“x x x every employer or indirect employer shall be held responsible with his contractor or subcontractor for any violation of any provisions of this Code. For purposes of determining the extent of their civil liability under this Chapter, they shall be considered as direct employers.”

The decision also addressed the issue of prescription, with the LRTA arguing that the respondents’ claim had already prescribed. The Court cited De Guzman v. Court of Appeals, affirming the applicability of Article 1155 of the Civil Code to an employee’s claim for separation pay. The Court agreed with the NLRC’s conclusion that the prescriptive period for respondents’ claim was interrupted by their letters to LRTA demanding payment of the balance of their separation pay. Article 1155 of the Civil Code states:

“The prescription of actions is interrupted when they are filed before the court, when there is a written extrajudicial demand by the creditors, and when there is a written acknowledgment of the debt by the debtor.”

In conclusion, the Supreme Court dismissed LRTA’s petition, affirming the decision of the Court of Appeals and reinstating the Labor Arbiter’s decision. The Court emphasized that LRTA could not evade its responsibility to the employees of its subsidiary, METRO, due to its contractual obligations and its role as an indirect employer. This ruling serves as a reminder to companies about the importance of understanding their responsibilities and potential liabilities in business relationships, particularly in the context of labor law.

FAQs

What was the key issue in this case?	The key issue was whether LRTA, as the parent company of METRO, was liable for the unpaid separation pay of METRO’s employees after the O&M agreement ended and METRO ceased operations. This involved determining if LRTA had a contractual obligation or acted as an indirect employer.
Did the Supreme Court find LRTA liable?	Yes, the Supreme Court affirmed the lower courts’ decisions, holding LRTA liable for the remaining 50% of the employees’ separation pay. The court based this decision on LRTA’s obligation to fund METRO’s retirement fund and its status as an indirect employer.
What is an indirect employer under the Labor Code?	An indirect employer is any entity that contracts with an independent contractor for the performance of work, task, job, or project. The Labor Code holds indirect employers solidarily liable with the contractor for violations of the code.
What was the significance of LRTA Board Resolution No. 00-44?	LRTA Board Resolution No. 00-44, issued on July 28, 2000, authorized the updating of the Metro, Inc., Employee Retirement Fund. This resolution demonstrated LRTA’s intent to ensure the fund fully covered all retirement benefits payable to METRO’s employees, solidifying LRTA’s obligation.
How did the O&M agreement affect LRTA’s liability?	The O&M agreement between LRTA and METRO stipulated that LRTA would reimburse METRO for operating expenses. The courts interpreted this to include funding for the retirement fund, thus creating a contractual obligation for LRTA to cover the separation pay.
What is the effect of the government engaging in business through a corporation?	When the government engages in business through a corporation, it subjects itself to the rules governing private corporations. This means that government-owned corporations can be held liable under the Labor Code, like any private entity.
What is the role of Department Order No. 18-02, s. 2002?	Department Order No. 18-02, s. 2002, provides the rules implementing Articles 106 to 109 of the Labor Code. It clarifies the solidary liability of the principal in cases where the contract is preterminated for reasons not attributable to the contractor or subcontractor.
How did the court address the prescription issue?	The Court affirmed that the prescriptive period for the respondents’ claim was interrupted by their written demands to LRTA for payment of the remaining separation pay. This interruption is based on Article 1155 of the Civil Code.

This case underscores the importance of clearly defining contractual obligations and understanding the potential liabilities associated with subsidiary relationships and operational agreements. Companies must ensure that they are aware of their responsibilities under labor laws, both as direct and indirect employers, to avoid similar disputes.

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: LIGHT RAIL TRANSIT AUTHORITY vs. ROMULO S. MENDOZA, ET AL., G.R. No. 202322, August 19, 2015