1

EMPLOYER EMPLOYEE RELATIONSHIP

Employment relationship under the control test is determined by asking

whether "the person for whom the services are performed reserves [a] the right to
control not only the end [to be] achieved but also the manner and means [to be
used in reaching such] end." The broader economic reality test calls for the
determination of the nature of the relationship based on the circumstances of the
whole economic activity, namely: "(1) the extent to which the services performed
are an integral part of the employer's business; (2) the extent of the worker's
investment in equipment and facilities; (3) the nature and degree of control
exercised by the employer; (4) the worker's opportunity for profit and loss; (5) the
amount of initiative, skill, judgment or foresight required for the success of the
claimed independent enterprise; (6) the permanency and duration of the
relationship between the worker and the employer; and (7) the degree of
dependency of the worker on the employer for his continued employment in that
line of business. The proper standard of economic dependence is whether the
worker is dependent on the alleged employer for his continued employment in that
line of business."
The two-tiered test gives a complete picture of the relationship between the
parties. Aside from the employer's power to control the employee, an inquiry into
the economic realities of the relationship helps provide a comprehensive analysis
of the true classification of the individual, whether as employee, independent
contractor, corporate officer or some other capacity. (A.M. No. 10-9-15-SC,
February 12, 2013 EN BANK) RE: REQUEST OF (RET.) CHIEF JUSTICE
ARTEMIO V. PANGANIBAN FOR RE-COMPUTATION OF HIS
CREDITABLE SERVICE FOR THE PURPOSE OF RE-COMPUTING HIS
RETIREMENT BENEFITS. DISSENTING OPINION OF Leonardo-de
Castro, Brion, Peralta, Bersamin, Villarama, Jr. and Mendoza)
To restate, the significant factor in determining the relationship of the parties
is the presence or absence of supervisory authority to control the method and the
details of performance of the service being rendered, and the degree to which the
principal may intervene to exercise such control. The presence of such power of
control is indicative of an employment relationship, while absence thereof is
indicative of independent contractorship. In other words, the test to determine the
existence of independent contractorship is whether one claiming to be an
independent contractor has contracted to do the work according to his own
methods and without being subject to the control of the employer except only as to
the result of the work. Such is exactly the nature of the relationship between
petitioner and private respondent.
Further, not every form of control that a party reserves to himself over the
conduct of the other party in relation to the services being rendered may be
accorded the effect of establishing an employer-employee relationship. The facts of

this case fall squarely with the case of Insular Life Assurance Co., Ltd. vs. NLRC.
In said case, we held that:
"Logically, the line should be drawn between rules that merely serve
as guidelines towards the achievement of the mutually desired result
without dictating the means or methods to be employed in attaining it,
and those that control or fix the methodology and bind or restrict the
party hired to the use of such means. The first, which aim only to
promote the result, create no employer-employee relationship unlike
the second, which address both the result and the means used to
achieve it. The distinction acquires particular relevance in the case of
an enterprise affected with public interest, as is the business of
insurance, and is on that account subject to regulation by the State
with respect, not only to the relations between insurer and insured but
also to the internal affairs of the insurance company. Rules and
regulations governing the conduct of the business are provided for in
the Insurance Code and enforced by the Insurance Commissioner. It
is, therefore, usual and expected for an insurance company to
promulgate a set of rules to guide its commission agents in selling its
policies that they may not run afoul of the law and what it requires or
prohibits. . . . None of these really invades the agent's contractual
prerogative to adopt his own selling methods or to sell insurance at
his own time and convenience, hence cannot justifiably be said to
establish an employer-employee relationship between him and the
company."
(AFP MUTUAL BENEFIT ASSOCIATION, INC., petitioner, vs.
NATIONAL LABOR RELATIONS COMMISSION and EUTIQUIO
BUSTAMANTE, respondents, G.R. No. 102199. January 28, 1997)
From jurisprudence, an important lesson that the first Insular Life case
teaches us is that a commitment to abide by the rules and regulations of an
insurance company does not ipso facto make the insurance agent an
employee. Neither do guidelines somehow restrictive of the insurance
agent's conduct necessarily indicate "control" as this term is defined in
jurisprudence. Guidelines indicative of labor law "control," as the first
Insular Life case tells us, should not merely relate to the mutually desirable
result intended by the contractual relationship; they must have the nature of
dictating the means or methods to be employed in attaining the result, or of
fixing the methodology and of binding or restricting the party hired to the
use of these means. In fact, results-wise, the principal can impose production
quotas and can determine how many agents, with specific territories, ought
to be employed to achieve the company's objectives. These are management
policy decisions that the labor law element of control cannot reach. Our
ruling in these respects in the first Insular Life case was practically reiterated
in Carungcong. Thus, as will be shown more fully below, Manulife's codes
of conduct, all of which do not intrude into the insurance agents' means and
manner of conducting their sales and only control them as to the desired

results and Insurance Code norms, cannot be used as basis for a finding that
the labor law concept of control existed between Manulife and Tongko.
(GREGORIO V. TONGKO, petitioner, vs. THE MANUFACTURERS
LIFE INSURANCE CO. (PHILS.), INC. and RENATO A. VERGEL DE
DIOS, respondents, G.R. No. 167622 June 29, 2010)
In Sevilla v. Court of Appeals, we observed the need to consider the
existing economic conditions prevailing between the parties, in addition to
the standard of right-of-control like the inclusion of the employee in the
payrolls, 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.
Thus, the determination of the relationship between employer and
employee depends upon the circumstances of the whole economic activity,
such as: (1) the extent to which the services performed are an integral part of
the employer's business; (2) the extent of the worker's investment in
equipment and facilities; (3) the nature and degree of control exercised by
the employer; (4) the worker's opportunity for profit and loss; (5) the amount
of initiative, skill, judgment or foresight required for the success of the
claimed independent enterprise; (6) the permanency and duration of the
relationship between the worker and the employer; and (7) the degree of
dependency of the worker upon the employer for his continued employment
in that line of business.
The proper standard of economic dependence is whether the worker is
dependent on the alleged employer for his continued employment in that line
of business. In the United States, the touchstone of economic reality in
analyzing possible employment relationships for purposes of the Federal
Labor Standards Act is dependency. By analogy, the benchmark of economic
reality in analyzing possible employment relationships for purposes of the
Labor Code ought to be the economic dependence of the worker on his
employer.
In Domasig v. National Labor Relations Commission, we held that in
a business establishment, an identification card is provided not only as a
security measure but mainly to identify the holder thereof as a bona fide
employee of the firm that issues it. Together with the cash vouchers covering
petitioner's salaries for the months stated therein, these matters constitute
substantial evidence adequate to support a conclusion that petitioner was an
employee of private respondent.
We likewise ruled in Flores v. Nuestro that a corporation who registers
its workers with the SSS is proof that the latter were the former's employees.
The coverage of Social Security Law is predicated on the existence of an
employer-employee relationship. (ANGELINA FRANCISCO, petitioner,
vs. NATIONAL LABOR RELATIONS COMMISSION, KASEI
CORPORATION, SEIICHIRO TAKAHASHI, TIMOTEO ACEDO,

DELFIN LIZA, IRENE BALLESTEROS, TRINIDAD LIZA and RAMON

ESCUETA, respondents, G.R. No. 170087, August 31, 2006)
MANAGEMENT PREROGATIVES
The added requirement of consultation imposed by the Secretary in
cases of contracting out for six (6) months or more has been rejected by the
Court. Suffice it to say that the employer is allowed to contract out services
for six months or more. However, a line must be drawn between
management prerogatives regarding business operations per se and those
which affect the rights of employees, and in treating the latter, the employer
should see to it that its employees are at least properly informed of its
decision or modes of action in order to attain a harmonious labormanagement relationship and enlighten the workers concerning their rights.
Hiring of workers is within the employer's inherent freedom to regulate and
is a valid exercise of its management prerogative subject only to special laws
and agreements on the matter and the fair standards of justice. The
management cannot be denied the faculty of promoting efficiency and
attaining economy by a study of what units are essential for its operation. It
has the ultimate determination of whether services should be performed by
its personnel or contracted to outside agencies. While there should be mutual
consultation, eventually deference is to be paid to what management
decides. Contracting out of services is an exercise of business judgment or
management prerogative. Absent proof that management acted in a
malicious or arbitrary manner, the Court will not interfere with the exercise
of judgment by an employer. As mentioned in the January 27, 1999
Decision, the law already sufficiently regulates this matter. Jurisprudence
also provides adequate limitations, such that the employer-must be
motivated by good faith and the contracting out should not be resorted to
circumvent the law or must not have been the result of malicious or arbitrary
actions. These are matters that may be categorically determined only when
an actual suit on the matter arises. (MANILA ELECTRIC COMPANY,
petitioner, vs. Hon. SECRETARY of LABOR LEONARDO
QUISUMBING and MERALCO EMPLOYEES and WORKERS
ASSOCIATION (MEWA), respondents, G.R. No. 127598, February 22,
2000.)

Finally, on the issue of whether petitioner should consult the pilot

concerned before exercising its option to retire pilots, we rule that this added
requirement, in effect, amended the terms of Article VII, Section 2 of the
1976 PAL-ALPAP Retirement Plan. The option of an employer to retire its
employees is recognized as valid. In the earlier case of Bulletin Publishing
Corp. v. Sanchez, this Court held:

The aforestated sections explicitly declare, in no uncertain terms, that

retirement of an employee may be done upon initiative and option of the
management. And where there are cases of voluntary retirement, the same is
effective only upon the approval of management. The fact that there are
some supervisory employees who have not yet been retired after 25 years
with the company or have reached the age of sixty merely confirms that it is
the singular prerogative of management, at its option, to retire supervisors or
rank-and-file members when it deems fit. There should be no unfair labor
practice committed by management if the retirement of private respondents
were made in accord with the agreed option. That there were numerous
instances wherein management exercised its option to retire employees
pursuant to the aforementioned provisions, appears to be a fact which private
respondents have not controverted. It seems only now when the question of
the legality of a supervisors union has arisen that private respondents
attempt to inject the dubious theory that the private respondents are entitled
to form a union or go on strike because there is allegedly no retirement
policy for their benefit. As above noted, this assertion does not appear to
have any factual basis.
Surely, the requirement to consult the pilots prior to their retirement
defeats the exercise by management of its option to retire the said
employees. It gives the pilot concerned an undue prerogative to assail the
decision of management. Due process only requires that notice be given to
the pilot of petitioner's decision to retire him. Hence, the Secretary of Labor
overstepped the boundaries of reason and fairness when he imposed on
petitioner the additional requirement of consulting each pilot prior to retiring
him. (PHILIPPINE AIRLINES, INC., petitioner, vs. AIRLINE PILOTS
ASSOCIATION OF THE PHILIPPINES, respondent, G.R. No. 143686,
January 15, 2002.)
We are not unmindful that every business enterprise endeavors to
increase profits. As it is, the Court will not interfere with the business
judgment of an employer in the exercise of its prerogative to devise means
to improve its operation, provided that it does not violate the law, CBAs, and
the general principles of justice and fair play. We have thus held that
management is free to regulate, according to its own discretion and
judgment, all aspects of employment, including hiring, work assignments,
working methods, time, place and manner of work, processes to be followed,
supervision of workers, working regulations, transfer of employees, work
supervision, layoff of workers and discipline, dismissal, and recall of
workers. (MANILA JOCKEY CLUB EMPLOYEES LABOR UNIONPTGWO, petitioner, vs. MANILA JOCKEY CLUB, INC., respondent, G.R.
No. 167760, March 7, 2007)
All these factors strongly give credence to the contention of
respondents that the real reason behind the shutdown of the corporation was
the formation of their union. Note that, to constitute an unfair labor practice,
the dismissal need not entirely and exclusively be motivated by the union's
activities or affiliations. It is enough that the discrimination was a

contributing factor. If the basic inspiration for the act of the employer is
derived from the affiliation or activities of the union, the former's
assignment of another reason, no matter how seemingly valid, is unavailing.
Concededly, the determination to cease operations is a management
prerogative that the State does not usually interfere in. Indeed, no business
can be required to continue operating at a loss, simply to maintain the
workers in employment. That would be a taking of property without due
process of law. But where it is manifest that the closure is motivated not by a
desire to avoid further losses, but to discourage the workers from organizing
themselves into a union for more effective negotiations with management,
the State is bound to intervene. (ME-SHURN CORPORATION AND
SAMMY CHOU, petitioners, vs. ME-SHURN WORKERS UNION-FSM
AND ROSALINA CRUZ, respondents, G.R. No. 156292, January 11,
2005)
Jurisprudence recognizes the exercise of management prerogative to
transfer or assign employees from one office or area of operation to another,
provided there is no demotion in rank or diminution of salary, benefits, and
other privileges, and the action is not motivated by discrimination, made in
bad faith, or effected as a form of punishment or demotion without sufficient
cause.
To determine the validity of the transfer of employees, the employer
must show that the transfer is not unreasonable, inconvenient, or prejudicial
to the employee; nor does it involve a demotion in rank or a diminution of
his salaries, privileges and other benefits. Should the employer fail to
overcome this burden of proof, the employee's transfer shall be tantamount
to constructive dismissal. (AILEEN G. HERIDA, petitioner, vs. F & C
PAWNSHOP and JEWELRY STORE/MARCELINO FLORETE, JR.,
respondents, G.R. No. 172601, April 16, 2009.)
It is noteworthy to state that an employer is free to manage and
regulate, according to his own discretion and judgment, all phases of
employment, which includes hiring, work assignments, working methods,
time, place and manner of work, supervision of workers, working
regulations, transfer of employees, lay-off of workers, and the discipline,
dismissal and recall of work. While the law recognizes and safeguards this
right of an employer to exercise what are clearly management prerogatives,
such right should not be abused and used as a tool of oppression against
labor. The company's prerogative must be exercised in good faith and with
due regard to the rights of labor. A priori, they are not absolute prerogatives
but are subject to legal limits, collective bargaining agreements and the
general principles of fair play and justice. (PHILEX GOLD
PHILIPPINES, INC., GERARDO H. BRIMO, LEONARD P. JOSEF, and
JOSE B. ANIEVAS, petitioners, vs. PHILEX BULAWAN SUPERVISORS
UNION, represented by its President, JOSE D. PAMPLIEGA,

respondents, G.R. No. 149758, August 25, 2005 Citing PhilippineSingapore Transport Services, Inc. v. NLRC)