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LECTURE NOTES ON REGULATORY FRAMEWORK AND

LEGAL ISUES IN BUSINESS
BSA 2104; SECTIONS BCC and BBC
College of Business Administration
University of the East -- Manila

ATTY. BENJAMIN R. REONAL - Professor

LABOR LAW AND SOCIAL LEGISLATION

Part 2

1. SOCIAL JUSTICE POLICY MANDATES COMPASSIONATE ATTITUDE TOWARDS THE

WORKING CLASS; WHILE THE CONSTITUTION’S PROTECTION TO LABOR DOES NOT
CONDONE WRONGDOING, IT URGES MODERATION OF THE SANCTIONS THAT MAY BE
IMPOSED. (Gandara Mill Supply vs. NLRC, 300 SCRA 702 [1998].)

In holding the constitutional mandate of protection to labor, the rigid rules of

procedure may sometimes be dispensed with to give room for compassion. The
doctrine of “compassion ate justice” is applicable under the premises, in view of the fact
that the worker is the breadwinner of his family. The Social Justice policy mandates a
compassionate attitude toward the working class in its relation to management. In
calling for the protection to labor, the Constitution does not condone wrongdoing by the
employee, it nevertheless urges a moderation of the sanctions that may be applied to
him in the light of the many disadvantages that weigh heavily on him like an alabatrross
on his neck.

2. GENERAL LABOR CONCEPTS

2.1. General Rule

Article 4 Labor Code. -- All doubts in the implementation and

interpretation of the provision of this Code, including its implementing
rules and regulations. shall be resolved in favor of labor.

Moreover, Article 1702 of the New Civil Code provides that, in

case of doubt, all labor legislation and all labor contracts shall be
construed in favor of the safety and decent living of the laborer. Any
doubt or ambiguity in the contract between management and the union
members should be resolved in favor of the latter. Therefore, there is no
doubt, in this case, that the welfare of the laborers stand supreme. (BPI
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vs. BPI Employees Union – Metro Manila, G.R. No. 175678 [22 August
2012])

2.2. Interpretation of Labor Code. -- In interpreting Labor Code provisions,

the workingmen’s welfare should be the primordial and paramount
consideration.

In carrying out and interpreting the Labor Code’s provisions and

its implementing regulations, the workingman’s welfare should be the
primordial and paramount consideration. This kind of interpretation
gives meaning and substance to the liberal and compassionate spirit of
the law as provided for in Article 4 of the Labor Code as amended, which
states that “all doubts in the implementation and interpretation of the
provisions of the Labor Code including its implementing rules and
regulation shall be resolved in favor of labor,” as well as the
Constitutional mandate that the State shall afford full protection to labor
and promote full employment opportunities for all.

2.3. BURDEN OF ROOF IS ALWAYS UPON EMPLOYER TO SHOW VALIDITY OF

ITS EXERCISE OF MANAGEMENT PREROGATIVES, ESPECIALL AS
REGARDS TERMINATION OF EMPLOYMENT.

In termination cases, the burden of proof rests on the employer to show

that the dismissal is for just cause.

When there is no showing of a clear, valid and legal cause for the
termination of employment, the law considers the matter a case of illegal
dismissal and the burden is on the employer to prove that the
termination was for a valid or authorized cause. And the quantum of
proof which the employer must discharge is substantial evidence. An
employee’s dismissal due to serious misconduct must be supported by
substantial evidence. “Substantial Evidence” is the amount of relevant
evidence as a reasonable mind might accept as adequate to support a
conclusion, even if other minds, equally reasonable might conceivably
opine otherwise. (Alex Gurango vs. Best Chemicals and Plastics Inc. and
Moon Pyo Hong, G.R. No. 174593, 25 August 2010 citing AMA Computer
College -- East Rizal vs Ignacio, G. R. No. 178520, 23 June 2009, 590
SCRA 633).

3. “NO WORK, NO PAY” PRINCIPLE.

The age-old rule governing the relation between labor and capital, or management
and employee of a “fair day’s wage for a fair day’s labor” remains as the basic factor in
determining employees’ wages.
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The age-old rule governing the relation between labor and capital, or
management and employee of a “fair day’s wage for a fair day’s labor” remains
as the basic factor in determining employees’ wages. If there is no work
performed by the employee, there can be no wage or pay unless, of course, the
laborer was able, willing and ready to work but was illegally locked out,
suspended or dismissed, or otherwise illegally prevented from working. It
would neither be fair nor just to allow the workers to recover something they
have not earned and could not have earned because they did not render
services. (Aklan Electric Cooperative, Inc. vs. NLRC, 323 SCRA 258 [2000])

3.1 “No Work, No Pay” principle does not apply when the employee himself was
forced out of job. (Neeland vs. Villanueva, 364 SCRA 204 [2001])

“Back salaries and other economic benefits cannot be denied on the ground that
the employee did not work.” For the principle of “no work, no pay” does not apply
when the employee himself was forced out of job.

As ruled sympathetically in University of Pangasinan Faculty Union vs. University

of Pangasinan, (127 SCRA 691 [1984]), the “no work, no pay” principle does not apply
where the employee is “constrained to take mandatory leave from work,” and for this,
the employee cannot altogether be faulted or begrudged for asserting and claiming that
which is due him under the law. Indeed, it is not always true that back salaries are
paid only when work was done.

Thus in Serrano vs. NLRC, (323 SCRA 445 [2000]), the employer is liable for back
wages when he fails to give notice to the employee before the latter is dismissed from
work, regardless of fault. Back wages, too, are paid to an employee who is merely
reinstated in the payroll` under Art. 229 of the Labor Code which provides that “[i]n
any event, the decision of the Labor Arbiter reinstating a dismissed or separated
employee insofar as the reinstated aspect is concerned, shall be immediately executory,
even pending appeal. The employee shall either be admitted back to work under the
same terms and conditions prevailing prior to his dismissal or separation or, at the
option of the employer, merely reinstated in the payroll.

“For another, the poor employee could offer no work since he was forced out of
work. Thus, to always require complete exoneration or performance of work would
ultimately leave the dismissal uncompensated no matter how grossly disproportionate
the penalty was. Clearly, it does not serve justice to simply restore the dismissed
employee to his position and deny him his claim for back salaries and other economic
benefits on these grounds. We would otherwise be serving justice in halves.” (Neeland
vs. Villanueva, ibid.)
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4. “LAST IN, FIRST OUT” (LIFO) RULE. – LIFO RULE APPLIES TO TERMINATION OF
EMPLOYMENT IN THE LINE OF WORK.

It is not disputed that per CBA, the LIFO rule applies to termination of
employment in line of work. Verily, what is contemplated in the LIFO rule is that when
there are two or more employees occupying the same position in the company affected
by the retrenchment program, the last one employed will necessarily be the first to go.
(Maya Farms Employees Organization vs. NLRC, 239 SCRA 508 [1994]).

4.1 In the case of any CBA provision, the “last in, first out” method yields to the
sound exercise of management prerogatives.

4.2 In De La Salle University vs. De La Salle University Employees Association,

(330 SCRA 363 [2000]), it was held that the employer can adopt valid and equitable
grounds as basis for lay-off or separation.

“We agree with the voluntary arbitrator that as an exercise of management

prerogative, the University has the right to adopt valid and equitable grounds as basis
for terminating or transferring employees. As we ruled in the case of Autobus Workers’
Union (AWU) and Ricardo Escanlar vs. National Labor Relations Commission, “[a] valid
exercise of management prerogative is one which, among others, covers work
assignment, working methods, time, supervision of workers, transfer of employees,
work supervision, and the discipline, dismissal and recall of workers. Except as provided
for, or limited by special laws, an employer is free to regulate, according to his own
discretion and judgment, all aspects of employment.”

5. “ONE UNION-ONE COMPANY” POLICY.

As a general rule, there should only be one union in one employer unit. The
proliferation of unions in one employer unit should be discouraged unless there are
compelling reasons which would deny a certain class of employees the right to self-
organization. (Philtranco Service Enterprises vs. Bureau of Labor Relations, 174 SCRA
388 [1989])

In this case, the Supreme Court was constrained to disallow the formation of
another union. There is no dispute that there exists a labor union in the company,
which is the collective bargaining agent of the rank and file employees in the Company.

The Court saw no need for the formation of another union in the Company. The
qualified members of the challenger-union may join the incumbent union if they want
to be union members and to be consistent with the one-union, one-company policy of
the Department of Labor and Employment, and the laws it enforces. As held in the case
of General Rubber and Footwear Corp. vs. Bureau of Labor Relations. 155 SCRA 283
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[1987]). The Court found that the “substantial differences” in the terms and conditions
of employment between the challenger-union’s members and the rest of the company’s
rank and file employees are more imagined than real. The Court held that the
differences alleged are not substantial or significant enough to merit the formation of
another union.

The one company-one union policy must yield to the right of the employees to
form unions or associations for purposes not contrary to law, to self-organization and
to enter into collective bargaining negotiations among others, which the Constitution
guarantees.

The “one union-one company” rule is not without exception. The exclusion of
the subject employees from the rank-and-file bargaining unit and the CBA is definitely a
“compelling reason” for it completely deprived them of the chance to bargain
collectively with their employer and are, thus left with no recourse but to group
themselves into a separate and distinct bargaining unit and form their own organization,
the rationale behind the exception to the aforementioned policy is further elucidated in
Knitjoy Mandaluyong, Inc. Ferrer-Calleja, (214 SCRA 174 [1992]),

5.1. Rationale for “one company-one union” policy.

The ends of unionism are better served if all the rank-and-file employees, with
substantially the same interests and who invoke their right to self-organization, are part
of a single unit so that they can deal with their employer with just one and yet potent
voice. The employees’ bargaining power with management is strengthened thereby.
(Pagkakaisa ng mga Manggagawa sa Triumph International-United Lumber and General
Workers of the Phils. Vs. Ferrer-Calleja, 181 SCRA 119 [1990])
.

6. “EQUAL PAY FOR EQUAL WORK” PRINCIPLE

6.1 The long-honored legal truism dictates that persons who work with
substantially equal qualifications, skill, effort and responsibility, under similar conditions,
should be paid similar salaries.

6.2 If an employer accords employees the same position and rank, the
presumption is that these employees perform equal work. Hence, the doctrine of
“equal pay for equal work” will apply. (Philex gold Philippines, Inc. vs. Philex Bulawan
Supervisors Union, 468 SCRA 111 [2005])

7. NON-DIMUNUTON OF BENEFITS.
Article 100, Labor Code. Prohibition against elimination or diminution
of benefits. –
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7.1 Requisites for voluntary employer practice such that the same
cannot be unilaterally withdrawn anymore: (a) It should have been practiced
over a long period of time; and (b) It must be shown to have been consistent
and deliberate. (Sevilla Trading Company vs. Semana, 428, SCRA 239 [2004],
citing Globe Mackay Cable and Radio Corp. vs. NLRC, 163 SCRA 71 [1988])

7.2 As to length of time required to ripen into a corporate policy:

The test of long practice has been enunciated thus: where the company
agreed to continue giving holiday pay knowing fully well that said employees are
not covered by the law requiring payment of holiday pay. (Oceanic Pharmacal
Employees Union (FFW) vs. Inciong, 94 SCRA 270 [1979]).

With regard to the length of time the company practice should have been
exercised to constitute voluntary employer practice which cannot be unilaterally
withdrawn by the employer, the Court held that jurisprudence has not laid down
any rule requiring a specific minimum number of years.

7.3 Nature of Bonus: A bonus is generally an act of gratuity or liberality

and hence, not demandable as a matter of right. However, a bonus becomes a
demandable or enforceable obligation when it is made part of the wage or
salary or compensation of the employee. It cannot be unilaterally withdrawn
even if there were company losses, without the consent of the employee.
Hence, a stipulation in the Collective Bargaining Agreement providing for 13 th,
14th, and 15th month pay bonuses without qualifications or conditions, is
demandable on the part of the employees, and the employer cannot validly
refuse to give the same on account of business losses. (Eastern
Telecommunications Phils. Vs. Eastern Telecommunications Employees Union,
G.R. No 185665, 08 February 2012).

7.4 As an act of liberality: To ripen into a company practice that is

demandable as a matter of right, the giving of the benefit should not be by
reason of a strict legal or contractual obligation, but by reason of an act of
liberality on the part of the employer. (Pag-asa Steel Works, Inc. vs. Court of
Appeals, 486 SCRA 475 [2006]).

7.5. Nature of “benefit”; entitlement to the same will not require

additional service.

The requirement of rendering additional service differentiates overtime

pay from benefits such as thirteenth month pay or yearly merit increase. These
benefits do not require any additional service from their beneficiaries. Thus,
overtime pay does not fall within the definition of benefits under Article 100 of
the Labor Code. (San Miguel Corporation vs. Numeriano Layoc, Jr, et al. G. R.
No. 149640, 19 October 2007).
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Respondent employer is not obliged to allow all its employees to render

overtime work every day for the whole year; but only those employees whose
services were needed after their regular working hours and only upon
instructions of management. The overtime work was not given to each
employee consistently, deliberately and unconditionally, but as compensation
for additional services rendered. Thus overtime pay does not fall within the
definition of benefits under Art. 100 of the Labor Code on prohibition against
elimination or diminution of benefits.

EMPLOYER-EMPLOYEE RELATIONSHIP

1. CONCEPT OF EMPLOYHER-EMPLOYEE RELATIONSHIP

The employer-employee relationship is contractual in character. It arises from the

agreement of the parties, e.g., for one to render services to another in exchange for
remuneration or compensation. However, such relationship is so impressed with
the public interest that labor contracts must yield to the common good (Civil
Code, Art. 1700). Thus, employment contracts are subject to laws on minimum
standards of wages, hours of work, right to self-organization (union), collective
bargaining, strikes, picketing and other collective actions.

2. FOUR-FOLD TEST. - THE CONTROL TEST IS THE MOST CRUCIAL INDICATION OF THE
EXISTENCE OF AN EMPLOYER-EMPLOYEE RELATIONSHIP. (The Manila Hotel Corp.
vs. NLRC; 343 SCRA 1 [2000]; Jo vs. NLRC; 324 SCRA 437 [2000]; Canlubang Security
Agency Corporation vs. National Labor Relations Commission, et al., 216 SCRA 280
[1992])

In determining whether a given set of circumstances constitute or exhibit an

employer=employee relationship, the accepted rule is that the elements or
circumstances relating to the following matters shall be examined and considered.

a. the selection and engagement of the employees;

b. the payment of wages;
c. the power of dismissal; and
d. the power to control the employees’ conduct.

2.1. The Control Test.

Of these four tests however, the most important test is the element of control,
which has been defined as “one where the employer has reserved the right to control
not only the work to be achieved, but the manner and method by which such work is to
be achieved.” (LVN Pictures vs. LVN Musician’s Guild, 1 SCRA 132). Simply put, an
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employer-employee relationship is deemed to exist where the employer has a right to

control the conduct of the employee in relation to his work. (See also: Great Pacific Life
Assurance Corp. vs. National Labor Relations, 187 SCRA 694 [1990]; Hydro Resources
Contractor’s Corporation vs. Pagalilauan, 172 SCRA 399 [1989]).

The power of control refers to the existence of the power and not necessarily
to the actual exercise thereof. It is not essential for the employer to actually supervise
the performance of duties of the employees; it is enough that the employer has the
right to wield that power. (Republic of the Philippines represented by the Social
Security Commission and Social Security Services vs. Asiapro Cooperative, G.R. No.
172101, 23 November 2007).

2.2 Economic Reality Test.

Aside from the control test, the Supreme Court has also used the economic
reality test. The economic realities prevailing within the activity or between the parties
are examined, taking into consideration the totality of circumstances surrounding the
true nature of the relationship between the parties. This is especially appropriate when
there is no written agreement or contract on which to base the relationship. In our
jurisdiction, the benchmark of economic reality in analyzing possible employment
relationships for purposes of applying the Labor Code ought to be the economic
dependence of the worker on his employer.

2.3 DIFFERENCE BETWEEN AN EMPLOYEE AND INDEPENDENT CONTRACTOR (Tan vs.

Lagrama, 387 SCRA 393 [2002]).

Of the four elements of the employer-employee relationship, the “control test”

is the most important. Compared to an employee, an independent contractor is one
who carries on a distinct and independent business and undertakes to perform the job,
work, or service on its own account and under its own responsibility according to its
own manner and method, free from the control and direction of the principal in all
matters connected with the performance of the work except as to the results thereof.
Hence, while an independent contractor enjoys independence and freedom from the
control and supervision of his principal, an employee is subject to the employer’s power
to control the means and methods by which the employee’s work is to be performed
and accomplished.

JOB-CONTRACTING AND LABOR-ONLY CONTRACTING ARRANGEMENTS

CONTRCTING OUT IS VALID AS AN EXERCISE OF MANAGEMENT PREROGATIVE FOR AS

LONG AS IT COMPLIES WITH THE LIMITS AND STANDARDS PROVIDED BY THE LABOR CODE.
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The Supreme Court has held in a number of cases that an employer’s good faith in
implementing a redundancy program is NOT necessarily destroyed by the availment of the
services of an independent contractor, to replace the services of the terminated employees.
The reduction of employees in a company made necessary by the introduction of the services of
an independent contractor is justified when the latter is undertaken in order to effectuate
more economic and efficient methods of production. The burden of proof is thus on the
complaining employees to show that the management acted in a malicious or arbitrary manner
in engaging the services of an independent contractor to do a specific activity. Absent such
proof, the Supreme Court has no basis to interfere with the bona fide decision of management
to effect a more economic and efficient methods of production. (Asian Alcohol Corporation vs.
NLRC, 305 SCRA 416, at 435-436 [1999]; Serrano vs. NLRC, G.R. No. 117040 27 January 2000).

Job-contracting or outsourcing is a legitimate activity in the exercise of management’s

prerogatives, for as long as it is done in good faith, pursuant to the employer’s valid
interests and not for the circumvention of the employees’ rights. (Temic Automative Phils. Vs.
Temic Automotive Phils Inc. Employees Union-FFW, G.R. No. 186965, 23 December 2009).

The law and its implementing rules recognize that management may rightfully
exercise its prerogatives in determining what activities may be contracted out, regardless of
whether such activity is peripheral or core in nature. (Alviado et al. vs. Procter & Gamble, and
Promm Gemm, G.R. No. 160506, 09 March 2010).

2.4 When is there valid “Job-contracting” ?

Specifically, there is “job contracting” where: (1) the contractor carries on an

independent business and undertakes the contract work on his own account under his own
responsibility according to his manner and method, free from the control and direction of his
employer or principal in all matters connected with the performance of the work except as to
the results thereof; and (2) the contractor has substantial capital or investment in the form of
tools, equipment, machineries, work premises, and other materials which are necessary to the
conduct of the business.

2.5 Distinction between valid job-contracting versus labor-only contracting

In Digital Telecommunications Phiippines, Inc. vs. Digital Employees Union, et al. (G.R.
No. 184903-04, 10 October 2012, citing PCI Automation Center Inc., vs. NLRC, 322 Phil. 536
[1996], the Supreme Court made the following distinctions: “the legitimate job contractor
provides services while the labor-only contractor provides only manpower. The legitimate job
contractor undertakes to perform a specific job for the principal while the labor-only contractor
merely provides the personnel to work for the principal employer.”
3. LABOR-ONLY CONTRACTING ARRANGEMENTSPROHIBITED BY LAW

3.1 When is there “labor-only” contracting?

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A person is deemed to be engaged in “labor-only”contracting where: (1)

the person supplying workers to an employer does not have substantial capital
or investment in the form of tools, equipment, machineries, work premises,
among others; and (2) the workers recruited and placed by such person are
performing activities which are directly related to the principal business of such
employer. (Baguio, et al. vs. NLRC, et al., 202 SCRA 465 [1991]); or that the
principal has control over the conduct of the work or services performed by the
employees of the job-contractor. (See Dept. Order No. 18-02, series of 2002)

MANAGEMENT PREROGATIVES

1. THE FREE WILL OF MANAFGEMENT TO CONDUCT ITS OWN AFFAIRS TO ACHIEVE ITS
PURPOSE CANNOT BE DENIED.

“While the law is solicitous of the welfare of employees, it must also protect the
right of an employer to exercise what are clearly management prerogatives. The free
will of management to conduct its own business affairs to achieve its purpose cannot be
denied.

“Except as limited by special laws, an employer is free to regulate, according to

his own discretion and judgment, all aspects of employment, including hiring, work
assignments, working methods, time, place and manner of work, tools to be used,
processes to be followed, supervision of workers, working regulations, transfer of
employees, work supervision, lay-off of workers and the discipline, dismissal and recall
of work. (San Miguel Brewery Sales Force Union [PTGWO] vs. Ople, G.R. No. L-53515
1989, 170 SCRA 25 [08 February 1989]); Republic Savings Bank vs. CIR, 21 SCRA 226,
235 [1967]; Manila Jockey Club Employees Labor Union – PTGWO vs Manila Jockey
Club, Inc., G.R. No. 167760, 07 March 2007.)

While it is true that compassion and human consideration should guide the
disposition of cases involving termination of employment since it affects one’s source of
livelihood, it should not be overlooked that the benefits accorded to labor do not
include compelling an employer to retain the services of an employee who has been
shown to be a gross liability to the employer. The law in protecting the rights of the
employees authorizes neither oppression nor self-destruction of the employer. It
should be made clear that when the law tilts the scale of justice in favor of labor, it is
but a recognition of the inherent economic inequality between labor and
management. The intent is to balance the scale of justice, to put the two parties in
relatively equal positions, There may be cases where the circumstances warrant
favoring labor over the interests of management but never should the scale be so tilted
if the result is an injustice to the employer. (Mansion Printing Center vs. Bitara, Jr. G.R.
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No. 168120,25 January 2012 citing Associate Justice Ma. Alicia Austria-Martinez vs.
Philippine Long Distance and Telephone Company, Inc. vs. Balbastro, G.R. No. 157202,
28 March 2007.)