With more and more businesses seeing value in engaging skilled Filipino contractors to perform specific services, the persistent challenge that confronts them is misclassification of their contractors as their employees.
This is unsurprising, as there is a marked difference in the benefits and safeguards afforded to employees under Philippine laws, as opposed to the looser, if any at all, protections given to workers who are engaged under a mere contract. Unlike contractors, employees are entitled to security of tenure under the Labor Code and all the benefits that are attached to it, including mandatory payments by their employer for overtime and holiday work, service incentive leaves, and retirement, among others.
Misclassification of a worker from contractor to employee, thus, can become an expensive mistake for many businesses.
Philippine courts have unfortunately not yet imposed an absolute test when challenges on worker misclassification arise. More often, these contentions are judged on a case-to-case basis with no clear rule to follow that businesses can immediately consult. With this uncertainty, reference and guidance can be sought from how another jurisdiction has recently treated cases of misclassification.
On 10 January 2024, the United States (US) Department of Labor (DOL) published its Final Rule to determine whether a worker is an independent contractor or an employee under its Fair Labor Standards Act. To classify a worker as an independent contractor, not as an employee, the following factors must be considered:
- Opportunity for profit or loss depending on managerial skill;
- Investments by the worker and the potential employer;
- Degree of permanence of the work relationship;
- Nature and degree of control over the work;
- Extent to which the work performed is an integral part of the potential employer's business; and
- Skill and initiative.
The Final Rule overturned an earlier US rule that placed greater weight on two core factors, namely the nature and degree of the worker's control over the work and the worker's opportunity for profit or loss. Now, one factor cannot be intended to be weighed more heavily than another when analyzing whether a worker is properly classified. The economic reality test set forth by the Final Rule focuses more broadly on a worker's economic dependence on the business of the employer, considering the totality of the circumstances.
The Philippines has yet to lay down its own version of the Final Rule regarding independent contractors. In essence, the US rule requires consideration of the totality of circumstances of the worker, as opposed to favoring one factor over another. A cursory look at our case law would show that there is no such consistency for the Philippines.
Philippine courts have generally relied on the so-called four-fold test in determining the existence of an employment relationship, which requires the establishment of the following: (a) selection and engagement of the employee; (b) payment of wages; (c) power to dismiss; and (d) power to control the employee's conduct. The most important of these four is the right of control test where the person for whom the services are performed reserves a right to control not only the end to be achieved but also the means to be used in reaching such end.
In a 2006 case,1 notably similar to the US Final Rule, the Philippine Supreme Court has declared that 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. In this case, not one factor was given more premium over another when identifying an employment relationship.
A 2004 case2 placed specific premium on the criteria that independent contractors often present themselves to possess unique skills, expertise or talent to distinguish them from ordinary employees. The specific selection and hiring of the worker in that case, because of his unique skills, talent and celebrity status not possessed by ordinary employees, is a circumstance that was considered as indicative, but not conclusive, of an independent contractual relationship.
In 2015 meanwhile, the Court in one case held that the presumption is that when the work done is an integral part of the regular business of the employer and when the worker, relative to the employer, does not furnish an independent business or professional service, such work is a regular employment of such employee and not an independent contractor.3
In a 2022 case,4 however the Philippine Supreme Court seemingly placed heavy emphasis on the economic dependency test over the traditional four-fold test when determining the existence of an employer-employee relationship between an independent contractor and their principal. It placed great weight on the fact that the supposed contractors therein were performing essential functions that directly contributed to their principal's business operations.
This cursory look at how courts identify an employment relationship would show an inconsistent characterization of independent contractors, of which businesses should be wary. Like the Final Rule, the courts had set out a totality of circumstances rule to determine whether or not a worker can be classified as an employee. However, more recent jurisprudence appears to have steadily departed from the same, now seemingly putting a greater weight on the economic dependence of the worker to the line of business on which he or she is engaged.
Adapting to the latest court declaration affecting independent contractors is crucial for businesses who have been engaging these workers. Independent contractor agreements must be carefully worded to avoid any and all badges of employment. The most crucial element, based on the latest ruling of the Supreme Court, appears to be that the contract must expressly state that the independent contractors are not economically reliant on their principal. As a result, principals will now need to encourage their independent contractors to engage in contracts with other principals. This step will help establish that the independent contractors are not solely dependent on the principal for their economic well-being.
Misclassification will always prove to be a potential risk when engaging independent contractors. The Philippines currently has not provided its own Final Rule on characterizing independent contractors, thus it would be prudent for businesses to always be on top of every case law pronouncements that involve such workers.
Footnotes
1. Francisco vs. National Labor Relations Commission et al., G.R. No. 170087 (2006).
2. Jose Y. Sonza vs. Abs-Cbn Broadcasting Corporation, G.R. No. 138051, (2004).
3. Begino vs. ABS-CBN Corporation, G.R. No. 199166 (2015).
4. Ditiangkin vs. Lazada E-Services Philippines, Inc., G.R. No. 246892 (2022).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
