Dusol vs. Lazo

The existence of an employer-employee relationship is established by the four-fold test — selection and engagement, payment of wages, power of dismissal, and the power of control — and the power of control need only exist, not be actually exercised; an employer's admission that he left the entire business operation to the workers is itself proof that the power of control resided in him. Receipt of a share in profits or gross returns does not establish a partnership where the amounts are in fact wages of an employee, and the absence of any documentary or circumstantial evidence of an intent to form a partnership defeats the defense of industrial partnership.

Pedro Dusol began working as caretaker of Ralco Beach, a beach resort then operated by the parents of respondent Emmarck Lazo, in 1993. Emmarck later took over the business. Pedro married Maricel in 2001, and Emmarck employed Maricel in January 2007 to manage the store inside the resort. The dispute centers on whether the relationship between the Dusols and Emmarck was one of employment or industrial partnership, and whether the Dusols' termination when Emmarck decided to lease out the resort constituted illegal dismissal.

On January 6, 1993, Pedro Dusol began working as caretaker of Ralco Beach, a beach resort then operated by the parents of Emmarck Lazo. As the only employee, Pedro cleaned, watched, and secured the beach area, cottages, rest house, store, and other resort properties, and also entertained guests and cottage occupants. He worked from 5 a.m. to 9 p.m. every day, including weekends and holidays, receiving a weekly allowance of P100.00, later increased to P239.00 in 2001. Sometime in 1995, Pedro was also asked to work in a fishpond business owned by Emmarck's parents under an arrangement where he would be compensated based on harvest income. This arrangement lasted only two harvest seasons, approximately seven months, as the business was not profitable. Pedro continued serving as caretaker of Ralco Beach throughout and after this endeavor.

In 2001, Pedro married Maricel. On January 28, 2007, Emmarck employed Maricel to manage the store in the resort, paying her P1,000 a month plus a 15% commission on rentals collected from cottages and the rest house. Like Pedro, she worked from 5 a.m. to 9 p.m. every day. The accounting records of the resort showed that items sold in the store carried a 20% mark-up — 10% to generate income and 10% to cover operational expenses — and that Pedro's and Maricel's allowances and commissions were deducted from the rentals and sales.

Emmarck denied the existence of an employer-employee relationship, asserting that Pedro and Maricel were his industrial partners. He claimed that Pedro became an industrial partner of his mother in the fishpond business in 1993, entitled to one-third of the total harvest plus a weekly allowance of P230.00, and that Emmarck merely adopted this arrangement when he took over. Similarly, Maricel was taken in as an industrial partner to manage the store, entitled to a P1,000.00 monthly allowance and 15% commission on resort facility rentals, and allowed to sell anything in the store with profits solely belonging to her. Emmarck stated that he put up cottages and a store at the beach property so Pedro and Maricel would have a means of livelihood, allowed them to reside on the property free of charge, and had no power to dismiss them because the existence of a partnership depends on the viability of the business. He insisted he had no control over them and left the entire business operation in their hands.

Sometime in July 2008, Emmarck notified Pedro and Maricel that he would be leasing out Ralco Beach because the business was not profitable and their services were no longer needed. On July 31, 2008, Pedro and Maricel stopped reporting for work and subsequently filed a complaint for illegal dismissal, underpayment of benefits, claim for damages, and attorney's fees. The Labor Arbiter dismissed the complaint for lack of jurisdiction, finding no employer-employee relationship under the control test. The NLRC reversed, declaring Pedro and Maricel as employees and their dismissal illegal, but the Court of Appeals reversed the NLRC and reinstated the Labor Arbiter's dismissal, finding the element of control absent.

• Employer-Employee Relationship: Petitioners argued that they were employees of Emmarck in Ralco Beach, not business partners, as Emmarck and his parents engaged and hired them and paid their salaries, and Emmarck terminated their employment.
• Existence of Control: Petitioners maintained that the CA erred in concluding that the element of control was lacking, as their daily rendition of work and regular submission of accounting of rentals and store sales were indicative of control. They contended that explicit or written directives and guidelines were unnecessary since Ralco Beach was not large and its operation was not complicated.
• No Other Livelihood: Petitioners asserted that due to their workload, they could no longer engage in other means of livelihood, and there was no proof that Maricel was allowed to sell personal items in the store, as all items sold were owned by Emmarck.
• Absurdity of Partnership Claim: Petitioners argued that Emmarck's claim that Pedro was an industrial partner in the fishpond business was unsubstantiated, and that it was absurd for a person receiving a mere P230.00 allowance to be considered a business partner.

• Industrial Partnership: Respondent maintained that there was sufficient proof that Pedro and Maricel were his industrial partners, especially since they shared in the profits of the businesses.
• Admission of Partnership: Respondent asserted that Pedro admitted being a partner in the fishpond business.
• Absence of Control: Respondent, echoing the CA's justifications, insisted that Pedro and Maricel were not his employees because he had no control over them, having left the entire business operation to them.

• Status of the Parties: Whether Pedro and Maricel are employees or industrial partners of Emmarck.
• Validity of Dismissal: In the event that Pedro and Maricel are employees, whether they were validly dismissed.

• Status of the Parties: Yes, Pedro and Maricel are employees of Emmarck, not industrial partners. All four elements of the employer-employee relationship are present, and Emmarck failed to substantiate the existence of a partnership.
• Validity of Dismissal: No, the dismissal was illegal. Emmarck failed to comply with the procedural notice requirements under Article 298 of the Labor Code for closure of business, entitling Pedro and Maricel to separation pay and nominal damages.

• Status of the Parties: The Court first addressed whether a partnership existed. Under Article 1767 of the Civil Code, a partnership requires that two or more persons bind themselves to contribute money, property, or industry to a common fund with the intention of dividing profits. The best evidence is the contract or articles of partnership, but in its absence, circumstantial evidence may suffice. Emmarck presented no documentary evidence of any partnership — only self-serving statements. Under Article 1769, receipt of a share of profits is prima facie evidence of partnership, but no such inference is drawn when profits are received as wages of an employee. The sharing of gross returns does not itself establish a partnership. The allowances and commissions Pedro and Maricel received were taken from gross sales, not net profits, and there was no showing they shared in net profits as defined in Santos vs. Spouses Reyes. The absence of any actual sharing of profits reinforced the finding that there was no intention to form a partnership. The Court relied on Sy vs. CA, Corporal, Sr. vs. NLRC, Negre vs. Workmen's Compensation Commission, Jo vs. NLRC, and Santiago vs. Spouses Garcia, all of which rejected the defense of industrial partnership where no evidence of a partnership agreement existed and the workers' compensation was in the nature of wages. Having found no partnership, the Court applied the four-fold test: (1) Ralco Beach engaged Pedro as caretaker and Maricel as storekeeper; (2) Emmarck paid wages in the form of allowances and commissions, which fall within the statutory definition of wages under Article 97(6) of the Labor Code; (3) Emmarck terminated their employment when he notified them of the lease and that their services were no longer needed; and (4) most importantly, Emmarck had the power of control. His express admission that he left the entire business operation to Pedro and Maricel demonstrated that control resided in him. The power of control refers to the existence of the power, not its actual exercise. The high latitude of freedom was attributable to the fact that Pedro and Maricel were the only employees and Emmarck's lackadaisical management style. The lack of guidelines or close supervision could not be construed as absence of control. Emmarck also positively exercised control by imposing a 20% mark-up on store items. There was no proof that Pedro and Maricel engaged in other livelihood or that Maricel sold personal items for her exclusive gain. Their long daily working hours, including holidays, further negated the notion that they worked at their own pleasure.

• Validity of Dismissal: Article 298 of the Labor Code treats closure of business as an authorized cause for dismissal, whether or not due to serious business losses. However, if the closure is not due to serious business losses, the employer must pay separation pay equivalent to one month pay or at least one-half month pay for every year of service, whichever is higher. The closure was undisputed, but there was no proof it was due to serious business losses, so Pedro and Maricel were entitled to separation pay. Emmarck failed to comply with the required notices, making Pedro and Maricel each entitled to nominal damages of P30,000 under Agabon vs. NLRC. The NLRC's awards of salary differentials and 13th month pay were sustained because Emmarck failed to prove their payment. The total monetary awards were subject to 10% attorney's fees and would earn 6% interest from the date of finality until fully paid.

• Four-Fold Test for Employer-Employee Relationship — The existence of an employer-employee relationship is determined by four elements: (1) the selection and engagement of the employee; (2) the payment of wages; (3) the power of dismissal; and (4) the employer's power of control over the employee's conduct. The most important element is the power of control — not only as to the result of the work but also as to the means and methods to accomplish it. The power of control refers to the existence of the power, not its actual exercise. The Court applied this test and found all four elements present, emphasizing that Emmarck's admission of leaving the entire operation to Pedro and Maricel was itself proof that the power of control resided in him.

• Distinction Between Partnership and Employment — A partnership exists when two or more persons bind themselves to contribute money, property, or industry to a common fund with the intention of dividing profits (Article 1767, Civil Code). Under Article 1769, receipt of a share of profits is prima facie evidence of partnership, but no such inference is drawn if the profits are received as wages of an employee. The sharing of gross returns does not itself establish a partnership. The Court held that Emmarck failed to prove any partnership because there was no documentary evidence, no proof of contribution to a common fund, no proof of intent to divide net profits, and the allowances and commissions were in fact wages.

• Procedural Due Process in Closure of Business — Under Article 298 of the Labor Code, closure of business is an authorized cause for termination, but the employer must serve written notice on the workers and the Department of Labor and Employment at least one month before the intended date. Failure to comply with notice requirements entitles the dismissed employees to nominal damages of P30,000. The Court applied this doctrine and found Emmarck failed to comply with the required notices, rendering the dismissal procedurally infirm.

• "The power of control refers merely to the existence of the power, and not to the actual exercise thereof." — This passage articulates the canonical formulation of the control test's central principle, distinguishing the existence of control from its exercise, which is critical in cases where the employer grants workers broad autonomy.

• "Thus, even if Emmarck claims that he did not control nor supervise their performance of duties – which may indicate lack of control – Emmarck's admission reveals that control resided upon him." — This statement explains how an employer's admission of delegating the entire business operation to workers is itself evidence of the power of control, defeating a defense of absence of control.

• "No such inference shall be drawn if such profits were received in payment as wages of an employee or rent to a landlord." — This quotation from Article 1769 of the Civil Code, as emphasized by the Court, establishes the rule that receipt of profit shares as wages does not create a prima facie inference of partnership.

• "Clearly, Emmarck palpably failed to substantiate that Pedro and Maricel were his industrial partners." — This sentence encapsulates the Court's conclusion on the partnership issue, underscoring that the burden of proving a partnership rests on the party asserting it and that self-serving statements are insufficient.

• Sy vs. CA, 446 Phil. 404 (2003) — Controlling precedent followed. The Court rejected the defense of industrial partnership where no written agreement existed, the worker contributed no money or property, and there was no proof of active participation in management. The Court applied the same reasoning to reject Emmarck's partnership defense.
• Corporal, Sr. vs. National Labor Relations Commission, 395 Phil. 890 (2000) — Followed. The Court ignored the employer's defense of a joint venture where only a self-serving affidavit was presented, and held that profit-sharing privileges do not negate employee status.
• Negre vs. Workmen's Compensation Commission, 220 Phil. 325 (1985) — Followed. The Court rejected the claim that crew members paid a fixed amount plus a percentage of the catch were industrial partners, noting that commission-based payment does not support a partnership theory.
• Jo vs. National Labor Relations Commission, 381 Phil. 428 (2000) — Followed. The Court disregarded the defense that a barber was a "partner in trade" despite a fee-sharing arrangement, finding no clear intent to form a partnership.
• Santiago vs. Spouses Garcia, G.R. No. 228356, March 9, 2020 — Followed. The Court ruled that no partnership existed absent an "unmistakable intention to form a partnership," a principle applied to reject Emmarck's claim.
• Santos vs. Spouses Reyes, 420 Phil. 313 (2001) — Followed. The Court defined net profits as gross income less expenses or losses, and held that allowances and commissions taken from gross sales cannot be deemed a share in net profits.
• Agabon vs. National Labor Relations Commission, 485 Phil. 248 (2004) — Applied. The Court relied on Agabon for the award of P30,000 nominal damages for failure to observe procedural due process in termination.
• Nacar vs. Gallery Frames, 716 Phil. 267 (2013) — Applied. The Court adopted the rule that monetary awards earn 6% interest from the date of finality of the decision until fully paid.

• Article 1767, Civil Code — Defines partnership as a contract where two or more persons bind themselves to contribute money, property, or industry to a common fund with the intention of dividing profits. Applied to determine whether a partnership existed; the Court found no evidence satisfying this definition.
• Article 1769, Civil Code — Provides rules for determining the existence of a partnership, including that receipt of a share of profits is prima facie evidence of partnership but no such inference is drawn if profits are received as wages of an employee, and that sharing of gross returns does not itself establish a partnership. Applied to reject the partnership defense.
• Article 97(6), Labor Code — Defines "wages" as remuneration or earnings capable of being expressed in terms of money, whether fixed or ascertained on a time, task, piece, or commission basis. Applied to classify the allowances and commissions received by Pedro and Maricel as wages.
• Article 298, Labor Code — Governs closure of establishment and reduction of personnel as an authorized cause for termination, requiring written notice to workers and the Department of Labor and Employment at least one month before the intended date, and mandating separation pay where closure is not due to serious business losses. Applied to hold the dismissal illegal for failure to comply with notice requirements and to entitle Pedro and Maricel to separation pay.
• Article III, Labor Code — Governs attorney's fees in labor cases. Applied to sustain the award of 10% attorney's fees on the total monetary award.

Perlas-Bernabe, S.A.J. (Chairperson), Gesmundo, J., and Lazaro-Javier, J., concurred. Rosario, J., was on official leave.