Encyclopaedia Britannica (Philippines), Inc. vs. NLRC

The control test is the most crucial determinant of employer-employee relationship; where the worker is free to conduct his operations by his own means and methods and is compensated by commissions based on sales results, no employer-employee relationship exists, even if the company issues memoranda and guidelines on company policies.

Encyclopaedia Britannica (Philippines), Inc. marketed encyclopedias and books through dealership agreements, with sales operations primarily conducted by independent authorized agents who did not receive regular compensation but commissions based on sales, and who hired their own sales representatives, financed their own office expenses, and maintained their own staff. Benjamin Limjoco served as Sales Division Manager, in charge of selling petitioner's products through sales representatives, and was compensated by commissions from products sold by his agents; he was allowed to use petitioner's name, goodwill, and logo, while office expenses were deducted from his commissions. Petitioner was to be informed of appointments, promotions, and transfers of employees in Limjoco's district.

Benjamin Limjoco was a Sales Division Manager of Encyclopaedia Britannica (Philippines), Inc. and was in charge of selling petitioner's products through some sales representatives. As compensation, he received commissions from the products sold by his agents. He was also allowed to use petitioner's name, goodwill, and logo. It was agreed that office expenses would be deducted from his commissions, and petitioner would be informed about appointments, promotions, and transfers of employees in Limjoco's district.

Britannica alleged that Limjoco was not its employee but an independent dealer authorized to promote and sell its products and who received commissions therefrom. Limjoco did not have any salary, and his income from the company depended on the volume of sales accomplished. He had his own separate office, financed the business expenses, and maintained his own workforce; the salaries of his secretary, utility man, and sales representatives were chargeable to his commissions. Britannica thus argued that it had no control and supervision over Limjoco as to the manner and means he conducted his business operations. Limjoco did not report to Britannica's office and did not observe fixed office hours.

Limjoco maintained otherwise. He alleged that he was hired by petitioner in July 1970, was assigned in the sales department, and was earning an average of P4,000.00 monthly as his sales commission. He was under the supervision of petitioner's officials who issued to him and his other personnel memoranda, guidelines on company policies, instructions, and other orders. He claimed he was dismissed by petitioner when the Laurel-Langley Agreement expired. As a result, he asserted that in accordance with established company practice and the provisions of the collective bargaining agreement, he was entitled to termination pay equivalent to one month salary, unpaid benefits (Christmas bonus, midyear bonus, clothing allowance, vacation leave, and sick leave), and amounts illegally deducted from his commissions which were used for payments of office supplies, office space, and overhead expenses.

On June 14, 1974, Limjoco resigned from office to pursue his private business. In his resignation letter, he stated that his decision was brought about by conflict with other interests which lately had increasingly required his personal attention, and that in fairness to the company and the people under his supervision he should relinquish the position to someone who could devote full-time to the Division. At the time he was connected with petitioner, Limjoco was also a director and later the president of the Farmers' Rural Bank. He admitted in his testimony that he was on a profit-and-loss basis; that if his sales representative did not produce any sales, he would not get any money from Britannica; that Britannica did the accounting for him as division manager; and that when he hired a secretary or trainer, he merely hired the person and notified Britannica so that Britannica would give the salaries and deduct them from his earnings.

On October 30, 1975, Limjoco filed a complaint against Britannica with the Department of Labor and Employment, claiming non-payment of separation pay and other benefits, and illegal deduction from his sales commissions. Labor Arbiter Teodorico Dogelio ruled that Limjoco was an employee of Britannica, finding that petitioner had control over Limjoco since the latter was required to make periodic reports of his sales activities and all transactions were subject to final approval. The NLRC found no evidence that Limjoco was an independent contractor or dealer; that petitioner still exercised control over him through memoranda and guidelines and prohibitions on the sale of products other than those authorized; and that Limjoco passed costs to petitioner chargeable against his future commissions, which proved he was not an independent dealer or contractor because an independent contractor should have substantial capital or investment.

• Independent Contractor Status: Petitioner argued that the NLRC gravely abused its discretion in holding that its contention that Limjoco was an independent contractor was not supported by evidence on record. Petitioner maintained that Limjoco was not an employee but an independent dealer authorized to promote and sell its products, who received commissions, had no salary, had his own separate office, financed business expenses, maintained his own workforce, and was not subject to control or supervision as to the manner and means of his business operations.
• Validity of Benefits Claims: Petitioner argued that the NLRC committed grave abuse of discretion in not passing upon the validity of the Labor Arbiter's pronouncement granting Limjoco's claim for Christmas bonus, mid-year bonus, clothing allowance, and money equivalent of accrued and unused vacation and sick leave.

• Employment Relationship: Respondent Limjoco maintained that he was hired by petitioner in July 1970, assigned in the sales department, earning an average of P4,000.00 monthly as sales commission, and was under the supervision of petitioner's officials who issued memoranda, guidelines on company policies, instructions, and other orders.
• Entitlement to Benefits: Respondent Limjoco asserted that he was dismissed when the Laurel-Langley Agreement expired and, under established company practice and the provisions of the collective bargaining agreement, was entitled to termination pay equivalent to one month salary, unpaid Christmas bonus, midyear bonus, clothing allowance, vacation leave, sick leave, and amounts illegally deducted from his commissions for office supplies, office space, and overhead expenses.

• Employer-Employee Relationship: Whether an employer-employee relationship existed between Encyclopaedia Britannica (Philippines), Inc. and Benjamin Limjoco under the four-fold test, particularly the control test.
• Entitlement to Separation Pay and Other Benefits: Whether Limjoco was entitled to separation pay, Christmas bonus, mid-year bonus, clothing allowance, accrued vacation and sick leave, and reimbursement of alleged illegal deductions from his commissions.

• Employer-Employee Relationship: No. The NLRC's finding was reversed; under the control test, the most crucial indicator, Britannica did not exercise control over the manner and means of Limjoco's work. The memoranda were merely guidelines on company policies, and Limjoco was an independent dealer or agent.
• Entitlement to Separation Pay and Other Benefits: No. Because no employer-employee relationship existed, Limjoco was not entitled to the benefits prayed for, and the NLRC decision was reversed and set aside.

• Employer-Employee Relationship: In determining the existence of an employer-employee relationship, the following elements must be present: (1) selection and engagement of the employee; (2) payment of wages; (3) power of dismissal; and (4) power to control the employee's conduct. Control is commonly regarded as the most crucial and determinative indicator. Under the control test, an employer-employee relationship exists where the person for whom the services are performed reserves the right to control not only the end to be achieved but also the manner and means used in reaching that end. The issuance of memoranda to Limjoco and other division sales managers did not prove actual control; the memoranda were merely guidelines on company policies which the sales managers followed and imposed on their respective agents. In Britannica's business of selling encyclopedias and books, marketing was done through dealership agreements, and sales operations were primarily conducted by independent authorized agents who did not receive regular compensation but only commissions based on sales; these agents hired their own sales representatives, financed their own office expenses, and maintained their own staff. The memoranda were necessary to apprise Limjoco of company policies and procedures, but he and the other agents remained free to conduct and promote their sales operations. Periodic reports were necessary to update the company of performance and business income. Although Britannica fixed product prices for uniformity and Limjoco could not alter them, he had free rein in the means and methods of marketing; he selected his own personnel, and the only reason he had to notify Britannica of appointments was to deduct the employees' salaries from his commissions. Limjoco admitted that he was on a profit-and-loss basis, that if his sales representative produced no sales he would receive no money from Britannica, that Britannica did the accounting for him, and that when he hired a secretary or trainer he merely notified Britannica so that the salary would be charged to his earnings. He was merely an agent or independent dealer, free to conduct his work and engage in other means of livelihood; at the time he was connected with Britannica, he was also a director and later president of the Farmers' Rural Bank. Had he been an employee, he could not have been employed elsewhere and would have been required to devote full time to Britannica. His delay of more than a year after separation before filing his claims was unusual for an employee. His resignation letter cited conflict with other interests requiring his personal attention, indicating that Britannica had no effective control over his personal activities. Each case must be determined by its own facts and all features of the relationship considered. The records showed no employer-employee relationship. The element of control was absent; where a person works for another more or less at his own pleasure, is not subject to definite hours or conditions of work, and is compensated according to the result of his efforts and not the amount thereof, no employer-employee relationship exists. Nothing in the records showed that Limjoco was under Britannica's control in respect of the means and methods of his work.
• Entitlement to Separation Pay and Other Benefits: Because no employer-employee relationship existed, Limjoco was not entitled to the benefits prayed for. His claims for separation pay, Christmas bonus, mid-year bonus, clothing allowance, accrued vacation and sick leave, and reimbursement of alleged illegal deductions failed. The petition was granted, and the NLRC decision was reversed and set aside.

• Four-Fold Test in Employer-Employee Relationship — The existence of an employer-employee relationship requires: (1) selection and engagement of the employee; (2) payment of wages; (3) power of dismissal; and (4) power to control the employee's conduct. The Court applied this test and found no employer-employee relationship because the element of control was absent.
• Control Test — Control of the employee's conduct is commonly regarded as the most crucial and determinative indicator of the presence or absence of an employer-employee relationship. Under the control test, an employer-employee relationship exists where the person for whom the services are performed reserves the right to control not only the end to be achieved but also the manner and means used in reaching that end. The Court held that Britannica's memoranda and guidelines did not establish actual control; Limjoco retained free rein in the means and methods of marketing, selected his own personnel, was compensated by commissions based on sales, did not observe fixed office hours, and was free to engage in other means of livelihood.
• Compensation by Results — Where a person who works for another does so more or less at his own pleasure, is not subject to definite hours or conditions of work, and is compensated according to the result of his efforts and not the amount thereof, no employer-employee relationship exists. The Court applied this rule because Limjoco's income depended on the volume of sales accomplished and he admitted that if his sales representative produced no sales, he would receive no money from Britannica.
• Memoranda and Company Guidelines as Evidence of Control — The issuance of memoranda and guidelines on company policies does not, by itself, prove that the company exercises actual control over the recipient. Such issuances may be necessary to apprise independent dealers or agents of company policies and procedures. The Court held that the memoranda issued to Limjoco and other division sales managers were merely guidelines on company policies and did not establish control.
• Each Case Determined by Its Own Facts — In ascertaining whether a relationship is that of employer-employee or independent contractor, each case must be determined by its own facts and all features of the relationship are to be considered. The Court considered Limjoco's other employment as director and later president of the Farmers' Rural Bank, his resignation letter citing conflict with other interests, his delay of more than a year in filing claims, and his admissions regarding profit-and-loss basis and commission-based compensation.
• Independent Dealer or Agent — In Britannica's business, sales operations were primarily conducted by independent authorized agents who did not receive regular compensation but only commissions based on sales; these agents hired their own sales representatives, financed their own office expenses, and maintained their own staff. The Court found Limjoco to be such an independent dealer or agent, not an employee.

• "In determining the existence of an employer-employee relationship the following elements must be present: 1) selection and engagement of the employee; 2) payment of wages; 3) power of dismissal; and 4) the power to control the employee's conduct. Of the above, control of employee's conduct is commonly regarded as the most crucial and determinative indicator of the presence or absence of an employer-employee relationship." — This passage states the four-fold test and identifies control as the most crucial determinant of employer-employee relationship.
• "Under the control test, an employer-employee relationship exists where the person for whom the services are performed reserves the right to control not only the end to be achieved, but also the manner and means to used in reaching that end." — This passage defines the control test applied by the Court in reversing the NLRC's finding of an employer-employee relationship.
• "The fact that petitioner issued memoranda to private respondents and to other division sales managers did not prove that petitioner had actual control over them. The different memoranda were merely guidelines on company policies which the sales managers follow and impose on their respective agents." — This passage applies the control test and rejects the memoranda as proof of actual control.
• "where a person who works for another does so more or less at his own pleasure and is not subject to definite hours or conditions of work, and in turn is compensated according to the result of his efforts and not the amount thereof, we should not find that the relationship of employer and employee exists." — This passage summarizes the absence of control and the significance of compensation by results in negating an employer-employee relationship.

• Vallum Security Services vs. NLRC, G.R. Nos. 97320-27, July 30, 1993 — Cited in support of the four-fold test for determining the existence of an employer-employee relationship.
• Cosmopolitan Funeral Homes, Inc. vs. Maalat, G.R. No. 86693, July 2, 1990 — Cited in support of the control test, under which the employer must reserve the right to control the manner and means of reaching the desired end.
• Opulencia Ice Plant and Storage vs. NLRC, G.R. 98368, December 15, 1993 — Cited for the principle that whether a relationship is that of employer-employee or independent contractor must be determined by the facts of each case, considering all features of the relationship.
• Investment Planning Corporation of the Philippines vs. Social Security System, No. L-19124, November 18, 1967, 21 SCRA 924 — Cited for the rule that no employer-employee relationship exists where the element of control is absent and the worker works at his own pleasure, not subject to definite hours or conditions, and is compensated according to the result of his efforts rather than the amount thereof.

Justices Regalado, Romero, Puno, and Mendoza concurred.