Innodata Knowledge Services, Inc. vs. Inting

Employees hired under contracts denominated as "project-based" are regular employees where the employer fails to prove that the duration and scope of the specific project were determined at the time of engagement and that the employees were in fact made to work only on that project; placing such regular employees on indefinite forced leave without bona fide suspension of business operations constitutes constructive dismissal.

IKSI is a company engaged in data processing, encoding, indexing, abstracting, typesetting, imaging, and other processes in the capture, conversion, and storage of data and information. Applied Computer Technologies (ACT), a United States–based company, hired IKSI to review various litigation documents, requiring IKSI to engage lawyers or law graduates as reviewers. IKSI hired respondents as senior and junior reviewers under contracts styled as "Project-Based Employment Contracts" with a stated duration of five years, tied to the Content Supply Chain Project (also known as the ACT Project). The relationship between the parties is governed by the Labor Code's provisions on regular and project employment, and the constitutional mandate to afford full protection to labor and security of tenure.

IKSI, a company engaged in data processing and related services, was hired by Applied Computer Technologies (ACT), a United States–based company, to review various litigation documents. Because of the nature of the work, ACT required IKSI to engage lawyers or law graduates to review and classify litigation documents into prescribed categories and ensure timely delivery of outputs. For this purpose, IKSI hired respondents—Socorro D'Marie T. Inting, Ismael R. Garaygay, Edson S. Solis, Michael A. Rebato, James Horace Balonda, Stephen C. Olingay, Dennis C. Rizon, Juneth A. Rentuma, Hernan Ed Noel I. de Leon, Jr., Jess Vincent A. dela Peña, Ronan V. Alamillo, Ennoh Chentis R. Fernandez, Wendell B. Quiban, Aldrin O. Torrentira, Michael Ray B. Molde, Fritz J. Sembrino, Dax Matthew M. Quijano, Rodolfo M. Vasquez, Ma. Nazelle B. Miralles, and Carl Hermes Carskit—as senior and junior reviewers under contracts denominated "Project-Based Employment Contracts" with a stated duration of five years, tied to the Content Supply Chain Project, also known as the ACT Project. The contracts provided that the employees' positions would last for the "duration of the Project, which is expected to be completed after a maximum of five (5) years, or on or before [blank]," with the completion date left blank and varying for each employee depending on the hiring date.

Sometime in November 2008, IKSI required respondents to work on another project called "Bloomberg," which was not included in their original contracts and for which no new project employment contracts were executed. During that period, respondents were required to read and review decided cases in the United States and were referred to as "Case Classifiers" rather than Senior or Junior Reviewers. Respondents initially opposed working on the Bloomberg project but eventually agreed, fearing loss of employment. Months later, they were required to return to the ACT Project and reverted to their previous designation as Document Reviewers.

On January 7, 2010, respondents received a Notice of Forced Leave from IKSI informing them that they would be placed on indefinite forced leave effective that same day due to changes in business conditions, client requirements, and specifications. The notice stated that they would be called upon once the company's condition relative to work requirements stabilized. Respondents were told to no longer report the next day, made to vacate their workstations, required to surrender their company identification cards, and were not allowed to use their remaining unused leave credits. The DOLE Region VII Office was only informed on January 11, 2010, four days after the forced leave had taken effect. Respondents thereafter filed a complaint for illegal dismissal, reinstatement or payment of separation pay, backwages, and damages against IKSI.

Subsequently, on May 27, 2010, IKSI sent respondents separate notices informing them that due to the unavailability of new work related to the product stream and uncertainties pertaining to the arrival of new workloads, their project employment contracts would be terminated effective July 7, 2010. The termination letters did not state any just or authorized cause under Articles 297 or 298 of the Labor Code. Notably, IKSI continued its operations and retained other employees working on the ACT Project even after the forced leave was implemented, and it continued to hire new employees with the same qualifications as some of the respondents through paid advertisements in Sunstar Cebu on February 24, 2010 and March 7, 2010. IKSI denied the existence of any dismissal, whether actual or constructive, until it appended its termination letters dated May 27, 2010 to its Comment on Complainants' Motion for Reconsideration dated August 3, 2011.

• Project Employment Status: Petitioner argued that respondents' employment was fixed for a specific project or undertaking—the ACT Project—with its completion or termination clearly determined at the time of engagement, as evidenced by the contracts specifically indicating the Content Supply Chain Project and a maximum five-year duration.
• Validity of Floating Status: Petitioner maintained that placing respondents on forced leave or floating status was a valid exercise of management prerogative and a cost-saving measure adopted to prevent further losses, and that it never intended to terminate respondents' employment, as shown by memoranda expressing the intention to recall them once work became available.
• Procedural Defect — Verification and Certification Against Forum Shopping: Petitioner argued that eight of the respondents who were excluded from the NLRC decision did not sign the required Verification and Certification of Non-Forum Shopping of the Appeal Memorandum before the NLRC, and some also failed to execute the Verification in the Petition for Certiorari before the CA, warranting their dismissal as parties.
• Reliance on Contract Nomenclature: Petitioner contended that respondents were lawyers or law graduates who freely and with full knowledge entered into the employment agreements, and that the agreement is the law between the parties.

• Regular Employment Status: Respondents contended that they were regular employees, not project employees, because IKSI required them to work on the Bloomberg project, which was separate and distinct from the ACT Project specified in their contracts, and because the five-year period was merely the duration of the employment contract, not the project itself.
• Constructive Dismissal: Respondents argued that when IKSI feigned suspension of operations and placed them on forced leave, the same amounted to constructive dismissal, and when IKSI sent termination letters effective July 7, 2010, they were actually dismissed.
• No Bona Fide Suspension of Operations: Respondents asserted that IKSI failed to prove any bona fide suspension of business operations or undertaking, and that IKSI continued to operate, retained other ACT Project employees, and even hired new employees while respondents were on forced leave.
• Lack of Due Process: Respondents pointed out that neither the DOLE nor they received prior notice of the temporary lay-off as required under Article 298, and that the forced leave took effect before they received notice.

• Nature of Employment: Whether respondents were project employees or regular employees under their employment contracts with IKSI.
• Validity of Floating Status: Whether IKSI's placement of respondents on forced leave or floating status constituted constructive dismissal.
• Just or Authorized Cause for Termination: Whether IKSI had just or authorized cause to terminate respondents' employment.
• Procedural Compliance: Whether the NLRC committed grave abuse of discretion in ruling that respondents were project employees validly placed on floating status.
• Verification and Certification Against Forum Shopping: Whether the failure of some respondents to sign the Verification and Certification Against Forum Shopping warranted their exclusion as parties.
• Award of Damages: Whether respondents were entitled to backwages, separation pay, moral and exemplary damages, and attorney's fees.

• Nature of Employment: No. Respondents were regular employees, not project employees, because IKSI failed to prove that the duration and scope of the project were reasonably determinable at the time of engagement and that respondents were in fact made to work only on the specified project.
• Validity of Floating Status: No. The floating status was invalid because IKSI failed to establish any bona fide suspension of business operations or undertaking, and the forced leave exceeded the six-month maximum period under Article 301 without recall or valid permanent retrenchment, amounting to constructive dismissal.
• Just or Authorized Cause for Termination: No. The termination letters cited no just or authorized cause under Articles 297 or 298 of the Labor Code, and IKSI adduced no evidence of substantial losses or bona fide cessation of operations.
• Procedural Compliance: Yes. The NLRC gravely abused its discretion in ruling that respondents were project employees validly placed on floating status, its findings not being supported by substantial evidence.
• Verification and Certification Against Forum Shopping: No. The failure of some respondents to sign did not warrant their exclusion, as all respondents shared a common interest and invoked a common cause of action, substantially complying with the Rule; however, Atty. Fernandez was properly dropped as a party before the CA because the labor tribunals' rulings had already attained finality as to him.
• Award of Damages: Yes. Respondents were entitled to backwages, separation pay in lieu of reinstatement, moral and exemplary damages of ₱50,000.00 each, attorney's fees of 10% of the total awards, and legal interest.

• Nature of Employment: The employment status of a person is defined and prescribed by law, not by what the parties say it should be. Article 295 of the Labor Code distinguishes regular from project employment: an employment is regular where the employee performs activities usually necessary or desirable in the employer's usual business, except where the employment is fixed for a specific project or undertaking the completion or termination of which has been determined at the time of engagement. The litmus test is whether the employees were assigned to carry out a specific project, the duration and scope of which were specified at the time of engagement. While IKSI identified the ACT Project in the contracts, it failed to prove that respondents were in reality made to work only on that project. In November 2008, IKSI required respondents to work on the Bloomberg project without executing new contracts, which was beyond the scope of their original undertaking. That this occurred only once was inconsequential; the decisive fact was that respondents were made to work on a project separate and distinct from the one for which they were hired. IKSI also failed to prove that the project's duration was reasonably determinable at the time of hiring. The five-year period in the contracts was the duration of the employment contract, not the project itself, as evidenced by the varying completion dates for each employee. The contracts were ambiguous, attempting to alternatively invoke project employment and fixed-term employment to preclude regularization. Under Article 1700 of the Civil Code and Article 1702, labor contracts are impressed with public interest and must yield to the common good; in case of doubt, they are construed in favor of the worker. The contracts were accordingly construed strictly against IKSI as the drafter, and respondents were declared regular employees.

• Validity of Floating Status: Article 301 of the Labor Code provides that a bona fide suspension of business operations for a period not exceeding six months does not terminate employment. After six months, the employees must either be recalled or permanently retrenched following the requirements of law; failure to do so is tantamount to dismissal. IKSI claimed its act of placing respondents on forced leave was a valid exercise of management prerogative due to a decline in work volume. However, IKSI failed to discharge the burden of proving bona fide suspension of its business operations or of the ACT Project. The records contained no evidence of actual suspension; IKSI merely cited "changes in business conditions, client requirements and specifications." It continued operations, retained other ACT Project employees, and even hired new employees through newspaper advertisements while respondents were on forced leave—indicating a surplus of work rather than a suspension. The forced leave took effect on January 7, 2010, and termination letters were sent on May 27, 2010, effective July 7, 2010. As of December 10, 2010, IKSI still denied that respondents had been dismissed. The six-month maximum period under Article 301 was thus exceeded. There being no valid suspension of business operations, IKSI's act amounted to constructive dismissal. Even assuming a suspension existed, IKSI did not recall respondents or place them on valid permanent retrenchment within six months.

• Just or Authorized Cause for Termination: The termination letters dated May 27, 2010 cited only the "unavailability of work" and "uncertainties pertaining to the arrival of new workloads" as grounds for termination—none of which constitute just or authorized causes under Articles 297 or 298 of the Labor Code. IKSI never offered evidence of bona fide closure or cessation of operations, substantial losses, or retrenchment. The employer bears the burden of proving the validity and legality of termination with clear and satisfactory evidence; failure to do so results in a finding of unjustified dismissal. IKSI's conduct—denying dismissal while simultaneously terminating respondents, failing to pay separation pay, and continuing to hire new employees—demonstrated bad faith and an intent to sever the employer-employee relationship from the outset.

• Procedural Compliance: Grave abuse of discretion connotes judgment exercised in a capricious and whimsical manner tantamount to lack of jurisdiction. In labor disputes, grave abuse of discretion may be ascribed to the NLRC when its findings and conclusions are not supported by substantial evidence. The NLRC's ruling that respondents were project employees validly placed on floating status was not supported by substantial evidence, as respondents had satisfactorily established by substantial evidence that they had become regular employees and had been constructively dismissed. The CA therefore correctly granted the certiorari petition.

• Verification and Certification Against Forum Shopping: The Court's guidelines distinguish between non-compliance with verification and non-compliance with certification against forum shopping. Verification is a formal, not jurisdictional, requirement; non-compliance does not necessarily render a pleading fatally defective, and the court may order correction or waive strict compliance to serve the ends of justice. As to certification against forum shopping, non-signing parties are generally dropped, unless reasonable or justifiable circumstances exist—such as when all petitioners share a common interest and invoke a common cause of action or defense, in which case the signature of only one substantially complies with the Rule. Here, only twelve of twenty respondents signed, given only ten days to perfect an appeal and some no longer being based in Cebu City. All respondents shared a common interest and invoked a common cause of action, pursuing the case as a collective body. The signatures of the twelve substantially complied with the Rule, and those who failed to sign were not dropped. However, Atty. Fernandez was properly excluded from the CA proceedings because he had filed a Motion for Execution of the LA and NLRC rulings, admitting that he did not elevate the case to the NLRC; the labor tribunals' rulings had attained finality as to him. Rules of procedure in labor cases are applied only in suppletory manner, and technical rules may be relaxed to serve substantial justice.

• Award of Damages: As a necessary consequence of illegal dismissal, respondents were entitled to reinstatement without loss of seniority rights and backwages from the time compensation was withheld. Reinstatement was no longer feasible due to palpable strained relations and the likelihood that the positions were already occupied by new hires; separation pay of one month salary for every year of service was awarded in lieu thereof. Moral and exemplary damages of ₱50,000.00 each were proper under Article 2220 of the Civil Code, as respondents had been harassed and arbitrarily terminated in bad faith. Attorney's fees of 10% of the total awards were due because respondents were forced to litigate to protect their rights. Legal interest was set at 12% per annum from January 8, 2010 to June 30, 2013, and 6% per annum from July 1, 2013 until full satisfaction, pursuant to Bangko Sentral ng Pilipinas Circular No. 799, Series of 2013.

• Litmus Test for Project Employment — The decisive test for determining whether employees are properly characterized as project employees, as distinguished from regular employees, is whether the employees were assigned to carry out a specific project or undertaking, the duration and scope of which were specified at the time the employees were engaged for that project. Employers claiming project-employee status bear the burden of showing that (a) the duration and scope of the employment were specified at the time of engagement and (b) there was indeed a project. In this case, IKSI failed both requisites: it required respondents to work on a separate project (Bloomberg) beyond the scope of their original contracts, and the five-year period was the contract duration, not the project duration, as shown by the varying completion dates per employee.

• Fixed-Term Employment as Exception — Fixed-term employment contracts are recognized as valid but are more the exception than the general rule. Where the circumstances show that the fixed periods were imposed to preclude acquisition of tenurial security by the employee, they should be struck down as contrary to public policy. The decisive determinant in fixed-term employment is not the activity the employee performs but the day certain agreed upon for the commencement and termination of the employment relationship. IKSI's contracts were suspect for being ambiguous, attempting to alternatively avail of project employment and fixed-term employment to prevent regularization.

• Six-Month Rule on Floating Status — Under Article 301 of the Labor Code, an employer may validly put employees on forced leave or floating status upon bona fide suspension of business operations for a period not exceeding six months. After six months, the employees must either be recalled or permanently retrenched following the requirements of law. Failure to comply is tantamount to dismissal, making the employer liable. The employer bears the burden of proving bona fide suspension of operations with sufficient and convincing evidence.

• Burden of Proof in Retrenchment — Not every loss incurred or expected will justify retrenchment. The losses must be substantial and the retrenchment reasonably necessary to avert such losses. The employer bears the burden of proving the existence or imminence of substantial losses, which is an affirmative defense. Failure to prove this with clear and satisfactory evidence results in a finding of unjustified dismissal.

• Constructive Dismissal Through Bad-Faith Floating Status — Placing employees on indefinite forced leave without bona fide suspension of operations, while continuing to hire new employees and retaining other workers on the same project, constitutes constructive dismissal. The employer's manifest bad faith in terminating employees under the guise of floating status violates the employees' right to security of tenure.

• Liberal Application of Procedural Rules in Labor Cases — Rules of procedure are mere tools designed to facilitate the attainment of justice; their strict and rigid application resulting in technicalities that frustrate substantial justice must be eschewed. In labor cases, technical rules are not binding and may be relaxed to serve the demand of substantial justice. Verification is a formal, not jurisdictional, requirement. The certification against forum shopping need not be signed by all petitioners when they share a common interest and invoke a common cause of action; the signature of one substantially complies with the Rule.

• Contra Proferentem in Labor Contracts — In the interpretation of contracts, obscure words and provisions shall not favor the party that caused the obscurity. Labor contracts must be construed strictly against the employer as the party who prepared them, and in case of doubt, in favor of the worker pursuant to Article 1702 of the Civil Code.

• "The employment status of a person is defined and prescribed by law and not by what the parties say it should be. Equally important to consider is that a contract of employment is impressed with public interest such that labor contracts must yield to the common good." — This passage articulates the foundational principle that the nature of employment is determined by law and public policy, not by the parties' contractual nomenclature, and is frequently cited in regularization disputes.

• "the litmus test for determining whether particular employees are properly characterized as project employees, as distinguished from regular employees, is whether or not the employees were assigned to carry out a specific project or undertaking, the duration and scope of which were specified at the time the employees were engaged for that project." — This is the canonical formulation of the test for distinguishing project from regular employment, central to the ratio decidendi.

• "an employer may validly put its employees on forced leave or floating status upon bona fide suspension of the operation of its business for a period not exceeding six (6) months. In such a case, there is no termination of the employment of the employees, but only a temporary displacement. When the suspension of the business operations, however, exceeds six (6) months, then the employment of the employees would be deemed terminated, and the employer would be held liable for the same." — This passage states the six-month rule governing floating status and its consequence, a key doctrine in temporary lay-off cases.

• "Rules of procedure should be viewed as mere tools designed to facilitate the attainment of justice; their strict and rigid application, which would result in technicalities that tend to frustrate rather than promote substantial justice, must always be eschewed." — This is the standard formulation for the liberal application of procedural rules in labor cases, frequently invoked to justify relaxation of technical requirements.

• ALU-TUCP vs. NLRC, 304 Phil. 844 (1994) — Cited for the pronouncement on the two categories of project employees and the requirement that the duration and scope of the project be determined or specified at the time of engagement.
• Dacles vs. Millenium Erectors Corporation, 763 Phil. 550 (2015) — Cited for the rule that the Court may take cognizance of factual issues when the findings of the LA/NLRC are inconsistent with those of the CA, and for the litmus test for project employment.
• Brent School, Inc. vs. Zamora, 260 Phil. 747 (1990) — Cited for the doctrine that fixed-term employment contracts are more the exception than the general rule, and that periods imposed to preclude tenurial security should be struck down.
• Price vs. Innodata Phils., Inc., 588 Phil. 568 (2008) — Cited for the principle that employment contracts are impressed with public interest and that provisions of applicable statutes are deemed written into the contract.
• Lopez vs. Irvine Construction Corp., 741 Phil. 728 (2014) — Cited for the definition of retrenchment, the requirement of good faith in both permanent and temporary lay-offs, and the employer's burden to prove bona fide suspension of operations.
• PT&T vs. NLRC, 496 Phil. 164 (2005) — Cited for the application of Article 301 to set a specific period within which employees may remain on floating status, filling the hiatus for temporary retrenchment.
• Bontia vs. NLRC, 325 Phil. 443 (1996) — Cited for the principle that an employer's underhanded circumvention of the law through forced leave applications without expiration dates constitutes illegal dismissal, and that separation pay must be given to validly retrenched employees.
• Altres, et al. vs. Empleo, 594 Phil. 246 (2008) — Cited and distinguished for the rule on certification against forum shopping; the non-signing petitioners in Altres were dropped not merely for failure to sign but because they could no longer be contacted or were no longer interested.
• Pacquing vs. Coca-Cola Philippines, Inc., 567 Phil. 323 (2008) — Cited for the rule that the signature of only one petitioner substantially complies with the certification against forum shopping requirement when all petitioners share a common interest and invoke a common cause of action.
• Nacar vs. Gallery Frames, 716 Phil. 267 (2013) — Cited for the adjustment of the legal interest rate to 6% per annum starting July 1, 2013, pursuant to BSP Circular No. 799, Series of 2013.

• Article 295, Labor Code (formerly Article 280) — Defines regular, project, seasonal, and casual employment. Applied as the statutory basis for distinguishing project from regular employment; the law determines the nature of employment regardless of the parties' agreement.
• Article 297, Labor Code (formerly Article 282) — Enumerates just causes for termination by employer (serious misconduct, gross neglect, fraud, commission of crime, analogous causes). Cited to show that IKSI's termination letters stated none of these just causes.
• Article 298, Labor Code (formerly Article 283) — Enumerates authorized causes for termination (installation of labor-saving devices, redundancy, retrenchment, closure of operations) and requires one-month notice to workers and DOLE. Cited to show that IKSI's termination did not comply with any authorized cause and that the one-month notice rule was mandatory and violated.
• Article 301, Labor Code (formerly Article 286) — Provides that bona fide suspension of business operations not exceeding six months does not terminate employment. Applied to set the maximum period for floating status; IKSI's failure to recall or validly retrench respondents within six months constituted dismissal.
• Article 1700, Civil Code — Declares that labor contracts are impressed with public interest and must yield to the common good. Applied to override the parties' private agreement and establish that the contracts could not insulate the relationship from labor laws.
• Article 1702, Civil Code — Provides that in case of doubt, all labor contracts shall be construed in favor of the worker. Applied to construe ambiguous contract terms against IKSI as the drafter.
• Article 2220, Civil Code — Basis for award of moral damages in cases of illegal dismissal tainted with bad faith. Applied to sustain the award of moral and exemplary damages.
• Section 3, Article XIII, 1987 Constitution — Guarantees the right to security of tenure. Cited as the constitutional basis for protecting respondents against IKSI's circumvention of regularization.
• BSP Circular No. 799, Series of 2013 — Adjusted the legal interest rate to 6% per annum effective July 1, 2013. Applied to modify the interest rate on the monetary awards.

Antonio T. Carpio (Chairperson), Estela M. Perlas-Bernabe, Alfredo Benjamin S. Caguioa, and Andres B. Reyes, Jr. concurred. No separate concurring opinions were written.