Innodata Philippines, Inc. vs. Quejada-Lopez and Natividad-Pascual

Fixed-term employment contracts that are imposed to block acquisition of security of tenure are void as contrary to law, morals, good customs, public order and public policy, even though fixed-term employment is generally recognized, where the contract retains a double-bladed option to dismiss either by expiration or by failure to meet standards during an embedded probationary period.

Innodata Philippines, Inc. is engaged in the encoding/data conversion business, employing encoders, indexers, formatters, programmers, and quality/quantity staff to maintain its business and perform job orders for clients. Employment tenure in such enterprise is governed by Article 280 of the Labor Code on regular employment and by the doctrine permitting fixed-term employment under defined limits. Petitioner had previously been party to contracts invalidated in Villanueva and Servidad for circumventing security of tenure.

Innodata Philippines, Inc., together with Innodata Processing Corporation, operated an encoding and data conversion business that depended on formatters, encoders, indexers, programmers, and related staff to service client job orders. Estella G. Natividad and Jocelyn L. Quejada were hired as formatters effective March 4, 1997 under individual contracts stating employment as FORMATTER from March 04, 1997 to March 03, 1998, a period of one year, with automatic termination on March 03, 1998 without need of notice or demand.

The same contracts granted petitioner the right to pre-terminate within the first three months upon failure of the employee to meet and pass qualifications and standards set by petitioner and made known prior to execution, without prejudice to automatic termination upon expiration or cancellation for other causes provided by contract and law. Respondents worked continuously in that capacity until their separation on March 3, 1998 upon expiration of the stated term.

Thereafter respondents filed a complaint for illegal dismissal, damages, and attorney's fees against Innodata Philippines, Inc., Innodata Processing Corporation, and Todd Solomon. According to the prosecution version, their work as formatters was necessary and desirable to the usual business of data processing/conversion, making them regular employees under Article 280 of the Labor Code, and prior rulings against the same petitioner corporation had already settled that its employment was regular rather than fixed-term. Petitioner, for its part, maintained that the one-year period had simply expired and that fixed-term employment was valid under Brent School, requiring termination of the relationship.

The Labor Arbiter credited respondents and found illegal dismissal with reinstatement, backwages, and attorney's fees, while the NLRC reversed on the ground that the contracts were for a valid fixed term. The Court of Appeals restored the Labor Arbiter's findings, treating the fixed-term stipulation as a crude attempt to circumvent security of tenure for work necessary and desirable to petitioner's business.

• Validity of Fixed-Term Employment: Petitioner argued that fixed-term employment contracts are valid under law and prevailing jurisprudence and that expiration of the agreed one-year period validly terminated respondents' employment under Brent School.
• Nature of Business: Petitioner maintained that as a mere service contractor dependent on availability of job orders or undertakings from clients, continuity of work could not be ascertained, constraining it to resort to fixed-term contracts.
• Distinction from Prior Cases: Petitioner argued that Villanueva vs. NLRC and Servidad vs. NLRC did not apply because the present contracts no longer contained the so-called double-bladed provisions previously found objectionable.
• Regularity Test: Petitioner contended that regularity of employment does not always depend on whether the task is necessary or desirable in the usual business of the employer.

• Regular Employment: Respondents argued that their job as formatters was necessary and desirable to petitioner's usual business of data processing/conversion, making them regular employees pursuant to Article 280 of the Labor Code.
• Stare Decisis: Respondents invoked Villanueva vs. NLRC and Servidad vs. NLRC, arguing that the Court had already ruled with finality that the nature of employment at petitioner corporation was regular and not on a fixed-term basis.

• Validity of Fixed-Term Contract: Whether the alleged fixed-term employment contracts entered into by petitioner and respondents are valid.

• Validity of Fixed-Term Contract: No. The contracts were void as a circumvention of security of tenure, respondents being regular employees entitled to reinstatement, backwages, and attorney's fees as ordered by the Labor Arbiter.

• Validity of Fixed-Term Contract: While fixed-term employment is recognized, periods imposed to block acquisition of security of tenure must be struck down for being contrary to law, morals, good customs, public order or public policy. Despite rewording after Villanueva and Servidad, the present contracts retained two periods: the one-year term in paragraph 1 and a three-month pre-termination right in paragraph 7.4 for failure to meet qualifications and standards made known before execution, which in reality refers to a probationary period. Resorting alternatively to probationary employment and fixed-term employment to avoid regularization reproduced the prohibited double-bladed scheme, giving petitioner the option to dismiss either by expiration or by failure to meet work standards and allowing dismissal during the term for reasons other than just and authorized causes shown by clear and convincing evidence. Obscure provisions were construed strictly against petitioner as drafter pursuant to Article 1377 of the Civil Code and in favor of labor, while employment contracts, impressed with public interest under Article 1700, were deemed to incorporate labor law protections that parties cannot contract around. Entrepreneurial risk from dependence on client patronage, being inherent in any enterprise, could not justify circumvention, otherwise no worker could attain regularity.

• Fixed-term employment; prohibition against circumvention of tenure — Fixed-term employment contracts are valid, but when the circumstances show that the periods were imposed to block acquisition of security of tenure, they must be struck down for being contrary to law, morals, good customs, public order or public policy. Applied to void petitioner's one-year contracts that embedded an early termination option to avoid regularization.
• Double-bladed scheme — A contract providing both automatic expiration after a fixed term and employer discretion to dismiss during that term for failure to meet work standards is a double-bladed device jeopardizing constitutionally guaranteed security of tenure, because the employer may terminate either by expiration or by invoking failure to meet standards. Found to persist in paragraph 7.4 despite rewording from the contracts voided in Villanueva vs. NLRC and Servidad vs. NLRC.
• Interpretation against the drafter; construction in favor of labor — Under Article 1377 of the Civil Code, obscure words and provisions shall not favor the party that caused the obscurity, so employment terms are construed strictly against the employer that prepared them; in case of doubt, terms are construed in favor of labor. Applied to construe ambiguous paragraph 7.4 against petitioner as referring to a probationary period.
• Labor contracts impressed with public interest — Under Article 1700 of the Civil Code, relations between capital and labor are not merely contractual but impressed with public interest, so labor contracts must yield to the common good and incorporate applicable labor statutes; parties are not at liberty to insulate themselves from labor laws by mere contract. Applied to subject petitioner's stipulations to Article 280 and security-of-tenure guarantees.
• Entrepreneurial risk not a defense to regularization — Dependence on continued client patronage and fluctuating job orders is an inherent business risk and cannot excuse non-compliance with labor laws on regular employment. Petitioner's claim as service contractor was thus rejected.

• "A contract that misuses a purported fixed-term employment to block the acquisition of tenure by the employees deserves to be struck down for being contrary to law, morals, good customs, public order and public policy." — States the controlling ratio on misuse of fixed-term contracts to defeat security of tenure.
• "The language of the contract in dispute is truly a double-bladed scheme to block the acquisition of the employee of tenurial security. Thereunder, [the employer] has two options. It can terminate the employee by reason of expiration of contract, or it may use ‘failure to meet work standards’ as the ground for the employee’s dismissal. In either case, the tenor of the contract jeopardizes the right of the worker to security of tenure guaranteed by the Constitution." — Reiterates the Servidad formulation adopted to invalidate the present contracts containing both expiration and standards-based dismissal options.
• "parties are not at liberty to insulate themselves and their relationships from the impact of labor laws and regulations by simply contracting with each other." — Defines the limit on contractual stipulation where employment is impressed with public interest.
• "In the interpretation of contracts, obscure words and provisions shall not favor the party that caused the obscurity." — States the interpretive rule applied to construe ambiguous paragraph 7.4 strictly against petitioner.

• Villanueva vs. NLRC, 356 Phil. 638 — Prior ruling against petitioner holding its employment contracts as devious but crude attempts to circumvent security of tenure; invoked by respondents as stare decisis and found applicable in principle.
• Servidad vs. NLRC, 364 Phil. 518 — Controlling precedent striking down petitioner's prior contract with two periods and double-bladed dismissal options; closely compared and followed to invalidate the reworded present contracts.
• Brent School, Inc. vs. Zamora, 181 SCRA 702 — Authority recognizing validity of fixed-term employment; invoked by petitioner but held inapplicable where the term was used to prevent tenure.
• Poseidon Fishing vs. NLRC, G.R. No. 168052; Philips Semiconductors, Inc. vs. Fadriquela, 427 SCRA 408; Pakistan International Airlines Corporation vs. Ople, 190 SCRA 90 — Cited as consistent authority that fixed-term periods imposed to defeat security of tenure are contrary to law, morals, good customs, public order or public policy.
• Philippine Federation of Credit Cooperatives, Inc. vs. NLRC, 360 Phil. 254 — Cited for strict construction against the drafter and construction in favor of labor.

• Article 280, Labor Code — Defines regular employment as work necessary or desirable to the usual business of the employer; applied to classify respondents-formatters as regular employees in data processing/conversion business.
• Article 1700, Civil Code — Provides that relations between capital and labor are impressed with public interest and labor contracts must yield to the common good under special labor laws; applied to deem statutory protections written into the employment contracts.
• Article 1377, Civil Code — Provides that obscure contractual provisions shall not favor the party causing the obscurity; applied to construe ambiguous termination language against petitioner.

Ynares-Santiago, J., Austria-Martinez, J., Callejo, Sr., J., Chico-Nazario, J., concur.