Special Steel Products, Inc. vs. Villareal

An employer cannot lawfully withhold an employee's wages and benefits as a lien or set-off for the employer's own claims against the employee, absent the worker's consent and the requisites of legal compensation under Articles 1278 and 1279 of the Civil Code. Article 2071 of the Civil Code, which allows a guarantor to demand security from the principal debtor, applies only to a contract of guaranty — not to a contract of suretyship — and must be invoked through a judicial action, not by unilateral withholding of wages.

Special Steel Products, Inc. is a domestic corporation engaged in the importation, sale, and marketing of BOHLER steel products. Lutgardo C. Villareal and Frederick G. So were employed by petitioner as assistant sales manager and salesman, respectively. Villareal obtained a car loan from the Bank of Commerce with petitioner acting as surety under a "continuing suretyship agreement," while So was sent by petitioner to an all-expense-paid training course in Kapfenberg, Austria, conducted by BOHLER, petitioner's principal company, as a reward for outstanding sales performance. Both employees eventually resigned and joined other companies, prompting petitioner to withhold their monetary benefits.

Special Steel Products, Inc. is a domestic corporation engaged in the importation, sale, and marketing of BOHLER steel products. Lutgardo C. Villareal and Frederick G. So were employed by petitioner as assistant sales manager and salesman, respectively. Sometime in May 1993, Villareal obtained a car loan from the Bank of Commerce in the amount of ₱786,611.60, payable in 72 monthly installments, with petitioner acting as surety under a "continuing suretyship agreement" and "promissory note" wherein they jointly and severally agreed to pay the bank. On January 15, 1997, Villareal resigned and joined Hi-Grade Industrial and Technical Products, Inc. as executive vice-president.

Sometime in August 1994, petitioner sponsored So to attend a training course in Kapfenberg, Austria, conducted by BOHLER, petitioner's principal company, as a reward for his outstanding sales performance. When So returned nine months later, petitioner directed him to sign a memorandum stating that BOHLER requires trainees from Kapfenberg to continue working with petitioner for three years after the training, failing which each trainee shall refund to BOHLER US$6,000.00 by way of set-off or compensation. So did not sign the memorandum before his trip; he was made to sign it only nine months after his return. In a letter to Augusto Pardo dated July 18, 1997, So stated that his signature was needed only as a formality and that he was left with no choice but to accommodate the request. On January 16, 1997 — two years and four months after attending the training — So resigned from petitioner, tendering his resignation effective February 16, 1997. Petitioner, however, advanced the effectivity of his resignation to January 16, 1997.

Immediately upon their resignations, petitioner ordered both respondents to render an accounting of various Christmas giveaways they had received, worth ₱38,108.00 for Villareal and ₱54,481.00 for So, which were intended for distribution to petitioner's customers. In protest, respondents demanded payment of their separation benefits, commissions, vacation and sick leave benefits, and proportionate 13th month pay. Petitioner refused and instead withheld their 13th month pay and other benefits.

On April 16, 1997, respondents filed a complaint with the Labor Arbiter for payment of their monetary benefits. The Labor Arbiter found in their favor, awarding Villareal ₱164,873.00 and So ₱71,279.58 for commissions, retirement benefit (for Villareal), proportionate 13th month pay, earned vacation and sick leave benefits, and attorney's fees. The Labor Arbiter also found that no existing memorandum required the accounting of Christmas giveaways, that no actual accounting had ever been required before — as in the case of former Sales Manager Benito Sayo, whose resignation took effect on December 31, 1996 but was not required to account for such items — and that requiring So to account now would amount to discrimination. The NLRC affirmed with modification, exempting petitioner's president from liability. The Court of Appeals affirmed the NLRC, holding that petitioner had no legal basis to withhold respondents' benefits.

• Surety's Right to Withhold (Villareal): Petitioner contended that as a guarantor, it could legally withhold respondent Villareal's monetary benefits as a preliminary remedy pursuant to Article 2071 of the Civil Code, which allows a guarantor to demand security to protect himself from proceedings by the creditor and from the danger of insolvency of the debtor. It asserted that it would release Villareal's benefits only if he caused its substitution as surety by his new employer, Hi-Grade.
• Set-Off for Training Expenses (So): Petitioner maintained, citing Article 113 of the Labor Code in relation to Article 1706 of the Civil Code, that it could withhold So's monetary benefits because the memorandum he signed authorized such withholding for failure to complete the three-year post-training service period.
• Accounting of Christmas Giveaways: Petitioner ordered respondents to render an accounting of the Christmas giveaways they had received for distribution to customers, implying a basis for withholding benefits pending such accounting.

• Withholding of Wages as Surety's Lien: Whether an employer, acting as surety on an employee's car loan, may lawfully withhold the employee's wages and benefits as a lien or preliminary remedy under Article 2071 of the Civil Code to protect its interest as surety.
• Legal Compensation for Training Expenses: Whether legal compensation or set-off may take place between the employer and an employee who failed to complete a three-year post-training service period, thereby justifying the withholding of the employee's wages and benefits.
• Distinction Between Guaranty and Suretyship: Whether Article 2071 of the Civil Code, which governs a guarantor's right to demand security, applies to a contract of suretyship.

• Withholding of Wages as Surety's Lien: No. Article 116 of the Labor Code prohibits the withholding of wages and benefits without the worker's consent, and Article 2071 of the Civil Code does not authorize unilateral self-help; the employer must file an action to demand security.
• Legal Compensation for Training Expenses: No. The requisites of legal compensation under Articles 1278 and 1279 of the Civil Code are absent because the employer and the employee are not mutually creditor and debtor of each other; the US$6,000.00 is owed to BOHLER, not to petitioner.
• Distinction Between Guaranty and Suretyship: No, Article 2071 does not apply. A guaranty is distinguished from a suretyship in that a guarantor insures the solvency of the debtor while a surety insures the debt itself; the contract executed by petitioner and Villareal is a suretyship, not a guaranty.

• Withholding of Wages as Surety's Lien: Article 116 of the Labor Code expressly provides that it is unlawful for any person, directly or indirectly, to withhold any amount from the wages and benefits of a worker without the worker's consent. The provision is clear and needs no further elucidation. An employer cannot simply refuse to pay the wages or benefits of an employee because the employee has defaulted in paying a loan guaranteed by the employer. Petitioner had made no payment on the car loan, so Villareal was not indebted to petitioner; on the contrary, petitioner owed Villareal the decreed monetary benefits. The withholding effectively prevented Villareal from settling his arrearages with the Bank. While petitioner invoked Article 2071 of the Civil Code, which allows a guarantor to demand security even before having paid, the Court found that provision inapplicable because the contract was one of suretyship, not guaranty. Even if it were applicable, the employer may only protect its right by instituting an action to demand security — it may not take the law into its own hands.

• Legal Compensation for Training Expenses: For legal compensation to take place, the requirements of Articles 1278 and 1279 of the Civil Code must be present: each obligor must be bound principally and be at the same time a principal creditor of the other, and both debts must be liquidated and demandable. In the present case, set-off cannot take place between petitioner and So because they are not mutually creditor and debtor of each other. The memorandum dated August 22, 1994 expressly states that the US$6,000.00 lump sum compensation would have to be refunded by each trainee to BOHLER, not to petitioner. The party entitled to claim the liquidated damages is BOHLER, not petitioner. Moreover, assuming the memorandum is binding on So, his more than two years of post-training stay constitutes substantial compliance with the three-year condition. Petitioner itself advanced the effectivity of So's resignation by one month, indicating it no longer needed the skill and expertise he acquired from the training. Furthermore, So did not sign the memorandum before his trip; he was made to sign it only nine months after his return, and the Labor Arbiter gave credence to his explanation that his signature was merely a formality.

• Distinction Between Guaranty and Suretyship: A guaranty is distinguished from a suretyship in that a guarantor is the insurer of the solvency of the debtor and binds himself to pay if the principal is unable to pay, while a surety is the insurer of the debt and obligates himself to pay if the principal does not pay. Based on this distinction, the contract executed by petitioner and Villareal in favor of the Bank of Commerce is a contract of surety, as denominated in the "continuing suretyship agreement." Consequently, Article 2071, which governs a guarantor's right to demand security, does not apply. Petitioner could not unilaterally withhold Villareal's wages or benefits as a preliminary remedy; it must file an action against Villareal.

• Prohibition Against Withholding of Wages (Article 116, Labor Code) — It is unlawful for any person, directly or indirectly, to withhold any amount from the wages and benefits of a worker or induce him to give up any part of his wages by force, stealth, intimidation, threat, or by any other means whatsoever without the worker's consent. An employer cannot refuse to pay wages or benefits because the employee has defaulted on a loan guaranteed by the employer, violated a memorandum of agreement, or failed to render an accounting of employer property. The employer's remedy is to file the appropriate action, not to take the law into its own hands.

• Distinction Between Guaranty and Suretyship — A guarantor is the insurer of the solvency of the debtor and binds himself to pay if the principal is unable to pay; a surety is the insurer of the debt and obligates himself to pay if the principal does not pay. Article 2071 of the Civil Code, which grants a guarantor the right to demand security from the principal debtor even before payment, applies only to a contract of guaranty and not to a contract of suretyship. A surety seeking to protect its interest must institute a judicial action rather than unilaterally withhold the debtor's wages.

• Requisites of Legal Compensation (Articles 1278 and 1279, Civil Code) — Compensation takes place when two persons, in their own right, are creditors and debtors of each other. The requisites are: (1) each obligor is bound principally and is at the same time a principal creditor of the other; (2) both debts consist in a sum of money, or if consumable things, of the same kind and quality; (3) both debts are due; (4) they are liquidated and demandable; and (5) neither debt is subject to any retention or controversy commenced by third persons and communicated in due time to the debtor. Legal compensation cannot occur where the parties are not mutually creditor and debtor of each other, as when the debt is owed to a third party rather than to the employer seeking set-off.

• "It may only protect its right as surety by instituting an 'action x x x to demand a security' (Kuenzle and Streiff vs. Tan Sunco, 16 Phil 670). It may not take the law into its own hands." — This passage, drawn from the Court of Appeals' ruling as quoted and adopted by the Supreme Court, articulates the principle that a surety's remedy under the Civil Code must be pursued judicially, not through unilateral withholding of an employee's wages.

• "There is no guaranty involved herein and, therefore, the provision of Article 2071 does not apply." — This statement is the ratio decidendi on the guaranty-versus-suretyship issue, establishing that Article 2071's protections for a guarantor do not extend to a surety and cannot be invoked to justify self-help withholding of employee benefits.

• "In the present case, set-off or legal compensation cannot take place between petitioner and respondent So because they are not mutually creditor and debtor of each other." — This passage applies the requisites of legal compensation to the facts, demonstrating that the absence of mutual creditor-debtor relationship — because the US$6,000.00 was owed to BOHLER, not petitioner — precludes set-off as a basis for withholding wages.

• Kuenzle and Streiff vs. Tan Sunco, 16 Phil. 670 — Cited for the proposition that a surety's right to demand security under the Civil Code must be pursued through an action, not by unilateral act. The Court adopted this principle in affirming that petitioner may only protect its right as surety by instituting an action to demand security.

• E. Zobel, Inc. vs. Court of Appeals, G.R. No. 113931, May 6, 1998, 290 SCRA 1 — Cited for the distinction between guaranty and suretyship, itself drawing from Machetti vs. Hospicio de San Jose and Fidelity & Surety Co., 43 Phil. 297 (1922). The Court relied on this distinction to hold that Article 2071, which governs guarantors, does not apply to a surety.

• Article 116, Labor Code — Prohibits the withholding of wages and benefits of a worker without the worker's consent, by force, stealth, intimidation, threat, or any other means. Applied as the primary basis for ruling that petitioner had no legal authority to withhold respondents' 13th month pay and other benefits.

• Article 2071, Civil Code — Enumerates the instances when a guarantor, even before having paid, may proceed against the principal debtor, including when the debt has become demandable and when there are reasonable grounds to fear the principal debtor intends to abscond. The Court held this provision inapplicable because the contract was one of suretyship, not guaranty, and because the remedy it provides must be sought through judicial action.

• Article 113, Labor Code — Limits wage deductions to three instances: insurance premiums paid by the employer with the worker's consent, union dues with check-off authorization, and deductions authorized by law or regulations issued by the Secretary of Labor. Petitioner invoked this provision but the Court found it did not authorize the withholding at issue.

• Article 1706, Civil Code — Provides that withholding of wages, except for a debt due, shall not be made by the employer. Petitioner cited this in relation to Article 113, but the Court found no debt due from respondents to petitioner that would justify withholding.

• Articles 1278 and 1279, Civil Code — Govern legal compensation, requiring that two persons be mutually creditors and debtors of each other and that the requisites of principal obligation, sum of money or same kind, due, liquidated and demandable, and free from third-party retention or controversy be satisfied. The Court held these requisites absent as to both respondents.

Vitug (Chairman), Corona, and Carpio-Morales, JJ., concurred.