Zanotte Shoes/Leonardo Lorenzo vs. NLRC

Separation pay cannot be awarded where there is no finding of dismissal or abandonment. The award of separation pay requires a clear legal basis; where the Labor Arbiter and NLRC both found that employees were "simply out of job for reasons not attributable to either party," the award of separation pay has no legal foundation and must be set aside.

Private respondents were workers in petitioner Leonardo Lorenzo's shoe business, which was engaged in manufacturing shoes. The business operations were seasonal, normally occurring twice a year—once in June coinciding with the opening of school classes and another in December during the Christmas holidays. The workers were paid on a piece-work basis and had requested to be made members of the Social Security System (SSS) and demanded an increase in their pay rates.

Private respondents Joseph Lluz, Lolito Lluz, Noel Adarayan, Rogelio Sira, Virginia Heresano, Genelito Heresano, and Carmelita de Dios filed a complaint for illegal dismissal and various monetary claims, including damages and attorney's fees, against petitioners Zanotte Shoes/Leonardo Lorenzo. In their supplemental position paper, the complainants confined themselves to the illegal dismissal charge and abandoned the monetary claims. One of the original eight complainants, Virgilio Alcunaba, decided to resume his work with petitioners, leaving the rest to pursue the case.

Private respondents averred that they started working for petitioners on various dates ranging from January 1975 to October 1987. They claimed that they worked for a minimum of twelve hours daily, including Sundays and holidays when needed; that they were paid on a piece-work basis; that it "angered" petitioner Lorenzo when they requested to be made members of the Social Security System; and that when they demanded an increase in their pay rates, they were prevented, starting 24 October 1988, from entering the work premises.

Petitioners, in turn, claimed that their business operations were only seasonal, normally twice a year—one in June coinciding with the opening of school classes and another in December during the Christmas holidays—when heavy job orders would come in. Private respondents, according to petitioners, were engaged on purely contractual basis and paid rates conformably with their respective agreements.

The Labor Arbiter found that there was neither dismissal nor abandonment, stating that "records show that even during the conciliation stage, respondents had repeatedly indicated that they were willing to accept back all complainants aside from denying complainants allegation. Hence, it is clear that there was no dismissal to talk about in the first place which would have to be determined whether legal or not." The Labor Arbiter also took note of the complainants' desire to be given separation pay instead of being ordered back to work, ruling that "there was neither dismissal nor abandonment but complainants are simply out of job for reasons not attributable to either party."

The NLRC, in agreeing with the Labor Arbiter's award of separation pay, reasoned that the Labor Arbiter saw in respondents' offer of reinstatement "the commanding advantage it had to later force (by whatever unlawful means they may resort to) the complainants out of job" and that it was "peculiar for an employer who wants to get rid of its employees, to insist on reinstatement rather than a separation pay scheme."

• Employer-Employee Relationship: Petitioners claimed that private respondents were engaged on purely contractual basis and paid rates conformably with their respective agreements, implying that no regular employer-employee relationship existed.
• Seasonal Nature of Business: Petitioners argued that their business operations were only seasonal, normally twice a year, which supported their position that workers were not regular employees.
• Award of Separation Pay: Petitioners appealed the Labor Arbiter's decision, and the NLRC's dismissal of that appeal was assailed in the petition for certiorari before the Supreme Court.

• Illegal Dismissal: Private respondents alleged that they were prevented from entering the work premises starting 24 October 1988 after they demanded an increase in their pay rates and requested SSS membership.
• Regular Employment: Private respondents claimed they worked for a minimum of twelve hours daily, including Sundays and holidays when needed, and were paid on a piece-work basis, indicating regular employment.
• Solicitor General's Position: The Solicitor General conceded that an employer-employee relationship existed but expressed strong reservations on the award of separation pay in view of the findings by both the Labor Arbiter and the NLRC that there was neither dismissal nor abandonment.

• Employer-Employee Relationship: Whether an employer-employee relationship existed between petitioners and private respondents.
• Award of Separation Pay: Whether the award of separation pay to private respondents was warranted despite the finding that there was neither dismissal nor abandonment.

• Employer-Employee Relationship: Yes. The work of private respondents was clearly related to, and in the pursuit of, the principal business activity of petitioners. The indicia for determining the existence of an employer-employee relationship were all extant in the case: (a) the selection and engagement of the employee; (b) the payment of wages; (c) the power of dismissal; and (d) the employer's power to control the employee with respect to the result of the work to be done and to the means and methods by which the work is to be accomplished.
• Award of Separation Pay: No. The award of separation pay was set aside for being without any clear legal basis. The Labor Arbiter, sustained by the NLRC, concluded that there was neither dismissal nor abandonment, and the NLRC's justification for the award was "too speculative and conjectural to be sustained."

• Employer-Employee Relationship: The Court applied the control test, citing Dy Keh Beng vs. International Labor and Marine Union of the Philippines, et al. The control test requires merely the existence of the right to control the manner of doing the work, not the actual exercise of the right. The Court found that the work of private respondents was clearly related to, and in the pursuit of, the principal business activity of petitioners. All four indicia of an employer-employee relationship were present: selection and engagement of the employee, payment of wages, power of dismissal, and the employer's power to control the employee with respect to the result of the work and the means and methods by which the work is to be accomplished. The Court noted that the requirement refers to the existence of the right to control and not necessarily to the actual exercise of the right.

• Award of Separation Pay: The Court agreed with the Solicitor General that the award of separation pay was unwarranted. The Labor Arbiter had expressly found that "there was neither dismissal nor abandonment but complainants are simply out of job for reasons not attributable to either party." The NLRC's attempt to justify the award by speculating that the employer's offer of reinstatement was a trap was found to be "too speculative and conjectural to be sustained." The Court noted that the fact of the matter was that petitioners had repeatedly indicated their willingness to accept private respondents but the latter had steadfastly refused the offer. For being without any clear legal basis, the award of separation pay was set aside. The Court added that nothing prevented petitioners from voluntarily giving private respondents some amounts on an ex gratia basis.

• Control Test — An employer-employee relationship exists "where the person for whom the services are performed reserves a right to control not only the end to be achieved but also the means to be used in reaching such end." The control test calls merely for the existence of the right to control the manner of doing the work, not the actual exercise of the right. The Court applied this test in finding that an employer-employee relationship existed between petitioners and private respondents.

• Indicia of Employer-Employee Relationship — The four-fold test for determining the existence of an employer-employee relationship includes: (a) the selection and engagement of the employee; (b) the payment of wages; (c) the power of dismissal; and (d) the employer's power to control the employee with respect to the result of the work to be done and to the means and methods by which the work is to be accomplished. All four indicia were present in this case.

• Separation Pay Requires Legal Basis — Separation pay cannot be awarded where there is no finding of dismissal or abandonment. Where employees are "simply out of job for reasons not attributable to either party," the award of separation pay has no clear legal basis and must be set aside.

• "Well-settled is the rule that factual findings of the NLRC, particularly when they coincide with that of the Labor Arbiter, are accorded respect, if not finality, and will not be disturbed absent any showing that substantial evidence which might otherwise affect the result of the case has been discarded." — This passage establishes the standard of review applied by the Court to NLRC factual findings, which is frequently cited in subsequent labor law jurisprudence.

• "The control test calls merely for the existence of the right to control the manner of doing the work, not the actual exercise of the right." — This is the canonical formulation of the control test in Philippine labor law, quoted from Dy Keh Beng v. International Labor and Marine Union of the Philippines, and is the controlling doctrine for determining employer-employee relationships.

• "We find the above disquisition of the NLRC too speculative and conjectural to be sustained. The fact of the matter is that petitioners have repeatedly indicated their willingness to accept private respondents but the latter have steadfastly refused the offer. For being without any clear legal basis, the award of separation pay must thus be set aside." — This passage states the ratio decidendi for the deletion of the separation pay award, holding that awards must rest on clear legal bases and not on speculation.

• Dy Keh Beng vs. International Labor and Marine Union of the Philippines, et al., 90 SCRA 161 — Controlling precedent cited for the control test in determining the existence of an employer-employee relationship. The Court quoted this case extensively to establish that the control test requires only the existence of the right to control, not its actual exercise.

• Article 279, Labor Code — Cited in the footnotes regarding security of tenure. The provision states that in cases of regular employment, the employer shall not terminate the services of an employee except for a just cause or when authorized by the Title, and that an employee who is unjustly dismissed shall be entitled to reinstatement without loss of seniority rights and other privileges and to full backwages. The Court's deletion of the separation pay award was consistent with this provision, as there was no finding of unjust dismissal.

Feliciano, Romero, Melo, and Francisco, JJ., concurred.