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Tests of Employment Relations

The determination of whether employer-employee relation exists between the parties is very important. For one,
entitlement to labor standards benefits such as minimum wages, hours of work, overtime pay, etc., or to social benefits
under laws such as social security law, workmens compensation law, etc., or to termination pay, or to unionism and other
labor relations provisions under the Labor Code, are largely dependent on the existence of employer-employee
relationship between the parties.

Another thing is that the existence of employer-employee relationship between the parties will determine whether the
controversy should fall within the exclusive jurisdiction of labor agencies or not. If for example the parties are not
employer-employee of each other, respectively, but perhaps partners or associates, then any dispute between them will
be not be covered by the jurisdiction of labor agencies but by regular courts.

Three test to determine employer-employee relationship

There are three test commonly used to determine the existence of employer-employee relationship, viz.:

Four-fold test

Economic reality test

Two-tiered test (or Multi-factor test)

Four-fold test elements

The usual test used to determine the existence of employer-employer relationship is the so-called four-fold test. In
applying this test, the following elements are generally considered:

Right to hire or to the selection and engagement of the employee.

Payment of wages and salaries for services.

Power of dismissal or the power to impose disciplinary actions.

Power to control the employee with respect to the means and methods by which the work is to be accomplished. This is
known as the right-of-control test.

Right of control test is considered as the most important element in determining the existence of employment relation.

Of the above-mentioned elements, the right of control test is considered as the most important element in determining the
existence of employment relation. The control test initially found application in the case of Viaa vs. Al-Lagadan and Piga,
where the court held that there is an employer-employee relationship when the person for whom the services are
performed reserves the right to control not only the end achieved but also the manner and means used to achieve that
end.

Control test thus refers to the employers power to control the employees conduct not only as to the result of the work to
be done but also with respect to the means and methods by which the work is to be accomplished.

In applying this test, it is the existence of the right, and not the actual exercise thereof, that is important.

Economic reality test

In view of todays highly specialized workforce, the court are often faced with situations where the right-of-control-test
alone can no longer adequately determine the existence of employer-employer relationship. Subsequently, another test
has been devised to fill the gap, known as the economic reality test.

In Sevilla v. Court of Appeals, the Court observed the need to consider the existing economic conditions prevailing
between the parties, in addition to the standard of right-of-control, to give a clearer picture in determining the existence of
an employer-employee relationship based on an analysis of the totality of economic circumstances of the worker.

Economic realities of the employment relations help provide a comprehensive analysis of the true classification of the
individual, whether as employee, independent contractor, corporate officer or some other capacity.

Under economic reality test, the benchmark in analyzing whether employment relation exists between the parties is the
economic dependence of the worker on his employer. That is, whether the worker is dependent on the alleged employer
for his continued employment in the latters line of business.

Applying this test, if the putative employee is economically dependent on putative employer for his continued employment
in the latters line of business, there is employer-employee relationship between them. Otherwise, there is none.

Two-tiered test (or Multi-factor test)

The economic reality test is not meant to replace the right of control test. Rather, these two test are often use in
conjunction with each other to determine the existence of employment relation between the parties. This is known as the
two-tiered test, or multi-factor test. This two-tiered test involves the following tests:
The putative employers power to control the employee with respect to the means and methods by which the work is to
be accomplished; and

The underlying economic realities of the activity or relationship.

References

Francisco vs. NLRC, G.R. No. 170087 August 31, 2006

Religious of the Virgin Mary vs. NLRC, G.R. No. 103606, October 13, 1999

Viaa vs. Al-Lagadan and Piga, 99 Phil. 408 (1956).

Sevilla v. Court of Appeals, G.R. Nos. L-41182-3, April 15, 1988.

Determining employee classification is a vital part of running your business. It can be easy to confuse an employee for an
independent contractor and vice versa, but doing so will cause you a lot of problems later on.

EMPLOYEE VS. INDEPENDENT CONTRACTOR DEFINITION

Unfortunately, there is no single definition as to what classifies one as an employee, and this can blur the lines a bit
between employee and contractor. However, the IRS relies on the Common Law Test to determine whether employment
taxes such as social security, Medicare, and so on should be withheld from an individuals pay.

THE COMMON LAW TEST

Common Law states if an employer has the right to control what work will be done and how that work will be done, then
an employer-employee relationship exists and the worker is indeed a common law employee. It is important to note that
this individual is an employee under the common law test even if the employer does not exercise their right to control.
Conversely, if an individual is under the control of someone else only as far as the results go, and not to details that go
into how that work is accomplished, they are not considered an employee under the common law test. It all comes down
to the amount of control the employer has over the individual performing work.

WHAT IS CONTROL?

If the common law test determines whether or not you have an employer-employee relationship or that of an employer-
independent contractor relationship, we need to know just what control means. The IRS has constructed three categories
to determine control: Behavioral control, financial control, and type of relationship.

Behavioral control refers to the right to control the details of the work being done. This includes the amount of instruction
given to the worker as far as when, where, and how to work. As mentioned before, an employer doesnt necessarily have
to exercise their right to control in order for them to be considered an employee, but the simple fact that they have the
ability to is sufficient enough. Another key component to behavior control is the training aspect of the job. If an employer is
providing training on a regular basis, they are considered to have an employer-employee relationship.

Financial control has a few different layers to it, but to sum it up the IRS is looking to see if the business has the right to
direct and control certain economic factors of the individuals job. The five factors that go into determining financial control
are:

Unreimbursed Expenses: Independent contractors are more likely than employees to have business expenses that are
not reimbursed.

Significant Amount Invested: Typically, independent contractors have much more invested in the equipment used to
perform the job.

Services Available to Public: If the worker offers their services to the public this indicates the individual may be an
independent contractor.

How Worker is Paid: Typically an employee is paid by the hour, week, or month, while independent contractors are paid
upon completion of a job. However, certain independent contractors will be paid an hourly rate as well, such as lawyers or
accountants.

Profit or Loss: If the individual is able to make a profit or incur a loss they are an independent contractor.

The final piece in determining control is the type of relationship. There are four factors that will give insight to whether or
not an individual is a contractor or an employee. The four factors are: if a written agreement exists, if employee benefits
are paid, term of relationship, and if the individuals services are an important part of the business's normal operations.

See how Applicant Tracking can help you categorizing your employees

A written agreement is important because it will advocate pretty clearly the relationship between the business and the
worker. The next factor, employee benefits, is important because if an employer provides benefits such as paid vacation,
health insurance, etc. that is evidence of an employer-employee relationship. Next is the term of the relationship. If an
employer hires an individual to complete a project, or for a specific period of time that is an indication of an independent
contractor. If the individual is hired without any timeframes around the employment that show intent of an employer-
employee relationship. The last factor in the type of relationship is the workers services being an important part of the
normal business operations. If an individual contributes to the key aspects of business activity, it is thought that the
employer will have the right to control, therefore making that individual an employee.

REASONABLE BASIS TEST

Just when you think you have it figured out you realize there is such thing as reasonable basis. The reasonable basis test
says even though an individual may meet the definition of an employee under the common law test, they can still be
treated as an independent contractor by the employer. This means they would be exempt from federal payroll taxes if the
employer has reasonable basis as stated by the Revenue Act of 1978. A few factors go into determining whether
reasonable basis is present.

A court decision, IRS rulings, IRS technical advice letter received by the employer, or a private letter from the IRS that
indicates the worker is not an employee.

A past audit by the IRS of the employer that did not show taxes owed or a penalty attributable to the employers treatment
of the worker as an independent contractor.

A longstanding, recognized practice in a significant segment of the employers industry of treating workers in similar
situations as independent contractors.

To claim reasonable basis, an employer must be consistent for the time frame being questioned. This means if they are
claiming they indeed do have an independent contractor, the employer must file all federal taxes and information to prove
their statements.

EMPLOYER-EMPLOYEE RELATIONSHIP

A basic concept in labor law is that of employer-employee relationship. When is an employer-employee relationship
deemed to exist? The Supreme Court had once again occasion to answer this question in the case of TELEVISION AND
PRODUCTION EXPONENTS, INC. and/or ANTONIO P. TUVIERA versus ROBERTO C. SERVAA, (G.R.
No. 167648, January 28, 2008).

The case involves a complaint for illegal dismissal and nonpayment of benefits filed by Servana against TAPE. Servana
alleged that he was first connected with Agro-Commercial Security Agency but was later on absorbed by TAPE as a
regular company guard.

On its part TAPE contended that Servana was merely a talent and/or independent contractor.

In resolving the issue of employer-employee relationship the Supreme Court made use of the four-fold test:

Jurisprudence is abound [sic] with cases that recite the factors to be considered in determining the existence of
employer-employee relationship, namely: (a) the selection and engagement of the employee; (b) the payment of wages;
(c) the power of dismissal; and (d) the employers power to control the employee with respect to the means and method
by which the work is to be accomplished. The most important factor involves the control test. Under the control test, there
is an employer-employee relationship when the person for whom the services are performed reserves the right to control
not only the end achieved but also the manner and means used to achieve that end.

The Court further observed that these factors were present in the case.

First, as to the selection and engagement of the employee:

Clearly, respondent was hired by TAPE. Respondent presented his identification card to prove that he is indeed an
employee of TAPE. It has been in held that in a business establishment, an identification card is usually provided not just
as a security measure but to mainly identify the holder thereof as a bona fideemployee of the firm who issues it.

Second, as to the payment of wages:

Respondent claims to have been receiving P5,444.44 as his monthly salary while TAPE prefers to designate such
amount as talent fees. Wages, as defined in the Labor Code, are remuneration or earnings, however designated, capable
of being expressed in terms of money, whether fixed or ascertained on a time, task, piece or commission basis, or other
method of calculating the same, which is payable by an employer to an employee under a written or unwritten contract of
employment for work done or to be done, or for service rendered or to be rendered. It is beyond dispute that respondent
received a fixed amount as monthly compensation for the services he rendered to TAPE.

Thirdly, as to the power of dismissal:

The Memorandum informing respondent of the discontinuance of his service proves that TAPE had the power to dismiss
respondent.

And finally, as to the power of control, which is the most important test:

Control is manifested in the bundy cards submitted by respondent in evidence. He was required to report daily and
observe definite work hours.
What is significant are the concrete objects which for the Supreme Court served as evidences for the existence of an
employer-employee relationship between the parties, namely:

(1) The identification card;

(2) The fixed amount as monthly compensation;

(3) The Memorandum of discontinuance; and

(4) The bundy cards.

Where these or similar evidences are present the conclusion is well-nigh inevitable that an employer-employee
relationship exists

Existence of employer-employee relationship; how proved - G.R. No. 169757

Before a case for illegal dismissal can prosper, it must first be established that an employer-employee relationship existed
between petitioner and respondent.

The elements to determine the existence of an employment relationship are: (a) the selection and engagement of the
employee; (b) the payment of wages; (c) the power of dismissal; and (d) the employers power to control the employees
conduct. The most important element is the employers control of the employees conduct, not only as to the result of the
work to be done, but also as to the means and methods to accomplish it.

It is settled that no particular form of evidence is required to prove the existence of an employer-employee
relationship.Any competent and relevant evidence to prove the relationship may be admitted.

In this case, the documentary evidence presented by respondent to prove that he was an employee of petitioner are as
follows: (a) a document denominated as "payroll" (dated July 31, 2001 to March 15, 2002) certified correct by petitioner,
which showed that respondent received a monthly salary ofP7,000.00 (P3,500.00 every 15th of the month and
anotherP3,500.00 every 30th of the month) with the corresponding deductions due to absences incurred by respondent;
and (2)copies of petty cash vouchers, showing the amounts he received and signed for in the payrolls.

The said documents showed that petitioner hired respondent as an employee and he was paid monthly wages
ofP7,000.00. Petitioner wielded the power to dismiss as respondent stated that he was verbally dismissed by petitioner,
and respondent, thereafter, filed an action for illegal dismissal against petitioner. The power of control refers merely to the
existence of the power. It is not essential for the employer to actually supervise the performance of duties of the
employee, as it is sufficient that the former has a right to wield the power.Nevertheless, petitioner stated in his Position
Paper that it was agreed that he would help and teach respondent how to use the studio equipment. In such case,
petitioner certainly had the power to check on the progress and work of respondent.

On the other hand, petitioner failed to prove that his relationship with respondent was one of partnership. Such claim was
not supported by any written agreement. The Court notes that in the payroll dated July 31, 2001 to March 15, 2002, there
were deductions from the wages of respondent for his absence from work, which negates petitioners claim that the wages
paid were advances for respondents work in the partnership. In Nicario v. National Labor Relations Commission,the Court
held:

It is a well-settled doctrine, that if doubts exist between the evidence presented by the employer and the employee, the
scales of justice must be tilted in favor of the latter. It is a time-honored rule that in controversies between a laborer and
his master, doubts reasonably arising from the evidence, or in the interpretation of agreements and writing should be
resolved in the formers favor. The policy is to extend the doctrine to a greater number of employees who can avail of the
benefits under the law, which is in consonance with the avowed policy of the State to give maximum aid and protection of
labor. This rule should be applied in the case at bar, especially since the evidence presented by the private respondent
company is not convincing. x x x[

Based on the foregoing, the Court agrees with the Court of Appeals that the evidence presented by the parties showed
that an employer-employee relationship existed between petitioner and respondent.

In termination cases, the burden is upon the employer to show by substantial evidence that the termination was for lawful
cause and validly made. Article 277 (b) of the Labor Code puts the burden of proving that the dismissal of an employee
was for a valid or authorized cause on the employer, without distinction whether the employer admits or does not admit
the dismissal. For an employees dismissal to be valid, (a) the dismissal must be for a valid cause, and (b) the employee
must be afforded due process.Procedural due process requires the employer to furnish an employee with two written
notices before the latter is dismissed: (1) the notice to apprise the employee of the particular acts or omissions for which
his dismissal is sought, which is the equivalent of a charge; and (2) the notice informing the employee of his dismissal, to
be issued after the employee has been given reasonable opportunity to answer and to be heard on his defense. Petitioner
failed to comply with these legal requirements; hence, the Court of Appeals correctly affirmed the Labor Arbiters finding
that respondent was illegally dismissed, and entitled to the payment of backwages, and separation pay in lieu of
reinstatement.