25 April 2024
25 April 2024
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4.7 - 22 votes
Employers over the recent years have been using certain methodologies to circumvent labor laws, one example is hiring an "independent contractor" in stead of engaging them as employees to avoid payment of government mandated benefits and other obligations imposed by the law. Knowing the key differences of an employee and an independent contractor can be a tool for an employee to protect himself from exploitative employers. This guide will explain the distinctions between an employee and an independent contractor.
Businesses should never hire employees under the guise of a contract with an "independent contractor" to circumvent labor laws.
An example of circumvention of labor laws is hiring independent contractors so that the employer won't have to pay or give benefits that are mandated by the labor laws, when, in fact, the "independent contractors" are actually employees under the law.
The four-fold test is a way laid down in several cases ruled by the Supreme Court to determine whether a person is an employee. In Alba vs. Espinosa, et. al (G.R. No. 227734, 9 August 2017), the Supreme Court asked the following questions to resolve the case before them:
1. Does the employer have the power to select and hire an employee?
2. Does the employer pay wages?
3. Does the employer have the power to dismiss the employee?
4. Does the employer have the power to control the employee's conduct? Specifically, does the employer have the power to control both the end or the goal and the manner and means to achieve the end or the goal?
If all answers to the question above is a resounding "Yes", then an employer-employee relationship exists. If an employer-employee relationship does not exist then their relationship could be that of a client and an independent contractor.
The power to select and hire employees is a straightforward test. If the employer has the power to choose who will work for them, basically they have the power to select and hire employees.
The test of whether wages are paid is also straightforward. However, it should be noted that the name by which the "wages" are called or the method of computing the wages is not the basis of an employer-employee relationship.
For example, a person who gets paid for every button that they sew and a person whose job is to sew buttons for 8 hours a day, regardless of their output, may both be considered employees.
If a person is tasked to sew clothes 8 hours a day, and another person is paid PHP5.00 for every clothes he sews, regardless of the manner by which he is paid, he is still considered as an employee.
Dismissing an employee is basically telling an employee that they no longer work for the employer and so the employer-employee relationship is terminated.
The power to control is the most important test in determining whether there is an employer-employee relationship. It is usually called the "control test". In determining whether there is an employer-employee relationship, the power to control must relate to both the end or the goal and the method and manner of achieving the end or goal.
There are two types of control that a person can exercise over another in terms of work. The first is when a person establishes guidelines in order to accomplish the work.
An example is when a corporation hires a programmer to build a website for their business. The corporation, or its representatives, may determine the design, color scheme, words, and photos that will go in the website and the deadline but the programmer will have control over the method or manner of building the website such as the time when they will work on the website, the program they will use, and the code that they will write. In this case, the programmer is an independent contractor since the control does not extend to the method and manner of achieving the end or goal.
The second is when a person fixes a methodology that has to be strictly followed in accomplishing the work.
An example is when a person is hired as a programmer for an advertising agency and works for 8 hours a day for the advertising agency making software and websites. The programmer's work is reviewed by the agency and the program and computer that they use are dictated by the agency. In this case, the programmer is an employee of the advertising agency since the agency can control both the end or goal and the method and manner of achieving the end or goal.
It should be noted that it is not necessary that the employer exercises control as long as the option to control is present, and then an employer-employee relationship is established.
It is important to differentiate employees from independent contractors because they are treated differently under the law. Employers are bound to comply with the labor laws of the Philippines in regards to their employees while there is no such obligation when it comes to clients and the independent contractors that they hire.
Employees are entitled to salary or wages, and those which is given by the employer must be compliant with the minimum wages set in the place where the employer is situated. Further, employers are required by law to pay government-mandated benefits in favor of the employees.
Contrarily, with independent contractors they are responsible for paying their own government-mandated benefits and the client is not mandated to contribute the same unless they have agreed otherwise.
The labor law provides for certain benefits which employees are entitled, and which independent contractors are not.
Examples are overtime pay, 13th-month pay, holiday pay, and premium pay, among others. Certain also get other non-monetary benefits such as the Service Incentive Leave, maternity leave, paternity leave, parental leave, etc.
On the other hand, independent contractors are not entitled to these benefits.
The procedure and the basis of terminating the relationship with an employee and an independent contract greatly differ and have different consequences.
An employer may only dismiss an employee for reasons stated under Articles 297, 298, and 299 of the Labor Code. Causes for termination under Article 297 are usually because of the actions or omissions of the employee such as:
On the other hand, causes for termination under Article 298 are usually due to changes in the employer's circumstances such as:
Finally, Article 299 allows an employer to dismiss an employee when the employee is suffering from any disease and their continued employment is not allowed by law or is detrimental to the employee's health or the health of his co-workers.
The employer is required to give two written notices to terminate the employer-employee relationship in all cases of dismissal, the first notice must informs the employee of the acts or omissions for which he might be dismissed. This is usually in the form of a notice to explain. Pursuant to the employee's consitutional right of due process, the employee must be given the chance to be heard and defend himself. The second notice is usually the notice of termination of employment. This is given by the employer to the employee informing him of the fact of his dismissal or termination of his employment. This document shows the decision to dismiss such employee and the reasons for the same.
For dismissal due to causes under Articles 298 and 299, the employer must give a notice announcing to the employees the relevant authorized cause for dismissal and the second written notice should be sent to the Department of Labor and Employment at least 30 days before its effectivity.
It must be noted that failure to comply with the above-mentioned rules may result in liabilities on the part of the employer such as backwages, benefits and damages.
Terminating a contract of an independent contractor is similar to termination of other types of contracts. This is subject to the terms and conditions in the service agreement between the client and the independent contractor, which usually includes the grounds of termination and the period required for notice to be given by either party before the effective date of termination.
The four-fold test is a reliable tool to determine the key differences between an employee and an independent contractor, namely, we have the power to hire, pay wages, dismiss and control. Knowing the differences between the two will help protect the rights of employees and can result in upholding their right to security of tenure.