Key Takeaway: The Supreme Court Allows Piercing the Corporate Veil in Labor Cases When Used to Evade Obligations

Dinoyo, et al. v. Undaloc Construction Company, Inc., et al., G.R. No. 249638, June 23, 2021

Imagine a scenario where workers, after years of toil, are awarded compensation for wrongful dismissal, only to find that the company has vanished, leaving them with nothing. This isn’t just a hypothetical; it’s the harsh reality faced by the petitioners in a landmark Supreme Court case in the Philippines. The central legal question was whether the corporate veil could be pierced to hold not only the company but also its owners and a related corporation liable for the awarded damages.

In this case, a group of workers filed complaints for illegal dismissal against Undaloc Construction Company, Inc. and were awarded significant backwages and damages. However, when it came time to collect, they discovered that the company had ceased operations, and its assets had seemingly been transferred to another corporation controlled by the same family. The workers sought to hold both the new corporation and the company’s owners personally liable, leading to a legal battle that reached the Supreme Court.

Understanding the Legal Framework

The concept of the corporate veil refers to the legal separation between a corporation and its shareholders or owners. This principle protects shareholders from being personally liable for the company’s debts or liabilities. However, the Supreme Court has established that this veil can be pierced when the corporate structure is used to perpetrate fraud or injustice.

In labor cases, the doctrine of piercing the corporate veil is particularly relevant when companies attempt to evade their legal obligations to employees. The Labor Code of the Philippines, under Article 212(e), defines an employer as any person or entity that employs the services of others. This broad definition allows for the possibility of holding related entities or individuals liable if they are found to be the true employer or if they have used the corporate structure to avoid responsibility.

A key precedent in this area is the case of A.C. Ransom Labor Union-CCLU v. NLRC, where the Supreme Court pierced the corporate veil of a company that created a “run-away corporation” to avoid paying back wages. The Court emphasized that when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime, it will be disregarded.

The Journey of the Case

The case began when Eduardo Dinoyo and his fellow workers were awarded a total of P3,693,474.68 in backwages and damages by a Labor Arbiter. Undaloc Construction appealed this decision, but their appeal was marred by procedural irregularities, including a late filing and a questionable supersedeas bond.

Despite these issues, the National Labor Relations Commission (NLRC) reversed the Labor Arbiter’s decision, ordering the reinstatement of the workers without backwages. The workers then appealed to the Court of Appeals (CA), which reinstated the original award but declined to pierce the corporate veil, citing a lack of clear evidence of bad faith.

During the execution stage, it was discovered that Undaloc Construction had no assets to satisfy the judgment. The workers filed a motion to hold the owners, Spouses Cirilo and Gina Undaloc, and their new company, Cigin Construction & Development Corporation, solidarily liable. The Labor Arbiter granted this motion, finding evidence of a scheme to evade legal obligations.

The Supreme Court’s decision highlighted the following key points:

“The veil of corporate fiction can be pierced, and responsible corporate directors and officers or even a separate but related corporation, may be impleaded and held answerable solidarily in a labor case, even after final judgment and on execution, so long as it is established that such persons have deliberately used the corporate vehicle to unjustly evade the judgment obligation, or have resorted to fraud, had faith or malice in doing so.”

“Bad faith, in this instance, does not connote bad judgment or negligence but imports a dishonest purpose or some oral obliquity and conscious doing of wrong; it means a breach of a known duty through some motive or interest or ill will; it partakes of the nature of fraud.”

The Court found that the transfer of assets from Undaloc Construction to Cigin Construction, coupled with the history of the Undaloc family creating new companies to avoid labor liabilities, constituted bad faith. Therefore, it pierced the corporate veil, holding Cigin Construction and the Spouses Undaloc solidarily liable for the workers’ claims.

Implications for Future Cases

This ruling sets a significant precedent for labor cases in the Philippines. It underscores that the corporate veil will not protect companies or their owners from liability if they engage in schemes to evade their legal obligations to workers. Businesses must be cautious not to misuse the corporate structure to avoid paying rightful claims.

For workers, this decision provides a powerful tool to pursue justice against employers who attempt to escape their responsibilities. It emphasizes the importance of documenting any suspicious activities by employers, such as asset transfers or the creation of new companies, to support claims of bad faith.

Key Lessons:

• Employers should ensure compliance with labor laws and avoid using corporate structures to evade liabilities.
• Workers must be vigilant in monitoring their employers’ actions and seek legal advice if they suspect attempts to avoid obligations.
• Legal practitioners should consider the doctrine of piercing the corporate veil in cases where companies engage in questionable practices to avoid labor judgments.

Frequently Asked Questions

What is the doctrine of piercing the corporate veil?

The doctrine of piercing the corporate veil allows courts to disregard the legal separation between a corporation and its owners or related entities when the corporate structure is used to perpetrate fraud or injustice.

Can a company’s owners be held personally liable for labor judgments?

Yes, if it is proven that the owners used the corporate structure to evade legal obligations, they can be held personally liable along with the company.

What constitutes bad faith in the context of piercing the corporate veil?

Bad faith involves a dishonest purpose or intent to wrongfully evade legal obligations, not merely negligence or bad judgment.

How can workers protect themselves from employer evasion tactics?

Workers should document any suspicious activities by their employers, such as asset transfers or the creation of new companies, and seek legal advice to pursue claims of bad faith.

What should businesses do to avoid legal issues related to the corporate veil?

Businesses should comply with labor laws and avoid using corporate structures to evade liabilities, as this can lead to the piercing of the corporate veil.

ASG Law specializes in labor and employment law. Contact us or email hello@asglawpartners.com to schedule a consultation.