This Supreme Court case clarifies the legal boundaries of employment in outsourcing arrangements, particularly concerning security personnel. The Court affirmed that security guards, supplied by a security agency to a client company, are employees of the agency, not the client, as long as the agency maintains control over their selection, wages, and discipline. This ruling underscores the importance of clearly defined roles and responsibilities in outsourcing agreements to avoid misclassification of employees and ensure proper labor standards compliance.

Who’s the Boss? Examining Employment in Outsourced Security

This case originated from a complaint filed by security guards against Philippine Long Distance Telephone Company (PLDT) and People’s Security Inc. (PSI), seeking regularization as PLDT employees. The guards, deployed by PSI to protect PLDT’s installations, argued that PLDT exerted control and supervision over their work, effectively making them regular employees entitled to the same benefits as PLDT’s rank-and-file staff. The central legal question revolved around determining whether an **employer-employee relationship** existed between the security guards and PLDT, despite the security service agreement designating PSI as their direct employer.

The factual backdrop revealed that PSI entered into a security service agreement with PLDT, stipulating that PSI would provide qualified security guards to protect PLDT’s properties. The agreement explicitly stated that no employer-employee relationship existed between PLDT and the security guards and that PSI would have full control over their selection, engagement, and discharge, including the determination and payment of wages. However, PLDT’s Security Division conducted interviews and evaluations of the security guards referred by PSI, rejecting those who did not meet specific height requirements.

On June 5, 1995, sixty-five (65) security guards filed a complaint for regularization against PLDT with the Labor Arbiter, alleging that they had been employed by the company through the years commencing from 1982. They further claimed that PLDT controlled and supervised their work through its Security Department, with PSI acting as a mere intermediary in the payment of their wages. After filing the complaint, the security guards formed the PLDT Company Security Personnel Union, led by Zaldy Abella. Subsequently, PLDT allegedly ordered PSI to terminate union members who participated in a protest picket in front of PLDT’s office.

The Labor Arbiter dismissed the complaint for lack of merit, a decision affirmed by the National Labor Relations Commission (NLRC). The Court of Appeals upheld the NLRC’s ruling, emphasizing that the power of selection over the guards rested with PSI and that the guards received their wages from PSI. The Supreme Court initially denied the petition for review due to a procedural technicality but later reconsidered the case to address the merits of the dispute.

The Supreme Court relied on the established **four-fold test** to determine the existence of an employer-employee relationship, as outlined in the case of *Philippine Airlines, Inc. v. National Labor Relations Commission*: (1) the selection and engagement of the employee; (2) the payment of wages; (3) the power to dismiss; and (4) the power to control the employee’s conduct. Applying this test, the Court concurred with the lower courts’ findings that PSI, not PLDT, was the employer of the security guards.

Regarding the first factor, the Court noted that PSI was responsible for selecting, engaging, hiring, and discharging the security guards. While PLDT conducted interviews and evaluations to ensure that the guards met its standards, the Court held that this process did not negate PSI’s role as the employer. The Labor Arbiter emphasized that the employer-employee relationship was perfected even before the guards were assigned to PLDT, as assignment only occurred after employment. Moreover, the Court affirmed the finding that PSI was a legitimate job contractor, duly licensed and possessing substantial capital and investments, servicing clients other than PLDT.

Concerning the second factor, the Court found that PSI determined and paid the security guards’ wages, salaries, and compensation. PLDT paid PSI for the security services on a lump-sum basis, and the guards’ wages constituted only a portion of the total sum. The signature of a PLDT supervisor on the Daily Time Records did not automatically make PLDT the employer, as the records showed that guards were paid even when the supervisor’s signature was absent. The guards also enjoyed the benefits and incentives of PSI employees and were reported as such to the Social Security System (SSS).

With respect to the third and fourth factors, the security guards presented delinquency reports prepared by PLDT personnel and certificates of training courses to demonstrate PLDT’s control and power to dismiss them. However, the Court determined that the delinquency reports served merely as reminders of infractions committed by the guards while on duty and provided a basis for PLDT to recommend their termination from PLDT, not necessarily from PSI. The training courses, while conducted at PLDT’s premises, were approved and funded by PSI. The Supreme Court cited the case of *Citytrust Banking Corporation v. NLRC*, wherein the Court upheld the validity of contracts allowing a client company to request the replacement of security guards deemed unsatisfactory, without necessarily establishing an employer-employee relationship.

The court emphasizes the importance of the right of control test, explaining its significance in outsourcing scenarios. The importance of the security service agreement between PLDT and PSI was highlighted, noting that it expressly disclaimed any employer-employee relationship between PLDT and the security guards. The court stated:

Even if we disregard the explicit covenant in said agreement that “there exists no employer-employee relationship between CONTRACTOR and/or his guards on the one hand, and PAL on the other” all other considerations confirm the fact that PAL was not the security guards’ employer.

The Supreme Court ruled that the lower courts did not gravely abuse their discretion or act without jurisdiction and therefore upheld their findings of fact. The Court reiterated that while the Constitution promotes social justice and protects the working class, it does not automatically favor labor in every dispute. Justice must be dispensed based on established facts, applicable laws, and legal doctrines. This ruling reinforces the principle that clear contractual agreements and adherence to the four-fold test are essential in determining the true employer in outsourcing arrangements.

FAQs

What was the key issue in this case?	The central issue was whether an employer-employee relationship existed between PLDT and the security guards provided by PSI, despite the security service agreement.
What is the four-fold test used to determine the existence of an employer-employee relationship?	The four-fold test considers: (1) the selection and engagement of the employee; (2) the payment of wages; (3) the power to dismiss; and (4) the power to control the employee’s conduct.
Who was found to be the employer of the security guards in this case?	The Supreme Court affirmed the lower courts’ findings that PSI, the security agency, was the employer of the security guards, not PLDT.
What factors supported the finding that PSI was the employer?	PSI was responsible for selecting, hiring, paying, and disciplining the guards. PLDT’s role was limited to setting standards and requesting replacements for unsatisfactory performance.
What was the significance of the security service agreement?	The security service agreement explicitly stated that no employer-employee relationship existed between PLDT and the security guards.
Did PLDT’s supervision of the guards make them PLDT employees?	No, the Court held that PLDT’s monitoring of the guards’ performance was part of its internal control system and did not establish an employer-employee relationship.
What is the importance of this ruling for outsourcing arrangements?	This ruling emphasizes the importance of clearly defined roles and responsibilities in outsourcing agreements to avoid misclassification of employees.
What happens if the client company directly controls the outsourced employees’ work?	If the client company directly controls the outsourced employees’ work, it could be deemed the employer, regardless of the outsourcing agreement.

This case serves as a reminder for companies engaging in outsourcing arrangements to ensure that the service provider maintains genuine control over its employees. This includes the power to hire, fire, pay wages, and direct the manner in which the work is performed. Failure to do so may result in the client company being deemed the employer and held liable for labor law violations.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: ZALDY G. ABELLA VS. PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, G.R. NO. 159469, June 08, 2005