In Century Properties, Inc. v. Babiano, the Supreme Court addressed the enforceability of forfeiture clauses in employment contracts, particularly concerning unpaid commissions. The Court ruled that an employee’s commissions could be forfeited if they violated a confidentiality and non-compete clause within their employment contract while still employed. However, the Court also affirmed the monetary award for unpaid commissions to an employee where no violation of company policies was found, emphasizing the importance of substantive rights and equitable compensation. This decision clarifies the scope and limitations of contractual stipulations regarding the forfeiture of earned compensation.

Betrayal or Fair Play: Can Employers Withhold Commissions for Employee Disloyalty?

The case revolves around Edwin Babiano and Emma Concepcion’s claims for unpaid commissions against Century Properties, Inc. (CPI). Babiano, a former Vice President for Sales at CPI, allegedly violated a “Confidentiality of Documents and Non-Compete Clause” by joining a competitor while still employed. CPI argued that this breach justified the forfeiture of Babiano’s unpaid commissions. Meanwhile, Concepcion, a former Project Director, also claimed unpaid commissions, asserting that she was an employee of CPI despite contractual stipulations to the contrary. The central legal question is whether CPI could legally withhold the commissions of Babiano and Concepcion, and whether the labor tribunals had jurisdiction over Concepcion’s claims given her contractual designation as an independent contractor.

The Supreme Court, in analyzing the case, leaned heavily on the principle of contractual interpretation. Article 1370 of the Civil Code dictates that if the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control. In this context, the Court examined the “Confidentiality of Documents and Non-Compete Clause” in Babiano’s employment contract. This clause explicitly prohibited Babiano from working for a competitor while employed by CPI and stipulated that any breach would result in the forfeiture of commissions. The Court emphasized that the language of the clause was unambiguous and reflected the clear intention of both parties, stating that:

The rule is that where the language of a contract is plain and unambiguous, its meaning should be determined without reference to extrinsic facts or aids. The intention of the parties must be gathered from that language, and from that language alone. Stated differently, where the language of a written contract is clear and unambiguous, the contract must be taken to mean that which, on its face, it purports to mean, unless some good reason can be assigned to show that the words should be understood in a different sense.

The Court emphasized the importance of upholding contractual obligations entered into in good faith, as enshrined in Article 1159 of the Civil Code, which states that “Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith.” The Court recognized that Babiano, as a Vice President for Sales, held a sensitive position that warranted the protection of CPI’s trade secrets. By seeking and accepting employment with a direct competitor while still employed by CPI, Babiano breached the non-compete clause. As a result, the Supreme Court held that CPI was justified in forfeiting his unpaid commissions, upholding the validity of the forfeiture clause under the specific circumstances of the case. This aspect of the ruling underscores the importance of clear, enforceable non-compete agreements in protecting a company’s legitimate business interests.

Conversely, the Court addressed Concepcion’s claim, focusing on whether an employer-employee relationship existed between her and CPI. Despite the “Contract of Agency for Project Director” stipulating that no such relationship existed, the Court applied the four-fold test, examining the power to hire, payment of wages, power of dismissal, and the power to control the employee’s conduct. It found that CPI exercised control over Concepcion’s work, continuously hired and promoted her, paid her a regular monthly subsidy, and had the power to dismiss her. The presence of these elements indicated that Concepcion was, in fact, an employee of CPI. The Court stated that:

It is axiomatic that the existence of an employer-employee relationship cannot be negated by expressly repudiating it in the management contract and providing therein that the “employee” is an independent contractor when the terms of the agreement clearly show otherwise. For, the employment status of a person is defined and prescribed by law and not by what the parties say it should be.

This ruling reinforces the principle that the nature of an employment relationship is determined by the actual circumstances, not merely by the labels used in a contract. Because an employer-employee relationship existed between Concepcion and CPI, the labor tribunals had jurisdiction over her claims for unpaid commissions. The Court agreed with the Court of Appeals that Concepcion was entitled to the full amount of her unpaid commissions, despite her failure to appeal the NLRC’s initial computation. The Supreme Court recognized that Concepcion’s right to her earned commissions was a substantive right that could not be diminished by a mere technicality. The Court has stated that:

Indeed, a party who has failed to appeal from a judgment is deemed to have acquiesced to it and can no longer obtain from the appellate court any affirmative relief other than what was already granted under said judgment. However, when strict adherence to such technical rule will impair a substantive right, such as that of an illegally dismissed employee to monetary compensation as provided by law, then equity dictates that the Court set aside the rule to pave the way for a full and just adjudication of the case.

The Supreme Court held that equity dictated a complete and just resolution of the case, allowing the CA to recompute Concepcion’s unpaid commissions to reflect the full amount she was entitled to. This highlights the Court’s commitment to ensuring fairness and preventing unjust enrichment. The Court’s decision provides guidance on the enforceability of forfeiture clauses in employment contracts and reinforces the importance of protecting employees’ substantive rights to compensation. While employers may include non-compete clauses in employment contracts to protect their business interests, such clauses must be reasonable and must not unduly infringe upon employees’ rights to earn a livelihood. Moreover, the decision emphasizes the importance of accurately characterizing employment relationships based on the actual dynamics of the work arrangement, rather than relying solely on contractual labels.

The key takeaway is that forfeiture clauses are enforceable when they are clear, unambiguous, and applied to employees who demonstrably violate the terms of their employment contracts. At the same time, courts and labor tribunals will carefully scrutinize employment contracts to ensure that they accurately reflect the true nature of the employment relationship and that employees are not deprived of their rightful compensation.

FAQs

What was the key issue in this case?	The key issue was whether Century Properties, Inc. (CPI) could legally withhold the commissions of Edwin Babiano and Emma Concepcion based on a confidentiality clause and the nature of their employment relationships. The court examined the enforceability of forfeiture clauses and the determination of employer-employee relationships.
What did the “Confidentiality of Documents and Non-Compete Clause” state?	The clause stated that employees could not work for competitors while employed by CPI and for one year after leaving the company. It also stipulated that breaching the clause would result in the forfeiture of commissions and incentives.
Why were Babiano’s commissions forfeited?	Babiano’s commissions were forfeited because he violated the confidentiality clause by seeking and accepting employment with a competitor while still employed by CPI. This breach justified the forfeiture under the explicit terms of his employment contract.
How did the court determine that Concepcion was an employee?	The court applied the four-fold test, examining CPI’s power to hire, pay wages, dismiss, and control Concepcion’s conduct. The court found that CPI exercised sufficient control over Concepcion’s work, indicating an employer-employee relationship despite the contract’s label.
What is the significance of the four-fold test?	The four-fold test is a legal standard used to determine the existence of an employer-employee relationship. It considers who has the power to hire, pay, dismiss, and control the worker’s conduct, with the control test being the most critical factor.
Why was Concepcion awarded the full amount of her unpaid commissions?	Concepcion was awarded the full amount because the court recognized her right to earned commissions as a substantive right that could not be diminished by an erroneous computation. Equity dictated a complete and just resolution of the case.
What does Article 1370 of the Civil Code state?	Article 1370 states that if the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control. This principle guided the court’s interpretation of the confidentiality clause.
What is the main takeaway for employers from this case?	Employers should ensure that non-compete clauses are clear, unambiguous, and reasonable. They should also accurately characterize employment relationships based on the actual dynamics of the work arrangement, not just contractual labels.
What is the main takeaway for employees from this case?	Employees must be aware of and comply with the terms of their employment contracts, especially confidentiality and non-compete clauses. They should also understand their rights to compensation and challenge any unfair or unlawful deductions from their earnings.

This case highlights the complexities of employment contracts and the importance of balancing the rights of employers and employees. While employers have a legitimate interest in protecting their business, employees also have a right to fair compensation and the ability to pursue their careers. The Supreme Court’s decision provides valuable guidance for navigating these competing interests.

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: Century Properties, Inc. v. Babiano, G.R. No. 220978, July 05, 2016