Fixed-Term Contracts: Employers Must Not Circumvent Security of Tenure

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G.R. NO. 148102, July 11, 2006

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TLDR: This case clarifies that while fixed-term employment contracts are legal in the Philippines, they must not be used to circumvent an employee’s right to security of tenure. The Supreme Court emphasizes that the terms must be agreed upon voluntarily, without coercion, and not exploit any power imbalance between employer and employee. If a worker performs tasks necessary for the business, but employment is terminated upon contract expiration, the court will scrutinize the arrangement for signs of unlawful circumvention.

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Introduction

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Imagine working diligently for a company, performing tasks essential to its success, only to find your employment abruptly terminated because your “fixed-term” contract has expired. This situation highlights a common tension in Philippine labor law: the balance between an employer’s prerogative to manage its workforce and an employee’s right to security of tenure. This case, Labayog v. M.Y. San Biscuits, Inc., delves into this very issue, clarifying the boundaries of fixed-term employment contracts and protecting workers from potential abuse.

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The central legal question revolves around whether the employees, hired under fixed-term contracts but performing tasks necessary for the company’s core business, should be considered regular employees with the right to security of tenure. The Supreme Court’s decision offers crucial guidance for both employers and employees navigating the complexities of employment contracts.

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Legal Context: Regular vs. Fixed-Term Employment

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Philippine labor law distinguishes between regular and fixed-term employment. Regular employees are entitled to security of tenure, meaning they can only be dismissed for just or authorized causes, with due process. Fixed-term employees, on the other hand, are hired for a specific period, and their employment automatically ends upon the expiration of that period.

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Article 280 of the Labor Code defines regular employment:

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“Art. 280. Regular and Casual Employment. – The provisions of written agreement to the contrary notwithstanding and regardless of the oral agreement of the parties, an employment shall be deemed to be regular where the employee has been engaged to perform activities which are usually necessary or desirable in the usual business of the employer, except where the employment has been fixed for a specific project or undertaking the completion or termination of which has been determined at the time of the engagement of the employee or where the work or services to be performed is seasonal in nature and the employment is for the duration of the season.”

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However, the Supreme Court has consistently ruled that Article 280 does not completely prohibit fixed-term contracts. The key is that these contracts must not be used to circumvent the employee’s right to security of tenure. Two criteria must be met to validate a fixed-term contract:

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• The fixed period was knowingly and voluntarily agreed upon, without force, duress, or improper pressure.

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• The employer and employee dealt with each other on more or less equal terms, with no moral dominance by the employer.

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Case Breakdown: Labayog vs. M.Y. San Biscuits, Inc.

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This case involves a group of employees who were hired by M.Y. San Biscuits, Inc. under fixed-term contracts. They worked as mixers, packers, and machine operators, performing tasks essential to the company’s biscuit production. Upon the expiration of their contracts, their employment was terminated.

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Feeling aggrieved, the employees filed complaints for illegal dismissal, arguing that they were actually regular employees entitled to security of tenure.

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Here’s a breakdown of the case’s journey through the courts:

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• Labor Arbiter: Initially ruled in favor of the employees, finding their dismissal illegal because they performed duties necessary for the company’s business and had become regular employees.

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• National Labor Relations Commission (NLRC): Reversed the Labor Arbiter’s decision, stating that the employees voluntarily entered into fixed-term contracts and knew their employment would end on a specific date.

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• Court of Appeals (CA): Initially sided with the employees, reinstating the Labor Arbiter’s decision. However, on reconsideration, the CA reversed itself, upholding the validity of the fixed-term contracts.

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• Supreme Court: Affirmed the CA’s final decision, denying the employees’ petition.

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The Supreme Court emphasized the importance of voluntary agreement and equal bargaining power in fixed-term contracts. As the Court stated:

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“Where the duties of the employee consist of activities which are necessary or desirable in the usual business of the employer, the parties are not prohibited from agreeing on the duration of employment. Article 280 does not proscribe or prohibit an employment contract with a fixed period provided it is not intended to circumvent the security of tenure.”

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The Court found no evidence of coercion or undue influence in the creation of the contracts. The employees were aware of the fixed-term nature of their employment and freely agreed to it. The Court also noted that the contracts were mutually beneficial, allowing the company to meet fluctuating production demands while providing the employees with temporary employment.

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“Simply put, petitioners were not regular employees. While their employment as mixers, packers and machine operators was necessary and desirable in the usual business of respondent company, they were employed temporarily only, during periods when there was heightened demand for production. Consequently, there could have been no illegal dismissal when their services were terminated on expiration of their contracts.”