When Can Multiple Construction Companies Be Held Jointly Liable for Employee Claims?

G.R. No. 251156, November 10, 2021

Imagine working for the same construction boss for nearly a decade, but your employer keeps changing company names. Then, one day, you’re suddenly dismissed and denied retirement benefits. Can you hold all the companies liable, or is each one a separate entity? This case explores when Philippine courts will “pierce the corporate veil” and hold related companies jointly responsible for labor violations.

Understanding Piercing the Corporate Veil

The concept of “piercing the corporate veil” is a legal doctrine that allows courts to disregard the separate legal personality of a corporation and hold its owners, directors, or related entities liable for its debts and obligations. This is an exception to the general rule that a corporation has a distinct legal identity from its shareholders.

The Supreme Court has outlined several instances where piercing the corporate veil is justified. One common scenario is when the corporation is used as a mere alter ego or instrumentality of another entity or individual. This often occurs when there is a unity of interest and ownership, and the separate personalities of the corporations no longer exist.

Another justification is to prevent fraud or injustice. If a corporation is used to shield illegal activities, evade contractual obligations, or defeat public policy, the courts will disregard its separate existence to ensure fairness and equity.

To successfully pierce the corporate veil, the following elements must generally be proven:

• Control: The parent corporation controls the subsidiary to such a degree that the subsidiary has become its mere instrumentality.
• Fraudulent Purpose: The control is used to commit fraud or wrong, to violate a statutory or other positive legal duty, or to commit a dishonest and unjust act in contravention of the other’s rights.
• Proximate Cause: The control and breach of duty must proximately cause the injury or unjust loss complained of.

Article 106 of the Labor Code is also relevant, particularly regarding labor-only contracting:

“There is ‘labor-only’ contracting where the person supplying workers to an employer does not have substantial capital or investment in the form of tools, equipment, machineries, work premises, among others, and the workers recruited and placed by such person are performing activities which are directly related to the principal business of such employer. In such cases, the person or intermediary shall be considered merely as an agent of the employer who shall be responsible to the workers in the same manner and extent as if the latter were directly employed by him.”

The Carpenter’s Decade-Long Fight for Retirement

Nori Castro De Silva worked as a carpenter from April 2009 to January 2018. During this time, he received company IDs from three different construction companies owned by Patrick Candelaria: CA Team Plus Construction, Inc. (CA Team Plus), CNP Construction, Inc. (CNP Construction), and Urban Konstruct Studio, Inc. (Urban Konstruct). Then, on January 4, 2018, Nori was verbally told he was dismissed.

Believing he was constructively dismissed and entitled to benefits, Nori filed a complaint against all three companies and Candelaria, seeking service incentive leave, 13th-month pay, retirement pay, and damages. The companies argued Nori was only employed by Urban Konstruct since January 2017, after it absorbed employees from M.L. Lopez Construction Services.

The Labor Arbiter (LA) dismissed Nori’s complaint, finding insufficient evidence of illegal dismissal and that the three companies were one and the same. The National Labor Relations Commission (NLRC) affirmed this decision, stating Nori’s letter requesting retirement benefits didn’t indicate any ill-feeling, negating his illegal dismissal claim. The NLRC also declined to pierce the corporate veil, as there was no evidence the companies were a farce.

• Labor Arbiter (LA): Dismissed the complaint.
• National Labor Relations Commission (NLRC): Affirmed the LA’s decision.
• Court of Appeals (CA): Dismissed Nori’s petition due to procedural errors.

The case eventually reached the Supreme Court. The Court emphasized the importance of resolving cases on their merits, relaxing technical rules to ensure substantial justice. The Court noted several key pieces of evidence:

• Shared business address and telephone number between CA Team Plus and Urban Konstruct.
• Identical primary purpose in their Articles of Incorporation.
• Patrick Candelaria being an incorporator of both Urban Konstruct and CNP Construction.

The Supreme Court ultimately ruled in favor of Nori, stating:

“Respondents made it appear that this case involves job contracting wherein the respondents are the principal, M.L. Lopez Construction Services (M.L. Lopez Construction) as the contractor or subcontractor, and Nori as the worker engaged by M.L. Lopez Construction…There is no evidence showing that M.L. Lopez Construction is an independent contractor and the respondents did not submit any proof that M.L. Lopez Construction is not engaged in labor-only contracting.”

The Court also found that Nori was illegally dismissed. “Umuwi ka na, wag ka na daw magtrabaho” (Go home, you’re not to work anymore) was deemed a dismissal instruction, and the companies failed to prove a valid cause for termination or compliance with due process.

Impact on Labor Cases and Corporate Liability

This case reinforces the principle that courts will not hesitate to pierce the corporate veil when companies are used to circumvent labor laws or commit injustice. It highlights the importance of maintaining distinct corporate identities and avoiding practices that blur the lines between related entities.

Businesses, especially those in the construction industry, should ensure proper documentation of employment relationships, adhere to labor laws, and avoid engaging in labor-only contracting arrangements. Failure to do so can result in significant financial liabilities and reputational damage.

Key Lessons

• Maintain Separate Identities: Ensure each company operates independently with distinct management, finances, and business operations.
• Proper Documentation: Keep accurate records of employment contracts, wages, and benefits.
• Avoid Labor-Only Contracting: Only engage legitimate independent contractors with substantial capital and control over their operations.
• Fair Labor Practices: Treat employees fairly and comply with all labor laws, including those related to dismissal and retirement benefits.

Frequently Asked Questions

1. What is “piercing the corporate veil”?

It’s a legal doctrine where courts disregard the separate legal personality of a corporation to hold its owners or related entities liable.

2. When can a company be held liable for the debts of another company?

When the first company controls the other, uses it to commit fraud or injustice, and this control directly causes harm.

3. What is labor-only contracting?

It’s when a contractor merely supplies workers without substantial capital or control, making them an agent of the employer.

4. What are the risks of labor-only contracting?

The principal employer becomes directly liable to the workers as if they were directly employed.

5. How many years do I need to work to be entitled to retirement pay?

At least five years of service are required to be entitled to retirement pay under the Labor Code.

6. What should I do if I’m illegally dismissed?

Consult with a labor lawyer immediately to assess your rights and options.

7. What evidence can I use to prove my employment?

Company IDs, pay slips, employment contracts, and testimonies from co-workers.

8. What happens if I am verbally dismissed?

A verbal dismissal is still a dismissal. The employer must prove the dismissal was for a just or authorized cause and that due process was followed.

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