Key Takeaway: Establishing Employer-Employee Relationships and the Limits of Piercing the Corporate Veil

Gesolgon and Santos v. CyberOne PH., Inc., et al., G.R. No. 210741, October 14, 2020

In today’s globalized economy, understanding the nuances of employment relationships and corporate structures is crucial. Imagine working tirelessly for a company, only to find out that your employer might not be who you thought it was. This was the reality for Maria Lea Jane I. Gesolgon and Marie Stephanie N. Santos, who believed they were employees of CyberOne PH., Inc., only to be caught in a legal battle over their employment status and the corporate veil doctrine. Their case raises critical questions about employer-employee relationships and the legal boundaries of corporate separateness.

The central legal question in this case was whether Gesolgon and Santos were employees of CyberOne PH., Inc., and if they were illegally dismissed. The Supreme Court’s decision sheds light on the complexities of determining employment status and the stringent conditions under which the corporate veil can be pierced.

Legal Context: Employer-Employee Relationships and Corporate Veil Doctrine

In Philippine labor law, the existence of an employer-employee relationship is determined by the four-fold test: selection and engagement of the employee, payment of wages, power of dismissal, and the employer’s power to control the employee’s work. This test is crucial in labor disputes, as it determines whether an individual can claim employee rights and protections under the Labor Code.

The doctrine of piercing the corporate veil, on the other hand, is a principle in corporate law that allows courts to disregard the separate legal personality of a corporation in certain circumstances. It is applied when the corporate fiction is used to defeat public convenience, justify a wrong, protect fraud, or when the corporation is merely an alter ego of another entity. The Supreme Court has emphasized that this doctrine should be applied sparingly and only when the wrongdoing is clearly established.

For instance, if a company uses a subsidiary to avoid legal obligations, the court might pierce the corporate veil to hold the parent company accountable. However, the mere ownership of shares by one corporation in another is not sufficient to justify piercing the veil.

Case Breakdown: The Journey of Gesolgon and Santos

Gesolgon and Santos were initially hired by CyberOne Pty. Ltd. (CyberOne AU), an Australian company, as home-based Customer Service Representatives in 2008. They later became full-time employees and were promoted to supervisors. In 2009, they were asked to become dummy directors and incorporators of CyberOne PH., Inc., a Philippine subsidiary, which they agreed to, and were subsequently promoted to managers.

In 2011, their salaries were reduced, and they were given three options: take an indefinite furlough, return to an entry-level position with CyberOne AU, or resign. They chose the furlough option but were later informed that their employment was terminated through furlough notifications from CyberOne AU.

Their legal journey began with a complaint for illegal dismissal against CyberOne PH., Inc., CyberOne AU, Maciej Mikrut, and Benjamin Juson. The Labor Arbiter (LA) dismissed their complaint, ruling that they were not employees of CyberOne PH., Inc. The National Labor Relations Commission (NLRC) reversed this decision, finding an employer-employee relationship with both CyberOne AU and CyberOne PH., Inc., and ruling that they were illegally dismissed.

The Court of Appeals (CA) overturned the NLRC’s decision, concluding that no employer-employee relationship existed with CyberOne PH., Inc. The Supreme Court upheld the CA’s ruling, stating:

“The four-fold test used in determining the existence of employer-employee relationship involves an inquiry into: (a) the selection and engagement of the employee; (b) the payment of wages; (c) the power of dismissal; and (d) the employer’s power to control the employee with respect to the means and method by which the work is to be accomplished.”

The Court found that Gesolgon and Santos failed to provide sufficient evidence of their employment with CyberOne PH., Inc., particularly in terms of control and the power of dismissal. Regarding the corporate veil, the Court noted:

“The doctrine of piercing the corporate veil applies only in three basic instances, namely: (a) when the separate distinct corporate personality defeats public convenience, as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; (b) in fraud cases, or when the corporate entity is used to justify a wrong, protect a fraud, or defend a crime; or (c) is used in alter ego cases, i.e., where a corporation is essentially a farce, since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.”

The Supreme Court concluded that the conditions for piercing the corporate veil were not met, as there was no evidence of fraud or bad faith by CyberOne PH., Inc.

Practical Implications: Navigating Employment and Corporate Structures

This ruling underscores the importance of clearly documenting employment relationships, especially in complex corporate structures involving foreign and local entities. For businesses operating in the Philippines, it is crucial to maintain clear distinctions between corporate entities to avoid unintended legal liabilities.

Employees must be vigilant about understanding their employment status and the entity they are working for. They should keep records of employment contracts, pay slips, and any communications that could establish their relationship with their employer.

Key Lessons:

• Ensure clear documentation of employment relationships, including contracts and pay slips.
• Understand the corporate structure of the company you work for, especially if it involves foreign entities.
• Be aware of the stringent conditions required to pierce the corporate veil in legal disputes.

Frequently Asked Questions

What is the four-fold test for determining an employer-employee relationship?
The four-fold test involves assessing the selection and engagement of the employee, payment of wages, power of dismissal, and the employer’s power to control the employee’s work.

When can the corporate veil be pierced?
The corporate veil can be pierced when it is used to defeat public convenience, justify a wrong, protect fraud, or when the corporation is merely an alter ego of another entity.

What should employees do to protect their rights in complex corporate structures?
Employees should keep detailed records of their employment, including contracts, pay slips, and communications with their employer, to establish their employment status clearly.

Can a foreign corporation be sued in the Philippines?
A foreign corporation not doing business in the Philippines can only be sued if it voluntarily appears in court or if the action is in rem or quasi in rem, allowing for extraterritorial service of summons.

What are the implications of this ruling for businesses with subsidiaries?
Businesses must maintain clear distinctions between their entities to avoid legal liabilities, and ensure that employment relationships are clearly documented and understood.

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