Case Summary (G.R. No. 266552)
Key Dates and Procedural Posture
Material events alleged include various initial hire dates (ranging from 2003 to 2012), alleged reclassification dates to freelance status (ranging from 2007 to 2013), filing of complaint on June 9, 2017, Labor Arbiter decision (April 5, 2018) declaring petitioners independent contractors, NLRC decision (December 28, 2018) affirming the Labor Arbiter, appellate Court of Appeals decision (August 18, 2022) affirming NLRC, denial of reconsideration (March 24, 2023), and Supreme Court disposition reversing the Court of Appeals and declaring petitioners regular employees.
Applicable Law and Constitutional Basis
Governing constitutional provision: 1987 Constitution, Article XIII, Section 3 (security of tenure and labor protections). Relevant statutory law: Labor Code provisions on security of tenure and wages (including Article 294 on security of tenure), NLRC Rules of Procedure (prohibited pleadings, requirements for petitions), and BIR Revenue Regulation No. 4-2014 as referenced in the parties’ dealings.
Facts Established by the Record
Petitioners were engaged by respondents to sell and conduct physical training programs using company equipment, were paid monthly salaries and commissions, and later signed and renewed Freelance Personal Trainer Agreements under which certain benefits (e.g., 13th month, overtime, holiday and rest day pay) were discontinued. The agreements required minimum monthly sales and a minimum number of training hours, attendance at company training sessions, compliance with company rules, exclusivity in handling company clients and products, and allowed company assignment to any managed health club.
Procedural History in the Tribunals
The Labor Arbiter found petitioners to be independent contractors and dismissed their claims. The NLRC affirmed, and petitioners’ motion for reconsideration was denied. Petitioners filed a Petition for Relief from Judgment at the NLRC (a pleading prohibited under NLRC Rules) alleging non-service of the denial-resolution; that petition was denied. The Court of Appeals affirmed the NLRC rulings, including the dismissal of the Petition for Relief as a prohibited pleading and the characterization of petitioners as independent contractors. The Supreme Court entertained a Rule 45 petition and resolved the case on the merits.
Issue Presented
Whether respondents sufficiently proved that petitioners were independent contractors rather than regular employees, and consequently whether petitioners are entitled to reinstatement and other labor remedies.
Controlling Legal Standards
Two tests were applied: (1) the four-fold test (selection/engagement, payment of wages, power to dismiss, and power to control conduct — with control being dominant); and (2) the economic dependence test (including integrality to business, investment in equipment, degree of control, opportunity for profit/loss, initiative/skill, permanency/duration of relationship, and degree of worker’s dependency). The employer bears the burden to prove an independent contractor relationship when challenged.
Application of the Four-Fold Test — Hiring and Payment
Selection and engagement: respondents initially hired petitioners as instructors and later transitioned them to freelance personal trainers; respondents’ claim that engagement was based on talent does not preclude regular employee status. Payment: the agreement specified commission-based compensation (which can still be wages under the Labor Code), but payment method alone does not determine independent contractor status.
Application of the Four-Fold Test — Power to Dismiss
The Freelance Personal Trainer Agreement and related policies reserved to respondents the right to terminate engagement for being unqualified, failure to meet minimum performance standards, or for other causes. The existence of unilateral termination provisions and contractual grounds for termination indicate respondents retained the power to dismiss, a hallmark of employment.
Application of the Four-Fold Test — Power of Control
Although the Agreement initially declared freelance trainers would have “free control” in marketing and conduct, multiple contractual and practical controls contradict that declaration: required minimum performance standards; specific monthly training-hour quotas; company authority to assign trainers to any managed club; mandatory attendance at company training sessions; unilateral revision of performance standards; restrictions on pricing, collection (commissions paid to company), and exclusivity. The Court found these manifestations sufficient to establish control over the means and methods of work, thereby supporting the existence of an employer-employee relationship.
Application of the Economic Dependence Test
Petitioners’ services were integral to Fitness First’s principal business of offering and delivering personal training packages; petitioners had minimal independent investment in equipment or premises; they had limited opportunity for independent profit outside company parameters; they were subject to company-determined package specifications and price schedules; and they were economically dependent on Fitness First for continued engagement. These factors corroborated employee status under the economic dependence analysis.
Contractual Terms and Attempts to Circumvent Security of Tenure
The Court scrutinized the pattern of successive one-year freelance agreements and concluded that fixed-term or labeled independent contractor arrangements can be invalid if used to undermine security of tenure. The record supported a conclusion that the contractual scheme and successive renewals served to evade employee protections, consistent with precedents recognizing invalidation of arrangements that circumvent labor rights.
Remedies and Relief Awarded
The Supreme Court reversed the Court of Appeals and declared the petitioners regular employees. The Court ordered Fitness First to: (1) reinstate the petitioners to their former positions; (2) pay full backwages and withheld be
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Procedural Posture and Nature of the Case
- Petition for review under Rule 45 from Court of Appeals decisions in CA-G.R. SP No. 165342 (Decision dated August 18, 2022 and Resolution dated March 24, 2023) reversing or assailing NLRC findings.
- Lower labor proceedings began with a Complaint dated June 9, 2017 for illegal dismissal, regularization, and other monetary claims filed by petitioners against Fitness First Phil., Inc. and Liberty Cruz.
- Labor Arbiter decision (April 5, 2018) dismissed complaint, declaring petitioners independent contractors.
- NLRC affirmed Labor Arbiter by Decision dated December 28, 2018 and denied reconsideration by Resolution dated February 28, 2019; Entry of Judgment lapsed into finality on April 12, 2019 (Entry of Judgment dated May 23, 2019).
- Petitioners filed a prohibited Petition for Relief from Judgment (August 27, 2019) before the NLRC which was denied (Resolution dated October 31, 2019), then denied reconsideration (Resolution dated December 27, 2019).
- Court of Appeals affirmed NLRC and dismissed the Petition for Relief from Judgment as a prohibited pleading; held petitioners independent contractors (Decision dated August 18, 2022; Resolution dated March 24, 2023 denying reconsideration).
- Present petition to the Supreme Court asserts lack of service of NLRC Resolution, propriety of filing Petition for Relief from Judgment, and substantive contention that petitioners are regular employees, not independent contractors.
Parties and Claimants
- Petitioners: Rico B. Escauriaga, Cristine Dela Cruz, Rene B. Severino, Ralph Errol Mercado, and Geraldine Guevarra (also identified alongside others like Junnie Ordoña, Peter John Fullante in pleadings).
- Respondents: Fitness First Phil., Inc. (corporate employer) and Liberty Cruz (Senior Human Resource Manager).
- Nature of claims by petitioners: illegal dismissal, regularization, nonpayment of 13th month pay, damages, and attorney’s fees.
Material Allegations of Petitioners (Facts as Pleaded)
- Petitioners were engaged by Fitness First on various dates (specific hiring/engagement dates for several petitioners provided).
- Initially engaged as fitness trainers and paid fixed monthly salaries, 13th month pay, and commissions; used respondent’s equipment to conduct training sessions.
- On various dates, reclassified to “freelance trainers” (specific reclassification dates provided for each petitioner).
- As freelance trainers, salary continued but many other labor benefits (13th month pay, overtime pay, holiday pay, rest day pay) were discontinued.
- Freelance trainers were allowed flexible schedules but required to train clients a minimum of 90 hours/month and secure PHP 80,000.00 worth of sales; hours between trainings excluded from the 90-hour cap.
- Failure to meet quotas resulted in salary deduction and possible disciplinary action, including warnings, suspension, or termination for repeated failure.
- On March 20, 2017, respondents required petitioners to register their freelance business with the BIR per BIR Regulation No. 4-2014; an offered 3% commission increase for compliance, and penalty of 20% commission deduction plus termination/non-renewal for noncompliance; petitioners believed themselves to be regular employees and did not comply.
- Petitioners lacked substantial capital investment in tools, machinery, or premises; their activities were necessary and desirable to respondents’ usual business.
- The freelance agreement was a contract of adhesion; petitioners claimed no understanding of its legal consequences.
Respondents’ Position and Defenses
- Respondents’ characterization: trainers initially hired as instructors were later promoted to freelance personal trainers and thus classified as independent contractors, enjoying flexible hours and commensurate higher commissions.
- Conditions imposed on freelance trainers: guarantee of minimum fixed monthly sales, conduct of 90 training hours, and adherence to house rules in client dealings; renewal of contracts until February 1, 2016 in several instances.
- All trainers start as full-time instructors; a progressive commission scheme permits promotion to freelance personal trainers; ability to revert to instructor status exists upon request to HR.
- In compliance with BIR Revenue Regulation No. 4-2014, Fitness First offered a 3% commission increase to those who register with BIR; revoked the offer when only 62 freelance trainers complied; offered petitioners option to revert to instructors on June 29, 2017 and reiterated on July 18, 2017.
- Fitness First asserted petitioners’ commissions and incentives were higher than regular employees; withholding of taxes applies to both employees and independent contractors; control exercised was limited to general guidelines, not detailed direction of means and methods.
- Respondents contended petitioners determined their own means and methods in conducting training, and that training sessions and company incentives do not negate independent contractor status.
- Respondents raised procedural defenses in Supreme Court: alleged defects in petition (signature, verification, forum shopping certification), improper impleading of NLRC in Rule 45 petition, and finality of NLRC decisions.
Labor Arbiter’s Findings and Rationale (April 5, 2018)
- Conclusion: petitioners are independent contractors; no basis for constructive dismissal; complaint dismissed for lack of merit; other claims likewise dismissed.
- Reasoning highlighted:
- Selection based on expertise indicative of independent contractor status.
- Petitioners voluntarily signed freelance agreement and renewed it over years.
- Payment on commission basis.
- Petitioners paid and remitted their own SSS contributions and filed their own income tax returns.
- Parties had mutual ability to terminate agreement with or without cause.
- Even under power of control test, freelance trainers exercised control over time and manner of conducting physical training; they were not required to report on fixed schedules.
- Monetary claims denied for lack of merit.
NLRC Proceedings and Rulings
- NLRC Decision (December 28, 2018) affirmed Labor Arbiter’s findings: no employer-employee relationship; freelance agreement demonstrated independent contractor status; petitioners failed to show respondent reserved control over means and methods.
- Reconsideration denied by NLRC Resolution (February 28, 2019).
- Entry of Judgment recorded May 23, 2019; Decision lapsed into finality on April 12, 2019.
- Petition for Relief from Judgment filed by petitioners arguing extrinsic fraud in entry of judgment and defective service; NLRC denied the petition (Resolution dated October 31, 2019), finding petitioners had been duly furnished the Resolution dated February 28, 2019 despite a shaded box in bailiff’s return and an annotation of “refused to receive” for service dated 4/2/19.
Court of Appeals Ruling and Reasoning (Assailed Decision dated August 18, 2022)
- Affirmed NLRC’s declaration that petitioners were independent contractors.
- Dismissed petitioners’ Petition for Relief from Judgment as prohibited under NLRC Rules of Procedure (Rule 5, Section 5).
- Found that inadvertent shading of “Decision” box in bailiff’s return did not obscure that a Resolution dated 2/28/19 was served (handwritten “2/28/19” beside the Resolution box)