Effects of the Absence of a Written Contract

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While a majority of larger companies provide written contracts for employees, “usually” on or before their first day of employment, there are still thousands of smaller companies and businesses that fail to provide their workers with written contracts.

Here, we will take a look at the benefits of not having a contract for the workers, and the down side of the same, for both worker and employer.

No Legal Requirement for Contracts

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Under the law, there is no requirement to provide a written contract of employment for workers, and employing someone without a contract usually just means that the basic rules of the Labor Code are applied, with no additional benefits except for those that are given by the company as common-practice allowances.

When a company or business hires an employee, and then does not provide him or her with a written contract, the principle of the Employer-Employee Relationship exists based on four factors, known as the Four-Fold Test, which requires the following to be present:

1) the selection and engagement of the employee;
2) the payment of wages;
3) the power of dismissal; and
4) the employer’s power to control the employee’s conduct (the ‘control test’).

The ONLY exception to the rule on requirement of contracts is found in DOLE Department Order No. 174, Series of 2017, which requires contractors and subcontractors to provide written employment contracts to their deployed personnel.

Otherwise, the Four-Fold Test is applied to show that a worker is truly employed by a company.

So, why bother issuing a contract at all?

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Just about every person employed by a private company or business in the Philippines is initially employed on a Probationary basis: that is, they are on a probationary contract for the first six months (180 days) of their employment, so that the employer can assess their worthiness for regular employment.

Any worker employed these days is required to work the six month probation period, during which they will be assessed for meeting the “reasonable requirements for regularization”, as is given under Article 296 of the Labor Code:

“Probationary Employment. Probationary employment shall not exceed six (6) months from the date the employee started working, unless it is covered by an apprenticeship agreement stipulating a longer period. The services of an employee who has been engaged on a probationary basis may be terminated for a just cause or when he fails to qualify as a regular employee in accordance with reasonable standards made known by the employer to the employee at the time of his engagement. An employee who is allowed to work after a probationary period shall be considered a regular employee.”

At the end of the six months, whether the employee is advised of their regularization or not, they become a regular employee, with all the rights and benefits therein. And everyone aims for that regularized position, so that they have some security of tenure in this ever-changing world.

However, without a contract of employment, in which the employer has included the requirements for regularization, a worker is deemed to have been a regular employee from day one. The fact that employment contracts are consensual notwithstanding, it is better for both parties to have an employment contract. The reason for this is that, an employee without a contract to prove that he is a probationary employee, is automatically assumed to be a regular employee from their first day of work.

Grounds for Dismissal and the “Twin Notice” Rule

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As has repeatedly been shown in the Supreme Court, for a probationary employee to be considered such, they must be given the requirements for regularization on the FIRST DAY of their employment. This is part of the standard Twin-Notice rule that is required for ALL cases of dismissal from employment.

With regular employees, the Twin-Notice rule is applied by the use of the Notice to Explain (first notice) and the Notice of Dismissal (second notice), which must be provided in writing by the employee in order to make the dismissal legal and following Due Process.

With probationary employees, dismissal merely requires the provision of the Notice of Non-Regularization (second notice), which can be given at any time before the end of their 180th day, and which does not require any form of advance notice.

The first notice is given in apprising the employee in writing of the “reasonable requirements for regularization”, which must be done on or before their first day of employment. Thus, if the requirements are given in a written document, the Twin-Notice rule in Due Process is deemed to have been followed.

Deemed to be Regular without Contract?

Businessman is very pieced off

Regular employment is the default status of employment, unless this can be proven to be otherwise by the employer. Unless otherwise stated, it is the employer who has the burden of proof that an employee is not a regular employee. This is done through the showing of certain documentation, such as the Employment Contract.

The Labor Code has something to say about the fact of being a regular employee if there is no written contract to state otherwise. Article 295 (280) states:

“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 or trade 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 service to be performed is seasonal in nature and the employment is for the duration of the season.”

So, unless there is a contract stating that the employee is a project employee or probationary employee, any worker that is employed to perform work that is normal and usual within a company is deemed to be a regular employee.

In the case of Omni Hauling Inc et al vs. Bon et al. (G.R. No. 199388, September 3, 2014), the Supreme Court provided that not having a contract to prove whether employees were project or regular employees “was a red flag”, and cast doubt on the question of being project employees.

In this case, since no contract was ever issued for their employment, the workers in question were deemed by the Supreme Court to have been Regular Employees, rather than Project Employees.

And while this was initially an argument of whether the workers were Project Employees or not, the failure of the company to provide contracts meant that they were deemed to be regular from their first day, and this decision can be applied to any other worker that was never given a contract of employment.

Regular even with a Contract

a new employment contract

Sometimes, even with a contract, the worker can be a regular employee from the first day of employment.

The issue of “regular v. probationary” employment was raised in the Supreme Court case of Abbot Laboratories Philippines v. Alcarez (G.R. No. 192571, 23 July 2013), where the Honorable Justices found in favor of the worker being a regular employee.

While the company DID provide a contract in this case, it was found that the contract did not contain the information about the performance standards on which the employee would be evaluated.

When no contract is issued, and there is no other evidence to show that the “requirements for regularization” were given in writing, probationary employees are automatically deemed to be regular employees.

In the case of Hacienda Primera Development Corporation vs. Michael S. Villegas (G.R. No. 186243, April 11, 2011), the Supreme Court again upheld the requirement of the employer to fully apprise the new hire of the reasonable performance requirements for regularization at the time of engagement:

“In this case, petitioner Hacienda fails to specify the reasonable standards by which respondents alleged poor performance was evaluated, much less to prove that such standards were made known to him at the start of his employment. Thus, he is deemed to have been hired from day one as a regular employee. Due process dictates that an employee be apprised beforehand of the condition of his employment and of the terms of advancement therein.”

Once again, the failure to provide a contract of employment meant that the worker was not apprised of the requirements for regularization, and was deemed in law to be a regular employee from their first day of work.

Issuance of Contracts

Young woman signing contracts and handshake with a manager

Whether you are the worker or the employer, it is in both of your best interests to ensure a valid and legal contract of employment is signed.

For the worker, while it does mean they are regular from day one without a contract, it can lead to expensive and time-consuming NLRC complaints to prove your regular status, and that is hard to afford with no job.

Better that there is a contract, which includes the regularization standards, so that you can be sure of security of tenure, no matter what happens. Once you are regular after six months, your employer cannot terminate you for some obscure reason or without Due Process.

For the employer, it is always in your best interests to draw up and sign a contract of employment with your workers, for your own protection. If you have followed the requirements of the law in issuing the Contract and Regularization Standards, then your workers cannot claim to be regular until they have completed their probation period, and you are covered if they claim they were dismissed illegally as probationary employees.

Issuing the contract enables you to set expectations from the start of your relationship with them. In the contract, you may include certain provisions such as:

  • Job position and status
  • Job description
  • Pay
  • Employee benefits
  • Length and condition of probationary period
  • Periods of notice
  • Code of conduct
  • Employee grievance mechanism
  • Company policies
  • and more…

In addition, if a conflict arises, then you would be glad to have the contract in place. Since the expectations are set there, and the employee signed them, it forms a binding contract and the employee cannot deny their responsibilities under that contract.

There have been cases that an employer sets an obligation, and if the employee fails to follow the obligation, they defend themselves by saying that they weren’t aware of that requirement.

They say, “I didn’t even know that I was required to do this! How can I follow something I wasn’t aware of?” The legal response for defenses like this is presenting the signed contract. Their signature on the document leads to the conclusion that they knew about the contents of the document.

And remember that, when in doubt, “all labor legislation and all labor contracts shall be construed in favor of the safety and decent living for the laborer.” (Article 1702, Civil Code) Without a contract, there is always doubt…

One thought on “Effects of the Absence of a Written Contract

  1. Ermela Amarra

    Thank you so Much.

    On Wed, 1 Sep 2021, 11:32 am Employment Law Project, wrote:

    > M Charles Sanderson posted: ” While a majority of larger companies provide > written contracts for employees, “usually” on or before their first day of > employment, there are still thousands of smaller companies and businesses > that fail to provide their workers with written contracts. ” >

    Liked by 1 person

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