LABOR OBLIGATIONS OF OPERATING COMPANY CANNOT EXTEND TO A HOLDING COMPANY IN A VALID CORPORATE SPIN-OFF

Labor obligations must be complied by employers. However, where the original corporation validly created a spin-off entity the labor obligation of the subsidiary cannot extend to the holding company.

The spin-off and the attendant transfer of employees are legitimate business interests of the original corporation which became the holding company. The transfer of employees through the Memorandum of Agreement was proper and did not violate any existing law or jurisprudence.

Labor Code of the Philippines 2018 Edition (re-numbered and updated)

Marsman & Company, Inc. vs. Rodil C. Sta. Rita
G.R. No. 194765, April 23, 2018

Spin-off; Transfer to subsidiary; Piercing the veil of corporate fiction; interlocking directors; Employer-employee relationship; Elements of employer-employee relationship

Facts:

Petitioner Marsman (Marsman) purchased Metro Drug Distribution, Inc. which changed its name to Consumer Products Distribution Services, Inc. and which became its business successor-in-interest.

Marsman temporarily hired Rodil C. Sta. Rita (Sta. Rita) as a warehouse helper. After the contract expired, Marsman rehired Sta. Rita as a warehouseman and placed him on probationary status. Marsman then confirmed Sta. Rita’s status as a regular employee.

Later, Sta. Rita joined Marsman Employees Union (MEU), the recognized sole and exclusive bargaining representative of Marsman’s employees. Marsman administered Sta. Rita’s warehouse assignments. Initially, Marsman assigned Sta. Rita to work in its GMA warehouse. Marsman then transferred Sta. Rita to Warehouses C and E of Kraft General Foods, Inc. Thereafter, Marsman reassigned Sta. Rita to Marsman Consumer Product Division Warehouse in ACSIE Parañaque.

Marsman thereafter, purchased Metro Drug, a company that was also engaged in the distribution and sale of pharmaceutical and consumer products, from Metro Pacific, Inc. The similarity in Marsman’s and Metro Drug’s business led to the integration of their employees which was formalized in a Memorandum of Agreement. In the said Memorandum of Agreement, the parties agreed to limit Marsman’s, functions to those of a holding company and run Metro Drug Distribution, Inc. as the main operating company. They also agreed to integrate the employees of Marsman and Metro Drug Distribution, Inc. under the Metro Drug legal entity. Further, the union acknowledged Marsman decision to transfer all employees of Marsman, including members of MEU-. PSMM/DF A, to Metro Drug Distribution, Inc.

Concomitant to the integration of employees is the transfer of all office, sales and warehouse personnel of Marsman to Metro Drug and the latter’s assumption of obligation with regard to the affected employees’ labor contracts and Collective Bargaining Agreement. The integration and transfer of employees ensued out of the transitions of Marsman and CPDSI into, respectively, a holding company and an operating company.

Thereafter, Metro Drug amended its Articles of Incorporation by changing its name to “Consumer Products Distribution Services, Inc.” (CPDSI) which was approved by the Securities and Exchange Commission.

CPDSI contracted its logistic services to EAC Distributors (EAC). CPDSI and EAC agreed that CPDSI would provide warehousemen to EAC’s tobacco business which operated in EAC-Libis Warehosue. A letter issued by Marsman confirmed Sta. Rita’s appointment as one of the warehousemen for EAC-Libis Warehouse which also stated that the assignment was a “transfer that is part of our cross-training program.”

EAC’s use of the EAC-Libis Warehouse was dependent upon the lease contract between EAC and Valiant Distribution (Valiant), owner of the EAC-Libis Warehouse. Hence, EAC’s operations were affected when Valiant decided to terminate their contract of lease. In response to the cessation of the contract of lease, EAC transferred their stocks into their own warehouse and decided to operate the business by themselves, thereby ending their logistic service agreement with CPDSI.

This sequence of events left CPDSI with no other option but to terminate the employment of those assigned to EAC-Libis Warehouse, including Sta. Rita. A letter issued CPDSI’s Vice-President and General Manager notified Sta. Rita that his services would be terminated due to redundancy. CPDSI rationalized that they could no longer accommodate Sta. Rita to another work or position. CPDSI however guaranteed Sta. Rita’s separation pay and other employment benefits.

Aggrieved, Sta. Rita filed a complaint in the NLRC, National Capital Region-Quezon City against Marsman for illegal dismissal with damages in the form of moral, exemplary, and actual damages and attorney’s fees. Sta. Rita alleged that his dismissal was without just or authorized cause and without compliance with procedural due process.

Marsman filed a Motion to Dismiss on the premise that the Labor Arbiter had no jurisdiction over the complaint for illegal dismissal because Marsman is not Sta. Rita’s employer. Marsman averred that the Memorandum of Agreement effectively transferred Sta. Rita’s employment from Marsman and Company, Inc. to CPDSI. Said transfer was further verified by Sta. Rita’s: 1) continued work in CPDSI’s premises; 2) adherence to CPDSI’s rules and regulations; and 3) receipt of salaries from CPDSI. Moreover, Marsman asserted that CPDSI terminated Sta. Rita.

LA Ruling:

The LA rendered a Decision finding Marsman guilty of illegal dismissal.

The LA held that Marsman acted in the interest of CPDSI because sometime in 1996, for purposes of efficiency and economy Marsman integrated its distribution business with the business operations of Consumer Products Distribution Services, Inc. and “in line with the integration of the distribution businesses of Marsman and CPDSI, the employment of all Marsman office, sales, and warehouse personnel was transferred to CPDSI. Thusly, Marsman qualifies as the employer of the complainant under the aforequoted provisions of the Labor Code.

The LA held further that the MOA is a piece of evidence that Marsman is the employer of complainant because it is solely the employer who can negotiate and conclude the terms and conditions of employment of the workers. The MOA does not establish the contention that Consumer is the employer of the complainant. Rule XVI of Department Order No. 9, Series of 1997, which took effect on June 21, 1997, requires among others, the ratification by the majority of all workers in the Collective Bargaining Unit of the Agreement. The non-compliance of the requirement, under said Department Order, renders the MOA ineffective.

Marsman appealed the foregoing Decision arguing that the Labor Arbiter had no jurisdiction over the complaint because an employer-employee relationship did not exist between the party-litigants at the time of Sta. Rita’s termination. Furthermore, Marsman stated that the ratification requirement under Rule XVI of Department Order No. 9, Series of 1997 applied only to Collective Bargaining Agreements, and the Memorandum of Agreement was certainly not a replacement for the Collective Bargaining Agreement which Marsman and MEU entered into in the immediately succeeding year prior to the ratification of the Memorandum of Agreement.

Marsman also maintained that it had a personality that was separate and distinct from CPDSI thus it may not be made liable to answer for acts or liabilities of CPDSI and vice-versa. Finally, Marsman claimed that Sta. Rita was validly declared redundant when CPDSI’ s logistics agreement with EAC was not renewed.

Sta. Rita filed his own appeal, contesting the failure of the Labor Arbiter to award him moral and exemplary damages, and attorney’s fees.

NLRC Ruling:

The NLRC reversed the Labor Arbiter’s Decision and found that there was no employer-employee relationship between Marsman and Sta. Rita.

The NLRC denied Sta. Rita’s motion for reconsideration.

Sta. Rita filed before the Court of Appeals a Petition for Certiorari imputing grave abuse of discretion on the part of the NLRC for 1) finding a lack of employer-employee relationship between the party-litigants; and 2) not awarding backwages, separation pay, damages and attorney’s fees.

CA Ruling:

The Court of Appeals promulgated its Decision reversing the NLRC Decision.

The Court of Appeals held that Marsman was Sta. Rita’s employer because Sta. Rita was allegedly not part of the integration of employees between Marsman and CPDSI. The Court gave credence to Sta. Rita’s contention that he purposely refused to sign the Memorandum of Agreement because such indicated his willingness to be transferred to CPDSI.

In addition, the appellate court considered Sta. Rita’s assignment to the EAC-Libis Warehouse as part of Marsman’s cross-training program, concluding that only Sta. Rita’s work assignment was transferred and not his employment.

The appellate court also found no merit in the NLRC’s contention that CPDSI paid Sta. Rita’s salaries and that it exercised control over the means and methods by which Sta. Rita performed his tasks. On the contrary, the Court of Appeals observed that Sta. Rita filed his applications for leave of absence with Marsman. Finally, the Court of Appeals adjudged that CPDSI, on the assumption that it had the authority to dismiss Sta. Rita, did not comply with the requirements for the valid implementation of the redundancy program.

Hence, the petition of Marsman before the SC.

Issue/s:

Whether or not the burden to prove validity of dismissal applies arises when the existence of employer-employee relationship has not yet been proven

Whether or not the transfer of an employee to a spin-off entity relieves the holding company from labor liability of the spin-off company

Whether or not the doctrine of piercing the veil of corporate fiction applies where the agreement between the original corporation and the spin-off entity guaranteed the tenure of the employees, the honoring of the Collective Bargaining Agreement, the preservation of salaries and benefits, and the enjoyment of the same terms and conditions of employment by the affected employees

Whether or not the existence of interlocking directors is enough to pierce the veil of corporae fiction

Whether or not the memorandum of agreement transferring the employee to a subsidiary prevents the subsidiary from exercising its power to select its employees and decide when to engage them

SC Ruling:

The SC found merit in the petition.

The SC held that in an illegal dismissal case, the onus probandi rests on the employer to prove that its dismissal of an employee was for a valid cause. However, before a case for illegal dismissal can prosper, an employer-employee relationship must first be established. In this instance, it was incumbent upon Sta. Rita as the complainant to prove the employer-employee relationship by substantial evidence. Unfortunately, Sta. Rita failed to discharge the burden to prove his allegations.

Marsman hired Sta. Rita as a warehouseman when it was still engaged in the business of distribution and sale of pharmaceutical and consumer products. Marsman paid Sta. Rita’s wages and controlled his warehouse assignments, acts which can only be attributed to a bona fide employer. Marsman thereafter purchased Metro Drug, now CPDSI, which at that time, was engaged in a similar business. Marsman then entered into a Memorandum of Agreement with MEU, its bargaining representative, integrating its employees with CPDSI and transferring its employees, their respective employment contracts and the attendant employment obligation to CPDSI. The planned integration was then carried out sometime in 1996, as admitted by Sta. Rita in his pleading.

Learn more about the labor liabilities in sale and transfer of business from Guide to Valid Dismissal of Employees Second Edition (pp. 266-271)

The integration and transfer was a necessary consequence of the business transition or corporate reorganization that Marsman and CPDSI had undertaken, which had the characteristics of a corporate spin-off. A proviso in the Memorandum of Agreement limited Marsman’s function into that of a holding company and transformed CPDSI as its main operating company. In business parlance, a corporate spin-off occurs when a department, division or portions of the corporate business enterprise is sold-off or assigned to a new corporation that will arise by the process which may constitute it into a subsidiary of the original corporation.

The spin-off and the attendant transfer of employees are legitimate business interests of Marsman. The transfer of employees through the Memorandum of Agreement was proper and did not violate any existing law or jurisprudence.

Analogously, the Court has upheld the transfer/absorption of employees from one company to another, as successor employer, as long as the transferor was not in bad faith and the employees absorbed by a successor-employer enjoy the continuity of their employment status and their rights and privileges with their former employer.

To assert that Marsman remained as Sta. Rita’s employer even after the corporate spin-off disregards the separate personality of Marsman and CPDSI. It is a fundamental principle of law that a corporation has a personality that is separate and distinct from that composing it as well as from that of any other legal entity to which it may be related.

Other than Sta. Rita’s bare allegation that Michael Leo T. Luna was Marsman’s and CPDSI’s Vice-President and General Manager, Sta. Rita failed to support his claim that both companies were managed and operated by the same persons, or that Marsman still had complete control over CPDSI’s operations. Moreover, the existence of interlocking directors, corporate officers and shareholders without more, is not enough justification to pierce the veil of corporate fiction in the absence of fraud or other public policy considerations.

Sta. Rita also failed to satisfy the four-fold test which determines the existence of an employer-employee relationship.

The Memorandum of Agreement effectively transferred Marsman’s employees to CPDSI. However, there was nothing in the agreement to negate CPDSI’ s power to select its employees and to decide when to engage them. This is in line with Article 1700 of the Civil Code. Marsman’s letter to Sta. Rita dated September 29, 1997 neither assumed nor disturbed CPDSI’s power of selection.

To prove the element on the payment of wages, Sta. Rita submitted forms for leave application, with either Marsman’s logo or CPDSI’s logo. Significantly, the earlier leave forms bore Marsman’s logo but the latest leave application of Sta. Rita already had CPDSI’ s logo. As to the power of dismissal, the letter dated January 14, 2000 clearly indicated that CPDSI, and not Marsman, terminated Sta. Rita’s services by reason of redundancy.

Finally, Sta. Rita failed to prove that Marsman had the power of control over his employment at the time of his dismissal. The power of an employer to control the work of the employee is considered the most significant determinant of the existence of an employer-employee relationship. Control in such relationships addresses the details of day to day work like assigning the particular task that has to be done, monitoring the way tasks are done and their results, and determining the time during which the employee must report for work or accomplish his/her assigned task.