Letter to Attorney

Dear Attorney,

I run a micro business, specifically a small café, which was formally registered in May 2024. However, the business has been operational since January 2024. I hired an employee to work as a cashier starting January until September of this year, but no written employment contract was executed between us. We agreed verbally that her government-mandated contributions (SSS, PhilHealth, Pag-IBIG) would only begin in August 2024. Unfortunately, I recently discovered that she had been adding unauthorized expenses to my records without my knowledge. After issuing her an incident report asking for an explanation, she refused to comply and instead resigned from her position.

She is now demanding that I pay her government-mandated contributions from the start of her employment in January, even though our verbal agreement stated otherwise. I believe this issue may escalate, and I have informed her that we should settle the matter legally.

Could you advise me on my legal obligations as a micro business owner under Philippine labor laws? Specifically, am I liable for her unpaid contributions from January to July? What are her rights and what are mine in this situation? Your guidance will also help me avoid similar issues in the future.

Thank you for your assistance.

Sincerely,
A Concerned Micro Business Owner

Understanding Employer and Employee Rights in Micro Businesses: A Comprehensive Guide

In this scenario, it is crucial to analyze the situation from the perspective of Philippine labor laws and relevant regulations. The discussion will address the key concerns raised: government-mandated contributions, verbal agreements versus written contracts, and the employer's potential liabilities in relation to employee benefits.

1. Government-Mandated Contributions (SSS, PhilHealth, Pag-IBIG)

Under Philippine law, employers are required to remit contributions for their employees to the Social Security System (SSS), Philippine Health Insurance Corporation (PhilHealth), and the Home Development Mutual Fund (Pag-IBIG) from the first day of employment. This requirement is mandated regardless of whether the business is newly registered or operating informally prior to registration.

Employer’s Obligations

SSS: The employer must register all employees and remit monthly contributions from the date the employee starts working. Contributions are shared between the employer and employee, with the employer shouldering a larger percentage.
PhilHealth: Contributions are similarly shared. Employers must register employees with PhilHealth and ensure monthly contributions are remitted.
Pag-IBIG: As with the other agencies, registration and monthly remittance of contributions are mandatory.

Key Legal Principle:

Even in the absence of a written contract, an employment relationship exists based on the "control test" and "economic reality test." The cashier's work as a cashier directly benefits the business and is controlled by the employer. Therefore, all labor laws, including obligations to remit mandatory contributions, apply.

Consequences of Non-Compliance

Employers who fail to remit contributions may face:

Monetary Penalties: Penalties, interest, and surcharges for late remittances.
Administrative Liability: Sanctions from the respective agencies (e.g., SSS, PhilHealth).
Criminal Liability: In severe cases, criminal charges may be filed against the employer.

Exception for Micro Businesses

The Department of Labor and Employment (DOLE) allows micro businesses registered under the Barangay Micro Business Enterprise (BMBE) Law to apply for exemptions from certain labor standards. However, this exemption does not cover mandatory contributions to SSS, PhilHealth, or Pag-IBIG. Therefore, even micro businesses must comply with these obligations.

2. Verbal Agreements Versus Written Contracts

The absence of a written contract does not invalidate the employer-employee relationship. Philippine labor law prioritizes the substantive nature of the working arrangement over formalities. In this case:

The verbal agreement regarding contributions starting in August may not supersede statutory obligations to remit contributions from the first day of employment.
Courts or regulatory bodies will likely disregard any private agreements that contravene labor laws or diminish employee rights.

Lesson for Employers

To avoid disputes, employers should:

Draft written employment contracts that clearly outline terms of employment, including wage rates, benefits, and contribution arrangements.
Ensure compliance with all statutory requirements, even in the absence of formal documentation.

3. Resignation and Its Implications

An employee’s resignation does not absolve the employer of past obligations. The cashier’s resignation is valid, even if done unilaterally and without a formal notice period. However, her resignation does not extinguish her claim to unpaid contributions or other entitlements under labor laws.

Employer Rights in the Context of Resignation

The employer retains the right to:

File counterclaims if the employee caused damages (e.g., financial mismanagement due to unauthorized expenses).
Report the employee’s misconduct to DOLE if it involves fraudulent activities.

4. The Legal Path Forward

A. Mediation and Settlement

Before proceeding to litigation, consider resolving the dispute through mediation:

DOLE Single Entry Approach (SEnA): This is a cost-effective, non-adversarial method for resolving employment disputes.
Prepare evidence of the verbal agreement, employment records, and proof of business registration date.

B. Compliance Moving Forward

To mitigate future risks:

Register Employees Promptly: Ensure that all employees are registered with SSS, PhilHealth, and Pag-IBIG from day one.
Maintain Proper Documentation: Employment contracts, payroll records, and contribution remittance receipts are essential.
Regular Audits: Conduct internal audits to verify compliance with labor laws.

C. Potential Legal Outcomes

Should the dispute escalate to a formal complaint:

The employer may be directed to remit unpaid contributions, with penalties.
If the employee files a claim for constructive dismissal (e.g., being forced to resign due to unfair treatment), the employer must present evidence of just cause (e.g., the employee’s misconduct).

5. Broader Implications for Micro Business Owners

Education and Awareness

Employers, especially those in micro businesses, should familiarize themselves with the following:

Labor Code of the Philippines: Outlines employee rights and employer obligations.
Republic Act No. 8282 (SSS Law): Covers contributions, penalties, and employer liabilities.
Republic Act No. 9679 (Pag-IBIG Fund Law): Details mandatory membership and contributions.
Republic Act No. 11223 (Universal Health Care Act): Expands on PhilHealth coverage and employer obligations.

Financial Planning

Small business owners should budget for employee benefits as part of operational costs. The misconception that micro businesses are exempt from these obligations often leads to costly disputes.

Conclusion

In this case, the employee has a valid claim to her government-mandated contributions from the start of her employment, irrespective of the verbal agreement. The employer should explore mediation to amicably resolve the dispute while working toward full compliance with labor laws. This situation underscores the importance of proper documentation, legal compliance, and proactive management practices for small businesses.