SPECIAL STEEL PRODUCTS, INC., PETITIONER, VS. LUTGARDO VILLAREAL AND FREDERICK SO, RESPONDENTS.

Special Steel Products versus Villareal and So

The Case

This is a labor case about an employer who took the law into its own hands. Special Steel Products, Incorporated, the employer, withheld the thirteenth month pay and other monetary benefits of two resigned employees, Lutgardo Villareal and Frederick So, to answer for obligations it claimed they owed: a car loan it had guaranteed as surety, and the cost of a training abroad. The employees sued for their money claims before the Labor Arbiter. The case matters because it fixes a bright line: wages and benefits already earned belong to the worker, and an employer may not use them as a lien, a set-off, or a bargaining chip. The employer's remedy is a court action, not self-help.

Procedural History

The employees filed a complaint for payment of monetary benefits with the Labor Arbiter against the employer and its president, Augusto Pardo. The Labor Arbiter ruled for the employees, ordering the employer and Pardo to pay them, jointly and severally, their commissions, retirement benefit for Villareal, proportionate thirteenth month pay, earned vacation and sick leave benefits, and attorney's fees. On appeal, the National Labor Relations Commission affirmed with modification, exempting Pardo from liability. The employer's motion for reconsideration was denied, so it went up to the Court of Appeals on a petition for certiorari. The Court of Appeals dismissed the petition and affirmed the Commission, and it likewise denied reconsideration. The employer then came to the Supreme Court through a petition for review on certiorari under Rule 45.

Facts

Villareal worked as assistant sales manager and So as salesman. In May 1993, Villareal obtained a car loan from the Bank of Commerce, with the employer acting as surety under a continuing suretyship agreement and a promissory note, binding the signatories to pay the bank in seventy two monthly installments. In August 1994, the employer sponsored So to a training course in Austria conducted by its principal company, as a reward for outstanding sales performance. Upon his return nine months later, the employer had him sign a memorandum stating that trainees must continue working for the employer for three years after training, failing which the trainee must refund six thousand dollars to the principal company by way of set-off or compensation.

Villareal resigned in January 1997 and joined another company. So resigned in January 1997 as well, two years and four months after his training. The employer then ordered both to render an accounting of Christmas giveaways intended for customers, and when the two demanded their separation benefits, commissions, leave benefits, and proportionate thirteenth month pay, the employer refused and withheld their thirteenth month pay and other benefits.

In April 1997, the employees filed their complaint. The Labor Arbiter ruled in their favor, and the Commission affirmed with modification, dropping the president from liability. The Court of Appeals affirmed, and the Supreme Court upheld the appellate court.

Issues

• Whether or not an employer may withhold its employees' wages and benefits as a lien to protect its interest as a surety in an employee's car loan.
• Whether or not the employer may withhold an employee's benefits by way of set-off or legal compensation for the cost of a training abroad.

Applicable Provisions

Article 116 of the Labor Code provides:

Article 116. Withholding of wages and kickbacks prohibited. It shall be unlawful for any person, directly or indirectly, to withhold any amount from the wages and benefits of a worker or induce him to give up any part of his wages by force, stealth, intimidation, threat or by any other means whatsoever without the worker's consent.

This is the core prohibition the employer violated when it withheld the employees' thirteenth month pay and other benefits.

Article 2071 of the Civil Code provides:

Article 2071. The guarantor, even before having paid, may proceed against the principal debtor: (1) When he is sued for the payment; (2) In case of insolvency of the principal debtor; (3) When the debtor has bound himself to relieve him from the guaranty within a specified period, and this period has expired; (4) When the debt has become demandable, by reason of the expiration of the period for payment; (5) After the lapse of ten years, when the principal obligation has no fixed period for its maturity, unless it be of such nature that it cannot be extinguished except within a period longer than ten years; (6) If there are reasonable grounds to fear that the principal debtor intends to abscond; (7) If the principal debtor is in imminent danger of becoming insolvent. In all these cases, the action of the guarantor is to obtain release from the guaranty, or to demand a security that shall protect him from any proceedings by the creditor and from the danger of insolvency of the debtor.

The employer invoked this provision, but the Court held it inapplicable because the employer was a surety, not a guarantor, and because the remedy is an action, not a unilateral withholding.

Article 1278 of the Civil Code provides:

Article 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other.

This governs the employer's claim of set-off against So, which fails because the parties are not mutually creditor and debtor.

Article 1279 of the Civil Code provides:

Article 1279. In order that compensation may be proper, it is necessary: (1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; (3) That the two debts be due; (4) That they be liquidated and demandable; (5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.

These requisites are the test the Court applied, and several of them are missing here.

Ruling

On the first issue, the Court ruled that the employer had no legal authority to withhold the employees' thirteenth month pay and other benefits. Article 116 of the Labor Code is clear and needs no further elucidation. What an employee has worked for, his employer must pay. An employer cannot simply refuse to pay wages or benefits because the employee defaulted on a loan guaranteed by the employer, violated a memorandum, or failed to render an accounting of the employer's property.

The employer's reliance on Article 2071 failed on two grounds. First, the Court distinguished a guaranty from a surety: a guarantor insures the solvency of the debtor and binds himself to pay if the principal is unable to pay, while a surety insures the debt and obligates himself to pay if the principal does not pay. The contract here was a continuing suretyship agreement, so Article 2071 did not apply. Second, even a guarantor's remedy is an action to obtain release or to demand security, not a unilateral withholding. The employer may only protect its right as surety by instituting an action to demand a security; it may not take the law into its own hands.

On the second issue, the Court ruled that set-off or legal compensation could not take place because the employer and So were not mutually creditor and debtor. The memorandum stated that the lump sum compensation would be refunded to the principal company, not to the employer. Hence the employer had no right to insist on payment, much less to withhold So's benefits to exact it. The Court also noted that So's more than two years of post-training service was substantial compliance, and that the employer itself advanced the effectivity of his resignation, showing it no longer needed his services.

Doctrine

First, under Article 116 of the Labor Code, an employer may not withhold any amount from the wages and benefits of a worker without the worker's consent. Earned wages and benefits are paid as a matter of right, and the employer's monetary claims against the employee are no excuse for withholding them.

Second, a surety is not a guarantor. The surety insures the debt and pays if the principal does not pay; the guarantor insures the debtor's solvency and pays only if the principal is unable to pay. Article 2071 belongs to guarantors, and even then its remedy is an action to obtain release or demand security, never self-help.

Third, legal compensation under Articles 1278 and 1279 requires that the two persons be creditors and debtors of each other in their own right, and that the debts be due, liquidated, and demandable. Where the claim belongs to a third party, as where the refund is owed to the principal company, there is no compensation.

Disposition

The Supreme Court denied the petition and affirmed the Decision and Resolution of the Court of Appeals, which had upheld the award of the employees' monetary benefits.

Remember This

The line to memorize: an employer cannot simply refuse to pay the wages or benefits of its employee because he defaulted on a loan guaranteed by the employer, violated their memorandum, or failed to account for the employer's property; the remedy is an action, not a lien. Examiners use this case on the prohibition against withholding wages under Article 116 of the Labor Code, on the guaranty versus surety distinction under Article 2071 of the Civil Code, and on the requisites of legal compensation.