SHS PERFORATED MATERIALS, INC., WINFRIED HARTMANNSHENN, AND HINRICH JOHANN SCHUMACHER, PETITIONERS, VS. MANUEL F. DIAZ, RESPONDENT.

SHS Perforated Materials versus Diaz

The Case

This is a labor case about a probationary manager who resigned after his employer withheld his salary, and who then claimed he had been constructively dismissed. SHS Perforated Materials, a start-up corporation registered with the Philippine Economic Zone Authority, together with its president Winfried Hartmannshenn and its treasurer Hinrich Johann Schumacher, asks the Supreme Court to reverse the Court of Appeals and to uphold the National Labor Relations Commission, which had found that the manager voluntarily resigned and that the withholding of his wages was a valid exercise of management prerogative. The case matters because it draws a hard line: an employer has no management prerogative to temporarily withhold wages, and a resignation compelled by that unlawful withholding is a constructive dismissal.

Procedural History

Manuel Diaz filed a complaint with the Labor Arbiter for illegal dismissal, unpaid salaries and thirteenth month pay, with a prayer for reinstatement and full backwages, damages, and attorney's fees. The Labor Arbiter ruled in his favor, declaring him illegally dismissed, ordering his reinstatement, deeming him a regular employee, and awarding backwages, unpaid wages, thirteenth month pay, moral and exemplary damages, and attorney's fees. On appeal, the National Labor Relations Commission reversed the Labor Arbiter. It dismissed the complaint for illegal dismissal, dismissed the claims for thirteenth month pay, damages, and attorney's fees, and ordered the company to pay only the unpaid salary for the period covering November 16 to 30, 2005 in the amount of 50,000 pesos. The Commission denied Diaz's motion for reconsideration. Diaz then went to the Court of Appeals, which reversed the Commission. The Court of Appeals held that the withholding was unlawful, that Diaz was constructively dismissed, and awarded separation pay equivalent to at least one month pay, full backwages, and other privileges and benefits or their monetary equivalent. The company and its two officers then came to the Supreme Court by petition for review on certiorari under Rule 45.

Facts

SHS Perforated Materials hired Manuel Diaz as Manager for Business Development on probationary status from July 18, 2005 to January 18, 2006, with a monthly salary of 100,000 pesos. His duties involved cultivating business ties and clients, and he was also instructed to report to the office and plant at least two days every work week to observe the manufacturing processes. Because Hartmannshenn was often abroad, his instructions were sent by electronic mail or relayed by telephone, and there was no close supervision of Diaz.

Hartmannshenn was dissatisfied with Diaz's performance, saying he delivered no concrete business proposal and no sales except a meagre 2,500 pesos for a sample product. On November 29, 2005, Hartmannshenn instructed Juliet Taguiang, who headed the accounting services department that handled the company's payroll, not to release Diaz's salary. The next day, November 30, 2005, Diaz served a demand letter and a resignation letter, tendering what he called his irrevocable resignation effective immediately upon receipt of his unpaid salary for November 16 to 30, 2005, which he said was being withheld illegally. That evening he met Hartmannshenn, who accepted the resignation and told him his salary would be released upon explanation of his failure to report for work and proof that he had in fact worked during that period.

Diaz filed his complaint for illegal dismissal on December 9, 2005. The company's counsel later advised that a check for 50,000 pesos had been prepared and was ready for pick-up, but Diaz never picked it up. The Labor Arbiter found constructive dismissal and unlawful withholding. The Commission found a voluntary resignation and a valid withholding. The Court of Appeals found the withholding unlawful and the resignation involuntary.

Issues

• Whether or not the temporary withholding of Diaz's salary for the period November 16 to 30, 2005 was a valid exercise of management prerogative.
• Whether or not Diaz voluntarily resigned, or was instead constructively dismissed.
• Whether or not the individual petitioners, Hartmannshenn and Schumacher, may be held solidarily and personally liable with the corporation for the monetary award.

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 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 provision the withholding violated, because the employer kept back wages without the worker's consent.

Article 113 of the Labor Code provides:

Article 113. Wage Deduction. No employer, in his own behalf or in behalf of any person, shall make any deduction from the wages of his employees, except: (a) In cases where the worker is insured with his consent by the employer, and the deduction is to recompense the employer for the amount paid by him as premium on the insurance; (b) For union dues, in cases where the right of the worker or his union to check-off has been recognized by the employer or authorized in writing by the individual worker concerned; and (c) In cases where the employer is authorized by law or regulations issued by the Secretary of Labor.

This fixes the only permitted deductions, and the withholding in this case fell under none of them.

Ruling

On the first issue, the Court held that management prerogative does not include the right to temporarily withhold salary or wages without the employee's consent. Management prerogative is the right of an employer to regulate all aspects of employment, such as work assignments, working methods, supervision of work, lay-off and discipline, and dismissal and recall of work. But to read into it a power to withhold wages would be contrary to Article 116 of the Labor Code. Any withholding may be allowed only as a wage deduction under the circumstances in Article 113, and the Court quoted the Labor Arbiter's observation that absent a showing that the withholding falls under those exceptions, the withholding is unlawful. The Court also found the employer's evidence insufficient to prove that Diaz did not work during the period. His duties as manager for business development called for meetings with prospective clients outside the office rather than a regular schedule, and no daily monitoring procedure had been established. His electronic mail reports, a receipt for a client's payment, and eight notarized letters of prospective clients were not controverted. Where doubt exists between the evidence of the employer and that of the employee, the scales of justice must be tilted in favor of the latter, in line with the policy to afford protection to labor. Diaz is therefore presumed to have worked and is entitled to his salary.

On the second issue, the Court held that Diaz was forced to resign and was constructively dismissed. It adopted the rule that there is constructive dismissal if an act of clear discrimination, insensibility, or disdain by an employer becomes so unbearable on the part of the employee that it would foreclose any choice by him except to forego his continued employment. The unlawful withholding of his salary made continued employment impossible, unreasonable, or unlikely, and his immediate filing of a complaint for illegal dismissal showed that his resignation was not voluntary. The Court of Appeals had correctly ruled out actual reinstatement because of the strain in the relationship and awarded separation pay in lieu of reinstatement, with full backwages and other privileges and benefits or their monetary equivalent.

On the third issue, the Court held that the individual petitioners could not be held solidarily and personally liable with the corporation. The corporation has a personality separate and distinct from its officers, and no ground was shown to pierce the veil of corporate fiction. Hartmannshenn and Schumacher acted in their official capacities as president and treasurer, and the monetary award must be satisfied by the corporation alone.

Doctrine

Management prerogative is the right of an employer to regulate all aspects of employment, but it does not include the right to temporarily withhold wages without the employee's consent. Any withholding of wages is lawful only as a wage deduction under the exceptions in Article 113 of the Labor Code, and a withholding outside those exceptions violates Article 116. A resignation compelled by an unlawful withholding of wages is not voluntary; it is a constructive dismissal, defined as a situation where an act of clear discrimination, insensibility, or disdain by the employer becomes so unbearable that the employee has no choice but to give up his employment. In doubtful cases, the evidence of the employee is favored over that of the employer under the policy to afford protection to labor. Finally, corporate officers are not solidarily and personally liable with the corporation for its monetary obligations absent a showing of a ground to pierce the veil of corporate fiction.

Disposition

The petition was denied and the decision of the Court of Appeals was affirmed, with the corporation ordered to pay Diaz separation pay, full backwages, and other privileges and benefits or their monetary equivalent, while the individual petitioners were relieved of solidary and personal liability.

Remember This

Memorize this line: there is no management prerogative to withhold wages, and a resignation forced by that unlawful withholding is a constructive dismissal. Examiners use this case to test the limits of management prerogative against Article 116 and Article 113 of the Labor Code, and to test the separate personality of corporate officers in labor awards.