The unique nature of Philippine employment contracts

Philippine employment contracts cannot be treated in the same manner as other civil or commercial contracts. To do so may expose one to massive and unexpected liability down the line.

Employment contracts are not only governed by the ordinary rule of negotiation and autonomy, but they are a legal hybrid, a volatile instrument where the State may choose to intervene. This results in an asymmetrical playing field which is constantly tilted in the worker’s favor due to the constitutional mandate of “protection to labor.”

Thus, an employer must understand the volatility of an employment contract, especially the various phases: from perfection, through its active term, and even the enforcement of certain clauses even after the employment has been severed.

For ordinary civil contracts, if a party backs out before the delivery of a service, the remedy may be a case for breach of contract before the regular courts. However, this is not the case for employment contracts in the Philippines.

The Supreme Court’s landmark ruling in Aragones v. Alltech Biotechnology Corp. (G.R. No. 251736, April 2, 2025) held that an employer-employee relationship exists the moment the candidate accepts and signs the job offer. The relationship is legally established immediately upon mutual consent, and the agreed-upon start date is merely a suspensive period.

In Aragones, the employer unilaterally withdrew the offer after the candidate had already accepted, citing redundancy. This was rejected by the Supreme Court declaring that the relationship was already perfected under the protective umbrella of the Labor Code. In this case, the employer’s withdrawal of the job offer was not treated as a simple breach of contract but was ruled an illegal dismissal. Consequently, a candidate who never set foot in the workplace, never clocked in, and never performed a single task can now successfully demand all forms of liabilities or damages associated with illegal dismissal. This includes backwages from the intended start date, damages, so long as the attendant circumstances are present, and attorney’s fees. Thus, a job offer may carry the full burden of security of tenure the moment it is signed.

During the active term of the employment contract, the State is a perpetual party that may impose changes or amendments to the contract. This is perhaps the most unique feature and greatest source of instability for long-term business planning.

Any new law, Department of Labor and Employment (DoLE) regulation, or Supreme Court ruling that is more favorable to labor is immediately and retroactively incorporated into existing employment contracts. While the terms may have been agreed upon yesterday, those terms may be nullified by a new government issuance today.

This means that an employment contract is fluid, and compliance is an ongoing, moving target, not a one-time legal check. Businesses must factor in new mandatory benefits, wage hikes, or holiday declarations, which may lead to unexpected cost surges in existing payroll budgets. Moreover, unforeseen stipulations such as new rules on work-from-home arrangements, or new types of leaves are instantly integrated in these contracts, which immediately changes the employee’s rights and employer’s obligations. Even a single Supreme Court decision, like Aragones, can redefine an existing relationship, instantly turning a standard HR practice into a statutory violation, even if that practice was considered sound before the decision came out. The employment contract shifts gears again after the relationship formally ends, specifically when an employer attempts to enforce post-employment restrictions, such as Non-Compete Agreements, Non-Disclosure, and Non-Solicitation clauses. These are legally recognized under Philippine contracts law as long as they adhere to the principle of contractual autonomy and are not contrary to public policy. It is critical to note that the enforcement of these covenants falls under the realm of Civil Law, not Labor Law, because the breach occurs after the employer-employee relationship has ceased, and the resulting claim is typically one for damages.

Jurisprudence dictates that the restriction should be reasonable and not greater than necessary to protect the employer’s legitimate business interests. Simply wanting to prevent a former employee from competing is not a sufficient justification. A non-compete clause must be tied to a specific, identifiable business interest.

It has been stressed that the restraint may not be unduly harsh or oppressive in curtailing the employee’s legitimate efforts to earn a livelihood, and must be reasonable in light of sound public policy. The clause must not be so broad that it effectively prevents the employee from earning a living in their profession. The prohibition must be limited to the specific line of business in which the employee was directly engaged. A clause that imposes a blanket ban on an entire industry is likely to be struck down as an unreasonable restraint of trade.

In assessing the enforceability of a restriction, the court must consider whether its enforcement would be injurious to the public or cause undue hardship to the employee, and whether the restraint imposed would be greater than necessary to protect the employer. Thus, the court must have evidence relating to the legitimate interests of the employer that might be protected, in terms of time, space, and the types of activity proscribed.

The duration of the restriction must not be indefinite or excessively long. Time periods of one or two years are generally upheld, with one year often considered a local best practice for most industries. A five-year non-compete clause was struck down by the Supreme Court as excessive.

A provision on territorial limitation is necessary to guide an employee as to what constitutes a violation of a restrictive covenant and whether the geographic scope is co-extensive with that in which the employer is doing business. In considering a territorial restriction, the facts and circumstances surrounding each case must be considered. The restriction must be limited to the area where the employer genuinely operates or has a legitimate business presence. While nationwide bans are generally viewed with suspicion, they may be upheld if the employee’s responsibilities were also nationwide.

Philippine employment contracts demand precision, and not generic templates. An employer must consider all three phases, from perfection, the active term, and the post-employment stage to mitigate risks. An employer who fails to consider all existing principles runs the risk of having a contractual clause struck down, or worse, being found liable for non-compliance with unanticipated changes introduced by new government issuances. Employers must manage the risk by mastering the volatility of this unique legal document.

The views and opinions expressed in this article are those of the author. This article is for general informational and educational purposes only and not offered as and does not constitute legal advice or legal opinion.

Martin Luigi G. Samson is a senior associate of the Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW), Davao Branch.

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