Probationary Employment vs Fixed-Term Contracts: What Schools Must Prove to Avoid Illegal Dismissal Claims

The Supreme Court’s 2010 ruling in Mercado v. AMA Computer College-Parañaque City, Inc. (G.R. No. 183572) settles an important question for schools and other employers: can a company avoid the protections of probationary employment simply by using fixed-term contracts? The answer is no. When a fixed-term contract merely masks a probationary arrangement, the employer must still comply with the probationary rules under the Labor Code—including proving that the employee failed to meet reasonable, communicated standards.

The Facts of the Case

Five faculty members of AMA Computer College-Parañaque City (AMACC) were hired in May 1998 under individual Teacher’s Contracts for each trimester. Each contract stated that the teacher accepted a "non-tenured appointment" effective for a specific term. The teachers taught for two years and three months—about seven consecutive trimesters.

In school year 2000–2001, AMACC implemented new faculty screening guidelines with stricter performance standards. The teachers failed to obtain passing ratings and received no salary increases. They filed a complaint for monetary claims and discriminatory practices. Shortly after, AMACC sent each teacher a "Notice of Non-Renewal of Contract," stating their contracts would expire and would not be renewed.

The teachers amended their complaint to include illegal dismissal. The Labor Arbiter ruled in their favor, and the NLRC affirmed. But the Court of Appeals reversed, holding that the teachers were merely on fixed-term contracts that expired, and that AMACC had the academic freedom to set higher standards.

The Issue

The central question: when a teacher is hired under successive fixed-term contracts during a probationary period, may the school simply refuse to renew the contract at the end of each term—without proving that the teacher failed to meet reasonable standards?

The Supreme Court’s Ruling

The Supreme Court reversed the Court of Appeals and ruled in favor of the teachers. The Court clarified three key points.

First, probationary employment for teachers is governed by both the Labor Code and special rules. Under Article 281 of the Labor Code, probationary employment shall not exceed six months, unless a longer period is covered by an apprenticeship agreement. For private school teachers, however, the applicable rules under the Manual of Regulations for Private Schools allow a longer probationary period: up to three consecutive years for elementary and secondary levels, six consecutive semesters for tertiary level, and nine consecutive trimesters where courses are offered on a trimester basis. The teachers here were still within their probationary period.

Second, a fixed-term contract used during probation cannot defeat the probationary rules. The Court acknowledged that fixed-term employment is valid under Philippine law, citing the doctrine in Brent School, Inc. v. Zamora. But it distinguished the present case: AMACC used its trimester contracts not because the parties truly intended a limited relationship, but as a convenient arrangement to regulate its teachers during their probationary period. In such a situation, Article 281 of the Labor Code must prevail over the fixed-term character of the contract.

Third, the employer bears the burden of proving just cause for non-renewal. The Court emphasized that when a school applies probationary standards, those standards must be reasonable and communicated to the teacher at the start of the probationary period—or at least at the start of the period when they are applied. More importantly, the school must show, as a matter of due process, how these standards were applied to each teacher. In this case, AMACC failed to introduce the exact terms of its new screening guidelines into evidence and did not show how they were applied to each petitioner. Without this evidence, the non-renewal lacked the supporting finding of just cause that the law requires and was therefore illegal.

The Court also recognized the school’s academic freedom—guaranteed by Article XIV, Section 5(2) of the Constitution—and its management prerogative to set high standards for faculty. But these rights are subject to the Labor Code’s limitations. Schools cannot use academic freedom as a shield to bypass the due process requirements of probationary employment.

Because of the time that had passed, the Court ordered separation pay in lieu of reinstatement, plus backwages and 13th month pay computed from the date of dismissal to the finality of the decision.

Practical Takeaways

• Fixed-term contracts do not automatically defeat probationary protections. If the contract is used during a probationary period and the parties expect possible renewal or regularization, the employer must still comply with probationary rules.
• Standards must be communicated at the start. Employers must make known the reasonable standards for regularization at the time of engagement, or at the latest, at the start of the period when they will be applied.
• Employers must prove how standards were applied. A vague claim that an employee "failed to pass" an evaluation is not enough. The employer must present evidence of the standards and show how they were applied to each employee.
• Academic freedom has limits. Schools may set high standards for faculty, but these must be reasonable, non-arbitrary, and applied in accordance with the Labor Code and due process.
• For teachers, the probationary period can be longer than six months. Under the Manual of Regulations for Private Schools, the probationary period for tertiary teachers may extend to six semesters or nine trimesters.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.