Understanding Employee Dismissal for Loss of Trust and Confidence: Key Lessons from Paez v. MARELCO

The Supreme Court's 2020 decision in Paez v. Marinduque Electric Cooperative, Inc. (G.R. No. 211185) clarifies an often-misunderstood area of Philippine labor law: when can an employer validly dismiss an employee for "loss of trust and confidence"? The ruling is a reminder that this ground for termination is not a catch-all provision. It applies only to specific classes of employees, and even then, the employer must prove the factual basis for the loss of trust. For employees and employers alike, understanding these limits is crucial.

The Facts of the Case

Jimmy Paez worked for Marinduque Electric Cooperative, Inc. (MARELCO) for 21 years, rising to the position of Sub-Office Chief. In 2004, MARELCO discovered irregularities involving the energization of certain Globe cell sites. An Ad-hoc Committee was created to investigate. During the inquiry, Paez was asked to name the person who ordered or approved the energization and installation of a KWH meter. He replied that the go-signal came from someone in the Technical Services Department, but he could not remember who, as the approval was made over the phone.

Paez later received three invitations to further investigations but failed to attend. MARELCO deemed this a waiver of his right to be heard. He was placed on floating status and eventually terminated on the ground that he was "concealing information" which could be classified as collusion or conspiracy. Paez appealed internally, but MARELCO stood by its decision. He then filed a complaint for illegal dismissal.

The Issue

The central question was whether Paez's failure to name the person who approved the energization constituted a just cause for termination under Article 297 (formerly Article 282) of the Labor Code, specifically for willful disobedience or for fraud or willful breach of trust.

The Ruling: Loss of Trust Requires a Position of Trust

The Supreme Court ruled in favor of Paez, declaring his dismissal illegal. The Court explained that for termination based on fraud or loss of trust and confidence to be valid, two requisites must concur: (1) the employee must hold a position of trust and confidence, and (2) the act complained of must justify the loss of that trust.

The law recognizes two classes of positions of trust. The first class consists of managerial employees—those vested with the power to lay down management policies and to hire, transfer, suspend, lay off, recall, discharge, assign, or discipline employees, or to effectively recommend such actions. The second class consists of fiduciary rank-and-file employees, such as cashiers, auditors, and property custodians, who in the normal and routine exercise of their functions regularly handle significant amounts of money or property.

The Court found that Paez, despite his title of Sub-Office Chief, was neither a managerial employee nor a fiduciary rank-and-file employee. He was not vested with powers to lay down management policies or recommend managerial actions, nor was he in charge of the care and custody of the company's money or property. Therefore, Article 297(c) of the Labor Code—the provision on loss of trust—simply did not apply to his case.

Willful Disobedience Also Not Established

The Court likewise rejected the ground of willful disobedience. For this to justify dismissal, the employee's conduct must be willful or intentional, and the order violated must be lawful, reasonable, and made known to the employee. The Court noted that Paez's refusal to name the person who instructed him did not amount to willful disobedience. He did not benefit from the act, nor did it prejudice MARELCO's business interests—the company was still able to finish its investigation and reach a conclusion. Furthermore, in his 21 years of service, Paez had no prior record of any offense or infraction.

Due Process and the Proper Ground for Dismissal

A significant part of the ruling addressed due process. The Court of Appeals had justified Paez's dismissal on a different ground—his failure to ensure that Globe's application went through proper procedure. The Supreme Court reversed this, stressing that an employee cannot be dismissed on a ground that was not the basis for the termination. Since MARELCO admitted that the only basis for dismissal was Paez's failure to identify the person who approved the energization, raising a new ground at the appellate level deprived him of due process.

While the Court acknowledged that Paez may have committed an infraction, it held that outright dismissal was too severe a penalty. It reiterated the settled rule that in determining the penalty, due consideration must be given to the employee's length of service and the number of violations committed during employment.

Practical Takeaways

• Loss of trust and confidence is not a blanket ground for dismissal. It applies only to managerial employees and to fiduciary rank-and-file employees (e.g., cashiers, auditors, property custodians) who regularly handle significant amounts of money or property.
• Employers must prove the factual basis for the loss of trust. The act complained of must be clearly established, and it must be related to the employee's duties.
• An employee cannot be dismissed on a ground raised for the first time on appeal. The basis for termination must be the same ground cited at the time of dismissal, or the employee is deprived of due process.
• Length of service and clean record matter. Even when an employee commits an infraction, dismissal may be too severe if the employee has a long, unblemished service record.
• For employees, the key takeaway is that a title alone does not make one a managerial employee. The actual functions and powers exercised determine whether a position is one of trust and confidence.

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