Can an Ousted Co-Founder Claim Partnership Instead?

Introduction

When an ousted co-founder files an illegal dismissal case, the first legal question is often not whether the termination was valid. It is whether the person was an employee who was dismissed or a partner or co-venturer whose business relationship ended.

The distinction has major consequences. An employee may invoke security of tenure, due process, reinstatement, backwages, and other labor remedies. An actual partner, however, generally cannot treat the termination of a partnership or joint venture relationship as an illegal dismissal case. The dispute may instead concern accounting, dissolution, profit sharing, ownership, or enforcement of the parties’ agreement.

Philippine law examines the actual relationship of the parties, not merely the labels used in contracts, corporate documents, or pleadings. Thus, a person described as a “co-founder,” “partner,” or “profit-sharing associate” may still be legally regarded as an employee if the elements of employment are present.

The First Issue: Was There an Employer-Employee Relationship?

The established test is the four-fold test: (1) selection and engagement of the worker; (2) payment of wages; (3) power of dismissal; and (4) power to control the worker’s conduct. The control test is generally regarded as the most important factor.

Under the control test, employment exists when the person for whom services are performed reserves the right to control not only the result to be achieved but also the manner and means of achieving it. This rule is stated in Rule I-A, Section 3 of Department of Labor and Employment Department Order No. 147-15.

The Supreme Court applied this approach in Lirio v. Genovia, G.R. No. 169757, 2011, explaining that the four-fold test determines the existence of employment and that the control element is the most significant. In cases involving conflicting evidence, labor policy may require the evidence to be assessed in favor of the worker, consistent with Article 4 of the Labor Code.

The same principle appears in Dusol, et al. v. Lazo, G.R. No. 200555, 2021, and Villaruel v. National Labor Relations Commission, et al., G.R. No. 120180, 1998. Profit sharing, commissions, or participation in business earnings does not by itself establish a partnership when the evidence shows that the alleged partner was selected, paid, supervised, and subject to dismissal by another person.

Why the Control Test Matters

Courts look beyond the parties’ description of their relationship. The following circumstances may indicate employment:

• One person selected or recruited the alleged partner to perform specific work;
• The person received a fixed salary, regular allowance, or wage-like compensation;
• The alleged partner was required to follow working hours, reporting rules, company policies, or instructions;
• The business owner could remove the person from the position or stop the person from working; and
• The owner controlled the methods, procedures, tools, schedules, and manner of performing the work.

Conversely, the relationship may be more consistent with partnership or co-venture where the parties made contributions to a common fund, shared profits and losses, exercised joint management, and acted as principals rather than as employer and worker.

When Does Profit Sharing Indicate Partnership?

Profit sharing is relevant but not conclusive. A genuine partnership requires more than an agreement to receive a percentage of earnings. The surrounding circumstances must show an intention to create a business association in which the parties contribute money, property, or industry to a common fund and intend to divide the resulting profits.

In Lirio v. Genovia, G.R. No. 169757, 2011, one party argued that the arrangement was an informal partnership because the parties contributed resources and agreed to divide profits. The Court nevertheless examined the actual relationship and the circumstances showing whether the supposed partner was independently engaged in the enterprise or was working under the other party’s control.

The practical question is therefore not simply, “Was the worker paid from profits?” It is, “Did the person participate as a co-owner of the business, or did the person perform work for another who controlled the business?”

Employee Status Versus Informal Partner Status

Issue	Employee	Informal Partner or Co-Venturer
Relationship	Worker serving an employer	Business associate pursuing a common enterprise
Compensation	Salary, wages, or regular remuneration	Share in profits and possibly losses
Control	Employer controls the means and methods of work	Parties generally exercise joint or independent business judgment
Removal from the business	May constitute dismissal	May constitute breach of agreement, exclusion, dissolution, or accounting dispute
Available remedies	Reinstatement, backwages, separation pay, and other labor remedies	Accounting, return of contributions, damages, enforcement of agreement, or dissolution-related relief

Filing an Illegal Dismissal Case

An illegal dismissal claim is appropriate when the claimant can establish employment and termination. Under Article 292(b) of the Labor Code, the employer must give written notice stating the causes for termination and must provide the worker an ample opportunity to be heard and to defend himself or herself, with the assistance of a representative if desired.

Article 294 of the Labor Code provides that a regular employee may not be terminated except for a just cause or an authorized cause. An employee unjustly dismissed is generally entitled to reinstatement without loss of seniority rights and to full backwages, inclusive of allowances and other benefits or their monetary equivalent, subject to applicable jurisprudence and the circumstances of the case.

The employer bears the burden of proving that the termination was based on a valid or authorized cause. Failure to establish a lawful cause may result in a finding of illegal dismissal. Failure to observe procedural due process may also result in monetary liability even where a valid cause is proven.

Before pursuing this remedy, the claimant should identify evidence showing employment, such as payroll records, employment contracts, company instructions, attendance records, work schedules, performance evaluations, government contributions, messages from supervisors, and proof that the business owner could remove the claimant from work.

When Claiming Partner Status May Defeat an Illegal Dismissal Case

A claimant who insists that he or she was an equal partner may create a position inconsistent with an employee-based remedy. If the evidence proves that the claimant was genuinely a partner, the dispute may not be one for illegal dismissal because a partner is not ordinarily an employee of the partnership merely by reason of participating in its business.

The alleged partner may instead need to pursue a commercial remedy involving the partnership agreement, the parties’ contributions, the distribution of profits, unauthorized exclusion, dissolution, or an accounting of partnership assets.

This does not mean that a person loses all remedies by being called a partner. It means that the proper remedy depends on the legal relationship actually proven. A claimant should avoid relying on a partnership theory when the evidence principally demonstrates supervision, fixed compensation, and employer control.

Can a Person Plead Alternative Theories?

A claimant may explain in the alternative that, if the alleged partnership is not recognized, the evidence establishes an employer-employee relationship. However, the allegations and evidence must be consistent with the chosen legal remedies.

For example, a claimant may allege that the parties discussed co-ownership or profit participation but that the arrangement never became a genuine partnership and that, in actual operation, the claimant worked under the business owner’s direction. The claimant should support this position with evidence of the four-fold test rather than relying only on the title “co-founder.”

Courts determine the relationship from the totality of circumstances. In Villaruel v. National Labor Relations Commission, et al., G.R. No. 120180, 1998, the Court emphasized that self-serving assertions and labels do not control where the surrounding evidence shows employer supervision and control.

Jurisdiction and the Nature of the Dispute

If the controversy concerns the termination of an employee, jurisdiction generally belongs to the Labor Arbiter and the National Labor Relations Commission under the labor laws. If the controversy concerns partnership rights, ownership, corporate governance, or enforcement of a commercial agreement, the proper forum and remedy may be different.

The fact that the claimant is a stockholder, director, or co-founder does not automatically make the dispute intra-corporate. In Real v. Sangu Philippines, Inc., et al., G.R. No. 168757, 2011, the Supreme Court applied the two-tier test: the relationship of the parties and the nature of the controversy must both be examined.

If the position from which the person was removed is not a corporate office and the dispute arises from an employer-employee relationship, the matter remains a labor dispute rather than an intra-corporate controversy.

Typical Scenarios

A Founder Receiving a Fixed Salary

A founder who owns no documented partnership interest, receives a monthly salary, follows the company’s working hours, reports to another founder, and may be removed by that person has substantial grounds to claim employee status. The use of the title “co-founder” does not defeat the four-fold test.

A Co-Venturer Contributing Capital and Sharing Losses

A person who contributed money or property, participated in management, received a share of net profits rather than a fixed wage, and bore an agreed share of losses may have a stronger partnership claim. The appropriate dispute may concern accounting or enforcement of the parties’ agreement rather than dismissal.

A Creative or Technical Contributor Paid From Profits

A worker paid through a percentage of project revenue may still be an employee if the business owner selected the worker, controlled the work process, supplied the equipment, directed the schedule, and retained the power to terminate the engagement. Compensation based on results does not by itself establish partnership.

A Director Removed From Office and Work

The removal of a director from a corporate office may raise corporate-law issues. However, if the person also had a separate employment position and was removed from that employment, the labor aspect must be separately examined. The existence of a corporate title does not automatically eliminate employment rights.

Evidence That Should Be Preserved

The claimant should preserve documents that establish both the parties’ original agreement and the actual manner in which the business operated. Relevant evidence may include:

• Partnership agreements, founders’ agreements, shareholders’ agreements, or written memoranda;
• Payroll records, bank transfers, payslips, and proof of statutory contributions;
• Company policies, work schedules, attendance records, and written instructions;
• Messages showing supervision, approval requirements, performance monitoring, or threats of dismissal;
• Proof of capital contributions, profit distributions, loss sharing, voting rights, and participation in management; and
• Notices of termination, demands, board resolutions, and communications concerning the person’s removal.

Evidence of actual conduct is often more persuasive than a general statement that the person was a “partner.” The absence of documentary proof of partnership was treated as significant in cases where the alleged employer exercised control over the worker.

Important Procedural Considerations

An employee considering an illegal dismissal complaint should promptly document the date and manner of termination. A verbal termination may still be legally significant, but the claimant must prove that the employer clearly ended the employment relationship.

The claimant should also be careful when signing quitclaims, resignation letters, releases, or documents describing the relationship as a partnership. Such documents are not always conclusive, but they may affect credibility and the assessment of the parties’ intent.

Employers, on the other hand, should maintain records showing the basis for treating a person as a genuine partner or independent co-venturer. Mere reliance on a title, profit-sharing formula, or informal understanding may not withstand the control test.

Recommended Legal Tactic

The claimant should first identify the remedy sought and then align the factual theory with that remedy. If the principal objective is reinstatement or separation pay because the person was removed from work, the evidence should focus on employment and the absence of a valid cause or due process.

If the principal objective is recovery of capital, profits, or the value of a business interest, the claimant should develop the partnership or commercial theory and establish the agreement, contributions, ownership rights, and accounting basis for the claim.

Where the facts support both possibilities, the pleading may explain the alternative theories carefully. The claimant should not characterize the person as an equal partner in one portion of the case and as a subordinate employee in another without explaining the distinction between the parties’ intended arrangement and their actual day-to-day relationship.

Conclusion

An ousted co-founder does not automatically have an illegal dismissal case, nor does the label “partner” automatically defeat labor protection. The controlling inquiry is the relationship actually created and implemented by the parties.

The four-fold test, especially the employer’s control over the means and methods of work, remains the principal guide. A claimant who was selected, paid, supervised, and subject to dismissal may be an employee despite receiving profits or holding a founder title. A person who truly contributed to and jointly operated a business may instead have partnership or commercial remedies.

Before filing, the claimant should preserve the relevant documents, identify the real nature of the dispute, assess jurisdiction, and choose a theory supported by the evidence. The remedy should follow the relationship proven—not merely the title used by the parties.

About Nicolas and De Vega Law Offices

 Nicolas and de Vega Law Offices is a full-service law firm in the Philippines.  You may visit us at the 16th Flr., Suite 1607 AIC Burgundy Empire Tower, ADB Ave., Ortigas Center, 1605 Pasig City, Metro Manila, Philippines.  You may also call us at +632 84706126, +632 84706130, +632 84016392 or e-mail us at [email protected]. Visit our website https://ndvlaw.com.