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G.R. No. 182018 October 10, 2012NORKIS TRADING CORPORATION,Petitioner,vs.JOAQUIN BUENA VISTA, HENRY FABROA, RICARDO CAPE, BERTULDO TULOD, WILLY DONDOY ANO and GLEN VILLARASA,Respondents.

Facts:

The petition stems from an amended complaint for illegal suspension, illegal dismissal, unfair labor practice and other monetary claims filed with the National Labor Relations Commission (NLRC) by herein respondents Joaquin Buenavista (Buenavista), Henry Fabroa (Fabroa), Ricardo Cape (Cape), Bertuldo Tulod (Tulod), Willy Dondoyano (Dondoyano) and Glen Villariasa (Villariasa) against Norkis Trading and Panaghiusa sa Kauswagan Multi-Purpose Cooperative (PASAKA).

The respondents were hired by Norkis Trading.

Although they worked for Norkis Trading as skilled workers assigned in the operation of industrial and welding machines owned and used by Norkis Trading for its business, they were not treated as regular employees by Norkis Trading. Instead, they were regarded by Norkis Trading as members of PASAKA, a cooperative organized under the Cooperative Code of the Philippines, and which was deemed an independent contractor that merely deployed the respondents to render services for Norkis Trading.4The respondents nonetheless believed that they were regular employees of Norkis Trading.

Despite having served respondent Norkis Trading for many years and performing the same functions as regular employees, complainants were not accorded regular status. It was made to appear that complainants are not employees of said company but that of respondent PASAKA.6The respondents filed on June 9, 1999 with the Department of Labor and Employment (DOLE) a complaint against Norkis Trading and PASAKA for labor-only contracting and non-payment of minimum wage and overtime pay.

On August 26, 1999, PASAKA informed the respondents of the cooperatives decision to suspend them for fifteen (15) working days.

On October 13, 1999, the respondents were to report back to work but during the hearing in their NLRC case, they were informed by PASAKA that they would be transferred to Norkis Tradings sister company, Porta Coeli Industrial Corporation (Porta Coeli), as washers of Multicab vehicles.

The respondents opposed the transfer as it would allegedly result in a change of employers, from Norkis Trading to Porta Coeli. The respondents also believed that the transfer would result in a demotion since from being skilled workers in Norkis Trading, they would be reduced to being utility workers.These circumstances made the respondents amend their complaint for illegal suspension, to include the charges of unfair labor practice, illegal dismissal, damages and attorneys fees.

The Ruling of the Labor Arbiter: Dismissed the complaint via a Decision. The allegation of unfair labor practice and claim for monetary awards were likewise rejected by the LA. Feeling aggrieved, the respondents appealed from the decision of the LA to the NLRC.

The Ruling of the NLRC: Affirmed with modification the decision of LA. It held that the respondents were not illegally suspended from work, as it was their membership in the cooperative that was suspended after they were found to have violated the cooperatives rules and regulations. It also declared that the respondents dismissal was not established by substantial evidence. The NLRC however declared that the LA had no jurisdiction over the dispute because the respondents were not employees, but members of PASAKA.

The Ruling of the CA: Reversed and set aside the decision and resolution of the NLRC. In ruling that the respondents were illegally dismissed, the CA held that Norkis Tradings refusal to accept the respondents back to their former positions, offering them instead to accept a new assignment as washers of vehicles in its sister company, was a demotion that amounted to a constructive dismissal.

Issue: Whether or not the respondents shall be regarded as employees (or whether or not PASAKA is a labor-only contractor). Ruling:Norkis Trading is the principal employer of the respondents, considering that PASAKA is a mere labor-only contractor.Labor-only contracting, a prohibited act, is an arrangement where the contractor or subcontractor merely recruits, supplies, or places workers to perform a job, work, or service for a principal. In labor-only contracting, the following elements are present: (a) the contractor or subcontractor does not have substantial capital or investment to actually perform the job, work, or service under its own account and responsibility; and (b) the employees recruited, supplied or placed by such contractor or subcontractor perform activities which are directly related to the main business of the principal. These differentiate it from permissible or legitimate job contracting or subcontracting, which refers to an arrangement whereby a principal agrees to put out or farm out with the contractor or subcontractor the performance or completion of a specific job, work, or service within a definite or predetermined period, regardless of whether such job, work, or service is to be performed or completed within or outside the premises of the principal. A person is considered engaged in legitimate job contracting or subcontracting if the following conditions concur: (a) the contractor carries on a distinct and independent business and partakes the contract work on his account under his own responsibility according to his own manner and method, free from the control and direction of his employer or principal in all matters connected with the performance of his work except as to the results thereof; (b) the contractor has substantial capital or investment; and (c) the agreement between the principal and the contractor or subcontractor assures the contractual employees entitlement to all labor and occupational safety and health standards, free exercise of the right to self-organization, security of tenure, and social welfare benefits.49PASAKA as a mere labor-only contractor, and Norkis Trading as the true employer of herein respondents. The respondents claim that the machinery, equipment and supplies they used to perform their duties were owned by Norkis Trading, and not by PASAKA, was undisputed. Herein petitioner failed to prove that their sub-contracting arrangements fall under any of the conditions set forth in Sec. 6 of D.O. # 10 S. 1997 to qualify as permissible contracting or subcontracting as provided for as follows:

Sec. 6.Permissible contracting or subcontracting. Subject to conditions set forth in Sec. 4 (d) and (e) and Section 5 hereof, the principal may engage the services of a contractor or subcontractor for the performance of any of the following:

a.) Works or services temporarily or occasionally needed to meet abnormal increase in the demand of products or services...

b) Works or services temporarily or occasionally needed by the principal for undertakings requiring expert or highly technical personnel to improve the management or operations of an enterprise;

c) Services temporarily needed for the introduction or promotion of new products...;

d) Works or services not directly related or not integral to main business or operation of the principal including casual work, janitorial, security, landscaping and messengerial services and work not related to manufacturing processes in manufacturing establishments.

e) Services involving the public display of manufacturers products...;

f) Specialized works involving the use of some particular, unusual or peculiar skills... and

g) Unless a reliever system is in place among the regular workforce, substitute services for absent regular employees...

It is therefore evident that herein respondents are engaged in "labor-only" contracting as defined in Art. 106 of the Labor Code. Furthermore, such contracting/sub-contracting arrangement not only falls under labor-only contracting but also fails to qualify as legitimate subcontracting as defined under Sec. 4 par. e of D.O. #10 S. 1997, to wit:

"Sec. 4. Definition of terms.

d)

Subject to the provisions of Sections 6, 7 and 8 of this Rule, contracting or subcontracting shall be legitimate if the following circumstances concur:

i) The contractor or subcontractor carries on a distinct and independent business and undertakes to perform the job, work or service on its own account and under its own responsibility, according to its own manner and method, and free from the control and direction of the principal in all matters connected with the performance of the work except to the results thereof;

ii) The contractor or subcontractor has substantial capital or investment; and

iii) The agreement between the principal and contractor or subcontractor assures the contractual employees entitlement to all labor and occupational and safety and health standards, free exercise of the right to self-organization, security of tenure and social and welfare benefits."52(Emphasis supplied)

This Court agrees with the finding of the DOLE Regional Director, as affirmed by the Secretary of Labor in her assailed Order, that petitioners among them, herein petitioner were engaged in labor-only contracting.

First.PASAKA failed to prove that it has substantial capitalization or investment in the form of tools, equipment, machineries, work premises, among others, to qualify as an independent contractor. Private respondents were using machineries and equipment owned by and located at the premises of NORKIS TRADING.

Second.PASAKA likewise did not carry out an independent business from NORKIS TRADING. Based on facts. The Project Contract dated December 18, 1998 with NORKIS INTERNATIONAL is nothing more than an afterthought by the petitioners to confuse its workers and defeat their rightful claims.Third.Private respondents performed activities directly related to the principal business of NORKIS TRADING. They worked as welders and machine operators engaged in the production of steel crates which were sent to Japan for use as containers of motorcycles that are then sent back to NORKIS TRADING. Private respondents functions therefore are directly related and vital to NORKIS TRADINGs business of manufacturing of Yamaha motorcycles.

All the foregoing considerations affirm by more than substantial evidence that NORKIS TRADING and PASAKA engaged in labor-only contracting.53

Termination of an employment for no just or authorized cause amounts to an illegal dismissal.As to the issue of whether the respondents were illegally dismissed by Norkis Trading, we answer in the affirmative, although not by constructive dismissal as declared by the CA, but by actual dismissal.

Where an entity is declared to be a labor-only contractor, the employees supplied by said contractor to the principal employer become regular employees of the latter. Having gained regular status, the employees are entitled to security of tenure and can only be dismissed for just or authorized causes and after they had been afforded due process.66Termination of employment without just or authorized cause and without observing procedural due process is illegal.1wphi1In claiming that they were illegally dismissed from their employment, the respondents alleged having been informed by PASAKA that they would be transferred, upon the behest of Norkis Trading, as Multicab washers or utility workers to Porta Coeli, a sister company of Norkis Trading. Norkis Trading does not dispute that such job transfer was relayed by PASAKA unto the respondents, although the company contends that the transfer was merely an "offer" that did not constitute a dismissal. It bears mentioning, however, that the respondents were not given any other option by PASAKA and Norkis Trading but to accede to said transfer. In fact, there is no showing that Norkis Trading would still willingly accept the respondents to work for the company. Worse, it still vehemently denies that the respondents had ever worked for it. Respondents transfer to Porta Coeli, although relayed to the respondents by PASAKA was effectively an act of Norkis Trading. Where labor-only contracting exists, the Labor Code itself establishes an employer-employee relationship between the employer and the employees of the labor-only contractor. The statute establishes this relationship for a comprehensive purpose: to prevent a circumvention of labor laws. The contractor is considered merely an agent of the principal employer and the latter is responsible to the employees of the labor-only contractor as if such employees had been directly employed by the principal employer.677K v NLRC et al GR 148490 Nov 22, 2006

Facts:

7K Corporation (petitioner) and Universal entered into a service contract where Universal bound itself to provide petitioner with drivers.

Pursuant to the service contract, petitioner paid Universal the sum ofP4,637.00 per driver.As to overtime pay however, petitioner directly paid the private respondents.

A controversy arose when the overtime paid by the accounting department of petitioner was short of the actual overtime rendered by the private respondents

LA: rendered a Decision declaring Universal as the employer of the private respondents.It also held that the respondents were illegally dismissed, thus entitled tobackwagesand separation pay.

Universal appealed to the NLRC claiming that it is petitioner which is the employer of the private respondents because: it was petitioner which hired and accepted the two as its drivers; it was petitioner which had direct control and supervision over the two; petitioner may select, replace, and dismiss the driver whose services are found to be unsatisfactory; and petitioner directly paid the private respondents their overtime pay.Universal also claimed that private respondents were not illegally dismissed, thus they are not entitled tobackwagesand reinstatement.[7]

The NLRC found that Universal is a labor-only contractor since it does not have substantial capital or investment in the form of tools, equipments, machineries and the like, and the workers recruited are performing activities which are directly related to the principal business of the employer.

In labor only contracting, the employer-employee relationship is established by law between the principal employer, in this case, 7K Corporation, and the employees of the labor-only contractor, that is the complainants.

The CA dismissed the petition and ruled that: Universal is a labor-only contractor as defined under Art. 106, par. 4 of the Labor Code.

Issue: Is Universal as a labor-only contractor.

Ruling:

The fact that the service contract entered into by petitioner and Universal stipulated that private respondents shall be the employees of Universal, would not help petitioner, as the language of a contract is not determinative of the relationship of the parties.[26]Petitioner and Universal cannot dictate, by the mere expedient of a declaration in a contract, the character of Universals business,i.e., whether as labor-only contractor, or job contractor, it being crucial that Universals character be measured in terms of and determined by the criteria set by statute.[27]

Art. 106 of the Labor Code provides that there is labor-only contractingwhere (1) the person supplying workers to an employer does not have substantial capital or investment in the form of tools, equipment, machineries, work premises, among others, and (2) the workers recruited and placed by such person are performing activities which are directly related to the principal business of such employer.

Sec. 4 (f), Rule VIII-A, Book III of the Omnibus Rules Implementing the Labor Code further defines labor-only contracting as follows:

(f) Labor-only contracting prohibited under this Rule is an arrangement where the contractor or subcontractor merely recruits, supplies or places workers to perform a job, work or service for a principal, and the following elements are present:

i)The contractor or subcontractor does not have substantial capital or investment to actually perform the job, work or service under its own account and responsibility; and

ii)The employees recruited, supplied or placed by such contractor or subcontractor are performing activities which are directly related to the main business of the principal.

Petitioners main argument is that since there is no proof that Universal does not have substantial capital, then Universal should be considered as a legitimate job contractor and not a labor-only contractor.Such contention is incorrect.

The presumption is that a contractor is a labor-only contractor unless such contractor overcomes the burden of proving that it has substantial capital, investment, tools and the like.[28]The employees, in this case, private respondents, should not be expected to prove the negative fact that the contractor does not have substantial capital, investment and tools to engage in job-contracting.[29]

Since neither petitioner nor Universal was able to adduce evidence that Universal had any substantial capital, investment or assets to perform the work contracted for, the presumption that Universal is a labor-only contractor stands.

Thus, petitioner, the principal employer, issolidarilyliable with Universal, the labor-only contractor, for the rightful claims of the employees.[30]Under this set-up, Universal, as the labor-only contractor, is deemed an agent of the principal, herein petitioner, and the law makes the principal responsible to the employees of the labor-only contractor as if the principal itself directly hired or employed the employees.[31]

Petitioner is thereforesolidarilyliable with Universal for the payment of holiday pay, 13thmonth pay and salary differentials in the amount ofP4,040.37 per respondent, as awarded by the NLRC and affirmed by the CA.

Even grantingenarguendothat Universal is a legitimate job contractor and not a labor-only contractor, still petitioner cannot escape liability becauseeven without a direct employer-employee relationship between the principal employer and the employees, the former is still jointly and severally liable with the job contractor for the employees monetary claims[32]following Arts. 106, 107 and 109 of the Labor Code, to wit:

Art. 106.Contractor or subcontractor. Whenever an employer enters into a contract with another person for the performance of theformerswork, the employees of the contractor and the latters subcontractor, if any, shall be paid in accordance with the provisions of this Code.

In the event that the contractor or subcontractor fails to pay the wages of his employees in accordance with this Code, the employer shall be jointly and severally liable with his contractor or subcontractor to such employees to the extent of the work performed under the contract, in the same manner and extent that he is liable to employees directly employed by him.

xxx

Art. 107. Indirect employer. The provisions of the immediately preceding Article shall likewise apply to any person, partnership, association or corporation which, not being an employer contracts with an independent contractor for the performance of any work, task, job or project.

xxx

Art. 109.Solidaryliability. -The provisions of existing laws to the contrary notwithstanding, every employer or indirect employer shall be held responsible with his contractor or subcontractor for any violation of any provision of this Code.For purposes of determining the extent of their civil liability under this Chapter, they shall be considered as direct employers.

As explained by the Court inSan Miguel Corporation v. MAERC Integrated Services, Inc.[33]In legitimate job contracting, the law creates an employer-employee relationship for a limited purpose, i.e., to ensure that the employees are paid their wages.The principal employer becomes jointly and severally liable with the job contractor only for the payment of the employees' wages whenever the contractor fails to pay the same.Other than that, the principal employer is not responsible for any claim made by the employees.

On the other hand, in labor-only contracting, the statute creates an employer-employee relationship for a comprehensive purpose: to prevent a circumvention of labor laws.The contractor is considered merely an agent of the principal employer and the latter is responsible to the employees of the labor-only contractor as if such employees had been directly employed by the principal employer.The principal employer therefore becomessolidarilyliable with the labor-only contractor for all the rightful claims of the employees.[34]

In legitimate job contracting, the law creates an employer-employee relationship for a limited purpose, to ensure that the employees are paid their wages.In such an arrangement, the principal employer becomes jointly and severally liable with the job contractor for the payment of the employees wages whenever the contractor fails to pay the same.[35]As the claim of private respondents in this case involve only monetary claims that fall within the purview of wages, petitioner, even if found as the principal employer in a legitimate job contracting, is still liable to them for the payment of such claims.

Mandaue Galleon Trade Inc and/or Gamallosons Traders Inc v Andales et al GR 159668 March 7, 2008

Facts:PetitionersMandaueGalleon Trade, Inc. (MGTI) andGamallosonsTraders, Inc.[4](GTI) are business entities engaged in rattan furniture manufacturing for export. Respondent VicenteAndales[5](Andales) filed a complaint with the Labor Arbiter (LA) against both petitioners for illegal dismissal and non-payment of 13thmonth pay and service incentive leave pay.On the other hand, MGTI denied the existence of employer-employee relationship with complainants, claiming that they are workers of independent contractors whose services were engaged temporarily and seasonally. On August 23, 1999, the LA rendered a Decision[6]holding that 183[7]complainants are regular piece-rate employees of MGTI since they were made to perform functions which are necessary toMGTI'srattan furniture manufacturing business; the independent contractors were not properly identified; the absence of proof that the independent contractors have work premises of their own, substantial capital or investment in the form of tools, equipment and machineries make them only labor contractors; and there was no dismissal but only a claim for separation pay.NLRC): rendered a Decision[8]affirming the LA's finding of employer-employee relationship.It held that labor-only contracting and not job-contracting was present since the alleged contractors did not have substantial capital in the form of equipment, machineries and work premises.

CA rendered a Decision[12]dismissing the petition and affirming the findings of the NLRC.It held that MGTI is liable to the respondents because the alleged contractors are not independent contractors but labor-only contractors; that respondents were constructively dismissed when they were unilaterally transferred to another contractor; and that the allegation of retrenchment was not proven.

Issue: WHETHER OR NOT RESPONDENTS ARE EMPLOYEES OF THE PETITIONERS.

Ruling:Article 106 of the Labor Code explains the relations which may arise between an employer, a contractor and the contractors employees thus:ART. 106.Contractor or subcontractor. Whenever an employer enters into a contract with another person for the performance of theformers work, the employees of the contractor and of the latters subcontractor, if any, shall be paid in accordance with the provisions of this Code.In the event that the contractor or subcontractor fails to pay the wages of his employees in accordance with this Code, the employer shall be jointly and severally liable with his contractor or subcontractor to such employees to the extent of the work performed under the contract, in the same manner and extent that he is liable to employees directly employed by him.The Secretary of Labor may, by appropriate regulations, restrict or prohibit the contracting out of labor to protect the rights of workers established under this Code. In so prohibiting or restricting, he may make appropriate distinctions between labor-only contracting and job contracting as well as differentiations within these types of contracting and determine who among the parties involved shall be considered the employer for purposes of this Code, to prevent any violation or circumvention of any provision of this Code.There is labor-only contracting where the person supplying workers to an employer does not have substantial capital or investment in the form of tools, equipment, machineries, work premises, among others, and the workers recruited and placed by such persons are performing activities which directly related to the principal business of such employer. In such cases, the person or intermediary shall be considered merely as an agent of the employer who shall be responsible to the workers in the same manner and extent as if the latter were directly employed by him.The first two paragraphs of Article 106 set the general rule that a principal is permitted by law to engage the services of a contractor for the performance of a particular job, but the principal, nevertheless, becomessolidarilyliable with the contractor for the wages of the contractors employees.The third paragraph of Article 106, however, empowers the Secretary of Labor to make distinctions between permissible job contracting and labor-only contracting, which is a prohibited act further defined under the last paragraph.A finding that a contractor is a labor-only contractor is equivalent to declaring that there is an employer-employee relationship between the principal and the employees of the supposed contractor, and the labor-only contractor is considered as a mere agent of the principal, the real employer.[25]

Sections 5 and 7 of the Rules Implementing Articles 106 to 109 of the Labor Code, as amended[26](Implementing Rules), reinforce the rules in determining the existence of employer-employee relationship between employer, contractor or subcontractor, and the contractors or subcontractors employee, to wit:Section 5.Prohibition against labor-only contracting. Labor-only contracting is hereby declared prohibited. For this purpose, labor-only contracting shall refer to an arrangement where the contractor or subcontractor merely recruits, supplies or places workers to perform a job, work or service for a principal, andanyof the following elements are [is] present:i)The contractor or subcontractor does not have substantial capital or investment which relates to the job, work or service to be performed and the employees recruited, supplied or placed by such contractor or subcontractor are performing activities which are directly related to the main business of the principal; orii)The contractor does not exercise the right to control over the performance of the work of the contractual employee.The forgoing provisions shall be without prejudice to the application of Article 248 (C) of the Labor Code, as amended.Substantial capital or investment refers to capital stocks and subscribed capitalization in the case of corporations, tools, equipment, implements, machineries and work premises, actually and directly used by the contractor or subcontractor in the performance or completion of the job, work or service contracted out.The right to control shall refer to the right reserved to the person for whom the services of the contractual workers are performed, to determine not only the end to be achieved, but also the manner and means to be used in reaching that end.Section 7.Existence of an employer-employee relationship. The contractor or subcontractor shall be considered the employer of the contractual employee for purposes of enforcing the provisions of the Labor Code and other social legislation. The principal, however, shall besolidarilyliable with the contractor in the event of any violation of any provision of the Labor Code, including the failure to pay wages.The principal shall be deemed the employer of the contractual employee in any of the following cases, as declared by a competent authority:a. where there is a labor-only contracting; orb. where the contracting arrangement falls within the prohibitions provided in Section 6 (Prohibitions) hereof.Thus, based on Article 106 of the Labor Code and Sections 5 and 7 of the Implementing Rules, labor-only contracting exists when the following criteria are present: (1) where the contractor or subcontractor supplying workers to an employer does not have substantial capital or investment in the form of tools, equipment, machineries, work premises, among other things; and the workers recruited and placed by the contractor or subcontractor are performing activities which are directly related to the principal business of such employer; or (2) where the contractor does not exercise the right to control the performance of the work of the contractual employee.In the present case, petitioners claim that their contractors are independent contractors, and, therefore, this case is one of permissible job contracting, is without basis.First, respondents work as weavers, grinders, sanders and finishers is directly related toMGTI'sprincipal business of rattan furniture manufacturing.Where the employees are tasked to undertake activities usually desirable or necessary in the usual business of the employer, the contractor is considered as a labor-only contractor and such employees are considered as regular employees of the employer.[27]Second,MGTI was unable to present any proof that its contractors had substantial capital. There was no evidence pertaining to the contractors' capitalization; nor to their investment in tools, equipment or implements actually used in the performance or completion of the job, work, or service that they were contracted to render.The law casts the burden on the contractor to prove that it has substantial capital, investment, tools,etc.Employees, on the other hand, need not prove that the contractor does not have substantial capital, investment, and tools to engage in job-contracting.[28]Thus, the contractors are labor-only contractors since they do not have substantial capital or investment which relates to the service performed and respondents performed activities which were directly related toMGTI'smain business.MGTI, the principal employer, is solidarilyliable with thelabor-onlycontractors, for the rightful claims of the employees.Under this set-up,labor-onlycontractors are deemed agents of the principal, MGTI, and the law makes the principal responsible to the employees of the labor-onlycontractor as if the principal itself directly hired or employed the employees.In prohibiting labor-only contracting and creating an employer-employee relationship between the principal and the supposed contractors employees, the law intends to prevent employers from circumventing labor laws intended to protect employees.Polyfoam v Concepcion GR 172349 June 13, 2012

Facts:

Respondent filed a Complaint[4]for illegal dismissal, non-payment of wages, premium pay for rest day, separation pay, service incentive leave pay, 13thmonth pay, damages, and attorneys fees against Polyfoam and Ms. Natividad Cheng (Cheng).Respondent alleged that he was hired by Polyfoam as an all-around factory worker and served as such for almost six years.[5]OnJanuary 14, 2000, he allegedly discovered that his time card was not in the rack and was later informed by the security guard that he could no longer punch his time card.[6]When he protested to his supervisor, the latter allegedly told him that the management decided to dismiss him due to an infraction of a company rule.Cheng, the companys manager, also refused to face him.

Gramaje filed a Motion for Intervention[9]claiming to be the real employer of respondent.

Gramaje claimed that P.A. Gramaje Employment Services (PAGES) is a legitimate job contractor who provided some manpower needs of Polyfoam.It was alleged that respondent was hired as packer and assigned to Polyfoam, charged with packing the latters finished foam products.

The Labor Arbiter found respondent to have been illegally dismissed from employment and thus is entitled to full backwages inclusive of allowances.

NLRC modified the LA decision by exonerating Polyfoam from liability for respondents claim for separation pay and deleting the awards of backwages, 13thmonth pay, damages, and attorneys fees. The NLRC found Gramaje to be an independent contractor who contracted the packaging aspect of the finished foam products of Polyfoam.

Respondent elevated the case to the CA. The CA agreed with the LAs conclusion that Gramaje is not a legitimate job contractor but only a labor-only contractor.

Issues: (1) whether or not Gramaje is an independent job contractor; (2) whether or not an employer-employee relationship exists between Polyfoam and respondent; and (3) whether or not respondent was illegally dismissed from employment.

Ruling:

Gramaje is a Labor-OnlyContractor

Article 106 of the Labor Code explains the relations which may arise between an employer, a contractor, and the contractors employees, thus:

ART. 106.Contractor or subcontracting. Whenever an employer enters into a contract with another person for the performance of the formers work, the employees of the contractor and of the latters subcontractor, if any, shall be paid in accordance with the provisions of this Code.

In the event that the contractor or subcontractor fails to pay the wages of his employees in accordance with this Code, the employer shall be jointly and severally liable with his contractor or subcontractor to such employees to the extent of the work performed under the contract, in the same manner and extent that he is liable to employees directly employed by him.

The Secretary of Labor and Employment may, by appropriate regulations, restrict or prohibit the contracting out of labor to protect the rights of workers established under the Code. In so prohibiting or restricting, he may make appropriate distinctions between labor-only contracting and job contracting as well as differentiations within these types of contracting and determine who among the parties involved shall be considered the employer for purposes of this Code, to prevent any violation or circumvention of any provision of this Code.

There is labor-only contracting where the person supplying workers to an employer does not have substantial capital or investment in the form of tools, equipment, machineries, work premises, among others, and the workers recruited and placed by such person are performing activities which are directly related to the principal business of such employer. In such cases, the person or intermediary shall be considered merely as an agent of the employer who shall be responsible to the workers in the same manner and extent as if the latter were directly employed by him.

InSasan, Sr. v. National Labor Relations Commission 4thDivision,[41]the Court distinguished permissible job contracting or subcontracting from labor-only contracting, to wit:

Permissible job contracting or subcontracting refers to an arrangement whereby a principal agrees to put out or farm out to a contractor or subcontractor the performance or completion of a specific job, work or service within a definite or predetermined period, regardless of whether such job, work or service is to be performed or completed within or outside the premises of the principal. A person is considered engaged in legitimate job contracting or subcontracting if the following conditions concur:

(a)The contractor or subcontractor carries on a distinct and independent business and undertakes to perform the job, work or service on its own account and under its own responsibility according to its own manner and method, and free from the control and direction of the principal in all matters connected with the performance of the work except as to the results thereof;(b) The contractor or subcontractor has substantial capital or investment; and

(c) The agreement between the principal and contractor or subcontractor assures the contractual employees entitlement to all labor and occupational safety and health standards, free exercise of the right to self-organization, security of tenure, and social and welfare benefits.

In contrast, labor-only contracting, a prohibited act, is an arrangement where the contractor or subcontractor merely recruits, supplies or places workers to perform a job, work or service for a principal. In labor-only contracting, the following elements are present:

(a)The contractor or subcontractor does not have substantial capital or investment to actually perform the job, work or service under its own account and responsibility; and

(b) The employees recruited, supplied or placed by such contractor or subcontractor are performing activities which are directly related to the main business of the principal.[42]

The test of independent contractorship is whether one claiming to be an independent contractor has contracted to do the work according to his own methods and without being subject to the control of the employer, except only as to the results of the work.[43]InSan Miguel Corporation v. Semillano,[44]the Court laid down the criteria in determining the existence of an independent and permissible contractor relationship, to wit:

x x x [W]hether or not the contractor is carrying on an independent business; the nature and extent of the work; the skill required; the term and duration of the relationship; the right to assign the performance of a specified piece of work; the control and supervision of the work to another; the employers power with respect to the hiring, firing and payment of the contractors workers; the control of the premises; the duty to supply the premises, tools, appliances, materials, and labor; and the mode, manner and terms of payment.[45]

Simply put, the totality of the facts and the surrounding circumstances of the case are to be considered.Each case must be determined by its own facts and all the features of the relationship are to be considered.[46]

Applying the foregoing tests, we agree with the CAs conclusion that Gramaje is not an independent job contractor, but a labor-only contractor.

First, Gramaje has no substantial capital or investment.The presumption is that a contractor is a labor-only contractor unless he overcomes the burden of proving that it has substantial capital, investment, tools, and the like.The employee should not be expected to prove the negative fact that the contractor does not have substantial capital, investment and tools to engage in job-contracting.[47]

Gramaje claimed that it has substantial capital of its own as well as investment in its office, equipment and tools.She pointed out that she furnished the plastic containers and carton boxes used in carrying out the function of packing the mattresses of Polyfoam.She added that she had placed in Polyfoams workplace ten (10) sealing machines, twenty (20) hand trucks, andtwo (2) forkliftsto enable respondent and the other employees of Gramaje assigned at Polyfoam to perform their job.Finally, she explained that she had her own office with her own staff.[48]However, aside from her own bare statement, neither Gramaje nor Polyfoam presented evidence showing Gramajes ownership of the equipment and machineries used in the performance of the alleged contracted job.Considering that these machineries are found in Polyfoams premises, there can be no other logical conclusion but that the tools and equipment utilized by Gramaje and her employees are owned by Polyfoam.Neither did Polyfoam nor Gramaje show that the latter had clients other than the former.Since petitioners failed to adduce evidence that Gramaje had any substantial capital, investment or assets to perform the work contracted for, the presumption that Gramaje is a labor-only contractor stands.[49]

Second,Gramaje did not carry on an independent business or undertake the performance of its service contract according to its own manner and method, free from the control and supervision of its principal, Polyfoam, its apparent role having been merely to recruit persons to work for Polyfoam.[50]It is undisputed that respondent had performed his task of packing Polyfoams foam products in Polyfoams premises.As to the recruitment of respondent, petitioners were able to establish only that respondents application was referred to Gramaje, but that is all.Prior to his termination, respondent had been performing the same job in Polyfoams business for almost six (6) years.He was even furnished a copy of PolyfoamsMga Alituntunin at Karampatang Parusa.

An Employer-Employee Relationship ExistsBetween Respondent and Polyfoam

A finding that a contractor is a labor-only contractor, as opposed to permissible job contracting, is equivalent to declaring that there is an employer-employee relationship between the principal and the employees of the supposed contractor, and the labor-only contractor is considered as a mere agent of the principal, the real employer.[53]In this case, Polyfoam is the principal employer and Gramaje is the labor-only contractor.Polyfoam and Gramaje are, therefore, solidarily liable for the rightful claims of respondent.[54]

Respondent was Illegally DismissedFrom EmploymentCoca-Cola v Dela Cruz et al GR 184977 December 7, 2009

Facts:

Respondents Ricky E. Dela Cruz, Rolando M. Guasis, Manny C. Pugal, Ronnie L. Hermo, Rolando C. Somero, Jr., Dibson D. Diocares, and Ian Ichapare (respondents) filed in July 2000 two separate complaints[4]for regularization with money claims against Coca-Cola Bottlers Philippines, Inc., (petitionerorthe company). The complaints were consolidated and subsequently amended to implead Peerless Integrated Service, Inc. (Peerless) as a party-respondent.

Before the Labor Arbiter, the respondents alleged that they are route helpers assigned to work in the petitioners trucks.They go from the Coca- Cola sales offices or plants to customer outlets such as sari-sari stores, restaurants, groceries, supermarkets and similar establishments; they were hired either directly by the petitioner or by its contractors, but they do not enjoy the full remuneration, benefits and privileges granted to the petitioners regular sales force. They argued that the services they render are necessary and desirable in the regular business of the petitioner.[5]

In defense, the petitioner contended that it entered into contracts of services with Peerless[6]and Excellent Partners Cooperative, Inc. (Excellent)[7]to provide allied services; under these contracts, Peerless and Excellent retained the right to select, hire, dismiss, supervise, control and discipline and pay the salaries of all personnel they assign to the petitioner; in return for these services, Peerless and Excellent were paid a stipulated fee. The petitioner posited that there is no employer-employee relationship between the company and the respondents and the complaints should be dismissed for lack of jurisdiction on the part of the National Labor Relations Commission (NLRC).

Labor Arbiter: the respondents were the employees of either Peerless or Excellent and not of the petitioner.

NLRC: affirmed the labor arbiters ruling. CA: Peerless and Excellent were engaged in labor-only contracting, a prohibited undertaking.[16]The appellate court explained that based on the respondents assertions and the petitioners admissions, the contractors simply supplied the company with manpower. On the matter of capitalization, the CA invoked our ruling in7K Corporation v. NLRC[18]presuming a contractor supplying labor to be engaged in prohibited labor-only contracting, unless the contractor can show that it has substantial capital, investment, and tools to undertake the contract. The CA found no proof in the records showing the required capitalization and tools; thus, the CA concluded that Peerless and Excellent were engaged in labor-only contracting.

Issue: Is labor contracting and a labor-only contracting situation is found to exist

Ruling:

The Necessary Party Issue.

In our view, the petitioners necessary party issue proceeds from a misapprehension of the relationships in a contracting relationship.As lucidly pointed out inAzucenas The Labor Code with Comments and Cases,[28]there are three parties in a legitimate contracting relationship, namely: the principal, the contractor, and the contractors employees.In this trilateral relationship, the principal controls the contractor and his employees with respect to the ultimate results or output of the contract; the contractor, on the other hand, controls his employees with respect, not only to the results to be obtained, but with respect to the means and manner of achieving this result. This pervasive control by the contractor over its employees results in an employer-employee relationship between them.

This trilateral relationship under a legitimate job contracting is different from the relationship in a labor-only contracting situation because in the latter, the contractor simply becomes an agent of the principal; either directly or through the agent, the principal then controls the results as well as the means and manner of achieving the desired results.In other words, the party who would have been the principal in a legitimate job contracting relationship and who has no direct relationship with the contractor's employees, simply becomes the employer in the labor-only contracting situation with direct supervision and control over the contracted employees.AsAzucenaastutely observed:in labor-contracting, there is really no contracting and no contractor; there is only the employers representative who gathers and supplies people for the employer; labor-contracting is therefore a misnomer.[29]

The Contracting Out Issue.

Contracting and sub-contracting are hot labor issues for two reasons.Thefirstis that job contracting and labor-only contracting are technical Labor Code concepts that are easily misunderstood.

The lawallowscontracting and subcontracting involving services butclosely regulatesthese activities for the protection of workers.Thus, an employer can contract out part of its operations, provided it complies with the limits and standards provided in the Code and in its implementing rules.

The directly applicable provision of the Labor Code on contracting and subcontracting is Article 106 which provides:

Whenever, an employer enters into a contract with another person for the performance of the formers work, the employees of the contractor and of the latters subcontractor shall be paid in accordance with the provisions of this Code.

The Secretary of Labor may, by appropriate regulations, restrict or prohibit the contracting out of labor to protect the rights of workers established under this Code. In so prohibiting or restricting, he may make appropriate distinctions between labor-only contracting and job contracting as well as differentiations within these types of contracting and determine who among the parties involved shall be considered the employer for purposes of this Code.

There is labor-only contracting where the person supplying workers to an employer does not have substantial capital or investment in the form of tools, equipment, machineries, work premises, among others, and the workers recruited and placed by such persons are performing activities which are directly related to the principal business of such employer. In such cases, the person or intermediary shall be considered merely as an agent of the employer who shall be responsible to the workers in the same manner and extent as if the alter were directly employed by him(underscoring supplied).

The Department of Labor and Employment implements this Labor Code provision through its Department Order No. 18-02 (D.O. 18-02).[30]On the matter of labor-only contracting, Section 5 thereof provides:

Prohibition against labor-only contracting. - Labor-only contracting is hereby declared prohibitedxxxlabor-only contracting shall refer to an arrangement where the contractor or subcontractor merely recruits, supplies or places workers to perform a job, work or service for a principal, and any of the following elements are present:

i)The contractor or subcontractor does not have sufficient capital or investment which relates to the job, work or service to be performed and the employees recruited, supplied or placed by such contractor or subcontractor are performing activities which are directly related to the main business of the principal; or

ii)The contractor does not exercisethe right to controlover the performance of the work of the contractual-employee.

Substantial capital or investment refers to capital stocks and subscribed capitalization in the case of corporations, tools or equipment, implements, machineries and work premises, actually and directly used by the contractor or subcontractor in the performance or completion of the job, work or service contracted out. [Emphasis supplied]

The right to control refers to the prerogative of a party to determine, not only the end result sought to be achieved, but also the means and manner to be used to achieve this end.

In strictly laymans terms, a manufacturer can sell its products on its own, or allow contractors, independently operating on their own, to sell and distribute these products in a manner that does not violate the regulations.From the terms of the above-quoted D.O. 18-02, the legitimate job contractor must have the capitalization and equipment to undertake the sale and distribution of the manufacturers products, and must do it on its own using its own means and selling methods.

In the present case, both the capitalization of Peerless and Excellent and their control over the means and manner of their operations are live sub-issues before us.

A key consideration in resolving these issues is the contract between the company and the purported contractors.The contract[31]with Peerless, which is almost identical with the contract with Excellent, among others, states:

1. The CONTRACTOR agrees and undertakes to perform and/or provide for the COMPANY, on a non-exclusive basis, the services of contractual employees for a temporary period for task or activities that are considered contractible under DOLE Department Order No. 10, Series of 1 997, such as lead helpers and replacement for absences as well as other contractible jobs that may be needed by the Company from time to time.[32]x x x x

5. The CONTRACTOR shall have exclusive discretion in the selection, engagement and discharge of its personnel, employees or agents or otherwise in the direction and control hereunder.The determination of the wages, salaries and compensation of the personnel, workers and employees of the CONTRACTOR shall be within its full control.[33]x x x x

. . . Although it is understood and agreed between the parties hereto that the CONTRACTOR, in the performance of its obligations hereunder, is subject to the control and direction of the COMPANY merely as to result to be accomplished by the work or services herein specified, and not as to the means and methods of accomplishing such result, the CONTRACTOR hereby warrants that it will perform such work or services in such manner as will be consistent with the achievement of the result herein contracted for.[34]

These provisions particularly, that Peerless and Excellent retain the right to select, hire, dismiss, supervise, control, and discipline all personnel they will assign to the petitioner, as well as pay their salaries were cited by the labor arbiter and the NLRC as basis for their conclusion that no employer-employee relationship existed between the respondents and the petitioner.

The Court of Appeals viewed matters differently and faulted the labor tribunals for relying solely on the service contracts to prove that the respondents were employees of Peerless and Excellent.The CA cited in this regard what we said in7K Corporation v. NLRC:[35]

The fact that the service contract entered into by petitioner and Universal stipulated that private respondents shall be the employees of Universal, would not help petitioner, as the language of a contract is not determinative of the relationship of the parties. Petitioner and Universal cannot dictate, by the mere expedient of a declaration in a contract, the character of Universal business, i.e., whether as labor-only contractor , or job contractor, it being crucial that Universals character be mentioned in terms of and determined by the criteria set by the statute.[36]

The CA noted that both the Peerless and the Excellent contracts show that their obligation was solely to provide the company withthe services of contractual employees,[38]and nothing more.These contracted services were for the handling and delivery of the companys products and allied services.[39]Following D.O. 18-02 and the contracts that spoke purely of the supply of labor, the CA concluded that Peerless and Excellent were labor-only contractors unless they could prove that they had the required capitalization and the right of control over their contracted workers.

In plainer terms, the contracted personnel (acting as sales route helpers) were only engaged in the marginal work of helping in the sale and distribution of company products; they only provided the muscle work that sale and distribution required and were thus necessarily under the companys control and supervision in doing these tasks.

The role of sales route helpers in company operations is not a new issue before this Court as we have ruled on this issue inMagsalin v. National Organization of Workingmen[40]which the CA itself cited in the assailed decision. We held in this cited case that:

The argument of petitioner that its usual business or trade is softdrink manufacturing and that the work assigned to the respondent workers so involves merely postproduction activities, one which is not indispensable in the manufacture of its products, scarcely can be persuasive. If, as so argued by petitioner company, only those whose work are directly involved in the production of softdrinks may be held performing functions necessary and desirable in its usual business or trade, there would have been no need for it to even maintain regular truck sales route helpers. The nature of the work performed must be viewed from a perspective of the business or trade in its entirety and not only in a confined scope.[41]

Following the lead we gave inMagsalin, the CA concluded that the contracted personnel who served as route helpers were really engaged in functions directly related to the overall business of the petitioner. This led to the further CA conclusion that the contracted personnel were under the companys supervision and control since sales and distribution were in fact not the purported contractors independent, discrete and separable activities, but were component parts of sales and distribution operations that the company controlled in its softdrinks business.

Based on these considerations, we fully agree with the CA that Peerless and Excellent were mere suppliers of labor who had no sufficient capitalization and equipment to undertake sales and distribution of softdrinks as independent activities separate from the manufacture of softdrinks, and who had no control and supervision over the contracted personnel.They are therefore labor-only contractors.

Babas v Lorenzo Shipping Corporation GR186091 December 15, 2010

Facts:Petitioners: Emmanuel Babas, Danilo T. Banag, Arturo V. Villarin, Sr., Edwin Javier, Sandi Bermeo, Rex Allesa, Maximo Soriano, Jr., Arsenio Estorque, and Felixberto Anajao

Respondent Lorenzo Shipping Corporation (LSC) entered into aGeneral Equipment Maintenance Repair and Management Services Agreement[3](Agreement) with Best Manpower Services, Inc. (BMSI).

BMSI then hired petitioners on various dates to work at LSC as checkers, welders, utility men, clerks, forklift operators, motor pool and machine shop workers, technicians, trailer drivers, and mechanics.Six years later, or on May 1, 2003, LSC entered into another contract with BMSI, this time, a service contract.[5]

In September 2003, petitioners filed with the Labor Arbiter (LA) a complaint for regularization against LSC and BMSI.

BMSI asserted that it is an independent contractor. LSC, on the other hand, averred that petitioners were employees of BMSI and were assigned to LSC by virtue of the Agreement.LA: rendered a decision[6]dismissing petitioners complaint.The LA found that petitioners were employees of BMSI.NLRC: reversed the LA and held that respondent BMSI is not engaged in legitimate job contracting. First, respondent BMSI has no equipment, no office premises, no capital and no investments as shown in the Agreement itself. Second, respondent BMSI has no independent business or activity or job to perform in respondent LSC free from the control of respondent LSC except as to the results thereof. Lastly, respondent BMSI has no other client but respondent LSC. If respondent BMSI were a going concern, it would have other clients to which to assign [petitioners] after its Agreement with LSC expired.Since there is only one client, respondent LSC, it is easy to conclude that respondent BMSI is a mere supplier of labor.

CA: reversed the NLRC. According to the CA, the fact that BMSI entered into a contract of lease with LSC did notipso facto make BMSI a labor-only contractor; on the contrary, it proved that BMSI had substantial capital.Issue: WON BMSI is engaged only in labor-contracting.

Ruling:

Yes.

De Los Santos v. NLRC[18]instructed us that the character of the business,i.e., whether as labor-only contractor or as job contractor, should be measured in terms of, and determined by, the criteria set by statute. The parties cannot dictate by the mere expedience of a unilateral declaration in a contract the character of their business.

InSan Miguel Corporation v. Vicente B. Semillano,Nelson Mondejas, Jovito Remada, Alilgilan Multi-Purpose Coop (AMPCO), and Merlyn N. Policarpio,[19]this Court explained:

Despite the fact that the service contracts contain stipulations which are earmarks of independent contractorship, they do not make it legally so. The language of a contract is neither determinative nor conclusive of the relationship between the parties. Petitioner SMC and AMPCO cannot dictate, by a declaration in a contract, the character of AMPCO's business, that is, whether aslabor-onlycontractor, or job contractor. AMPCO's character should be measured in terms of, and determined by, the criteria set by statute.

Thus, in distinguishing between prohibited labor-only contracting and permissiblejob contracting, the totality of the facts and the surrounding circumstances of the case are to be considered.

Labor-only contracting, a prohibited act, is an arrangement where the contractor or subcontractor merely recruits, supplies, or places workers to perform a job, work, or service for a principal. In labor-only contracting, the following elements are present:(a) the contractor or subcontractor does not have substantial capital or investment to actually perform the job, work, or service under its own account and responsibility;and (b) the employees recruited, supplied, or placed by such contractor or subcontractor perform activities which are directly related to the main business of the principal.[20]

On the other hand, permissible job contracting or subcontracting refers to an arrangement whereby a principal agrees to put out or farm out with the contractoror subcontractor the performance or completion of a specific job, work, or service within a definite or predetermined period, regardless of whether such job, work, or service is to be performed or completed within or outside the premises of the principal.[21]

A person is considered engaged in legitimate job contracting or subcontracting if the following conditions concur:

(a) The contractorcarries on a distinct and independent business and undertakes the contract work on his account under his own responsibility according to his own manner and method, free from the control and direction of his employer or principal in all matters connected with the performance of his work except as to the results thereof;

(b) The contractorhas substantial capital or investment; and

(c) The agreement between the principal and the contractoror subcontractor assures the contractual employees' entitlement to all laborand occupational safety and health standards, free exercise of the right to self-organization, security of tenure, and social welfare benefits.[22]

BMSI is engaged in labor-only contracting.

First, petitioners worked at LSCs premises, and nowhere else. Other than the provisions of theAgreement, there was no showing that it was BMSI which established petitioners working procedure and methods, which supervised petitioners in their work, or which evaluated the same. There was absolute lack of evidence that BMSI exercised control over them or their work, except for the fact that petitioners were hired by BMSI.

Second, LSC was unable to present proof that BMSI had substantial capital.The record before us is bereft of any proof pertaining to the contractors capitalization, nor to its investment in tools, equipment, or implements actually used in the performance or completion of the job, work, or service that it was contracted to render.What is clear was that the equipment used by BMSI were owned by, and merely rented from, LSC.

InMandaue Galleon Trade, Inc. v. Andales,[23]we held:

The law casts the burden on the contractor to prove that it has substantial capital, investment, tools,etc.Employees, on the other hand, need not prove that the contractor does not have substantial capital, investment, and tools to engage in job-contracting.

Third, petitioners performed activities which were directly related to the main business of LSC. The work of petitioners as checkers, welders, utility men, drivers, and mechanics could only be characterized as part of, or at least clearly related to, and in the pursuit of, LSCs business. Logically, when petitioners were assigned by BMSI to LSC, BMSI acted merely as a labor-only contractor.

Lastly, as found by the NLRC, BMSI had no other client except for LSC, and neither BMSI nor LSC refuted this finding, thereby bolstering the NLRC finding that BMSI is a labor-only contractor.

The CA erred in considering BMSIs Certificate of Registration as sufficient proof that it is an independent contractor.InSan Miguel Corporation v. Vicente B. Semillano, Nelson Mondejas, Jovito Remada, Alilgilan Multi-Purpose Coop (AMPCO), and Merlyn N. Policarpio,[24]we held that a Certificate of Registration issued by the Department of Labor and Employment is not conclusive evidence of such status. The fact of registration simply prevents the legal presumption of being a mere labor-only contractorfrom arising.[25]

Consequently, the workers that BMSI supplied to LSC became regular employees of the latter.[26]Having gained regular status, petitioners were entitled to security of tenure and could only be dismissed for just or authorized causes and after they had been accorded due process.

San Miguel Corp v Semillano et al GR 164257 July 5, 2010

Facts:

xxx It appears that AMPCO hired the services of Vicente et al. [Vicente Semillano, Nelson Mondejar, Jovito Remada and Alex Hawod,[4]respondents herein] on different dates in December [of 1991 and] 1994. In order to perform the following tasks: segregating bottles, removing dirt therefrom, filing them in designated places, loading and unloading the bottles to and from the delivery trucks, and performing other tasks as may be ordered by SMCs officers.[They] were required to work inside the premises of SMC using [SMCs] equipment. [They] rendered service with SMC for more than 6 months.

Consequently, Vicente et al., as complainants, filed on July 17, 1995 a COMPLAINT FOR ILLEGAL DISMISSAL with the Labor Arbiter against AMPCO, Merlyn V. Polidario, SMC and Rufino I. Yatar [SMC Plant Manager], as respondents.

However, SMC utilized AMPCO making it appear that the latter was their employer, so that SMC may evade the responsibility of paying the benefits due them under the law.

LA: rendered his decision declaring herein complainants as regular employees of San Miguel Corporation.

NLRC: held AMPCO, as employer of respondents, liable to pay for respondents backwages, accrued salaries, allowances, and attorneys fees.In holding that AMPCO was an independent contractor, NLRC was of the view that the law only required substantial capitalorinvestment. Since AMPCO had substantial capital of nearly one (1) million then it qualified as an independent contractor.The NLRC added that even under the control test, AMPCO would be the real employer of the respondents, since it had assumed the entire charge and control of respondents services.Hence, an employer-employee relationship existed between AMPCO and the respondents.

CA: found that petitioner SMC wielded (i) the power of control over respondent, as SMC personnel supervised respondents performance of loading and unloading of beer bottles, and (ii) the power of dismissal, as respondents were refused entry by SMC to its premises and were instructed by the AMPCO manager to wait for further instructions from the SMCs supervisor.The CA added that AMPCO was a labor-only contractor since a capital of nearly one million pesos was insufficient for it to qualify as an independent contractor.Issue: Whether or not AMPCO is a legitimate job contractor.

Ruling:

Department of Labor and Employment (DOLE) Department OrderNo. 10, Series of 1997, defines job contracting and labor-only contracting as follows:

Sec. 8.Job contracting. There is job contracting permissible under the Code if the following conditions are met:

(1) The contractor carries on an independent business and undertakes the contract work on his own account under his own responsibility according to his own manner and method, free from the control anddirectionofhisemployerorprincipalinall matters connected with the performance of the work except as to the results thereof; and

(2) The contractor has substantial capital or investment in the form of tools, equipment, machineries, work premises, and other materials which are necessary in the conduct of his business.

Sec. 9.Labor-only contracting. (a) Any person who undertakes to supply workers to an employer shall be deemed to be engaged in labor-only contracting where such person:

(1)Does not have substantial capital or investment in the form of tools, equipment, machineries, work premises and other materials; and

(2) The workers recruited and placed by such persons are performing activities which are directly related to the principal business or operations of the employer in which workers are habitually employed.

(b) Labor-only contracting as defined herein is hereby prohibited and the person acting as contractor shall be considered merely as an agent or intermediary of the employer who shall be responsible to the workers in the same manner and extent as if the latter were directly employed by him.

(c) For cases not falling under this Article, the Secretary of Labor shall determine through appropriate orders whether or not the contracting out of labor is permissible in the light of the circumstances of each case and after considering the operating needs of the employer and the rights of the workers involved. In such case, he may prescribe conditions and restrictions to insure the protection and welfare of the workers.

Section 5 of Department Order No. 18-02 (Series of 2002) of the Rules Implementing Articles 106 to 109 of the Labor Code further provides that:

Substantial capital or investment refers to capital stocks and subscribed capitalization in the case of corporations, tools, equipment, implements, machineries and work premises,actually and directly usedby the contractor or subcontractor in the performance or completion of thejob work or service contracted out.(emphasis supplied)

The "right to control" shall refer to the right reserved to the person for whom the services of the contractual workers are performed, to determine not only the end to be achieved, but also the manner and means to be used in reaching that end.

The test to determine the existence of independent contractorship is whether or not the one claiming to be an independent contractor has contracted to do the work according to his own methods and without being subject to the control of the employer, except only as to the results of the work.[15]

The existence of an independent and permissible contractor relationship is generally established by the following criteria: whether or not the contractor is carrying on an independent business; the nature and extent of the work; the skill required; the term and duration of the relationship; the right to assign the performance of a specified piece of work; the control and supervision of the work to another; the employer's power with respect to the hiring, firing and payment of the contractor's workers; the control of the premises; the duty to supply the premises, tools, appliances, materials, and labor; and the mode, manner and terms of payment.[16]Neither did petitioner prove that AMPCO had substantial equipment, tools, machineries, and supplies actually and directly used by it in the performance or completion of the segregation and piling job.In fact, ascorrectlypointed out by the NLRC in its original decision, there is nothing in AMPCOs list[17]of fixed assets, machineries, tools, and equipment which it could have used, actually and directly, in the performance or completion of its contracted job, work or service with petitioner.For said reason, there can be no other logical conclusion but that the tools and equipment utilized by respondents are owned by petitioner SMC. It is likewise noteworthy that neither petitioner nor AMPCO has shown that the latter had clients other than petitioner.Therefore, AMPCO has no independent business.

In connection therewith, DOLE Department Order No. 10 also states that an independent contractor carries on an independent business and undertakes the contract work on his own account, under his own responsibility, according to his own manner and method, and free from the control and direction of his employer or principal in all matters connected with the performance of the work except as to the results thereof.This embodies what has long been jurisprudentially recognized as the control test[18]to determine the existence of employer-employee relationship.

The Court is not convinced that AMPCO wielded exclusive discretion in the discharge[19]of respondents.As the CA correctly pointed out, Merlyn Polidario, AMPCOs project manager,even told respondents to wait for further instructions from the SMCs supervisor after they were prevented from entering petitioner SMCs premises. Based on the foregoing, no other logical conclusion can be reached than that it was petitioner, not AMPCO, who wielded power of control.

Despite the fact that the service contracts[20]contain stipulations which are earmarks of independent contractorship, they do not make it legally so.The language of a contract is neither determinative nor conclusive of the relationship between the parties. Petitioner SMC and AMPCO cannot dictate, by a declaration in a contract, the character of AMPCOs business, that is, whether as labor-only contractor, or job contractor. AMPCOs character should be measured in terms of, and determined by, the criteria set by statute.[21]At a closer look, AMPCOs actual status and participation regarding respondents employment clearly belie the contents of the written service contract.

Petitioner cannot rely either on AMPCOs Certificate of Registration as an Independent Contractor issued by the proper Regional Office of the DOLE to prove its claim.It is not conclusive evidence of such status.The fact of registration simply prevents the legal presumption of being a mere labor-only contractor from arising.[22]In distinguishing between permissible job contracting and prohibited labor-only contracting, the totality of the facts and the surrounding circumstances of the case are to be considered.[23]

Petitioner also argues that among the permissible contracting arrangements include work or services not directly related or not integral to the main business or operation of the principal including work related to manufacturing processes of manufacturing establishments.[24]The Court is not persuaded.The evidence is clear that respondents performed activities which were directly related to petitioners main line of business. Petitioner is primarily engaged in manufacturing and marketing of beer products, and respondents work of segregating and cleaning bottles is unarguably an important part of its manufacturing and marketing process.

Thus, petitioner SMC, as principal employer, is solidarily liable with AMPCO, the labor-only contractor, for all the rightful claims of respondents. Under this set-up, AMPCO, as the "labor-only" contractor, is deemed an agent of the principal (SMC).The law makes the principal responsible over the employees of the "labor-only" contractor as if the principal itself directly hired the employees.[25]G.R. No. 200094 June 10, 2013VIGILLA et al v PHILIPPINE COLLEGE OFCRIMINOLOGY INC. and/or GREGORY ALAN F. BAUTISTA Facts:

PCCr is a non-stock educational institution, while the petitioners were janitors, janitresses and supervisor in the Maintenance Department of PCCr under the supervision and control of Atty. Florante A. Seril (Atty. Seril). The petitioners, however, were made to understand, upon application with respondent school, that they were under MBMSI, a corporation engaged in providing janitorial services to clients. Atty. Seril is also the President and General Manager of MBMSI.

Sometime in 2008, PCCr discovered that the Certificate of Incorporation of MBMSI had been revoked. Citing the revocation, terminated the schools relationship with MBMSI, resulting in the dismissal of the employees or maintenance personnel under MBMSI.

Vigilla et al filed their respective complaints for illegal dismissal, reinstatement, back wages, separation pay (for Bongot), underpayment of salaries, overtime pay, holiday pay, service incentive leave, and 13th month pay against MBMSI, Atty. Seril, PCCr, and Bautista.

In their complaints, they alleged that it was the school, not MBMSI, which was their real employer because (a) MBMSIs certification had been revoked; (b) PCCr had direct control over MBMSIs operations; (c) there was no contract between MBMSI and PCCr; and (d) the selection and hiring of employees were undertaken by PCCr.

On the other hand, PCCr and Bautista contended that (a) PCCr could not have illegally dismissed the complainants because it was not their direct employer; (b) MBMSI was the one who had complete and direct control over the complainants; and (c) PCCr had a contractual agreement with MBMSI, thus, making the latter their direct employer.

LA: that (a) PCCr was the real principal employer of the complainants ; (b) MBMSI was a mere adjunct or alter ego/labor-only contractor; (c) the complainants were regular employees of PCCr; and (d) PCCr/Bautista were in bad faith in dismissing the complainants.

NLRC: the NLRC affirmed the LAs findings

CA: affirmed the Resolutions of the NLRC. The CA pointed out that based on the principle of solidary liability and Article 121711of the New Civil Code, petitioners respective releases, waivers and quitclaims in favor of MBMSI and Atty. Seril redounded to the benefit of the respondents.

Issue: whether or not their claims against the respondents were amicably settled by virtue of the releases, waivers and quitclaims which they had executed in favor of MBMSI. In resolving this case, the Court must consider sub-issue, to wit: whether or not a labor-only contractor is solidarily liable with the employer.

Ruling:

A Labor-only Contractor is SolidarilyLiable with the Employer

The issue of whether there is solidary liability between the labor-only contractor and the employer is crucial in this case. If a labor-only contractor is solidarily liable with the employer, then the releases, waivers and quitclaims in favor of MBMSI will redound to the benefit of PCCr. On the other hand, if a labor-only contractor is not solidarily liable with the employer, the latter being directly liable, then the releases, waivers and quitclaims in favor of MBMSI will not extinguish the liability of PCCr.

The NLRC and the CA correctly ruled that the releases, waivers and quitclaims executed by petitioners in favor of MBMSI redounded to the benefit of PCCr pursuant to Article 1217 of the New Civil Code. The reason is that MBMSI is solidarily liable with the respondents for the valid claims of petitioners pursuant to Article 109 of the Labor Code.

As correctly pointed out by the respondents, the basis of the solidary liability of the principal with those engaged in labor-only contracting is the last paragraph of Article 106 of the Labor Code, which in part provides: "In such cases labor-only contracting, the person or intermediary shall be considered merely as an agent of the employer who shall be responsible to the workers in the same manner and extent as if the latter were directly employed by him."

Section 19 of Department Order No. 18-02 issued by the Department of Labor and Employment (DOLE), which was still in effect at the time of the promulgation of the subject decision and resolution, interprets Article 106 of the Labor Code in this wise:

Section 19. Solidary liability. The principal shall be deemed as the direct employer of the contractual employees and therefore, solidarily liable with the contractor or subcontractor for whatever monetary claims the contractual employees may have against the former in the case of violations as provided for in Sections 5 (LaborOnly contracting), 6 (Prohibitions), 8 (Rights of Contractual Employees) and 16 (Delisting) of these Rules. In addition, the principal shall also be solidarily liable in case the contract between the principal and contractor or subcontractor is preterminated for reasons not attributable to the fault of the contractor or subcontractor. [Emphases supplied].

The DOLE recognized anew this solidary liability of the principal employer and the labor-only contractor when it issued Department Order No. 18-A, series of 2011, which is the latest set of rules implementing Articles 106-109 of the Labor Code. Section 27 thereof reads:

Section 27. Effects of finding of labor-only contracting and/or violation of Sections 7, 8 or 9 of the Rules. A finding by competent authority of labor-only contracting shall render the principal jointly and severally liable with the contractor to the latters employees, in the same manner and extent that the principal is liable to employees directly hired by him/her, as provided in Article 106 of the Labor Code, as amended.

A finding of commission of any of the prohibited activities in Section 7, or violation of either Sections 8 or 9 hereof, shall render the principal the direct employer of the employees of the contractor or subcontractor, pursuant to Article 109 of the Labor Code, as amended. (Emphasis supplied.)

These legislative rules and regulations designed to implement a primary legislation have the force and effect of law. A rule is binding on the courts so long as the procedure fixed for its promulgation is followed and its scope is within the statutory authority granted by the legislature.33Jurisprudence is also replete with pronouncements that a job-only contractor is solidarily liable with the employer. One of these is the case of Philippine Bank of Communications v. NLRC34where this Court explained the legal effects of a job-only contracting, to wit:

Under the general rule set out in the first and second paragraphs of Article 106, an employer who enters into a contract with a contractor for the performance of work for the employer, does not thereby create an employer-employees relationship between himself and the employees of the contractor. Thus, the employees of the contractor remain the contractor's employees and his alone. Nonetheless when a contractor fails to pay the wages of his employees in accordance with the Labor Code, the employer who contracted out the job to the contractor becomes jointly and severally liable with his contractor to the employees of the latter "to the extent of the work performed under the contract" as such employer were the employer of the contractor's employees. The law itself, in other words, establishes an employer-employee relationship between the employer and the job contractor's employees for a limited purpose, i.e., in order to ensure that the latter get paid the wages due to them.

A similar situation obtains where there is "labor only" contracting. The "labor-only" contractor-i.e "the person or intermediary" - is considered "merely as an agent of the employer." The employer is made by the statute responsible to the employees of the "labor only" contractor as if such employees had been directly employed by the employer. Thus, where "labor-only" contracting exists in a given case, the statute itself implies or establishes an employer-employee relationship between the employer (the owner of the project) and the employees of the "labor only" contractor, this time for a comprehensive purpose: "employer for purposes of this Code, to prevent any violation or circumvention of any provision of this Code." The law in effect holds both the employer and the "laboronly" contractor responsible to the latter's employees for the more effective safeguarding of the employees' rights under the Labor Code.35[Emphasis supplied].

The case of San Miguel Corporation v. MAERC Integrated Services, Inc.36also recognized this solidary liability between a labor-only contractor and the employer. In the said case, this Court gave the distinctions between solidary liability in legitimate job contracting and in labor-only contracting, to wit:

In legitimate job contracting, the law creates an employer-employee relationship for a limited purpose, i.e., to ensure that the employees are paid their wages. The principal employer becomes jointly and severally liable with the job contractor only for the payment of the employees' wages whenever the contractor fails to pay the same. Other than that, the principal employer is not responsible for any claim made by the employees.

On the other hand, in labor-only contracting, the statute creates an employer-employee relationship for a comprehensive purpose: to prevent a circumvention of labor laws. The contractor is considered merely an agent of the principal employer and the latter is responsible to the employees of the labor-only contractor as if such employees had been directly employed by the principal employer. The principal employer therefore becomes solidarily liable with the labor-only contractor for all the rightful claims of the employees.37[Emphases supplied; Citations omitted]

Recently, this Court reiterated this solidary liability of labor-only contractor in the case of 7K Corporation v. NLRC38where it was ruled that the principal employer is solidarily liable with the labor-only contractor for the rightful claims of the employees.

Conclusion

Considering that MBMSI, as the labor-only contractor, is solidarily liable with the respondents, as the principal employer, then the NLRC and the CA correctly held that the respondents solidary liability was already expunged by virtue of the releases, waivers and quitclaims executed by each of the petitioners in favor of MBMSI pursuant to Article 1217 of the Civil Code which provides that "payment made by one of the solidary debtors extinguishes the obligation."

This Court has constantly applied the Civil Code provisions on solidary liability, specifically Articles 1217 and 1222,39to labor cases. In Varorient Shipping Co., Inc. v. NLRC,40this Court held:

The POEA Rules holds her, as a corporate officer, solidarily liable with the local licensed manning agency. Her liability is inseparable from those of Varorient and Lagoa. If anyone of them is held liable then all of them would be liable for the same obligation. Each of the solidary debtors, insofar as the creditor/s is/are concerned, is the debtor of the entire amount; it is only with respect to his co-debtors that he/she is liable to the extent of his/her share in the obligation. Such being the case, the Civil Code allows each solidary debtor, in actions filed by the creditor/s, to avail himself of all defenses which are derived from the nature of the obligation and of those which are personal to him, or pertaining to his share [citing Section 1222 of the Civil Code]. He may also avail of those defenses personally belonging to his co-debtors, but only to the extent of their share in the debt. Thus, Varorient may set up all the defenses pertaining to Colarina and Lagoa; whereas Colarina and Lagoa are liable only to the extent to which Varorient may be found liable by the court.1wphi1x x x x

If Varorient were to be found liable and made to pay pursuant thereto, the entire obligation would already be extinguished [citing Article 1217 of the Civil Code] even if no attempt was made to enforce the judgment against Colarina. Because there existed a common cause of action against the three solidary obligors, as the acts and omissions imputed against them are one and the same, an ultimate finding that Varorient was not liable would, under these circumstances, logically imply a similar exoneration from liability for Colarina and Lagoa, whether or not they interposed any defense.41[Emphases supplied]

In light of these conclusions, the Court holds that the releases, waivers and quitclaims executed by petitioners in favor of MBMSI redounded to the respondents' benefit. The liabilities of the respondents to petitioners are now deemed extinguished. The Court cannot allow petitioners to reap the benefits given to them by MBMSI in exchange for the releases, waivers and quitclaims and, again, claim the same benefits from PCCr.

While it is the duty of the courts to prevent the exploitation of employees, it also behooves the courts to protect the sanctity of contracts that do not contravene the law.42The law in protecting the rights of the laborer authorizes neither oppression nor self-destruction of the employer. While the Constitution is committed to the policy of social justice and the protection of the working class, it should not be supposed that every labor dispute will be automatically decided in favor of labor. Management also has its own rights, which, as such, are entitled to respect and enforcement in the interest of simple fair play. Out of its concern for those with less privileges in life, the Court has inclined more often than not toward the worker and upheld his cause in his conflicts with the employer. Such favoritism, however, has not blinded the Court to the rule that justice is in every case for the deserving, to be dispensed in the light of the established facts and applicable law and doctrine.43WHEREFORE, the petition is DENIED.

SO ORDERED.