PBCOM v. NLRC, Hon. Arbiter Teodorico L.
Dogelio and Ricardo - The employer is made by the statute responsible to the employees
Orpiada
December 19, 1986| Feliciano, J.
By: Justin
SUMMARY:
PBCOM and CESI entered into a letter agreement wherein CESI will
provide “Temporary Services” to petitioner. Attached to the letter was a
list of messengers, assigned to work with the petitioner, including
respondent Orpiada. Orpiada rendered services within the premises of
the bank. On October 1976, PBCOM requested CESI to withdraw Orpiada’s
assignment because Orpiada’s services were no longer needed. Thus,
Orpiada filed a complaint against petitioner for illegal dismissal and
failure to pay the 13th month pay. Court held that applying the 4 fold test
would yield in mixed results so the court looked at the relationship
between PBCOM and CESI and considered whether there was labor-only
contracting. Having found that they were indeed in such a contract the
court held PBCOM is liable to Orpiada for backwages and 13th month pay.
DOCTRINE:
an employer who enters into a contract with a contractor for the
performance of work for the employer, does not thereby create an
employer-employee 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.
of the "labor only" contractor as if such employees had been
directly employed by the employer.
- 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.
FACTS:
 PBCOM and Corporate Executive Search Inc. (CESI) entered into a
letter agreement wherein CESI undertook to provide temporary
services to PBCOM consisting of 11 messengers. PBCOM
undertook to pay “daily service rate of P18” per person
 The letter agreement was dated January 1976 and the contract
period described as being “from January 1976-“
 The list of messengers assigned included the name of private
respondent Ricardo Orpiada (item no. 5)
 He was assigned to work with PBCOM, he rendered services
within the premises of the bank alongside other people also
rendering services to the bank.
 There was some question as to when he started rendering
services. The letter agreement stated that the contract was from
Jan 1976 but the position paper of CESI stated that he started on
June 1975 (as evidenced by an appointment memo issued to
Orpiada on that day)
 October 1976, PBCOM requested CESI to withdraw ORpiada since
his services were no longer needed
 Orpiada filed a complaint before the Department of labor against
PBCOM for illegal dismissal and failure to pay 13th month pay
 His complaint was dismissed after an investigation of the regional
director, Regional Office no. IV. Orpiada failed to show the
existence of an employer-employee relationship between him and
PBCOM
 Despite this, he was able to have his complaint certified for
compulsory arbitration. During the arbitration proceedings, CESI
1
 was brought into the picture as additional respondent by the
bank.
 Both CESI and the Bank maintained that he CESI was the employer
of Orpiada and not the bank
 LA Dogelio issued a decision and ordered the bank to reinstate
Orpiada to the same or equivalent position and to pay full
backwages and his 13th month pay for 1976
 PBCOM appealed to the NLRC (took 6 years). NLRC affirmed LA
 Hence this petition for certiorari.
ISSUES/HELD:
Whether or not an employer-employee relationship existed between
PBCOM and Orpiada.
Under the circumstances of this case, YES since CESI was a labor only
contractor
RATIO:
- The language of the agreement stated that the messengers will
remain as CESI employees but the court considered this as the
intent of the agreement and that it was important to see if this
intent was realized successfully by the parties
- The Court looked at the factors laid down in Viana v. AI-Lagdan
o Selection and engagement of the putative employee
 Although CESI was the one which selected
orpiada, but this was subject to the acceptance of
the bank.CESI had hired Orpiada from the outside
world precisely for the purpose of assigning him
to the bank.
o Payment of wages
 PBCOM remitted the service rate to CESI and then
CESI paid Orpiada. Orpiada was also not in the
payroll of PBCOM, a fact not denied by Orpiada
o Power of dismissal
 CESI hired Orpiada specifically for assignment
with the bank. After orpiada was withdrawn from
the assignment with PBCOM, Orpiada was also
terminated by CESI. Accourding to CESI, when his
service contract was terminated, then the reason
for his employment with CESI ceased to exist and
had no alternative but to discontinue his
employment until another opportune time for his
hiring would present itself
o Power to control the putative employees’ conduct
although the latter is the most important element
 Having worked within the premises of PBCOM,
Orpiada must have been subject to at least the
same conrol and supervision that the bank
exercises over any other employee or staff
member of the bank. It would be unreasonable to
suppose that Orpiada was allowed to remain in the
premises without subjecting him to a substantial
measure of control and supervision, whether in
respect of the manner in which they discharged
their functions, or in respect to the end results of
their functions or activities or both.
- It would seem that applying the factors yield mixed results (2nd
and 3rd suggest that Orpiada was an employee of CESI, while the
1st and 4th factors suggest that some direct relationship did exist
between Orpiada and the bank.
- It is therefore necessary to confront the task of determining the
appropriate characterization of the relationship between the
bank and (CESI) was that relationship one of employer and job
(independent) contractor or one of employer and "labor-only"
contractor
- 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-employee relationship between himself and
the employees of the contractor. Thus, the employees of the
contractor remain the contractor's employees and his alone
o 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.
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 o 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.
o 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.
o 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. "
- PBCOM and CESI insisted that CESI was not a “labor only”
contractor. The court did not agree and held that the definition of
“labor only” contracting in Rule VIII, Book III of the implementing
rules 1must be read in conjunction with the definition of job
contracting under Sec. 8 of the same rules 2
- The undertaking given by CESI in favor of the bank was not the
performance of a specific job, for instance, the carriage and
delivery of documents and parcels to the addresses thereof. The
undertaking of (CESI) was to provide its client-the bank-with a
certain number of persons able to carry out the work of
messengers.
1 Sec. 9. Labor-only contracting. — (a) Any person who undertakes to supply workers to an
employer shag 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 person are performing activities which are to the
principal business or operations of the c 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 file 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
o CESI is not a parcel delivery company: it is a recruitment
and placement corporation placing bodies, as it were, in
different client companies for longer or shorter periods of
time
- The eleven (11) messengers were thus supposed to render
"temporary" services for an indefinite period of time. Ricardo
Orpiada himself was assigned to the bank's offices from 25 June
1975 until October 1976, or a period of about sixteen months
o Under the Labor Code, however, any employee who has
rendered at least one year of service, whether such service
is continuous or not, shall be considered a regular
employee (Article 281, Second paragraph).
o The court held that if the arrangement between PBCOM
and CESI was upheld, it would in effect permit employers
to avoid the necessity of hiring regular or permanent
employees and to enable them to keep the employees on a
temporary or casual status and in effect denying them
security of tenure.
- Court held that CESI was engaged in labor only contracting with
PBCOM and that PBCOM is liable to Orpiada as if Orpiada had been
directly employed not only by CESI but also by PBCOM. PBCOM
may well proceed against CESI to obtain reimbursement the
amounts which PBCOM will have to pay to Orpiada
petition for certiorari is DENIED and the decision promulgated on 29
December 1983 of the National Labor Relations Commission is
AFFIRMED
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.
2 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 and direction of his employer or principal in all 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.
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Guarin v. NLRC according to the Court, by Novelty's rehiring the workers or renewing the
contract with Lipercon every year from 1983 to 1986, a period of three
Facts:
(3) years.
In 1983, private respondents Lipercon Services, Inc. and Novelty As Lipercon was a "labor-only" contractor, the workers it supplied
Philippines, Inc. entered into a "Contract of Services" in which the former, Novelty became regular employees of the latter and the Court ordered
for a contract price, undertook to provide the latter with Contractual their reinstatement with backwages.
Laborers/Helpers/Janitors. For this reason, petitioners were hired by
Lipercon to work with Novelty as helpers, janitors, janitresses, firemen,
and mechanics. Petitioners worked with Novelty as such for three years.
In 1986, Novelty terminated its agreement with Lipercon and
consequently petitioners were dismissed. Petitioners filed an illegal
dismissal case against Novelty and Lipercon, in which case the Labor
Arbiter ruled that petitioners were regular employees of Novelty and
declared their dismissal illegal. Both employers appealed. The National
Labor Relations Commission reversed the Labor Arbiter's decision and
ruled that Lipercon was an independent contractor. It ordered Lipercon
to reinstate petitioners.
Issue:

Whether or not Lipercon is an independent contractor and the petitioners

are its employees.
Ruling:

The Supreme Court ruled that as provided in Article 106 of the Labor
Code, and as can be gleaned from the agreement between Lipercon and
Novelty, it was clear that Lipercon was a "labor-only" contractor and thus
served merely an agent of Novelty tasked to provide it with manpower.
Lipercon's contention that it is an independent contractor because it
claimed to have substantial capital and investment in tools and equipment
was not given merit because it was not able to present substantial
evidence to that effect. On the contrary, the Supreme Court held that
petitioners' works were directly related to the daily operations of a
garment factory since gardeners work to maintain clean and well-kept
grounds around the factory, mechanics to keep the machines functioning
properly, and firemen to look out for fires. This fact is confirmed,
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CCBPI v. HINGPIT
FACTS:
 COCA-COLA is a corporation duly organized under Philippine laws
with principal offices at Ace Building, Legaspi Village, Makati,
Metro Manila, engaged in the bottling, distribution and sale of soft
drink products. 1 It maintains, among others, a bottling plant in
Tagbilaran City, with sales offices and bodegas in strategic places
to serve the surrounding areas in Bohol Province.
 Pioneer Multi-Services Co. (PIONEER) and Lipercon Services, Inc.
(LIPERCON), are manning companies with which COCA COLA
successively entered into contracts for the supply of the
manpower needs of its plant in Tagbilaran. COCA-COLA's contract
with PIONEER was executed on May 28, 1983, and that with
LIPERCON, five (5) years later, on December 17, 1988.
 11 employees claim to have been illegally dismissed
 It appears that all the complainants, except Delfin Hingpit and
Gabriel Francisco, were originally recruited by PIONEER which
detailed them, under its contract with COCA COLA, in the latter's
Tagbilaran Plant, some being assigned as utility workers, and
others, as bottling crew members. 9 Three years afterwards, they
were absorbed by LIPERCON when it replaced PIONEER as COCA-
COLA's labor supplier.
 It appears that Hingpit was recruited by LIPERCON for the
Tagbilaran COCA-COLA plant, and first assigned as bottling crew
member on November 24, 1984. Sometime in 1988, Hingpit, being
then involved in a labor case against his employer, sent a letter to
then President Corazon C. Aquino asking that she help him obtain
permanent employment in COCA COLA. This brought about a
conciliation conference in the Bohol Labor Extension Office in
Tagbilaran City; and there, an agreement was reached between
Hingpit and COCA COLA, represented by its Tagbilaran Personnel
Officer, Ms. Suzette Gotera. According to Hingpit, 10 Ms. Gotera had
offered him "the position of driver-helper or security guard if I
possess the necessary qualifications for the aforesaid position,"
and he had "accepted her offer as a truck-helper in the meantime
that I have not secured a driver's license." On the basis of this
amicable agreement, and after obtaining a clearance from
Lipercon Services, Inc., Hingpit was hired by COCA COLA on a
probationary basis for a period of six (6) months effective May 16,
1988.
 Hingpit was then required, among other things, to take
examinations to qualify for permanent placement and to submit a
police clearance. He submitted a police clearance issued by the
Integrated National Police Command of Bohol which stated that
he was a resident of Batuan, Bohol, and that he had no criminal
record thereat. Unfortunately for him, not only did he obtain
failing marks in the qualifying examinations, but the police
clearance submitted by him was shortly afterwards revealed to be
false, belied by a certification of the Office of the City Fiscal of
Tagbilaran City to the effect that he was then facing charges of
physical injuries in no less than three (3) cases. As a result, his
services — considered temporary or probationary — were
terminated on July 22, 1988, on the ground that he had (1) failed
to measure up to the standards of the firm, having flunked the
required qualifying tests, and (2) been shown to be dishonest, for
not disclosing that he had been charged with 3 counts of physical
injuries.
 Gabriel Francisco originally worked as bottling crew member of
San Miguel Corporation at its Tagbilaran Plant from 1971 until
1976. He was re-employed in 1979, and assigned to the beer
department of COCA-COLA. In 1980, he was hired by PIONEER,
which as aforestated had concluded a contract to supply COCA-
COLA's manpower needs. He worked under this arrangement
until PIONEER was replaced by LIPERCON, in December 1986. He
5
 continued working as bottling crew member until he was
separated from employment on December 15, 1988. 12
 The other complainant-employees — Cecilio Pinar, Jr., Abundio
Balatero, Narito Manluluyo, Secero Zamora, Medardo Gabines,
Enrique Bangalao, Julito Apat, Sotero Pandan, Nelson Umali —
were, as already stated, found by the Labor Arbiter to have been
first placed in the COCA COLA Tagbilaran plant by their recruiter,
PIONEER, and after the latter's contract expired, were recruited
by LIPERCON and again assigned at the same Tagbilaran plant.
LA: PIONEER was a "labor only contractor,"14 LIPERCON — which had
also undertaken to provide COCA COLA with manpower for such
services as the repair and maintenance of machines, activities related
to projects, yard cleaning, utility jobs; loading and unloading of full
and empty bottles 15 — was a legitimate labor contractor.
The two were already regular employees of the respondent firm
(COCA COLA). Its entry, even if viewed as a consequence of a
legitimate business of a manpower servicing firm, resulted to (sic) the
illegal termination of the complainants who at that point in time had
already acquired regular status. The coming in of Lipercon did not
deprive the complainants of the right to claim separation pay. Their
severance from respondent firm, it appears, was forced upon them. It
is only fair, thus, that they be given the benefits that they deserve
while placed under Pioneer Multi-Services, Inc.
NLRC: Reversed. It opined that (1) LIPERCON was a labor-only, not an
independent labor contractor; and (2) COCA COLA not having
presented evidence to establish any just cause for the termination of
complainants' employment, such termination must be held illegal;
and having, as well, failed to submit the payrolls corresponding to the
complainants, its monetary liability to them should be increased.
 COCA COLA thereupon commenced the present certiorari action
on December 11, 1996 through which it seeks the setting aside of
the Commission's Decision of February 28, 1996 and its
Resolution of October 3, 1996.
ISSUE: W/N Coca Cola is liable to pay Delfin Hingpit separation pay
(NO)
The Court will deal with Delfin Hingpit first. It seems fairly evident
from the record that his services were validly terminated. As already
narrated, on the basis of his compromise agreement with the
Tagbilaran Personnel Officer of COCA COLA (entered into under the
auspices of the Bohol Labor Extension Office), and after obtaining a
clearance from LIPERCON, Hingpit was employed by COCA COLA on a
probationary basis for a period of six (6) months effective May 16,
1988. However, Hingpit subsequently flunked the qualifying
examinations for regular employment, and was later discovered to
have misled COCA COLA by submitting a police clearance contradicted
by the records of the Fiscal's Office of Tagbilaran City showing that he
was then facing three (3) charges of physical injuries. Upon the facts,
therefore, there can be no question: first, of the propriety of his
contract or probationary employment — not only executed before
Labor officials, but also admitted by him as freely and voluntarily
entered into — andsecond, of the fact that he had not only failed the
qualifying examinations, but had also presented a false clearance.
Hence, his services were properly terminated on July 22, 1988, for (1)
failing to qualify for the job, and (2) for dishonesty.
W/N LIPERCON is an independent contractor thus liable to pay
separation pay to employees not Coca Cola (YES)
 The Lipercon has indeed substantial capital of its own is proven by the
testimony of its personnel-in-charge in Tagbilaran City, Filomena
Legaspi. Legaspi affirmed the fact that Lipercon paid its employees
(the complainants herein) regularly even before it is paid of its billing
(TSN. p. 49, September 2, 1992). She also testified that she had control
over the complainants. Without her signature, they cannot get inside
the premises of respondent firm. She signed their daily time records
and monitored their hours of work. She saw to it that they were in
their positions and places of work. And if the regular employees of
CCBPI or their supervisors complain, they notify and inform her of
these complaints. With regard to the route helpers, these were
covered by requisition slips
6
 Here, there is substantial evidence, detailed by the Labor Arbiter, to VINOYA v. NLRC and RFC (2000)
establish LIPERCON's character as an independent contractor in the Kapunan, J.
real sense of the word, 25 which makes the Labor Arbiter's ruling more
acceptable than respondent Commission's on the same matter, being TWO SETS OF FACTS:
founded solely on an inapplicable precedent. Also more deserving of
assent is said Labor Arbiter's conclusion that the complainants' ALEXANDER VINOYA
acceptance of employment in LIPERCON in December, 1986 — lasting  He applied and was accepted 
by RFC as sales representative
for a period of some two years — effectively operated as a cessation
on 26 May 1990. On the same
of the prior relationship they had with PIONEER and COCA COLA in date, a company identification 
consequence of which they became entitled to separation pay from card was issued to him.
COCA COLA, PIONEER being merely its hiring agent. o He reported daily to
the office in Pasig City
 The evidence therefore satisfactorily establishes that complainants to take the latters van
were employees of LIPERCON. It was LIPERCON that terminated their for the delivery of its
services at which time, as found by the Labor Arbiter, the products.
complainants "signed quitclaim and release documents" in favor of o He was assigned to
various supermarkets
LIPERCON. COCA COLA was not privy either to that act of
and grocery stores
employment-termination or execution of "quitclaim and release where he booked sales
documents," or to the earlier act of creation of the employment orders and collected
relationship between the complainants and LIPERCON. COCA COLA payments for RFC.
was in no position to intervene in any manner in the creation or o He was required by
termination of the relationship between complainants and LIPERCON. RFC to put up a
monthly bond
REVERSED ofP200.00 as security
deposit to guarantee
the performance of his
obligation as sales
representative.
o He was under the
direct control and
supervision of Mr.
Dante So and Mr. Sadi
Lim, plant manager
and senior salesman of
RFC, respectively.
 On 1 July 1991, he was
transferred by RFC to
Regent Food Corporation
No employer-employee
relationship existed between
Vinoya and itself.
Vinoya is actually an employee
of PMCI, an independent
contractor, which had a
Contract of Service with RFC.
o RFC presents an
Employment
Contract signed by
Vinoya on 1 July 1991,
wherein PMCI appears
as his employer, and
denies that he was
ever employed by it
prior to 1 July 1991.
o Vinoya was issued an
ID card so that its
clients and customers
would recognize him
as a duly authorized
representative of RFC.
o With regard to
the P200.00 pesos
monthly bond posted
by Vinoya, it was
required in order to
guarantee the
turnover of his
collection since he
handled funds of RFC.
o It had control and
supervision over
7
 Peninsula Manpower
Company, Inc. ("PMCI"), an
agency which provides RFC
with additional contractual
workers pursuant to a
contract for the supply of
manpower services
(hereinafter referred to as the
"Contract of Service").
 After his transfer to PMCI, he
was reassigned to RFC as sales
representative.
 On 25 November 1991, he was
informed by Ms. Susan Chua,
personnel manager of RFC, 
that his services were
terminated and he was asked
to surrender his ID card.
o He was told that his
dismissal was due to
the expiration of the 
Contract of Service
between RFC and
PMCI.
 He claims he was dismissed 
from employment despite the
absence of any notice or
investigation.
o On 3 December 1991,
Vinoya filed a case
against RFC before the
Labor Arbiter for
illegal dismissal and
non-payment of 13th
month pay.
 LA favoured Vinoya for the following reasons:
Vinoya, but such was a) Vinoya was originally with RFC and was merely transferred to
exercised in PMCI to be deployed as an agency worker and then subsequently
coordination with reassigned to RFC as sales representative;
PMCI. b) RFC had direct control and supervision over Vinoya;
o The termination of its
c) RFC actually paid for the wages of Vinoya although coursed
relationship with
Vinoya was brought through PMCI; and,
about by the d) Vinoya was terminated per instruction of RFC.
expiration of the  The NLRC reversed the findings of the Labor Arbiter. The NLRC
Contract of Service opined that PMCI is an independent contractor because it has
between itself and substantial capital and, as such, is the true employer of Vinoya. The
PMCI and not because
NLRC, thus, held PMCI liable for the dismissal of Vinoya.
he was dismissed from
employment.  Vinoya elevated the case to the SC.
On 3 December 1991, when
Vinoya filed a complaint for ISSUES:
illegal dismissal before the 1. WON Vinoya was an employee of RFC or PMCI- YES
Labor Arbiter, PMCI was Is PMCI a labor-only contractor or an independent contractor?
initially impleaded as one of RFC: PMCI is a highly capitalized venture and presented a copy of the
the respondents. Articles of Incorporation and the Treasurers Affidavit submitted by PMCI
However, Vinoya thereafter to the Securities and Exchange Commission showing that it has an
withdrew his charge against authorized capital stock of Php1M. It is a duly organized corporation
PMCI and pursued his claim
engaged in the business of creating and hiring a pool of temporary
solely against RFC.
personnel and, thereafter, assigning them to its clients from time to time
Subsequently, RFC filed a third
party complaint against PMCI. for such duration as said clients may require. PMCI has a separate office,
permit and license and its own organization.
Labor-Only Contracting Permissible Job Contracting or
Subcontracting
A prohibited act, is an Refers to an arrangement
arrangement where the whereby a principal agrees to put
contractor or subcontractor out or farm out with a contractor
merely recruits, supplies or places or subcontractor the performance
workers to perform a job, work or or completion of a specific job,
service for a principal. work or service within a definite
or predetermined period,
regardless of whether such job,
8
In labor-only contracting, the work or service is to be performed
following elements are present: or completed within or outside
the premises of the principal.
(a) The contractor or
subcontractor does not have A person is considered engaged in
substantial capital or investment legitimate job contracting or
to actually perform the job, work subcontracting if the following
or service under its own account conditions concur:
and responsibility; (a) The contractor or
(b) The employees recruited, subcontractor carries on a distinct
supplied or placed by such and independent business and
contractor or subcontractor are undertakes to perform the job,
performing activities which are work or service on its own
directly related to the main account and under its own
business of the principal. 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.
 Neri v. NLRC: Once substantial capital is established it is no longer
necessary for the contractor to show evidence that it has
investment in the form of tools, equipment, machineries, work
premises, among others.
o Article 106 of the Labor Code does not require that the
contractor possess both substantial capital and
investment in the form of tools, equipment, machineries,
work premises, among others.
o BCC carried on an independent business and undertook
the performance of its contract according to its own
manner and method, free from the control and
supervision of its principal in all matters except as to the
results thereof.
o The employees of BCC were engaged to perform specific
special services for its principal.
o Thus, the Court ruled that BCC was an independent
contractor.
 Philippine Fuji Xerox Corporation vs. NLRC: The Court declared
Skillpower, Inc. to be engaged in labor-only contracting and was
considered as a mere agent of the employer.
o It is not enough to show substantial capitalization or
investment in the form of tools, equipment, machineries
and work premises, among others, to be considered as an
independent contractor.
o In determining the existence of an independent contractor
relationship, several factors might be considered such as,
but not necessarily confined to, whether 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 specified pieces of work; the control and
supervision of the workers; the power of the employer
with respect to the hiring, firing and payment of the
workers of the contractor; the control of the premises; the
9
 duty to supply premises, tools, appliances, materials and Based on the foregoing, PMCI can only be classified as a labor-only
labor; and the mode, manner and terms of payment. contractor and, as such, cannot be considered as the employer of
Vinoya.
Given the above standards and the factual milieu of the case, PMCI is Also, the Contract of Service entered into between RFC and PMCI reveals
engaged in labor-only contracting. that Vinoya as a sales representative is actually not included in the
1st, PMCI does not have substantial capitalization or investment in the enumeration of the workers to be assigned to RFC.
form of tools, equipment, machineries, work premises, among others, to
qualify as an independent contractor. While it has an authorized capital Even if we use the "four-fold test" to ascertain whether RFC is
stock of P1,000,000.00, only P75,000.00 is actually paid-in, which, to our the true employer of Vinoya the same result would be
mind, cannot be considered as substantial capitalization.3 achieved.
2nd, PMCI did not carry on an independent business nor did it
undertake the performance of its contract according to its own RFC "Four-Fold Test"
manner and method, free from the control and supervision of its (1) the RFC denies any No particular form of proof is
principal, RFC.4 selection involvement in the required to prove the existence of
These are telltale indications that PMCI was not left alone to and recruitment and an employer-employee
supervise and control its alleged employees. Consequently, it can engagement selection of Vinoya relationship. Any competent and
be concluded that PMCI was not an independent contractor since of the and asserts that relevant evidence may show the
it did not carry a distinct business free from the control and employee Vinoya did not relationship.
supervision of RFC. or the present any proof
3 , Since the undertaking of PMCI did not involve the performance of a
rd power to that he was The ID presented by Vinoya, dated
specific job, but rather the supply of manpower only, PMCI clearly hire actually hired and one year before RFC states that
conducted itself as labor-only contractor.5 employed by RFC. PMCI hired him, constitutes
4th, in labor-only contracting, the employees recruited, supplied or sufficient proof to show that RFC
placed by the contractor perform activities which are directly truly hired Vinoya.
related to the main business of its principal. In this case, the work
of Vinoya as sales representative is directly related to the business While the Employment Contract
of RFC. indicates the word "renewal," no
evidence of a prior contract

3 Furthermore, RFC undertook to assist PMCI in making sure that the daily time records of its alleged
In the case of Neri, BCC had a capital stock of P1,000,000.00 which was fully subscribed and paid-for.
Moreover, when the Neri case was decided in 1993, the rate of exchange between the dollar and the peso
was only P27.30 to $1 while presently it is at P40.390 to $1. In 1993, the economic situation in the country
was not as adverse as the present, as shown by the devaluation of our peso. With the current economic
atmosphere in the country, the paid-in capitalization of PMCI amounting to P75,000.00 cannot be
considered as substantial capital and, as such, PMCI cannot qualify as an independent contractor.
4
The evidence at hand shows that the workers assigned by PMCI to RFC were under the control and
supervision of the latter. The Contract of Service itself provides that RFC can require the workers assigned
by PMCI to render services even beyond the regular eight hour working day when deemed necessary.
employees faithfully reflect the actual working hours. With regard to Vinoya, RFC admitted that it
exercised control and supervision over him.
5 PMCI was not engaged to perform a specific and special job or service, which is one of the strong
indicators that an entity is an independent contractor as explained by the Court in the cases
of Neri and Fuji. The sole undertaking of PMCI was to provide RFC with a temporary workforce able to
carry out whatever service may be required by it. Such venture was complied with by PMCI when the
required personnel were actually assigned to RFC. Apart from that, no other particular job, work or service
was required from PMCI. Obviously, with such an arrangement, PMCI merely acted as a recruitment
agency for RFC.
10
 entered into between Vinoya and terminated from service upon compliance with the legal
PMCI was ever presented by RFC. requisites for dismissal.
(2) the RFC: The The Court takes judicial notice of  Under the Labor Code, the requirements for the lawful dismissal
payment of invoices presented the practice of employers who, in of an employee are two-fold, the substantive and the procedural
wages by it, show that it order to evade the liabilities under aspects.
was PMCI who the Labor Code, do not issue  Not only must the dismissal be for a valid or authorized cause, the
paid Vinoya his payslips directly to their
rudimentary requirements of due process - notice and
wages through its employees. Under the current
hearingmust, likewise, be observed before an employee may be
regular monthly practice, a third person, usually the
dismissed. Without the concurrence of the two, the termination
billings charged to purported contractor (service or
RFC. manpower placement agency), would, in the eyes of the law, be illegal.
assumes the act of paying the  As the employer, RFC has the burden of proving that the dismissal
wage. For this reason, the lowly of Vinoya was for a cause allowed under the law and that Vinoya
worker is unable to show proof was afforded procedural due process. RFC failed to discharge this
that it was directly paid by the true burden. Its lone allegation that the dismissal was due to the
employer. expiration or completion of contract is not even one of the
(3) the RFC: It was PMCI The Contract of Service gave RFC grounds for termination allowed by law. Neither did RFC show
power to who terminated the right to terminate the workers that Vinoya was given ample opportunity to contest the legality of
dismiss the employment of assigned to it by PMCI without the his dismissal.
Vinoya. latter’s approval. The dismissal of  An employee who has been illegally dismissed is entitled to
Vinoya was indeed made under the reinstatement to his former position without loss of seniority
instruction of RFC to PMCI. rights and to payment of full backwages corresponding to the
period from his illegal dismissal up to actual
(4) the RFC: The power of RFC already admitted that it
reinstatement. Vinoya is entitled to no less.
power to control was jointly exercised control and supervision
control the exercised with over Vinoya.
DISPOSITIVE: PETITION GRANTED.
employee PMCI.
(most
important)
An employer-employee relationship exists between Vinoya and
RFC.

2. WON Vinoya was lawfully dismissed- NO

 SC: Since Vinoya, due to his length of service, already attained the
status of a regular employee, he is entitled to the security of tenure
provided under the labor laws. Hence, he may only be validly
11
TABAS v. California Manufacturing Company, Inc.
G.R. No. L-80680
January 26, 1989
Sarmiento, J.
FACTS:
 Petitioners were employees of Livi Manpower Services, Inc.,
which assigned them to work as “promotional merchandisers” for
respondent pursuant to a manpower supply agreement. Among
other things, the agreement provided that:
“California has no control or supervision whatsoever over
Livi’s workers with respect to how they accomplish their
work or perform California’s obligation;”
“Livi is an independent contractor and nothing herein
contained shall be construed as creating between them…
the relationship of principal-agent or employer-employee;”
“It is hereby agreed that it is the sole responsibility of Livi to
comply with all the existing as well as future laws, rules and
regulations pertinent to employment of labor;”
“California is free and harmless from any liability arising
from such labor laws or from any accident that may befall
workers and employees of Livi while in the performance of
their duties for California.”
 It was further expressly stipulated that the assignment of workers
to California shall be on a “seasonal and contractual basis.”
 The petitioners were then made to sign employment contracts
with durations of 6 months, upon the expiration of which they
signed new agreements with the same period, and so on. Unlike
regular California employees, who received not less than
P2,823.00 a month in addition to a host of fringe benefits and
bonuses, they received P38.56 plus P15.00 in allowance daily.
 The petitioners now allege that they had become regular
California employees and demand, as a consequence whereof,
similar benefits. They likewise claim that pending further
proceedings below, they were notified by California that they
would not be rehired. As a result, they filed an amended complaint
charging California with illegal dismissal.
 California admits having refused to accept Tabas et al., back to
work but deny liability therefor for the reason that it is not, to
begin with, the petitioner’s employer and that the “retrenchment”
had been force by business losses as well as expiration of
contracts. It appears that thereafter, Livi reabsorbed them into its
labor pool on a “wait-in or standby” status.
ISSUE:
WON the contractual agreement was binding insofar as California is free
from any liability.
HOLDING/RATIO:
NO.
Art. 106. Contractor or subcontractor. – Whenever an
employer enters into a contract with another person for
the performance of the former’s work, the employees of
the contractor and of the latter’s 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 jintly and severally liable
with his contractor or subcontractor to such employees x
x x.
The Secretary of Labor may, by appropriate regulations,
restrict or prohibit the contracting out of labor to protect
the rights of workers x x x.
There is “labor-only” contracting where the person
supplying workers to an employer does not have
substantial capital or investment x x x and the workers
recruited and placed by such person are performing
12
 activities which are directly related to the principal
business of usc employer. In such cases, the person
intermediary shall be considered merely as an agenet of
the employer who shall responsible to the workers in the
same manner and extent as if the latter directly employed
by him.
expressing its concern. For then that would compromise the rights
of the workers, especially their right to security of tenure.
 Petition is granted. California is hereby ordered to reinstate
petitioners and to jointly and severally pay with Livi, the latter
their money claims.

 In the case at bar, Livi is admittedly an “independent contractor

providing temporary services of manpower to its clients.” When it
thus provided California with manpower, it supplied California
with personnel, as if such personnel had been directly hired by
California, charged with “merchandising promotion or sale of the
products of California in the different sales outlets in Metro Manila
including task and occasional price tagging,” an activity that is
doubtless, an integral part of the manufacturing business.
Relations of parties must be judged from case to case and the
decree of law, and not by declarations of parties. Hence, Art. 106
of the LC applies.

 The fact that the petitioners have been hired on a “temporary or

season” basis merely is no argument either. As we held in PBC v.
NLRC, a temporary or casual employee, under Art. 281 of the LC,
becomes regular after service of one year, unless he has been
contracted for a specific project. And we cannot say that
merchandising is a specific project for the obvious reason that it
is an activity related to the day-to-day operations of California.

 Accordingly, under Art. 281 of the Code, they had become regular
employees of California and had acquired a security of tenure.
Hence, they cannot be separated without due process of law.

 It is not that by dismissing the terms and conditions of the

manpower supply agreement, we have, hence, considered it
illegal. Under the LC, genuine job contracts are permissible,
provided they are genuine job contracts. But, as we held in PBC,
when such arrangements are resorted to “in anticipation of, and
for the very purpose of making possible, the secondment” of the
employees from the true employer, the Court will be justified in

13
Escario v. NLRC
June 8, 2000 | Kapunan, J.
By: Arrow
SUMMARY:
Petitioners worked as merchandisers for the products of CMC. Their
services were terminated on 16 March 1992. Court held that they were
employees of DL Admark and not CMC.
DOCTRINE:
CMC can validly outsource its merchandising activities to a legitimate
independent contractor. D.L. Admark is a legitimate independent
contractor. There is permissible job contracting when a principal agrees
to put out or farm out with a contractor or a subcontractor the
performance or completion of a specific job, work or service within a
definite or predetermined period, regardless of whether such job or work
or service is to be performed or completed within or outside the premises
of the principal.
‘ no employer-employee relationship existed between the petitioners and
FACTS:
1. California Marketing Co. Inc. is a domestic corporation principally
engaged in the manufacturing of food products and distribution of such
products to wholesalers and retailers. Donna Louise Advertising and
Marketing Associates, Inc. is a duly registered promotional firm.
a. Petitioners allege that they were employed by CMC as
merchandisers.
i. Their tasks were done under the control, management and
supervision of CMC.
ii. The materials and equipment necessary in the performance of
their job, such as price markers, gun taggers, toys, pentel pen, streamers
and posters were provided by CMC.
iii. Their salaries were being paid by CMC.
b. According to petitioners, the hiring, control and supervision of the
workers and the payment of salaries, were all coursed by CMC through its
agent D.L. Admark in order for CMC to avoid its liability under the law.
2. Petitioners filed a case against CMC before the Labor Arbiter for
the regularization of their employment status. Their complaint was
amended so as to include illegal dismissal, when D.L. Admark
subsequently sent to petitioners notice of termination of their
employment.
a. CMC denied the existence of an employer-employee relationship
between petitioner and itself, contending that D.L. Admark is the
employer of the petitioners. CMC is not allowed by law to engage in retail
or direct sales to end consumers. However, it hired independent job
contractors such as D.L. Admark, to provide the necessary promotional
activities for its product lines.
b. D.L. Admark asserted that it is the employer of the petitioners. Its
primary purpose is to carry on the business of advertising, promotion and
publicity, the sales and merchandising of goods and services and conduct
survey and opinion polls. As an independent contractor it serves several
clients among which include Purefoods, Corona Supply, Firstbrand,
Splash Cosmetics and herein private respondent California Marketing.
3. The Labor Arbiter rendered a decision finding that petitioners are
the employees of CMC as they were engaged in activities that are
necessary and desirable in the usual business or trade of CMC.
4. The NLRC set aside the decision of the Labor Arbiter. It ruled that
CMC. It, likewise, held that D.L. Admark is a legitimate independent
contractor, hence, the employer of the petitioners. Finding no valid
grounds existed for the dismissal of the petitioners by D.L. Admark, it
ordered their reinstatement.
ISSUES/HELD:
1. WON the private respondents were employees of CMC or D.L.
Admark. - DL ADMARK
RATIO:
1. CMC can validly farm out its merchandising activities to a
legitimate independent contractor. D.L. Admark is a legitimate
independent contractor.
a. There is labor-only contracting when the contractor or sub-
contractor 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:
14
(1) The person supplying workers to an employer does not have all tending to show that D.L. Admark was paying for the petitioners’
substantial capital or investment in the form of tools, equipment, salaries.
machineries, work premises, among others; and c. the power of dismissal;
(2) The workers recruited and placed by such person are performing • Petitioners admitted that it was D.L. Admark who terminated
activities which are directly related to the principal business of the their employment.
employer. d. the power to control the employee’s conduct.
b. There is permissible job contracting when a principal agrees to • Petitioners presented the memoranda of CMC’s sales and
put out or farm out with a contractor or a subcontractor the performance promotions manager. However, a careful scrutiny of the documents, will
or completion of a specific job, work or service within a definite or reveal that nothing therein would remotely suggest that CMC was
predetermined period, regardless of whether such job or work or service supervising and controlling the work of the petitioners. The documents
is to be performed or completed within or outside the premises of the fail to show anything that would remotely suggest control and
principal. In this arrangement, the following conditions must concur: supervision exercised by CMC over petitioners on the matter on how they
(1) The contractor carries on a distinct and independent business and should perform their work.
undertakes the contract work on his account under his own responsibility 3. Having proven the existence of an employer-employee
according to his own manner and method, free from the control and relationship between D.L. Admark and petitioners, it is no longer relevant
direction of his employer or principal in all matters connected with the to determine whether the activities performed by the latter are necessary
performance of his work except as to the results thereof; and or desirable to the usual business or trade of CMC.
(2) .The contractor has substantial capital or investment in the form On the issue of illegal dismissal, we agree with the findings of the NLRC
of tools, equipment, machineries (sic), work premises, and other that D.L. Admark "admits having dismissed the petitioners for allegedly
materials which are necessary in the conduct of his business. disowning and rejecting them as their employer." Undoubtedly, the
c. The following factors need be considered: (a) whether the reason given is not just cause to terminate petitioners.
contractor is carrying on an independent business; (b) the nature and
extent of the work; (c) the skill required; (d) the term and duration of the
relationship; (e) the right to assign the performance of specified pieces of
work; (f) the control and supervision of the workers; (g) the power of the
employer with respect to the hiring, firing and payment of workers of the
contractor; (h) the control of the premises; (i) the duty to supply
premises, tools, appliances, materials, and labor; and (j) the mode,
manner and terms of payment.
2. By applying the four-fold test used in determining employer-
employee relationship, the status of D.L. Admark as the true employer of
petitioners is further established.
a. the selection and engagement of employee;
• Petitioners themselves admitted that they were selected and
hired by D.L. Admark.
b. the payment of wages;
• D.L. Admark was able to present in evidence the payroll of
petitioners, sample SSS contribution forms filed and submitted by D.L.
Admark to the SSS, and the application for employment by R. de los Reyes,

15
PAL v. Enrique Ligan et al.
February 29, 2008| Carpio-Morales, J.
By: Justin
SUMMARY:
PAL and SYNERGY entered into an agreement for the performance of
work for PAL. It was stated in the agreement that the workers provided
by Synergy would not be considered as regular employees of PAL. The
workers were dismissed and filed complaint for underpayment and
regularization among others. PAL argued that they were not regular
employees since Synergy was a legitimate contractor. Court ruled in favor
of the workers. SC held that although it was expressly stated in the
agreement, the totality of the facts and surrounding circumstances should
determine the relationship between PAL and the workers. SC relied on the
elements provided for in Sec. 5 of DO 18-02 to determine if there was
labor-only contracting. PAL failed to prove that Synergy had substantial
capital or investment and that the facts of the case showed that the
workers were placed under the control of PAL’s managers and
supervisors. Hence the workers should be considered as regular
employees of PAL.
DOCTRINE:
- For labor-only contracting to exist, Section 5 of D.O. No. 18-02
which requires any of two elements to be present
o (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, OR
o (ii) The contractor does not exercise the right to control
over 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,
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.
FACTS:
 PAL as owner and Synergy Services Corporation as contractor
entered into an agreement whereby Synergy undertook to prvied
loading, unloading, delivery of baggage and cargo and other
related services to and from PAL’s aircraft at the mactan station
 The agreement expressly provided that Synergy was an
independent contractor and that there would be no employer-
employee relationship between Synergy and/or its employees on
the one hand and PAL on the other
 Except for Benedicto Auxtero, the rest of the respondents filed
complaints before the NLRC Regional Office VII at Cebu City
against PAL, Synergy and their respective officials for
underpayment, non-payment of premium pay for holidays,
premium pay for rest days, SILP, 13th month pay and allowances
and for regularization of employment status with PAL. They
claimed that they had been performing duties for the benefit of
PAL since their job is directly connected with PAL’s business
 Auxtero initially filed a complaint against PAL and Synergy for
regularization but later alleged that he was without valid ground,
verbally dismissed, and then he filed a complaint against PAL and
Synergy and their respective officials for illegal dismissal and
reinstatement with full backwages. The complaints of the
respondents were consolidated
 LA Dominador Almirante found Synergy an independent
contractor and dismissed the complaint for regularization against
PAL but granted their money claims
 NLRC vacated the said decision on appeal and held that Snergy
was a labor-only contractor and ordered PAL to accept as its
regular employees all the complainants and to give them the
salaries and allowances and other employment benefits and
privileges of a regular employee under the CBA. It also declared
the dismissal of Auxtero illegal and ordered reinstatement with
PAL
16
  PAL filed a petition for certiorari before the SC. But because of the
St. Martin ruling, it was referred to the CA. CA then affirmed the
NLRC decision. MR denied hence this petition.
ISSUES/HELD:
Whether Synergy is a mere job-only contractor or a legitimate contractor.
Synergy was a Labor only contractor
RATIO:
- Pal argued that the law does not prohibit employer from engaging
an independent contractor like Synergy, which has substantial
capital to perform specific jobs. That the fact that it is contracting
out to synergy various services which are directly related to its
business does not make the respondents its employees. It also
alleged that the 4 elements of an employer-employee relationship
was not present in this case. Finally that reinstatement had been
rendered impossible because it had reduced its personnel due to
the heavy losses it had and that it actually terminated the contract
with Synergy as a cost-saving measure
- The statutory basis of a legitimate contracting or subcontracting
is provided in Art. 106 of the labor code. Legitimate contracting
and labor-only contracting are defined in DO 18-02 Series of 2002
(rules implementing art. 105-109 of the labor code)6
- “Substantial Capital or investment” and the “right to control” are
defines in the same sec. 5 of the DO
o "Substantial capital or investment" refers to capital stocks
and subscribed capitalization in the case of corporations,
6
Section 3. Trilateral relationship in contracting arrangements. In legitimate
contracting, there exists a trilateral relationship under which there is a contract for a
specific job, work or service between the principal and the contractor or
subcontractor, and a contract of employment between the contractor or
subcontractor and its workers. Hence, there are three parties involved in these
arrangements, the principal which decides to farm out a job or service to a contractor
or subcontractor, the contractor or subcontractor which has the capacity to
independently undertake the performance of the job, work or service, and the
contractual workers engaged by the contractor or subcontractor to accomplish the
job, work or service.
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.
o 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
- from the records of the case it is shown that the work performed
by almost all the respondents is directly related to the main
business of PAL and the equipment used were owned by PAL
- PAL argues that mere compliance with substantial capital
requirement suffices for synergy to be considered a legitimate
contractor. It cited Neri v. NLRC. However the court ruled that in
the cited case the contractor was shown to have a capital stock of
P1M fully subscribed and paid for and the status of it being an
independent contractor had been previously confirmed in an
earlier case.
o However in this case, PAL failed to provide evidence that
Synergy has a substantial capital to engage in legitimate
contracting. It was only after the CA rendered its decision
when PAL in its MR sought to prove it by attaching
photocopies of Synergy’s financial statements
o Also the respondents worked alongside the regular
employees of PAL. This is an indicium of labor-only
contracting
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, and any of the
following elements are [sic] 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; OR
(ii) The contractor does not exercise the right to control over the performance of
the work of the contractual employee.
17
- For labor-only contracting to exist, Section 5 of D.O. No. 18-02
which requires any of two elements to be present
o (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,
OR
o (ii) The contractor does not exercise the right to control
over the performance of the work of the contractual
employee.
- Even if only one is present, there is labor-only contracting.
- One who claims to be an independent contractor has to prove that
he contracted to do the work according to his own methods and
without being subject to the employer's control except only as to
the results
- PAL claimed that it was Synergy’s supervisors who actually
supervised the respondents, however it failed to identify who
were these supervisors
- The agreement itself runs counter to this claim by PAL since it
expressly stated that the workers wer to comply with PAL’s rules,
regulations, procedures and riectives relative to the safety and
security of PAL’s premises, it also provided that the IDs provided
by synergy needed to be countersigned by PAL and their uniforms
needed to be approved by PAL. PAL may also require Synergy to
dismiss immediately and prohibit entry to PAL’s premises any
worker who in PAL’s opinion is incompetent or does not comply
with PAL’s reasonable instructions
o PAL did not deny that it fixes the work schedule of the
respondents. NLRC also found that PAL’s managers and
supervisors approved the respondents’ weekly work
assignments and respondents and regular PAL employees
were collectively called “station attendants”
- Respondents having performed tasks which are usually necessary
and desirable in the air transportation business of petitioner, they
should be deemed its regular employees and Synergy as a labor-
only contractor
- Although there was an express provision against this in the
agreement the court held that it is the totality of the facts
surrounding circumstances of the case which should determine
the relationship.
- With regard to Auxterio PAL failed to prove that he abandoned his
work. PAL failed to prove elements of abandonment: (1) the
failure to report for work or absence without valid or justifiable
reason, and (2) a clear intention to sever the employer-employee
relationship manifested by some overt acts
- Auxterio a regular employee found to be illegally dismissed
should be entitled to salary differential from the time he rendered
one year service until dismissal, reinstatement plus backwages.
But since a long period of time has elapsed since his dismissal it
would be appropriate to award separation pay instead of
reinstatement (1 month salary per year of service)
- As for the respondents, PAL was ordered to accept them as its
regular employees and to give each of them the salaries,
allowances and other employment benefits and privileges of a
regular employee. Other than the bare allegations of PAL that it
could not comply with this order, there’s no evidence to
substantiate this claim. PAL failed to raise this in its memo before
the CA. IT also terminated the contract with synergy in disregard
of a subsisting TRO to preserve status quo.
- Respondents having been declared regular employees, Synergy
being a mere agent of PAL, had acquired security of tenure, they
could only be dismissed on the basis of just or authorized cause
and with observance of procedural due process
Court of Appeals Decision of September 29, 2000 is AFFIRMED with
MODIFICATION. There being no data from which this Court may
determine the monetary liabilities of petitioner, the case is
REMANDED to the Labor Arbiter solely for that purpose.
18
SMC v. MAERC Integrated Services
July 10, 2003| Bellosillo, J.
By: Rose Ann
SUMMARY:
291 workers filed labor cases against petitioner San Miguel Corporation
(SMC) and Respondent Maerc Integrated Services, Inc. (MAERC). SMC
denied liability for the claims, averring that the complainants were not its
employees but of MAERC, an independent contractor. Labor Arbiter held
that MAERC was an independent contractor, The NLRC ruled that MAERC
was a labor-only contractor and that complainants were employees of
SMC, and held SMC jointly and severally liable with MAERC for
complainants' separation benefits. CA affirmed the NLRC. The Supreme
Court affirmed the CA decision.
DOCTRINE:
In determining the existence of an independent contractor relationship,
several factors may be considered, such as, but not necessarily confined
to:
1. whether the contractor was carrying on an independent business;
2. the nature and extent of the work;
3. the skill required;
4. the term and duration of the relationship;
5. the right to assign the performance of specified pieces of work;
6. the control and supervision of the workers;
7. the power of the employer with respect to the hiring, firing and
payment of the workers of the contractor;
8. the control of the premises; the duty to supply premises, tools,
appliances, materials and labor; and
9. the mode, manner and terms of payment.
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.
FACTS:
291 workers filed their complaints against San Miguel Corporation (SMC)
and Maerc Integrated Services, Inc. (MAERC), for illegal dismissal,
underpayment of wages, non-payment of service incentive leave pays and
other labor standards benefits, and for separation pays from 25 June to
24 October 1991.
The complainants alleged that they were hired by SMC through its agent
or intermediary MAERC to work in two (2) designated workplaces in
Mandaue City: one, inside the SMC premises at the Mandaue Container
Services, and another, in the Philphos Warehouse owned by MAERC.
They washed and segregated various kinds of empty bottles used by SMC
to sell and distribute its beer beverages to the consuming public. They
were paid on a per piece or pakiao basis except for a few who worked as
checkers and were paid on daily wage basis.
Complainants alleged that long before SMC contracted the services of
MAERC a majority of them had already been working for SMC under the
guise of being employees of another contractor, Jopard Services, until the
services of the latter were terminated on 31 January 1988.
SMC denied liability for the claims and averred that the complainants
were not its employees but of MAERC, an independent contractor whose
primary corporate purpose was to engage in the business of cleaning,
receiving, sorting, classifying, etc., glass and metal containers.
It appears that SMC entered into a Contract of Services with MAERC
engaging its services on a non-exclusive basis for one (1) year beginning
1 February 1988. The contract was renewed for two (2) more years in
March 1989. It also provided for its automatic renewal on a month-to-
month basis after the two (2)-year period and required that a written
notice to the other party be given thirty (30) days prior to the intended
date of termination, should a party decide to discontinue with the
contract.
When the service contract was terminated, complainants claimed that
SMC stopped them from performing their jobs; that this was tantamount
to their being illegally dismissed by SMC who was their real employer as
their activities were directly related, necessary and desirable to the main
business of SMC; and, that MAERC was merely made a tool or a shield by
SMC to avoid its liability under the Labor Code.
MAERC for its part admitted that it recruited the complainants and placed
them in the bottle segregation project of SMC but maintained that it was
only conveniently used by SMC as an intermediary in operating the
project or work directly related to the primary business concern of the
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latter with the end in view of avoiding its obligations and responsibilities
towards the complaining workers.
LA: MAERC was an independent contractor. Complaints for illegal
dismissal are dismissed but MAERC was ordered to pay separation
benefits. MAERC and SMC were also ordered to jointly and severally pay
complainants their wage differentials and to pay attorney's fees.
NLRC: MAERC was a labor-only contractor and that complainants were
employees of SMC. Whether MAERC was a job contractor or a labor-only
contractor, SMC was still solidarily liable with MAERC for the latter's
unpaid obligations, citing Art. 109 of the Labor Code.
CA: affirmed the decision of the NLRC.
ISSUES/HELD:
Whether the complainants are employees of SMC or of MAERC—SMC.
RATIO:
In ascertaining an employer-employee relationship, the following
factors are considered: (a) the selection and engagement of employee; (b)
the payment of wages; (c) the power of dismissal; and, (d) the power to
control an employee's conduct, the last being the most
important. Application of the aforesaid criteria clearly indicates an
employer-employee relationship between SMC and the complainants.
On hiring
SMC played a large and indispensable part in the hiring of MAERC's
workers. It also appears that majority of the complainants had already
been working for SMC long before the signing of the service contract
between SMC and MAERC in 1988.
The incorporators of MAERC admitted having supplied and recruited
workers for SMC even before MAERC was created. When MAERC was
organized into a corporation in February 1988, the complainants who
were then already working for SMC were made to go through the motion
of applying for work with Ms. Olga Ouano, President and General Manager
of MAERC, upon the instruction of SMC through its supervisors to make it
appear that complainants were hired by MAERC.
On wages
SMC assumed the responsibility of paying for the mandated
overtime, holiday and rest day pays of the MAERC workers. SMC also paid
the employer's share of the SSS and Medicare contributions, the 13th
month pay, incentive leave pay and maternity benefits. In the lump sum
received, MAERC earned a marginal amount representing the contractors
share. These lend credence to the complaining workers' assertion that
while MAERC paid the wages of the complainants, it merely acted as an
agent of SMC.
On control
The contract of services between MAERC and SMC provided that
MAERC was an independent contractor and that the workers hired by it
"shall not, in any manner and under any circumstances, be considered
employees of the Company, and that the Company has no control or
supervision whatsoever over the conduct of the Contractor or any of its
workers in respect to how they accomplish their work or perform the
Contractor's obligations under the Contract."
In deciding the question of control, the language of the contract is not
determinative of the parties' relationship; rather, it is the totality of the
facts and surrounding circumstances of each case.
In this case, there are indicia that SMC actively supervised the
complainants. SMC maintained a constant presence in the workplace
through its own checkers. The checkers were tasked to report on the
identity of the workers whose performance or quality of work was not
according to the rules and standards set by SMC.
Reinforcing the belief that the SMC exerted control albeit through the
instrumentality of MAERC were letters by SMC to the MAERC
management. More than just a mere written report of the number of
bottles improperly cleaned and/or segregated, the letters named 3
workers who were responsible for the rejection of several bottles,
specified the infraction committed in the segregation and cleaning, then
recommended the penalty to be imposed.
Although calling the attention of its contractors as to the quality of
their services may reasonably be done by SMC, there appears to be no
need to instruct MAERC as to what disciplinary measures should be
imposed on the specific workers who were responsible for rejections of
bottles.
Control of the premises in which the contractor's work was
performed was also viewed as another phase of control over the work,
and this strongly tended to disprove the independence of the contractor.
In the case at bar, the bulk of the MAERC segregation activities was
20
accomplished at the MAERC-owned PHILPHOS warehouse but the
building along with the machinery and equipment in the facility was
actually being rented by SMC.
But the most telling evidence is a letter by Mr. Antonio Ouano, Vice-
President of MAERC dated 27 May 1991 addressed to Francisco Eizmendi,
SMC President and Chief Executive Officer, asking the latter to reconsider
the phasing out of SMCs segregation activities in Mandaue City.
It provided an account of how in 1987 Eizmendi approached the
would-be incorporators of MAERC and offered them the business of
servicing the SMC bottle-washing and segregation department in order to
avert an impending labor strike. After initial reservations, MAERC
incorporators accepted the offer and before long trial segregation was
conducted by SMC at the PHILPHOS warehouse. In sum, the letter attested
to an arrangement entered into by the two (2) parties which was not
reflected in the Contract of Services.
On substantial capitalization
SMC alleged that the CA and the NLRC erred when they declared
MAERC a labor-only contractor despite the finding that MAERC had
investments amounting to P4,608,080.00 consisting of buildings,
machinery and equipment.
It was not enough to show substantial capitalization or investment in
the form of tools, equipment, machinery and work premises, etc., to be
considered an independent contractor. In fact, jurisprudential holdings
were to the effect that in determining the existence of an independent
contractor relationship, several factors may be considered, such as, but
not necessarily confined to, whether the contractor was 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 specified pieces of work; the control and supervision of
the workers; the power of the employer with respect to the hiring, firing
and payment of the workers of the contractor; the control of the premises;
the duty to supply premises, tools, appliances, materials and labor; and
the mode, manner and terms of payment.[Vinoya v. NLRC]
MAERC, as earlier discussed, displayed the characteristics of a labor-
only contractor. Moreover, while MAERCs investments in the form of
buildings, tools and equipment amounted to more than P4 Million, it was
the SMC which required MAERC to undertake such investments under the
understanding that the business relationship between petitioner and
MAERC would be on a long term basis. MAERC did not have an
independent business. Not only was it set up to specifically meet the
pressing needs of SMC which was then having labor problems in its
segregation division, none of its workers was also ever assigned to any
other establishment, thus convincing us that it was created solely to
service the needs of SMC.
On the liability of SMC
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.
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.
This distinction between job contractor and labor-only contractor,
however, will not discharge SMC from paying the separation benefits of
the workers, inasmuch as MAERC was shown to be a labor-only
contractor; in which case, petitioner's liability is that of a direct employer
and thus solidarily liable with MAERC.
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Coca-Cola Bottlers v. Agito
Facts:
This is a petition for review on certiorari filed by the petitioner GMA
Network Inc assailing the decision of the CA. The Court of Appeals, in its
assailed Decision, declared that respondents Alan M. Agito Regolo S. Oca
III, Ernesto G. Alariao, Jr., Alfonso Paa, Jr., Dempster P. Ong, Urriquia T.
Arvin, Gil H. Francisco, and Edwin M. Golez were regular employees of
petitioner Coca-Cola Bottlers Phils., Inc; and that Interserve Management
& Manpower Resources, Inc. (Interserve) was a labor-only contractor,
whose presence.
 Respondents filed before the NLRC two complaints against
petitioner, Interserve, Peerless Integrated Services, Inc., Better
Builders, Inc., and Excellent Partners, Inc. for reinstatement with
backwages, regularization, nonpayment of 13th month pay, and
damages.
 Respondents alleged in their position paper that they were
salesmen assigned at the Lagro Sales Office of petitioner. They had
been in the employ of petitioner for years, but were not
regularized. Their employment was terminated without just cause
and due process.
 Petitioner Coca Cola Bottlers filed its Position Paper where it
averred that respondents were employees of Interserve who were
tasked to perform contracted services in accordance with the
provisions of the Contract executed between petitioner and
Interserve. Said Contract between petitioner and Interserve,
constituted legitimate job contracting, given that the latter was a
bona fide independent contractor with substantial capital or
investment in the form of tools, equipment, and machinery
necessary in the conduct of its business. petitioner asserted that
respondents were employees of Interserve, since it was the latter
which hired them, paid their wages, and supervised their work, as
proven by: (1) respondents’ Personal Data Files in the records of
Interserve; (2) respondents’ Contract of Temporary Employment
with Interserve;and (3) the
payroll records of Interserve.
 Labor Arbiter found that respondents were employees of
Interserve and not of petitioner.
 NLRC affirmed labor Arbiter’s decision and pronounced that no
employer-employee relationship existed between petitioner and
respondents. respondents. It reiterated the findings of the Labor
Arbiter that Interserve was an independent contractor as
evidenced by its substantial assets and registration with the
DOLE.
 CA ruled that Interserve was a labor-only contractor, with
insufficient capital and investments for the services which it was
contracted to perform.
Issue:
WON the Interserve is a legitimate job contractor
Held:
No. Interserve was engaged in prohibited labor-only contracting.
Hence, Coca Cola Bottlers shall be deemed the true employer of
respondents.
A legitimate job contract, wherein an employer enters into a contract with
a job contractor for the performance of the former’s work, is permitted by
law. Thus, the employer-employee relationship between the job contractor
and his employees is maintained. In legitimate job contracting, the law
creates an employer-employee relationship between the employer and the
contractor’s employees only for a limited purpose, i.e., to ensure that the
employees are paid their wages. The 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 employer is not responsible for any claim made by the
contractor’s employees.
22
On the other hand, labor-only contracting is an arrangement wherein the
contractor merely acts as an agent in recruiting and supplying the
principal employer with workers for the purpose of circumventing labor
law provisions setting down the rights of employees. It is not condoned
by law. A finding by the appropriate authorities that a contractor is a
"labor-only" contractor establishes an employer-employee relationship
between the principal employer and the contractor’s employees and the
former becomes solidarily liable for all the rightful claims of the
employees.
Section 5 of the Rules Implementing Articles 106-109 of the Labor Code,
as amended, provides the guidelines in determining whether labor-only
contracting exists:
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, and any of 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; or
ii) The contractor does not exercise the right to control the
performance of the work of the contractual employee.
The law clearly establishes an employer-employee relationship between
the principal employer and the contractor’s employee upon a finding that
the contractor is engaged in "labor-only" contracting. Article 106 of the
Labor Code categorically states: "There is ‘labor-only’ contracting where
the person supplying workers to an employee 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." Thus, performing activities directly
related to the principal business of the employer is only one of the two
indicators that "labor-only" contracting exists; the other is lack of
substantial capital or investment. The Court finds that both indicators
exist in the case at bar.
The work of respondents, constituting distribution and sale of Coca-Cola
products, is clearly indispensable to the principal business of petitioner.
The repeated re-hiring of some of the respondents supports this finding.
The Court clarifies that although Interserve has an authorized capital
stock amounting toP2,000,000.00, only P625,000.00 thereof was paid up
as of 31 December 2001. The Court does not set an absolute figure for
what it considers substantial capital for an independent job contractor,
but it measures the same against the type of work which the contractor is
obligated to perform for the principal. However, this is rendered
impossible in this case since the Contract between petitioner and
Interserve does not even specify the work or the project that needs to be
performed or completed by the latter’s employees, and uses the dubious
phrase "tasks and activities that are considered contractible under
existing laws and regulations." Even in its pleadings, petitioner carefully
sidesteps identifying or describing the exact nature of the services that
Interserve was obligated to render to petitioner. The importance of
identifying with particularity the work or task which Interserve was
supposed to accomplish for petitioner becomes even more evident,
considering that the Articles of Incorporation of Interserve states that its
primary purpose is to operate, conduct, and maintain the business of
janitorial and allied services. But respondents were hired as salesmen and
leadman for petitioner. The Court cannot, under such ambiguous
circumstances, make a reasonable determination if Interserve had
substantial capital or investment to undertake the job it was contracting
with petitioner.
It is thus evident that Interserve falls under the definition labor-only"
contractor, under Article 106 of the Labor Code. Interserve did not have
substantial capital or investment in the form of tools, equipment,
machineries, and work premises; and respondents, its supposed
employees, performed work which was directly related to the principal
business of petitioner.
23
It is also apparent that Interserve is a labor-only contractor under Section Aliviado v Proctor & Gamble
5(ii of the Rules Implementing Articles 106-109 of the Labor Code, as
amended, since it did not exercise the right to control the performance of June 6, 2011 | Del Castillo, J.
the work of respondents. By: Cate Alegre

SUMMARY:
Aliviado & co. as merchandisers of P&G were illegally dismissed.

DOCTRINE: (4-fold Test)

"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.

FACTS:
Aliviado and others (80 of them) worked as merchandisers of Proctor &
Gamble Philippines (P&G) from various dates, allegedly starting as early
as 1982 or as late as June 1991, to either May 5, 1992 or March 11, 1993.
They signed employment contracts with respondent Promm-Gem Inc.
(Promm-Gem) and Sales and Promotions Services (SAPS) and received
wages from the said companies. Their employment was 5 months at a
time. SAPS and Promm-Gen paid petitioners’ wages and imposed
disciplinary measures when warranted.

P&G entered into contracts with SAPS and Promm-Gen for the promotion
and merchandising of its products. In December 1991, petitioners filed a
complaint for regularization and other money claims against P&G. This
was later amended to include illegal dismissal.

LA: Dismissed the complaint – there was no employer-employee

relationship (EER) between petitioners and P&G. The former were
employed by Promm-Gem and SAPS who were legitimate job contractors.

NLRC: Affirmed LA. MR denied

24
CA: Affirmed NLRC’s decision but modifying that P&G must pay service
incentive leave to petitioners
ISSUES/HELD:
1. WON contracting out of a company’s core activities is allowed
under the Labor Code and its Implementing Rules – YES
2. WON Promm-Gem and SAPS are engaged in labor-only
contracting – Promm-Gem: legitimate job contractor; SAPS –
labor-only contracting
3. WON EER exists between P&G and petitioners - YES
RATIO:
1. Contracting out of a company’s core activities is allowed
 The Labor Code and its IRR do not prohibit job contracting, The law
allows contracting arrangements for the performance of specific jobs.
 It is management prerogative to farm out any activities, regardless of
whether such activity is peripheral or core in nature. However, in
order for such outsourcing to be valid, it must be made to an
independent contractor because the current labor rules expressly
prohibit labor-only contracting.
 In legitimate contracting, there exists a trilateral relationship under
which there is a contract for a specific job between the principal and
the contractor or subcontractor, and a contract of employment
between the contractor or subcontractor and its workers. Hence,
there are three parties, the principal which decides to farm out a job
or service to a contractor or subcontractor, the contractor or
subcontractor which has the capacity to independently undertake
the performance of the job, work or service, and the contractual
workers engaged by the contractor or subcontractor to accomplish
the job, work or service.
 Labor-only contracting exists where the “contractor” merely
recruits, supplies or places workers to perform a job, work or
service for a principal. Moreover, any of the following elements must
concur:
a. 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; or
b. The contractor does not exercise the right to control over the
performance of the work of the contractual employee.
2. Promm-Gem is a legitimate job contractor. SAPS is engaged in
labor only contracting
 Promm-Gem has substantial capital as shown by its financial
statements (authorized capital stock – P1 million; paid-in capital –
P500K). It has substantial investments in the form of warehouses,
office spaces and vehicles. It also has other clients aside from P&G.
Promm-Gem provides its workers with uniforms and materials.
 SAPS doesn’t have substantial capital (paid-in capital – P31,250 and
failed to show that it’s sufficient for the period required for it to
generate revenue). Neither is there showing in substantial evidence
in tools & equipment. Also its activities consisted of merchandising
and promotion og P&G products.
3. There exists an EER between P&G and petitioners
 Where labor-only contracting exits, the law establishes an EER
between the employer and the employees of the “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.
 The petitioners recruited by SAPS are considered P&G employees. The
petitioners who worked under Promm-Gem are not, since the latter is
a legitimate job contractor.
25