G.R. No.

184977 December 7, 2009

COCA-COLA BOTTLERS PHILIPPINES, INC., Petitioner,

vs.
RICKY E. DELA CRUZ, ROLANDO M. GUASIS, MANNY C. PUGAL, RONNIE L. HERMO, ROLANDO C.
SOMERO, JR., DIBSON D. DIOCARES, and IAN B. ICHAPARE, Respondents.

DECISION

BRION, J.:

The present petition for review on certiorari1 challenges the decision2 and resolution3 of the Court of Appeals
(CA) rendered on August 29, 2008 and October 13, 2008, respectively, in CA-G.R. SP No. 102988.

THE ANTECEDENTS

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 complaints4 for
regularization with money claims against Coca-Cola Bottlers Philippines, Inc., (petitioner or the 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 petitioner’s
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
petitioner’s 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 Peerless6 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). Peerless did not file a position paper, although nothing on record indicates that it was ever
notified of the amended complaint.

In reply, the respondents countered that they worked under the control and supervision of the company’s
supervisors who prepared their work schedules and assignments. Peerless and Excellent, too, did not have
sufficient capital or investment to provide services to the petitioner. The respondents thus argued that the
petitioner’s contracts of services with Peerless and Excellent are in the nature of "labor-only" contracts prohibited
by law.8

In rebuttal, the petitioner belied the respondents’ submission that their jobs are usually necessary and desirable
in its main business. It claimed that its main business is softdrinks manufacturing and the respondents’ tasks of
handling, loading and unloading of the manufactured softdrinks are not part of the manufacturing process. It
stressed that its only interest in the respondents is in the result of their work, and left to them the means and the
methods of achieving this result. It thus argued that there is no basis for the respondents’ claim that without
them, there would be over-production in the company and its operations would come to a halt.9 The petitioner
lastly argued that in any case, the respondents did not present evidence in support of their claims of company
control and supervision so that these claims cannot be considered and given weight.10

The Compulsory Arbitration Rulings

Labor Arbiter Joel S. Lustria dismissed the complaint for lack of jurisdiction in his decision of September 28,
2004,11after finding that the respondents were the employees of either Peerless or Excellent and not of the
petitioner. He brushed aside for lack of evidence the respondents’ claim that they were directly hired by the
petitioner and that company personnel supervised and controlled their work. The Labor Arbiter likewise ordered
Peerless "to accord to the appropriate complainants all employment benefits and privileges befitting its regular
employees."12
The respondents appealed to the NLRC.13 On October 31, 2007, the NLRC denied the appeal and affirmed the
labor arbiter’s ruling,14 and subsequently denied the respondents’ motion for reconsideration.15 The respondents
thus sought relief from the CA through a petition for certiorari under Rule 65 of the Rules of Court.

The CA Decision

The main substantive issue the parties submitted to the CA was whether Excellent and Peerless were
independent contractors or "labor-only" contractors. Procedurally, the petitioner questioned the sufficiency of the
petition and asked for its dismissal on the following grounds: (1) the petition was filed out of time; (2) failure to
implead Peerless and Excellent as necessary parties; (3) absence of the notarized proof of service that Rule 13
of the Rules of Court requires; and (4) defective verification and certification.

The CA examined the circumstances of the contractual arrangements between Peerless and Excellent, on the
one hand, and the company, on the other, and found that 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 petitioner’s admissions, the contractors simply supplied the company with manpower, and that the sale
and distribution of the company’s products are the same allied services found by this Court in Magsalin v.
National Organization of Workingmen17 to be necessary and desirable functions in the company’s
business.1avvphi1

On the matter of capitalization, the CA invoked our ruling in 7K Corporation v. NLRC18 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.

The CA faulted the labor tribunals for relying solely on the contract of services in determining who the real
employer is. Again invoking our 7K Corporation ruling, it pointed out that the language of a contract is not wholly
determinative of the relationship of the parties; whether a labor-only or a job contractor relationship exists must
be determined using the criteria established by law. Finding that the Labor Arbiter’s and the NLRC’s conclusions
were not supported by substantial evidence, the CA nullified the challenged NLRC decision and ordered the
company "to reinstate the petitioners with the full status and rights of regular employees and to grant them all
benefits as provided by existing collective bargaining agreement or by law."

The CA generally brushed aside the company’s procedural questions.

It ruled that the petition was filed on time, noting that April 7, 2008, a Monday and the last day for filing the
petition, was declared a holiday in lieu of April 9 (Araw ng Kagitingan), a Wednesday,19 and that the petition was
filed on April 8, 2008, a Tuesday and a working day.

That the contractors were not impleaded as necessary parties was not a fatal infirmity, according to the CA,
relying on the ruling of the Court in Cabutihan v. Landcenter Construction and Development Corporation.20 On
the other hand, the alleged lack of proof of service was brushed aside on the finding that there is in the records
of the case (page 35 of the petition) an affidavit of service executed by Rufino San Antonio indicating compliance
with the rule on service. Finally, the CA ruled that the defect in the verification and certification was a mere
formal requirement that can be excused in the interest of substantial justice, following the ruling of this Court in
Uy v. Landbank of the Philippines.21

Petitioner moved for reconsideration of the decision, but the CA denied the motion in its resolution of October
13, 2008.22

The Petition

The company filed the present appeal on November 4, 2008 on the grounds that the CA erred when it:23

1. gave due course to the petition despite the failure of the respondents to comply with the Rules on
Notarial Practice in its verification and certification;

2. excluded the contractors as necessary parties in violation of Section 8, Rule 3, in relation with Section
5, Rule 65 of the Rules of Court; and
 3. refused to follow established jurisprudence holding that the findings of fact of the NLRC are accorded
respect, if not finality, when supported by substantial evidence.

On the notarial issue, the petitioner argues that Rule 65 of the Rules of Court requires that a petition filed before
the CA must be verified and accompanied with a properly notarized certification of non-forum shopping. It claims
that the verification and certification accompanying the petition were not notarized as required by Section 12,
Rule II of the 2004 Rules on Notarial Practice (for failure to present competent evidence of identity) and Section
2, Rule IV (prohibition against the notarization without appropriate proof of identity); the verification and
certification attached to the petition before the CA do not indicate that the affiants were personally known to the
notary public, nor did the notary identify the affiants through competent evidence of identity other than their
community tax certificate. These violations, according to the petitioner, collectively resulted in a petition filed
without the proper verification and certification required by Section 4, Rule 7 of the Rules of Court.lawphil.net

On the necessary party issue, the petitioner posits that the CA ruling excluding the contractors as necessary
parties "results in the absurd situation whereby the grant of regularization by the Labor Arbiter in favor of the
respondents and against the contractors, is actually the same award the CA held in their favor and against the
Company thereby making them regular employees of both the Company and the contractors," a situation which
"is precisely what Section 8, Rule 3, in relation to Section 5, Rule 65 of the Rules of Court seeks to prevent."

The petitioner also takes exception to the CA’s reliance on the ruling of the Court in Cabutihan v. Landcenter
Construction and Development Corporation.24 It posits that the ruling in Cabutihan was taken out of context; in
that case, the subject matter was divisible as it pertained to the conveyance of 36.5% of the property under
litigation or, in the alternative, to the value corresponding to this portion. On this fact situation, the Court found
that the non-joinder of the companions of the petitioner as party-litigants was not prejudicial to their rights.

In the present case, the petitioner posits that supposed cause of action (for regularization of the respondents)
and the issue of employer-employee relationship cannot be ruled upon without including the parties who had
already been held liable by the NLRC. It adds that as a result of the CA ruling, the respondents are now regular
employees of both the petitioner and the contractors.

In their comment of March 4, 2009,25 the respondents, aside from the reiteration of their previously expressed
positions on necessary parties and the labor-only contracting issues, argued that the rules of procedure are not
controlling in labor cases and that every and all the reasonable means shall be used to ascertain the facts for the
full adjudication of the merits of the case. They argue that it is more in accord with substantial justice and equity
to overlook procedural questions raised.

THE COURT’S RULING

We resolve to deny the petition for lack of merit.

The Notarial Issue.

After due consideration, we deem the respondents to have substantially complied with the verification and
certification requirements in their petition for certiorari before the CA.

We find from our examination of the records that the fact situation that gave rise to the notarial issue before the
CA was not a new one; the same situation obtained before the NLRC where the verification and certification of
the respondents’ appeal were also notarized before the same notary public – Diosdado V. Macapagal – and
where the respondents presented the same evidence of identity (their community tax certificates).26

The petitioner’s belated attention to the imputed defect indicates to us that the petitioner did not consider this
defect worth raising when things were going its way, but considered it a serious one when things turned the
other way. This opportunistic stance is not our idea of how technical deficiencies should be viewed. We are
aware, too, that under the circumstances of this case, the defect is a technical and minor one; the respondents
did file the required verification and certification of non-forum shopping with all the respondents properly
participating, marred only by a glitch in the evidence of their identity.27 In the interest of justice, this minor defect
should not defeat their petition and is one that we can overlook in the interest of substantial justice, taking into
account the merits of the case as discussed below.

The Necessary Party Issue.

In our view, the petitioner’s necessary party issue proceeds from a misapprehension of the relationships in a
contracting relationship. As lucidly pointed out in Azucena’s The Labor Code with Comments and Cases,28 there
are three parties in a legitimate contracting relationship, namely: the principal, the contractor, and the
contractor’s 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. As
Azucena astutely observed: in labor-contracting, there is really no contracting and no contractor; there is only the
employer’s representative who gathers and supplies people for the employer; labor-contracting is therefore a
misnomer.29

Where, as in this case, the main issue is labor contracting and a labor-only contracting situation is found to exist
as discussed below, the question of whether or not the purported contractors are necessary parties is a non-
issue; these purported contractors are mere representatives of the principal/employer whose personality, as
against that of the workers, is merged with that of the principal/employer. Thus, this issue is rendered academic
by our conclusion that labor-only contracting exists. Our labor-only contracting conclusion, too, answers the
petitioner’s argument that confusion results because the workers will have two employers.

The Contracting Out Issue.

Contracting and sub-contracting are "hot" labor issues for two reasons. The first is that job contracting and labor-
only contracting are technical Labor Code concepts that are easily misunderstood. For one, there is a lot of lay
misunderstanding of what kind of contracting the Labor Code prohibits or allows. The second, echoing the cry
from the labor sector, is that the Labor Code provisions on contracting are blatantly and pervasively violated,
effectively defeating workers’ right to security of tenure.

This Court, through its decisions, can directly help address the problem of misunderstanding. The second
problem, however, largely relates to implementation issues that are outside the Court’s legitimate scope of
activities; the Court can only passively address the problem through the cases that are brought before us. Either
way, however, the need is for clear decisions that the workers, most especially, will easily understand and
appreciate. We resolve the present case with these thoughts in mind.

The law allows contracting and subcontracting involving services but closely regulates these 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 former’s work, the
employees of the contractor and of the latter’s 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 prohibited x x x 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 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 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 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 layman’s 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 manufacturer’s 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 contract31 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

xxxx

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

xxxx

. . . 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 he 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 in 7K 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 Universal’s character be mentioned in terms of and determined by the criteria set by the
statute.36

as basis for looking at how the contracted workers really related with the company in performing their contracted
tasks. In other words, the contract between the principal and the contractor is not the final word on how the
contracted workers relate to the principal and the purported contractor; the relationships must be tested on the
basis of how they actually operate.

Even before going into the realities of workplace operations, the CA found that the service
contracts37 themselves provide ample leads into the relationship between the company, on the one hand, and
Peerless and Excellent, on the other. The CA noted that both the Peerless and the Excellent contracts show that
their obligation was solely to provide the company with "the services of contractual employees,"38 and nothing
more. These contracted services were for the handling and delivery of the company’s 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.

The CA concluded that other than the petitioner’s bare allegation, there is no indication in the records that
Peerless and Excellent had substantial capital, tools or investment used directly in providing the contracted
services to the petitioner. Thus, in the handling and delivery of company products, the contracted personnel
used company trucks and equipment in an operation where company sales personnel primarily handled sales
and distribution, merely utilizing the contracted personnel as sales route helpers.

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 company’s control and supervision in doing these
tasks.

Still another way of putting it is that the contractors were not independently selling and distributing company
products, using their own equipment, means and methods of selling and distribution; they only supplied the
manpower that helped the company in the handing of products for sale and distribution. In the context of D.O.
18-02, the contracting for sale and distribution as an independent and self-contained operation is a legitimate
contract, but the pure supply of manpower with the task of assisting in sales and distribution controlled by a
principal falls within prohibited labor-only contracting.

The role of sales route helpers in company operations is not a new issue before this Court as we have ruled on
this issue in Magsalin v. National Organization of Workingmen40 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

While the respondents were not direct parties to this ruling, the petitioner was the party involved and Magsalin
described in a very significant way the manufacture of softdrinks and the company’s sales and distribution
activities in relation with one another. Following the lead we gave in Magsalin, 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
company’s 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. Consequently, the contracted personnel,
engaged in component functions in the main business of the company under the latter’s supervision and control,
cannot but be regular company employees. In these lights, the petition is totally without merit and hence must be
denied.

WHEREFORE, premises considered, we hereby DENY the petition and accordingly AFFIRM the challenged
decision and resolution of the Court of Appeals in CA-G.R. SP No. 102988. Costs against the petitioner.

SO ORDERED.

G.R. No. 179546 February 13, 2009

COCA-COLA BOTTLERS PHILS., INC., Petitioner,

vs.
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, Respondents.

DECISION

CHICO-NAZARIO, J.:

This is a Petition for Review on Certiorari, under Rule 45 of the Rules of Court, assailing the Decision 1 dated 19
February 2007, promulgated by the Court of Appeals in CA-G.R. SP No. 85320, reversing the
Resolution2 rendered on 30 October 2003 by the National Labor Relations Commission (NLRC) in NLRC NCR
CA No. 036494-03. 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 was
intended merely to preclude respondents from acquiring tenurial security.

Petitioner is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) and
engaged in manufacturing, bottling and distributing soft drink beverages and other allied products.

On 15 April 2002, 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. The two cases, docketed as NLRC NCR Case No.
04-02345-2002 and NLRC NCR Case No. 05-03137-02, were consolidated.

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 on 8 April 2002 without just cause and due process. However, they failed to state the reason/s for
filing a complaint against Interserve; Peerless Integrated Services, Inc.; Better Builders, Inc.; and Excellent
Partners, Inc.3

Petitioner filed its Position Paper (with Motion to Dismiss),4 where it averred that respondents were employees of
Interserve who were tasked to perform contracted services in accordance with the provisions of the Contract of
Services5 executed between petitioner and Interserve on 23 March 2002. Said Contract between petitioner and
Interserve, covering the period of 1 April 2002 to 30 September 2002, 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.
To prove the status of Interserve as an independent contractor, petitioner presented the following pieces of
evidence: (1) the Articles of Incorporation of Interserve;6 (2) the Certificate of Registration of Interserve with the
Bureau of Internal Revenue;7 (3) the Income Tax Return, with Audited Financial Statements, of Interserve for
2001;8and (4) the Certificate of Registration of Interserve as an independent job contractor, issued by the
Department of Labor and Employment (DOLE).9

As a result, 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;10 (2) respondents’ Contract of Temporary Employment with Interserve;11 and (3) the
payroll records of Interserve.12

Petitioner, thus, sought the dismissal of respondents’ complaint against it on the ground that the Labor Arbiter
did not acquire jurisdiction over the same in the absence of an employer-employee relationship between
petitioner and the respondents.13

In a Decision dated 28 May 2003, the Labor Arbiter found that respondents were employees of Interserve and
not of petitioner. She reasoned that the standard put forth in Article 280 of the Labor Code for determining
regular employment (i.e., that the employee is performing activities that are necessary and desirable in the usual
business of the employer) was not determinative of the issue of whether an employer-employee relationship
existed between petitioner and respondents. While respondents performed activities that were necessary and
desirable in the usual business or trade of petitioner, the Labor Arbiter underscored that respondents’ functions
were not indispensable to the principal business of petitioner, which was manufacturing and bottling soft drink
beverages and similar products.

The Labor Arbiter placed considerable weight on the fact that Interserve was registered with the DOLE as an
independent job contractor, with total assets amounting to ₱1,439,785.00 as of 31 December 2001. It was
Interserve that kept and maintained respondents’ employee records, including their Personal Data Sheets;
Contracts of Employment; and remittances to the Social Securities System (SSS), Medicare and Pag-ibig Fund,
thus, further supporting the Labor Arbiter’s finding that respondents were employees of Interserve. She ruled
that the circulars, rules and regulations which petitioner issued from time to time to respondents were not
indicative of control as to make the latter its employees.

Nevertheless, the Labor Arbiter directed Interserve to pay respondents their pro-rated 13th month benefits for
the period of January 2002 until April 2002.14

In the end, the Labor Arbiter decreed:

WHEREFORE, judgment is hereby rendered finding that [herein respondents] are employees of [herein
petitioner] INTERSERVE MANAGEMENT & MANPOWER RESOURCES, INC. Concomitantly, respondent
Interserve is further ordered to pay [respondents] their pro-rated 13th month pay.

The complaints against COCA-COLA BOTTLERS PHILS., INC. is DISMISMMED for lack of merit.

In like manner the complaints against PEERLESS INTEGRATED SERVICES, INC., BETTER BUILDING INC.
and EXCELLENT PARTNERS COOPERATIVE are DISMISSED for failure of complainants to pursue against
them.

Other claims are dismissed for lack of merit.

The computation of the Computation and Examination Unit, this Commission if (sic) made part of this
Decision. 15

Unsatisfied with the foregoing Decision of the Labor Arbiter, respondents filed an appeal with the NLRC,
docketed as NLRC NCR CA No. 036494-03.

In their Memorandum of Appeal,16 respondents maintained that contrary to the finding of the Labor Arbiter, their
work was indispensable to the principal business of petitioner. Respondents supported their claim with copies of
the Delivery Agreement17 between petitioner and TRMD Incorporated, stating that petitioner was "engaged in the
manufacture, distribution and sale of soft drinks and other related products with various plants and sales offices
and warehouses located all over the Philippines." Moreover, petitioner supplied the tools and equipment used by
respondents in their jobs such as forklifts, pallet, etc. Respondents were also required to work in the
warehouses, sales offices, and plants of petitioner. Respondents pointed out that, in contrast, Interserve did not
own trucks, pallets cartillas, or any other equipment necessary in the sale of Coca-Cola products.

Respondents further averred in their Memorandum of Appeal that petitioner exercised control over workers
supplied by various contractors. Respondents cited as an example the case of Raul Arenajo (Arenajo), who, just
like them, worked for petitioner, but was made to appear as an employee of the contractor Peerless Integrated
Services, Inc. As proof of control by petitioner, respondents submitted copies of: (1) a Memorandum18 dated 11
August 1998 issued by Vicente Dy (Dy), a supervisor of petitioner, addressed to Arenajo, suspending the latter
from work until he explained his disrespectful acts toward the supervisor who caught him sleeping during work
hours; (2) a Memorandum19 dated 12 August 1998 again issued by Dy to Arenajo, informing the latter that the
company had taken a more lenient and tolerant position regarding his offense despite having found cause for his
dismissal; (3) Memorandum20 issued by Dy to the personnel of Peerless Integrated Services, Inc., requiring the
latter to present their timely request for leave or medical certificates for their absences; (4) Personnel Workers
Schedules, 21prepared by RB Chua, another supervisor of petitioner; (5) Daily Sales Monitoring Report prepared
by petitioner;22and (6) the Conventional Route System Proposed Set-up of petitioner. 23

The NLRC, in a Resolution dated 30 October 2003, affirmed the Labor Arbiter’s Decision dated 28 May 2003
and pronounced that no employer-employee relationship existed between petitioner and 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. In addition, it was Interserve which hired and paid
respondents’ wages, as well as paid and remitted their SSS, Medicare, and Pag-ibig contributions. Respondents
likewise failed to convince the NLRC that the instructions issued and trainings conducted by petitioner proved
that petitioner exercised control over respondents as their employer.24 The dispositive part of the NLRC
Resolution states:25

WHEREFORE, the instant appeal is hereby DISMISSED for lack of merit. However, respondent Interserve
Management & Manpower Resources, Inc., is hereby ordered to pay the [herein respondents] their pro-rated
13th month pay.

Aggrieved once more, respondents sought recourse with the Court of Appeals by filing a Petition
for Certiorari under Rule 65, docketed as CA-G.R. SP No. 85320.

The Court of Appeals promulgated its Decision on 9 February 2007, reversing the NLRC Resolution dated 30
October 2003. The appellate court ruled that Interserve was a labor-only contractor, with insufficient capital and
investments for the services which it was contracted to perform. With only ₱510,000.00 invested in its service
vehicles and ₱200,000.00 in its machineries and equipment, Interserve would be hard-pressed to meet the
demands of daily soft drink deliveries of petitioner in the Lagro area. The Court Appeals concluded that the
respondents used the equipment, tools, and facilities of petitioner in the day-to-day sales operations.

Additionally, the Court of Appeals determined that petitioner had effective control over the means and method of
respondents’ work as evidenced by the Daily Sales Monitoring Report, the Conventional Route System
Proposed Set-up, and the memoranda issued by the supervisor of petitioner addressed to workers, who, like
respondents, were supposedly supplied by contractors. The appellate court deemed that the respondents, who
were tasked to deliver, distribute, and sell Coca-Cola products, carried out functions directly related and
necessary to the main business of petitioner. The appellate court finally noted that certain provisions of the
Contract of Service between petitioner and Interserve suggested that the latter’s undertaking did not involve a
specific job, but rather the supply of manpower.

The decretal portion of the Decision of the Court of Appeals reads:26

WHEREFORE, the petition is GRANTED. The assailed Resolutions of public respondent NLRC are REVERSED
and SET ASIDE. The case is remanded to the NLRC for further proceedings.

Petitioner filed a Motion for Reconsideration, which the Court of Appeals denied in a Resolution, dated 31
August 2007.27

Hence, the present Petition, in which the following issues are raised28:

I
WHETHER OR NOT THE COURT OF APPEALS ACTED IN ACCORDANCE WITH EVIDENCE ON RECORD,
APPLICABLE LAWS AND ESTABLISHED JURISPRUDENCE WHEN IT RULED THAT INTERSERVE IS A
LABOR-ONLY CONTRACTOR;

II

WHETHER OR NOT THE COURT OF APPEALS ACTED IN ACCORDANCE WITH APPLICABLE LAWS AND
ESTABLISHED JURISPRUDENCE WHEN IT CONCLUDED THAT RESPONDENTS PERFORMED WORK
NECESSARY AND DESIRABLE TO THE BUSINESS OF [PETITIONER];

III

WHETHER OR NOT THE COURT OF APPEALS COMMITTED SERIOUS ERROR WHEN IT DECLARED
THAT RESPONDENTS WERE EMPLOYEES OF [PETITIONER], EVEN ABSENT THE FOUR ELEMENTS
INDICATIVE OF AN EMPLOYMENT RELATIONSHIP; AND

IV

WHETHER OR NOT THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT CONCLUDED THAT
INTERSERVE WAS ENGAGED BY [PETITIONER] TO SUPPLY MANPOWER ONLY.

The Court ascertains that the fundamental issue in this case is whether Interserve is a legitimate job contractor.
Only by resolving such issue will the Court be able to determine whether an employer-employee relationship
exists between petitioner and the respondents. To settle the same issue, however, the Court must necessarily
review the factual findings of the Court of Appeals and look into the evidence presented by the parties on record.

As a general rule, factual findings of the Court of Appeals are binding upon the Supreme Court. One exception
to this rule is when the factual findings of the former are contrary to those of the trial court, or the lower
administrative body, as the case may be. This Court is obliged to resolve an issue of fact herein due to the
incongruent findings of the Labor Arbiter and the NLRC and those of the Court of Appeals. 29

The relations which may arise in a situation, where there is an employer, a contractor, and employees of the
contractor, are identified and distinguished under Article 106 of the Labor Code:

Article 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 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 restriction, 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 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. 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 afore-quoted provision recognizes two possible relations among the parties: (1) the permitted legitimate job
contract, or (2) the prohibited labor-only contracting.

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.30

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. 31

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 foregoing 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 reversed 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. (Emphasis supplied.)

When there is labor-only contracting, Section 7 of the same implementing rules, describes the consequences
thereof:

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 be solidarily liable 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 case, as
declared by a competent authority:

a. where there is labor-only contracting; or

b. where the contracting arrangement falls within the prohibitions provided in Section 6 (Prohibitions)
hereof.

According to the foregoing provision, labor-only contracting would give rise to: (1) the creation of an employer-
employee relationship between the principal and the employees of the contractor or sub-contractor; and (2) the
solidary liability of the principal and the contractor to the employees in the event of any violation of the Labor
Code.
Petitioner argues that there could not have been labor-only contracting, since respondents did not perform
activities that were indispensable to petitioner’s principal business. And, even assuming that they did, such fact
alone does not establish an employer-employee relationship between petitioner and the respondents, since
respondents were unable to show that petitioner exercised the power to select and hire them, pay their wages,
dismiss them, and control their conduct.

The argument of petitioner is untenable.

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.

Respondents worked for petitioner as salesmen, with the exception of respondent Gil Francisco whose job was
designated as leadman. In the Delivery Agreement32 between petitioner and TRMD Incorporated, it is stated that
petitioner is engaged in the manufacture, distribution and sale of softdrinks and other related products. 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.33 Petitioner also does not contradict respondents’ allegations that the former has Sales Departments and
Sales Offices in its various offices, plants, and warehouses; and that petitioner hires Regional Sales Supervisors
and District Sales Supervisors who supervise and control the salesmen and sales route helpers.34

As to the supposed substantial capital and investment required of an independent job contractor, petitioner calls
the attention of the Court to the authorized capital stock of Interserve amounting to ₱2,000,000.00.35 It cites as
authority Filipinas Synthetic Fiber Corp. v. National Labor Relations Commission36 and Frondozo v. National
Labor Relations Commission,37 where the contractors’ authorized capital stock of ₱1,600,000.00 and
₱2,000,000.00, respectively, were considered substantial for the purpose of concluding that they were legitimate
job contractors. Petitioner also refers to Neri v. National Labor Relations Commission38 where it was held that a
contractor ceases to be a labor-only contractor by having substantial capital alone, without investment in tools
and equipment.

This Court is unconvinced.

At the outset, the Court clarifies that although Interserve has an authorized capital stock amounting to
₱2,000,000.00, only ₱625,000.00 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.39But 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.

Petitioner cannot seek refuge in Neri v. National Labor Relations Commission. Unlike in Neri, petitioner was
unable to prove in the instant case that Interserve had substantial capitalization to be an independent job
contractor. In San Miguel Corporation v. MAERC Integrated Services, Inc.,40 therein petitioner San Miguel
Corporation similarly invoked Neri, but was rebuffed by the Court based on the following ratiocination41 :

Petitioner also ascribes as error the failure of the Court of Appeals to apply the ruling in Neri v. NLRC. In that
case, it was held that the law did not require one to possess both substantial capital and investment in the form
of tools, equipment, machinery, work premises, among others, to be considered a job contractor. The second
condition to establish permissible job contracting was sufficiently met if one possessed either attribute.
Accordingly, petitioner alleged that the appellate court and the NLRC erred when they declared MAERC a labor-
only contractor despite the finding that MAERC had investments amounting to ₱4,608,080.00 consisting of
buildings, machinery and equipment.

However, in Vinoya v. NLRC, we clarified that 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.

In Neri, the Court considered not only the fact that respondent Building Care Corporation (BCC) had substantial
capitalization but noted that BBC carried on an independent business and performed 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. The Court likewise mentioned that the employees of BCC were engaged to perform specific
special services for their principal. The status of BCC had also been passed upon by the Court in a previous
case where it was found to be a qualified job contractor because it was a "big firm which services among others,
a university, an international bank, a big local bank, a hospital center, government agencies, etc." Furthermore,
there were only two (2) complainants in that case who were not only selected and hired by the contractor before
being assigned to work in the Cagayan de Oro branch of FEBTC but the Court also found that the contractor
maintained effective supervision and control over them.

Thus, in San Miguel Corporation, the investment of MAERC, the contractor therein, in the form of buildings,
tools, and equipment of more than ₱4,000,000.00 did not impress the Court, which still declared MAERC to be a
labor-only contractor. In another case, Dole Philippines, Inc. v. Esteva,42 the Court did not recognize the
contractor therein as a legitimate job contractor, despite its paid-up capital of over ₱4,000,000.00, in the
absence of substantial investment in tools and equipment used in the services it was rendering.

Insisting that Interserve had substantial investment, petitioner assails, for being purely speculative, the finding of
the Court of Appeals that the service vehicles and equipment of Interserve, with the values of ₱510,000.00 and
₱200,000.00, respectively, could not have met the demands of the Coca-Cola deliveries in the Lagro area.

Yet again, petitioner fails to persuade.

The contractor, not the employee, has the burden of proof that it has the substantial capital, investment, and tool
to engage in job contracting.43 Although not the contractor itself (since Interserve no longer appealed the
judgment against it by the Labor Arbiter), said burden of proof herein falls upon petitioner who is invoking the
supposed status of Interserve as an independent job contractor. Noticeably, petitioner failed to submit evidence
to establish that the service vehicles and equipment of Interserve, valued at ₱510,000.00 and ₱200,000.00,
respectively, were sufficient to carry out its service contract with petitioner. Certainly, petitioner could have
simply provided the courts with records showing the deliveries that were undertaken by Interserve for the Lagro
area, the type and number of equipment necessary for such task, and the valuation of such equipment. Absent
evidence which a legally compliant company could have easily provided, the Court will not presume that
Interserve had sufficient investment in service vehicles and equipment, especially since respondents’ allegation
– that they were using equipment, such as forklifts and pallets belonging to petitioner, to carry out their jobs –
was uncontroverted.

In sum, 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. It is, thus, evident that Interserve falls under the definition of a "labor-only"
contractor, under Article 106 of the Labor Code; as well as Section 5(i) of the Rules Implementing Articles 106-
109 of the Labor Code, as amended.

The Court, however, does not stop at this finding. It is also apparent that Interserve is a labor-only contractor
under Section 5(ii)44 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 the work of respondents.
The lack of control of Interserve over the respondents can be gleaned from the Contract of Services between
Interserve (as the CONTRACTOR) and petitioner (as the CLIENT), pertinent portions of which are reproduced
below:

WHEREAS, the CONTRACTOR is engaged in the business, among others, of performing and/or undertaking,
managing for consideration, varied projects, jobs and other related management-oriented services;

WHEREAS, the CONTRACTOR warrants that it has the necessary capital, expertise, technical know-how and a
team of professional management group and personnel to undertake and assume the responsibility to carry out
the above mentioned project and services;

WHEREAS, the CLIENT is desirous of utilizing the services and facilities of the CONTRACTOR for emergency
needs, rush jobs, peak product loads, temporary, seasonal and other special project requirements the extent
that the available work of the CLIENT can properly be done by an independent CONTRACTOR permissible
under existing laws and regulations;

WHEREAS, the CONTRACTOR has offered to perform specific jobs/works at the CLIENT as stated heretofore,
under the terms and conditions herein stated, and the CLIENT has accepted the offer.

NOW THEREFORE, for and in consideration of the foregoing premises and of the mutual covenants and
stipulations hereinafter set forth, the parties have hereto have stated and the CLIENT has accepted the offer:

1. The CONTRACTOR agrees and undertakes to perform and/or provide for the CLIENT, on a non-
exclusive basis for tasks or activities that are considered contractible under existing laws and
regulations, as may be needed by the CLIENT from time to time.

2. To carry out the undertakings specified in the immediately preceding paragraph, the CONTRACTOR
shall employ the necessary personnel like Route Helpers, Salesmen, Drivers, Clericals, Encoders & PD
who are at least Technical/Vocational courses graduates provided with adequate uniforms and
appropriate identification cards, who are warranted by the CONTRACTOR to be so trained as to
efficiently, fully and speedily accomplish the work and services undertaken herein by the
CONTRACTOR. The CONTRACTOR represents that its personnel shall be in such number as will be
sufficient to cope with the requirements of the services and work herein undertaken and that such
personnel shall be physically fit, of good moral character and has not been convicted of any crime. The
CLIENT, however, may request for the replacement of the CONTRACTOR’S personnel if from its
judgment, the jobs or the projects being done could not be completed within the time specified or that the
quality of the desired result is not being achieved.

3. It is agreed and understood that the CONTRACTOR’S personnel will comply with CLIENT, CLIENT’S
policies, rules and regulations and will be subjected on-the-spot search by CLIENT, CLIENT’S duly
authorized guards or security men on duty every time the assigned personnel enter and leave the
premises during the entire duration of this agreement.

4. The CONTRACTOR further warrants to make available at times relievers and/or replacements to
ensure continuous and uninterrupted service as in the case of absences of any personnel above
mentioned, and to exercise the necessary and due supervision over the work of its personnel.45

Paragraph 3 of the Contract specified that the personnel of contractor Interserve, which included the
respondents, would comply with "CLIENT" as well as "CLIENT’s policies, rules and regulations." It even required
Interserve personnel to subject themselves to on-the-spot searches by petitioner or its duly authorized guards or
security men on duty every time the said personnel entered and left the premises of petitioner. Said paragraph
explicitly established the control of petitioner over the conduct of respondents. Although under paragraph 4 of
the same Contract, Interserve warranted that it would exercise the necessary and due supervision of the work of
its personnel, there is a dearth of evidence to demonstrate the extent or degree of supervision exercised by
Interserve over respondents or the manner in which it was actually exercised. There is even no showing that
Interserve had representatives who supervised respondents’ work while they were in the premises of petitioner.

Also significant was the right of petitioner under paragraph 2 of the Contract to "request the replacement of the
CONTRACTOR’S personnel." True, this right was conveniently qualified by the phrase "if from its judgment, the
jobs or the projects being done could not be completed within the time specified or that the quality of the desired
result is not being achieved," but such qualification was rendered meaningless by the fact that the Contract did
not stipulate what work or job the personnel needed to complete, the time for its completion, or the results
desired. The said provision left a gap which could enable petitioner to demand the removal or replacement of
any employee in the guise of his or her inability to complete a project in time or to deliver the desired result. The
power to recommend penalties or dismiss workers is the strongest indication of a company’s right of control as
direct employer.461avvphil.zw+

Paragraph 4 of the same Contract, in which Interserve warranted to petitioner that the former would provide
relievers and replacements in case of absences of its personnel, raises another red flag. An independent job
contractor, who is answerable to the principal only for the results of a certain work, job, or service need not
guarantee to said principal the daily attendance of the workers assigned to the latter. An independent job
contractor would surely have the discretion over the pace at which the work is performed, the number of
employees required to complete the same, and the work schedule which its employees need to follow.

As the Court previously observed, the Contract of Services between Interserve and petitioner did not identify the
work needed to be performed and the final result required to be accomplished. Instead, the Contract specified
the type of workers Interserve must provide petitioner ("Route Helpers, Salesmen, Drivers, Clericals, Encoders &
PD") and their qualifications (technical/vocational course graduates, physically fit, of good moral character, and
have not been convicted of any crime). The Contract also states that, "to carry out the undertakings specified in
the immediately preceding paragraph, the CONTRACTOR shall employ the necessary personnel," thus,
acknowledging that Interserve did not yet have in its employ the personnel needed by petitioner and would still
pick out such personnel based on the criteria provided by petitioner. In other words, Interserve did not obligate
itself to perform an identifiable job, work, or service for petitioner, but merely bound itself to provide the latter
with specific types of employees. These contractual provisions strongly indicated that Interserve was merely a
recruiting and manpower agency providing petitioner with workers performing tasks directly related to the latter’s
principal business.

The certification issued by the DOLE stating that Interserve is an independent job contractor does not sway this
Court to take it at face value, since the primary purpose stated in the Articles of Incorporation47 of Interserve is
misleading. According to its Articles of Incorporation, the principal business of Interserve is to provide janitorial
and allied services. The delivery and distribution of Coca-Cola products, the work for which respondents were
employed and assigned to petitioner, were in no way allied to janitorial services. While the DOLE may have
found that the capital and/or investments in tools and equipment of Interserve were sufficient for an independent
contractor for janitorial services, this does not mean that such capital and/or investments were likewise sufficient
to maintain an independent contracting business for the delivery and distribution of Coca-Cola products.

With the finding that Interserve was engaged in prohibited labor-only contracting, petitioner shall be deemed the
true employer of respondents. As regular employees of petitioner, respondents cannot be dismissed except for
just or authorized causes, none of which were alleged or proven to exist in this case, the only defense of
petitioner against the charge of illegal dismissal being that respondents were not its employees. Records also
failed to show that petitioner afforded respondents the twin requirements of procedural due process, i.e., notice
and hearing, prior to their dismissal. Respondents were not served notices informing them of the particular acts
for which their dismissal was sought. Nor were they required to give their side regarding the charges made
against them. Certainly, the respondents’ dismissal was not carried out in accordance with law and, therefore,
illegal.48

Given that respondents were illegally dismissed by petitioner, they are entitled to reinstatement, full backwages,
inclusive of allowances, and to their other benefits or the monetary equivalents thereof computed from the time
their compensations were withheld from them up to the time of their actual reinstatement, as mandated under
Article 279 of the Labor Code,.

IN VIEW OF THE FOREGOING, the instant Petition is DENIED. The Court AFFIRMS WITH MODIFICATION the
Decision dated 19 February 2007 of the Court of Appeals in CA-G.R. SP No. 85320. The Court DECLARES that
respondents were illegally dismissed and, accordingly, ORDERS petitioner to reinstate them without loss of
seniority rights, and to pay them full back wages computed from the time their compensation was withheld up to
their actual reinstatement. Costs against the petitioner.

SO ORDERED.
G.R. No. 79004-08 October 4, 1991

FRANKLIN BAGUIO AND 15 OTHERS, BONIFACIO IGOT AND 6 OTHERS, ROY MAGALLANES AND 4
OTHERS, CLAUDIO BONGO, EDUARDO ANDALES and 4 OTHERS, petitioners,
vs.
NATIONAL LABOR RELATIONS COMMISSION (3rd DIVISION), GENERAL MILLING CORPORATION
and/or FELICIANO LUPO, respondents.

Public Attorney's Office for petitioners.

Joseph M. Baduel & Steve R. Siclot for private respondents.

MELENCIO-HERRERA, J.:

The liability of an employer in job contracting, vis-a-vis his contractor's employees, is the sole issue brought to
the fore in this labor dispute.

This Petition for certiorari seeks to set aside the Resolution, dated 27 February 1987, of public respondent
National Labor Relations Commission (NLRC), Third Division, which reversed the Resolution of its First Division,
dated 27 December 1985, and absolved private respondent General Milling Corporation (GMC) from any and all
liability to petitioners.

Sometime in 1983, private respondent Feliciano LUPO, a building contractor, entered into a contract with GMC,
a domestic corporation engaged in flour and feeds manufacturing, for the construction of an annex building
inside the latter's plant in Cebu City. In connection with the aforesaid contract, LUPO hired herein petitioners
either as carpenters, masons or laborers.

Subsequently, LUPO terminated petitioners' services, on different dates. As a result, petitioners filed Complaints
against LUPO and GMC before the NLRC Regional Arbitration Branch No. VII, Cebu City, for unpaid wages,
COLA differentials, bonus and overtime pay.

In a Decision, dated 21 November 1984, the Executive Labor Arbiter, Branch VII, found LUPO and GMC jointly
and severally liable to petitioners, premised on Article 109 of the Labor Code, infra, and ordered them to pay the
aggregate amount of P95,382.92. Elevated on appeal on 14 December 1984, the NLRC (First Division) denied
the same for lack of merit in a Resolution, dated 27 December 1985.

Upon Motion for Reconsideration, filed on 27 February 1986, the case was reassigned to the Third Division. In a
Resolution of 27 February 1987, that Division absolved GMC from any liability. It opined that petitioners were
only hired by LUPO as workers in his construction contract with GMC and were never meant to be employed by
the latter.

Petitioners now assail that judgment in this Petition for Certiorari.

Petitioners contend that GMC is jointly and severally liable with LUPO for the latter's obligations to them. They
seek recovery from GMC based on Article 106 of the Labor Code, infra, which holds the employer jointly and
severally liable with his contractor for unpaid wages of employees of the latter.

In his "Manifestation in lieu of Comment," the Solicitor General recognizes the solidary liability of GMC and
LUPO but bases recovery on Article 108 of the Labor Code, infra, contending that inasmuch as GMC failed to
require them LUPO a bond to answer for the latter's obligations to his employees, as required by said provision,
GMC should, correspondingly, be deemed solidarily liable.

In their respective Comments, both GMC and the NLRC maintain that Article 106 finds no application in the
instant case because it is limited to situations where the work being performed by the contractor's employees are
directly related to the principal business of the employer. The NLRC further opines that Article 109 on "Solidary
Liability" finds no application either because GMC was neither petitioners' employer nor indirect employer.

Upon the facts and circumstances, we uphold the solidary liability of GMC and LUPO for the latter's liabilities in
favor of employees whom he had earlier employed and dismissed.
Recovery, however, should not be based on Article 106 of the Labor Code. This provision treats specifically of
"labor-only" contracting, which is not the set-up between GMC and LUPO.

Article 106 provides:

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 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 xxx xxx

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 latter were directly employed by him (Emphasis supplied).

In other words, a person is deemed to be engaged in "labor only" contracting where (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 (See Section 9, Rule
VIII, Book III of the Omnibus Rules Implementing the Labor Code; emphasis supplied).

Since the construction of an annex building inside the company plant has no relation whatsoever with the
employer's business of flour and feeds manufacturing, "labor-only" contracting does not exist. Article 106 is thus
inapplicable.

Instead, it is "job contracting," covered by Article 107, which is involved, reading:

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. (Emphasis supplied).

Specifically, there is "job contracting" where (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. It may be that LUPO subsequently ran out of capital and was unable to
satisfy the award to petitioners. That was an after-the-fact development, however, and does not detract from his
status as an independent contractor.

Based on the foregoing, GMC qualifies as an "indirect employer." It entered into a contract with an independent
contractor, LUPO, for the construction of an annex building, a work, task, job or project not directly related to
GMC's business of flour and feeds manufacturing. Being an "indirect employer," GMC is solidarily liable with
LUPO for any violation of the Labor Code pursuant to Article 109 thereof, reading:

Art. 109. Solidary Liability. — The provisions of existing laws to the contrary notwithstanding, every
employer or indirect employer shall be held responsible with a 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.

The provision of existing law referred to is Article 1728 of the Civil Code, which states, among others, that "the
contractor is liable for all the claims of laborers and others employed by him ..."
The foregoing interpretation finds a precedent in the case o Deferia v. NLRC (G.R. No. 78713, 27 February
1991) per Sarmiento, J., where Articles 107 and 109 were applied as the statutory basis for the joint and several
liability of the employer with his contractor, in addition to Article 106, since the situation in that case was clearly
one of "labor-only" contracting.

The NLRC submission that Article 107 is not applicable in the instant case for the reason that the coverage
thereof is limited to one "not an employer" whereas GMC is such an employer as defined in Article 97 (b) of the
Labor Code,1 is not well-taken. Under the peculiar set-up herein, GMC is, in fact, "not an employer" (in the sense
of not being a direct employer) as understood in Article 106 of the Labor Code, but qualifies as an "indirect
employer" under Article 107 of said Code.

The distinction between Articles 106 and 107 was in the fact that Article 106 deals with "labor-only" contracting.
Here, by operation of law, the contractor is merely considered as an agent of the employer, who is deemed
"responsible to the workers to the same extent as if the latter were directly employed by him." On the other hand,
Article 107 deals with "job contracting." In the latter situation, while the contractor himself is the direct employer
of the employees, the employer is deemed, by operation of law, as an indirect employer.

In other words, the phrase "not an employer" found in Article 107 must be read in conjunction with Article 106. A
contrary interpretation would render the provisions of Article 107 meaningless considering that everytime an
employer engages a contractor, the latter is always acting in the interest of the former, whether directly or
indirectly, in relation to his employees.

It should be recalled that a finding that a contractor is a "labor-only" contractor is equivalent to declaring that
there is an employer-employee relationship between the owner of the project and the employees of the "labor-
only" contractor (Associated Anglo-American Tobacco Corp. v. Clave, G.R. No. 50915, 30 August 1990, 189
SCRA 127; Industrial Timber Corp. v. NLRC, G.R. No. 83616, 20 January 1989, 169 SCRA 341). This is
evidently because, as heretofore stated, the "labor-only" contractor is considered as a mere agent of an
employer. In contrast, in "job contracting," no employer-employee relationship exists between the owner and the
employees of his contractor. The owner of the project is not the direct employer but merely an indirect employer,
by operation of law, of his contractor's employees.

As an indirect employer, and for purposes of determining the extent of its civil liability, GMC is deemed a "direct
employee" of his contractor's employees pursuant to the last sentence of Article 109 of the Labor Code. As a
consequence, GMC can not escape its joint and solidary liability to petitioners.

Further, Article 108 of the Labor Code requires the posting of a bond to answer for wages that a contractor fails
to pay, thus:

Article 108. Posting of Bond. — An employer or indirect employer may require the contractor or
subcontractor to furnish a bond equal to the cost of labor under contract, on condition that the bond will
answer for the wages due the employees showed the contractor or subcontractor, as the case may be,
fails to pay the same.

Having failed to require LUPO to post such a bond, GMC must answer for whatever liabilities LUPO may have
incurred to his employees. This is without prejudice to its seeking reimbursement from LUPO for whatever
amount it will have to pay petitioners.

WHEREFORE, the Petition for certiorari is GRANTED. The Resolution of respondent NLRC, Third Division,
dated 27 February 1987, is hereby SET ASIDE, and the Decision of the Labor Arbiter, dated 21 November 1984,
is hereby REINSTATED.

SO ORDERED.

Paras, Sarmiento and Regalado, JJ., concur.

G.R. Nos. 97008-09 July 23, 1993

VIRGINIA G. NERI and JOSE CABELIN, petitioners,

vs.
NATIONAL LABOR RELATIONS COMMISSION FAR EAST BANK & TRUST COMPANY (FEBTC) and
BUILDING CARE CORPORATION, respondents.

R.L. Salcedo & Improso Law Office for petitioners.

Bengzon, Zarnaga, Narciso, Cudala, Pecson, Bengzon & Jimenez for Bldg. Care Corp.

Bautista, Picaso, Buyco, Tan & Fider for respondent FEBTC.

BELLOSILLO, J.:

Respondents are sued by two employees of Building Care Corporation, which provides janitorial and other
specific services to various firms, to compel Far Bast Bank and Trust Company to recognize them as its regular
employees and be paid the same wages which its employees receive.

Building Care Corporation (BCC, for brevity), in the proceedings below, established that it had substantial
capitalization of P1 Million or a stockholders equity of P1.5 Million. Thus the Labor Arbiter ruled that BCC was
only job contracting and that consequently its employees were not employees of Far East Bank and Trust
Company (FEBTC, for brevity). on appeal, this factual finding was affirmed by respondent National Labor
Relations Commission (NLRC, for brevity). Nevertheless, petitioners insist before us that BCC is engaged in
"labor-only" contracting hence, they conclude, they are employees of respondent FEBTC.

Petitioners Virginia G. Neri and Jose Cabelin applied for positions with, and were hired by, respondent BCC, a
corporation engaged in providing technical, maintenance, engineering, housekeeping, security and other specific
services to its clientele. They were assigned to work in the Cagayan de Oro City Branch of respondent FEBTC
on 1 May 1979 and 1 August 1980, respectively, Neri an radio/telex operator and Cabelin as janitor, before
being promoted to messenger on 1 April 1989.

On 28 June 1989, petitioners instituted complaints against FEBTC and BCC before Regional Arbitration Branch
No. 10 of the Department of Labor and Employment to compel the bank to accept them as regular employees
and for it to pay the differential between the wages being paid them by BCC and those received by FEBTC
employees with similar length of service.

On 16 November 1989, the Labor Arbiter dismissed the complaint for lack of merit.1 Respondent BCC was
considered an independent contractor because it proved it had substantial capital. Thus, petitioners were held to
be regular employees of BCC, not FEBTC. The dismissal was appealed to NLRC which on 28 September 1990
affirmed the decision on appeal.2 On 22 October 1990, NLRC denied reconsideration of its
affirmance,3 prompting petitioners to seek redress from this Court.

Petitioners vehemently contend that BCC in engaged in "labor-only" contracting because it failed to adduce
evidence purporting to show that it invested in the form of tools, equipment, machineries, work premises and
other materials which are necessary in the conduct of its business. Moreover, petitioners argue that they perform
duties which are directly related to the principal business or operation of FEBTC. If the definition of "labor-only"
contracting4 is to be read in conjunction with job contracting,5 then the only logical conclusion is that BCC is a
"labor only" contractor. Consequently, they must be deemed employees of respondent bank by operation of law
since BCC is merely an agent of FEBTC following the doctrine laid down in Philippine Bank of Communications
v. National Labor Relations Commission6 where we ruled that 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; hence, FEBTC should be considered the employer of petitioners who are deemed its
employees through its agent, "labor-only" contractor BCC.

We cannot sustain the petition.

Respondent BCC need not prove that it made investments in the form of tools, equipment, machineries, work
premises, among others, because it has established that it has sufficient capitalization. The Labor Arbiter and
the NLRC both determined that BCC had a capital stock of P1 million fully subscribed and paid for.7 BCC is
therefore a highly capitalized venture and cannot be deemed engaged in "labor-only" contracting.
It is well-settled that there is "labor-only" contracting where: (a) 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, (b) the workers recruited and placed by such person are performing activities which are
directly related to the principal business of the employer.8

Article 106 of the Labor Code defines "labor-only" contracting thus —

Art. 106. Contractor or subcontractor. — . . . . 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 by such
persons are performing activities which are directly related to the principal business of such
employer . . . . (emphasis supplied).

Based on the foregoing, BCC cannot be considered a "labor-only" contractor because it has substantial capital.
While there may be no evidence that it has investment in the form of tools, equipment, machineries, work
premises, among others, it is enough that it has substantial capital, as was established before the Labor Arbiter
as well as the NLRC. In other words, the law does not require both substantial capital and investment in the form
of tools, equipment, machineries, etc. This is clear from the use of the conjunction "or". If the intention was to
require the contractor to prove that he has both capital and the requisite investment, then the conjunction "and"
should have been used. But, having established that it has substantial capital, it was no longer necessary for
BCC to further adduce evidence to prove that it does not fall within the purview of "labor-only" contracting. There
is even no need for it to refute petitioners' contention that the activities they perform are directly related to the
principal business of respondent bank.

Be that as it may, the Court has already taken judicial notice of the general practice adopted in several
government and private institutions and industries of hiring independent contractors to perform special
services.9 These services range from janitorial, 10 security 11 and even technical or other specific services such
as those performed by petitioners Neri and Cabelin. While these services may be considered directly related to
the principal business of the employer, 12 nevertheless, they are not necessary in the conduct of the principal
business of the employer.

In fact, the status of BCC as an independent contractor was previously confirmed by this Court in Associated
Labor Unions-TUCP v. National Labor Relations Commission, 13 where we held thus —

The public respondent ruled that the complainants are not employees of the bank but of the
company contracted to serve the bank. Building Care Corporation is a big firm which services,
among others, a university, an international bank, a big local bank, a hospital center, government
agencies, etc. It is a qualified independent contractor. The public respondent correctly ruled
against petitioner's contentions . . . . (Emphasis supplied).

Even assuming ex argumenti that petitioners were performing activities directly related to the principal business
of the bank, under the "right of control" test they must still be considered employees of BCC. In the case of
petitioner Neri, it is admitted that FEBTC issued a job description which detailed her functions as a radio/telex
operator. However, a cursory reading of the job description shows that what was sought to be controlled by
FEBTC was actually the end-result of the task, e.g., that the daily incoming and outgoing telegraphic transfer of
funds received and relayed by her, respectively, tallies with that of the register. The guidelines were laid down
merely to ensure that the desired end-result was achieved. It did not, however, tell Neri how the radio/telex
machine should be operated. In the Shipside case, 14 we ruled —

. . . . If in the course of private respondents' work (referring to the workers), SHIPSIDE

occasionally issued instructions to them, that alone does not in the least detract from the fact that
only STEVEDORES is the employer of the private respondents, for in legal contemplation, such
instructions carry no more weight than mere requests, the privity of contract being between
SHIPSIDE and STEVEDORES . . . .

Besides, petitioners do not deny that they were selected and hired by BCC before being assigned to work in the
Cagayan de Oro Branch of FFBTC. BCC likewise acknowledges that petitioners are its employees. The record is
replete with evidence disclosing that BCC maintained supervision and control over petitioners through its
Housekeeping and Special Services Division: petitioners reported for work wearing the prescribed uniform of
BCC; leaves
of absence were filed directly with BCC; and, salaries were drawn only from BCC. 15
As a matter of fact, Neri even secured a certification from BCC on 16 May 1986 that she was employed by the
latter. On the other hand, on 24 May 1988, Cabelin filed a complaint for underpayment of wages, non-integration
of salary adjustments mandated by Wage Orders Nos. 5 & 6 and R.A. 6640 as well as for illegal
deduction 16 against BCC alone which was provisionally dismissed on 19 August 1988 upon Cabelin's
manifestation that his money claim was negligible. 17

More importantly, under the terms and conditions of the contract, it was BCC alone which had the power to
reassign petitioners. Their deployment to FEBTC was not subject to the bank's acceptance. Cabelin was
promoted to messenger because the FEBTC branch manager promised BCC that two (2) additional janitors
would be hired from the company if the promotion was to be effected. 18 Furthermore, BCC was to be paid in
lump sum unlike in the situation in Philippine Bank of Communications 19 where the contractor, CESI, was to be
paid at a daily rate on a per person basis. And, the contract therein stipulated that the CESI was merely to
provide manpower that would render temporary services. In the case at bar, Neri and Cabelin were to perform
specific special services. Consequently, petitioners cannot be held to be employees of FEBTC as BCC "carries
an independent business" and undertaken the performance of its contract with various clients according to its
"own manner and method, free from the control and supervision" of its principals in all matters "except as to the
results thereof." 20

Indeed, the facts in Philippine Bank of Communications do not square with those of the instant case. Therein,
the Court ruled that CESI was a "labor-only" contractor because upholding the contract between the contractor
and the bank would in effect permit employers to avoid the necessity of hiring regular or permanent employees
and would enable them to keep their employees indefinitely on a temporary or casual basis, thus denying them
security of tenure in their jobs. This of course violates the Labor Code. BCC has not committed any violation.
Also, the former case was for illegal dismissal; this case, on the other hand, is for conversion of employment
status so that petitioners can receive the same salary being given to regular employees of FEBTC. But, as
herein determined, petitioners are not regular employees of FEBTC but of BCC. At any rate, the finding that
BCC in a qualified independent contractor precludes us from applying the Philippine Bank of
Communications doctrine to the instant petition.

The determination of employer-employee relationship involves factual findings. 21 Absent any grave abuse of
discretion, and we find none in the case before us, we are bound by the findings of the Labor Arbiter as affirmed
by respondent NLRC.

IN VIEW OF THE FOREGOING, the Petition for Certiorari is DISMISSED.

SO ORDERED.

G.R. No. 160506 June 6, 2011

JOEB M. ALIVIADO, ARTHUR CORPUZ, ERIC ALIVIADO, MONCHITO AMPELOQUIO, ABRAHAM

BASMAYOR, JONATHAN MATEO, LORENZO PLATON, JOSE FERNANDO GUTIERREZ, ESTANISLAO
BUENAVENTURA, LOPE SALONGA, FRANZ DAVID, NESTOR IGNACIO, JULIO REY, RUBEN MARQUEZ,
JR., MAXIMINO PASCUAL, ERNESTO CALANAO, ROLANDO ROMASANTA, RHUEL AGOO, BONIFACIO
ORTEGA, ARSENIO SORIANO, JR., ARNEL ENDAYA, ROBERTO ENRIQUEZ, NESTOR BAQUILA,
EDGARDO QUIAMBAO, SANTOS BACALSO, SAMSON BASCO, ALADINO GREGORO, JR., EDWIN
GARCIA, ARMANDO VILLAR, EMIL TAWAT, MARIO P. LIONGSON, CRESENTE J. GARCIA, FERNANDO
MACABENTE, MELECIO CASAPAO, REYNALDO JACABAN, FERDINAND SALVO, ALSTANDO MONTOS,
RAINER N. SALVADOR, RAMIL REYES, PEDRO G. ROY, LEONARDO P. TALLEDO, ENRIQUE F.
TALLEDO, WILLIE ORTIZ, ERNESTO SOYOSA, ROMEO VASQUEZ, JOEL BILLONES, ALLAN BALTAZAR,
NOLI GABUYO, EMMANUEL E. LABAN, RAMIR E. PIAT, RAUL DULAY, TADEO DURAN, JOSEPH
BANICO, ALBERT LEYNES, ANTONIO DACUNA, RENATO DELA CRUZ, ROMEO VIERNES, JR., ELAIS
BASEO, WILFREDO TORRES, MELCHOR CARDANO, MARIANO NARANIAN, JOHN SUMERGIDO,
ROBERTO ROSALES, GERRY C. GATPO, GERMAN N. GUEVARRA, GILBERT Y. MIRANDA, RODOLFO C.
TOLEDO, ARNOLD D. LASTONA, PHILIP M. LOZA, MARIO N. CULDAYON, ORLANDO P. JIMENEZ, FRED
P. JIMENEZ, RESTITUTO C. PAMINTUAN, JR., ROLANDO J. DE ANDRES, ARTUZ BUSTENERA,
ROBERTO B. CRUZ, ROSEDY O. YORDAN, DENNIS DACASIN, ALEJANDRINO ABATON, and ORLANDO
S. BALANGUE, Petitioners,
vs.
PROCTER & GAMBLE PHILS., INC., and PROMM-GEM INC., Respondents.

DECISION

DEL CASTILLO, J.:

Labor laws expressly prohibit "labor-only" contracting. To prevent its circumvention, the Labor Code establishes
an employer-employee relationship between the employer and the employees of the ‘labor-only’ contractor.

The instant petition for review assails the March 21, 2003 Decision1 of the Court of Appeals (CA) in CA-G.R. SP
No. 52082 and its October 20, 2003 Resolution2 denying the motions for reconsideration separately filed by
petitioners and respondent Procter & Gamble Phils. Inc. (P&G). The appellate court affirmed the July 27, 1998
Decision of the National Labor Relations Commission (NLRC), which in turn affirmed the November 29, 1996
Decision3 of the Labor Arbiter. All these decisions found Promm-Gem, Inc. (Promm-Gem) and Sales and
Promotions Services (SAPS) to be legitimate independent contractors and the employers of the petitioners.

Factual Antecedents

Petitioners worked as merchandisers of 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, more specifically as follows:

Name Date Employed Date Dismissed

1. Joeb M. Aliviado November, 1985 May 5, 1992

2. Arthur Corpuz 1988 March 11, 1993

3. Eric Aliviado 1985 March 11, 1993

4. Monchito Ampeloquio September, 1988 March 11, 1993

5. Abraham Basmayor[, Jr.] 1987 March 11, 1993

6. Jonathan Mateo May, 1988 March 11, 1993
7. Lorenzo Platon 1985 March 11, 1993

8. Jose Fernando Gutierrez 1988 May 5, 1992

9. Estanislao Buenaventura June, 1988 March 11, 1993

10. Lope Salonga 1982 March 11, 1993

11. Franz David 1989 March 11, 1993

12. Nestor Ignacio 1982 March 11, 1993

13. Julio Rey 1989 May 5, 1992
14. Ruben [Vasquez], Jr. 1985 May 5, 1992

15. Maximino Pascual 1990 May 5, 1992

16. Ernesto Calanao[, Jr.] 1987 May 5, 1992

17. Rolando Romasanta 1983 March 11, 1993

18. [Roehl] Agoo 1988 March 11, 1993

19. Bonifacio Ortega 1988 March 11, 1993

20. Arsenio Soriano, Jr. 1985 March 11, 1993

21. Arnel Endaya 1983 March 11, 1993

22. Roberto Enriquez December, 1988 March 11, 1993
23. Nestor [Es]quila 1983 May 5, 1992
24. Ed[g]ardo Quiambao 1989 March 11, 1993

25. Santos Bacalso 1990 March 11, 1993

26. Samson Basco 1984 March 11, 1993

27. Aladino Gregor[e], Jr. 1980 May 5, 1992

28. Edwin Garcia 1987 May 5, 1992

29. Armando Villar 1990 May 5, 1992

30. Emil Tawat 1988 March 11, 1993

31. Mario P. Liongson 1991 May 5, 1992

32. Cresente J. Garcia 1984 March 11, 1993

33. Fernando Macabent[a] 1990 May 5, 1992

34. Melecio Casapao 1987 March 11, 1993

35. Reynaldo Jacaban 1990 May 5, 1992

36. Ferdinand Salvo 1985 May 5, 1992

37. Alstando Montos 1984 March 11, 1993

38. Rainer N. Salvador 1984 May 5, 1992

39. Ramil Reyes 1984 March 11, 1993

40. Pedro G. Roy 1987

41. Leonardo [F]. Talledo 1985 March 11, 1993
42. Enrique [F]. Talledo 1988 March 11, 1993

43. Willie Ortiz 1987 May 5, 1992

44. Ernesto Soyosa 1988 May 5, 1992

45. Romeo Vasquez 1985 March 11, 1993

46. Joel Billones 1987 March 11, 1993

47. Allan Baltazar 1989 March 11, 1993

48. Noli Gabuyo 1991 March 11, 1993

49. Emmanuel E. Laban 1987 May 5, 1992

50. Ramir[o] E. [Pita] 1990 May 5, 1992

51. Raul Dulay 1988 May 5, 1992

52. Tadeo Duran[o] 1988 May 5, 1992

53. Joseph Banico 1988 March 11, 1993

54. Albert Leynes 1990 May 5, 1992

55. Antonio Dacu[m]a 1990 May 5, 1992

56. Renato dela Cruz 1982

57. Romeo Viernes, Jr. 1986

58. El[ia]s Bas[c]o 1989

 59. Wilfredo Torres 1986 May 5, 1992
60. Melchor Carda[ñ]o 1991 May 5, 1992

61. [Marino] [Maranion] 1989 May 5, 1992

62. John Sumergido 1987 May 5, 1992

63. Roberto Rosales May, 1987 May 5, 1992

64. Gerry [G]. Gatpo November, 1990 March 11, 1993

65. German N. Guevara May, 1990 March 11, 1993

66. Gilbert Y. Miranda June, 1991 March 11, 1993

67. Rodolfo C. Toledo[, Jr.] May 14, 1991 March 11, 1993

68. Arnold D. [Laspoña] June 1991 March 11, 1993

69. Philip M. Loza March 5, 1992 March 11, 1993

70. Mario N. C[o]ldayon May 14, 1991 March 11, 1993

71. Orlando P. Jimenez November 6, 1992 March 11, 1993

72. Fred P. Jimenez September, 1991 March 11, 1993

73. Restituto C. Pamintuan, Jr. March 5, 1992 March 11, 1993

74. Rolando J. de Andres June, 1991 March 11, 1993

75. Artuz Bustenera[, Jr.] December, 1989 March 11, 1993

76. Roberto B. Cruz May 4, 1990 March 11, 1993

77. Rosedy O. Yordan June, 1991 May 5, 1992
78. Dennis Dacasin May. 1990 May 5, 1992

79. Alejandrino Abaton 1988 May 5, 1992

80. Orlando S. Balangue March, 1989 March 11, 19934

They all individually signed employment contracts with either Promm-Gem or SAPS for periods of more or less
five months at a time.5 They were assigned at different outlets, supermarkets and stores where they handled all
the products of P&G. They received their wages from Promm-Gem or SAPS.6

SAPS and Promm-Gem imposed disciplinary measures on erring merchandisers for reasons such as habitual
absenteeism, dishonesty or changing day-off without prior notice.7

P&G is principally engaged in the manufacture and production of different consumer and health products, which
it sells on a wholesale basis to various supermarkets and distributors.8 To enhance consumer awareness and
acceptance of the products, P&G entered into contracts with Promm-Gem and SAPS for the promotion and
merchandising of its products.9

In December 1991, petitioners filed a complaint10 against P&G for regularization, service incentive leave pay and
other benefits with damages. The complaint was later amended11 to include the matter of their subsequent
dismissal.

Ruling of the Labor Arbiter

On November 29, 1996, the Labor Arbiter dismissed the complaint for lack of merit and ruled that there was no
employer-employee relationship between petitioners and P&G. He found that the selection and engagement of
the petitioners, the payment of their wages, the power of dismissal and control with respect to the means and
methods by which their work was accomplished, were all done and exercised by Promm-Gem/SAPS. He further
found that Promm-Gem and SAPS were legitimate independent job contractors. The dispositive portion of his
Decision reads:

WHEREFORE, premises considered, judgment is hereby rendered Dismissing the above-entitled cases against
respondent Procter & Gamble (Phils.), Inc. for lack of merit.

SO ORDERED.12

Ruling of the NLRC

Appealing to the NLRC, petitioners disputed the Labor Arbiter’s findings. On July 27, 1998, the NLRC rendered a
Decision13 disposing as follows:

WHEREFORE, premises considered, the appeal of complainants is hereby DISMISSED and the decision
appealed from AFFIRMED.

SO ORDERED.14

Petitioners filed a motion for reconsideration but the motion was denied in the November 19, 1998 Resolution.15

Ruling of the Court of Appeals

Petitioners then filed a petition for certiorari with the CA, alleging grave abuse of discretion amounting to lack or
excess of jurisdiction on the part of the Labor Arbiter and the NLRC. However, said petition was also denied by
the CA which disposed as follows:

WHEREFORE, the decision of the National Labor Relations Commission dated July 27, 1998 is AFFIRMED with
the MODIFICATION that respondent Procter & Gamble Phils., Inc. is ordered to pay service incentive leave pay
to petitioners.

SO ORDERED.16

Petitioners filed a motion for reconsideration but the motion was also denied. Hence, this petition.

Issues

Petitioners now come before us raising the following issues:

I.

WHETHER X X X THE HONORABLE COURT OF APPEALS HAS COMMITTED [A] REVERSIBLE

ERROR WHEN IT DID NOT FIND THE PUBLIC RESPONDENTS TO HAVE ACTED WITH GRAVE
ABUSE OF DISCRETION AMOUNTING TO LACK OF OR IN EXCESS OF JURISDICTION IN
RENDERING THE QUESTIONED JUDGMENT WHEN, OBVIOUSLY, THE PETITIONERS WERE ABLE
TO PROVE AND ESTABLISH THAT RESPONDENT PROCTER & GAMBLE PHILS., INC. IS THEIR
EMPLOYER AND THAT THEY WERE ILLEGALLY DISMISSED BY THE FORMER.

II.

WHETHER X X X THE HONORABLE COURT OF APPEALS HAS COMMITTED [A] REVERSIBLE

ERROR WHEN IT DID NOT DECLARE THAT THE PUBLIC RESPONDENTS HAD ACTED WITH
GRAVE ABUSE OF DISCRETION WHEN THE LATTER DID NOT FIND THE PRIVATE
RESPONDENTS LIABLE TO THE PETITIONERS FOR PAYMENT OF ACTUAL, MORAL AND
EXEMPLARY DAMAGES AS WELL AS LITIGATION COSTS AND ATTORNEY’S FEES. 17

Simply stated, the issues are: (1) whether P&G is the employer of petitioners; (2) whether petitioners were
illegally dismissed; and (3) whether petitioners are entitled for payment of actual, moral and exemplary damages
as well as litigation costs and attorney’s fees.

Petitioners’ Arguments
Petitioners insist that they are employees of P&G. They claim that they were recruited by the salesmen of P&G
and were engaged to undertake merchandising chores for P&G long before the existence of Promm-Gem and/or
SAPS. They further claim that when the latter had its so-called re-alignment program, petitioners were instructed
to fill up application forms and report to the agencies which P&G created.18

Petitioners further claim that P&G instigated their dismissal from work as can be gleaned from its letter19 to
SAPS dated February 24, 1993, informing the latter that their Merchandising Services Contract will no longer be
renewed.

Petitioners further assert that Promm-Gem and SAPS are labor-only contractors providing services of manpower
to their client. They claim that the contractors have neither substantial capital nor tools and equipment to
undertake independent labor contracting. Petitioners insist that since they had been engaged to perform
activities which are necessary or desirable in the usual business or trade of P&G, then they are its regular
employees.20

Respondents’ Arguments

On the other hand, P&G points out that the instant petition raises only questions of fact and should thus be
thrown out as the Court is not a trier of facts. It argues that findings of facts of the NLRC, particularly where the
NLRC and the Labor Arbiter are in agreement, are deemed binding and conclusive on the Supreme Court.

P&G further argues that there is no employment relationship between it and petitioners. It was Promm-Gem or
SAPS that (1) selected petitioners and engaged their services; (2) paid their salaries; (3) wielded the power of
dismissal; and (4) had the power of control over their conduct of work.

P&G also contends that the Labor Code neither defines nor limits which services or activities may be validly
outsourced. Thus, an employer can farm out any of its activities to an independent contractor, regardless of
whether such activity is peripheral or core in nature. It insists that the determination of whether to engage the
services of a job contractor or to engage in direct hiring is within the ambit of management prerogative.

At this juncture, it is worth mentioning that on January 29, 2007, we deemed as waived the filing of the Comment
of Promm-Gem on the petition.21 Also, although SAPS was impleaded as a party in the proceedings before the
Labor Arbiter and the NLRC, it was no longer impleaded as a party in the proceedings before the CA.22 Hence,
our pronouncements with regard to SAPS are only for the purpose of determining the obligations of P&G, if any.

Our Ruling

The petition has merit.

As a rule, the Court refrains from reviewing factual assessments of lower courts and agencies exercising
adjudicative functions, such as the NLRC. Occasionally, however, the Court is constrained to wade into factual
matters when there is insufficient or insubstantial evidence on record to support those factual findings; or when
too much is concluded, inferred or deduced from the bare or incomplete facts appearing on record.23 In the
present case, we find the need to review the records to ascertain the facts.

Labor-only contracting and job contracting

In order to resolve the issue of whether P&G is the employer of petitioners, it is necessary to first determine
whether Promm-Gem and SAPS are labor-only contractors or legitimate job contractors.

The pertinent Labor Code provision on the matter states:

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 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 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. (Emphasis and underscoring supplied.)

Rule VIII-A, Book III of the Omnibus Rules Implementing the Labor Code, as amended by Department Order No.
18-02,24 distinguishes between legitimate and labor-only contracting:

xxxx

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.

xxxx

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 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) [T]he contractor does not exercise the right to control over the performance of the work of the
contractual employee.

The foregoing 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.

x x x x (Underscoring supplied.)

Clearly, the law and its implementing rules allow contracting arrangements for the performance of specific jobs,
works or services. Indeed, it is management prerogative to farm out any of its 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 anindependent contractor because the current labor rules expressly prohibit labor-only contracting.

To emphasize, 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 principal25 and any of the following elements are 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 contractualemployee. (Underscoring supplied)

In the instant case, the financial statements26 of Promm-Gem show that it

has authorized capital stock of ₱1 million and a paid-in capital, or capital available for operations, of
₱500,000.00 as of 1990.27 It also has long term assets worth ₱432,895.28 and current assets of ₱719,042.32.
Promm-Gem has also proven that it maintained its own warehouse and office space with a floor area of 870
square meters.28 It also had under its name three registered vehicles which were used for its
promotional/merchandising business.29Promm-Gem also has other clients30 aside from P&G.31 Under the
circumstances, we find that Promm-Gem has substantial investment which relates to the work to be performed.
These factors negate the existence of the element specified in Section 5(i) of DOLE Department Order No. 18-
02.

The records also show that Promm-Gem supplied its complainant-workers with the relevant materials, such as
markers, tapes, liners and cutters, necessary for them to perform their work. Promm-Gem also issued uniforms
to them. It is also relevant to mention that Promm-Gem already considered the complainants working under it as
its regular, not merely contractual or project, employees.32 This circumstance negates the existence of element
(ii) as stated in Section 5 of DOLE Department Order No. 18-02, which speaks of contractual employees. This,
furthermore, negates – on the part of Promm-Gem – bad faith and intent to circumvent labor laws which factors
have often been tipping points that lead the Court to strike down the employment practice or agreement
concerned as contrary to public policy, morals, good customs or public order.33

Under the circumstances, Promm-Gem cannot be considered as a labor-only contractor. We find that it is a
legitimate independent contractor.

On the other hand, the Articles of Incorporation of SAPS shows that it has a paid-in capital of only ₱31,250.00.
There is no other evidence presented to show how much its working capital and assets are. Furthermore, there
is no showing of substantial investment in tools, equipment or other assets.

In Vinoya v. National Labor Relations Commission,34 the Court held that "[w]ith the current economic
atmosphere in the country, the paid-in capitalization of PMCI amounting to ₱75,000.00 cannot be considered as
substantial capital and, as such, PMCI cannot qualify as an independent contractor."35 Applying the same
rationale to the present case, it is clear that SAPS – having a paid-in capital of only ₱31,250 - has no substantial
capital. SAPS’ lack of substantial capital is underlined by the records36 which show that its payroll for its
merchandisers alone for one month would already total ₱44,561.00. It had 6-month contracts with P&G.37 Yet
SAPS failed to show that it could complete the 6-month contracts using its own capital and investment. Its capital
is not even sufficient for one month’s payroll. SAPS failed to show that its paid-in capital of ₱31,250.00 is
sufficient for the period required for it to generate its needed revenue to sustain its operations independently.
Substantial capital refers to capitalization used in the performance or completion of the job, work or service
contracted out. In the present case, SAPS has failed to show substantial capital.

Furthermore, the petitioners have been charged with the merchandising and promotion of the products of P&G,
an activity that has already been considered by the Court as doubtlessly directly related to the manufacturing
business,38 which is the principal business of P&G. Considering that SAPS has no substantial capital or
investment and the workers it recruited are performing activities which are directly related to the principal
business of P&G, we find that the former is engaged in "labor-only contracting".

"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."39 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.40

Consequently, the following petitioners, having been recruited and supplied

by SAPS41 -- which engaged in labor-only contracting -- are considered as the employees of P&G: Arthur
Corpuz, Eric Aliviado, Monchito Ampeloquio, Abraham Basmayor, Jr., Jonathan Mateo, Lorenzo Platon,
Estanislao Buenaventura, Lope Salonga, Franz David, Nestor Ignacio, Jr., Rolando Romasanta, Roehl Agoo,
Bonifacio Ortega, Arsenio Soriano, Jr., Arnel Endaya, Roberto Enriquez, Edgardo Quiambao, Santos Bacalso,
Samson Basco, Alstando Montos, Rainer N. Salvador, Pedro G. Roy, Leonardo F. Talledo, Enrique F. Talledo,
Joel Billones, Allan Baltazar, Noli Gabuyo, Gerry Gatpo, German Guevara, Gilbert V. Miranda, Rodolfo C.
Toledo, Jr., Arnold D. Laspoña, Philip M. Loza, Mario N. Coldayon, Orlando P. Jimenez, Fred P. Jimenez,
Restituto C. Pamintuan, Jr., Rolando J. De Andres, Artuz Bustenera, Jr., Roberto B. Cruz, Rosedy O. Yordan,
Orlando S. Balangue, Emil Tawat, Cresente J. Garcia, Melencio Casapao, Romeo Vasquez, Renato dela Cruz,
Romeo Viernes, Jr., Elias Basco and Dennis Dacasin.

The following petitioners, having worked under, and been dismissed by Promm-Gem, are considered the
employees of Promm-Gem, not of P&G: Wilfredo Torres, John Sumergido, Edwin Garcia, Mario P. Liongson, Jr.,
Ferdinand Salvo, Alejandrino Abaton, Emmanuel A. Laban, Ernesto Soyosa, Aladino Gregore, Jr., Ramil Reyes,
Ruben Vasquez, Jr., Maximino Pascual, Willie Ortiz, Armando Villar, Jose Fernando Gutierrez, Ramiro Pita,
Fernando Macabenta, Nestor Esquila, Julio Rey, Albert Leynes, Ernesto Calanao, Roberto Rosales, Antonio
Dacuma, Tadeo Durano, Raul Dulay, Marino Maranion, Joseph Banico, Melchor Cardano, Reynaldo Jacaban,
and Joeb Aliviado.42

Termination of services

We now discuss the issue of whether petitioners were illegally dismissed. In cases of regular employment, the
employer shall not terminate the services of an employee except for a just43 or authorized44 cause.

In the instant case, the termination letters given by Promm-Gem to its employees uniformly specified the cause
of dismissal as grave misconduct and breach of trust, as follows:

xxxx

This informs you that effective May 5, 1992, your employment with our company, Promm-Gem, Inc. has been
terminated. We find your expressed admission, that you considered yourself as an employee of Procter &
Gamble Phils., Inc…. and assailing the integrity of the Company as legitimate and independent promotion firm,
is deemed as an act of disloyalty prejudicial to the interests of our Company: serious misconduct and breach of
trust reposed upon you as employee of our Company which [co]nstitute just cause for the termination of your
employment.

x x x x45

Misconduct has been defined as improper or wrong conduct; the transgression of some established and definite
rule of action, a forbidden act, a dereliction of duty, unlawful in character implying wrongful intent and not mere
error of judgment. The misconduct to be serious must be of such grave and aggravated character and not
merely trivial and unimportant.46 To be a just cause for dismissal, such misconduct (a) must be serious; (b) must
relate to the performance of the employee’s duties; and (c) must show that the employee has become unfit to
continue working for the employer.47

In other words, in order to constitute serious misconduct which will warrant the dismissal of an employee under
paragraph (a) of Article 282 of the Labor Code, it is not sufficient that the act or conduct complained of has
violated some established rules or policies. It is equally important and required that the act or conduct must have
been performed with wrongful intent.48 In the instant case, petitioners-employees of Promm-Gem may have
committed an error of judgment in claiming to be employees of P&G, but it cannot be said that they were
motivated by any wrongful intent in doing so. As such, we find them guilty of only simple misconduct for assailing
the integrity of Promm-Gem as a legitimate and independent promotion firm. A misconduct which is not serious
or grave, as that existing in the instant case, cannot be a valid basis for dismissing an employee.

Meanwhile, loss of trust and confidence, as a ground for dismissal, must be based on the willful breach of the
trust reposed in the employee by his employer. Ordinary breach will not suffice. A breach of trust is willful if it is
done intentionally, knowingly and purposely, without justifiable excuse, as distinguished from an act done
carelessly, thoughtlessly, heedlessly or inadvertently.49

Loss of trust and confidence, as a cause for termination of employment, is premised on the fact that the
employee concerned holds a position of responsibility or of trust and confidence. As such, he must be invested
with confidence on delicate matters, such as custody, handling or care and protection of the property and assets
of the employer. And, in order to constitute a just cause for dismissal, the act complained of must be work-
related and must show that the employee is unfit to continue to work for the employer.50 In the instant case, the
petitioners-employees of Promm-Gem have not been shown to be occupying positions of responsibility or of
trust and confidence. Neither is there any evidence to show that they are unfit to continue to work as
merchandisers for Promm-Gem.

All told, we find no valid cause for the dismissal of petitioners-employees of Promm-Gem.

While Promm-Gem had complied with the procedural aspect of due process in terminating the employment of
petitioners-employees, i.e., giving two notices and in between such notices, an opportunity for the employees to
answer and rebut the charges against them, it failed to comply with the substantive aspect of due process as the
acts complained of neither constitute serious misconduct nor breach of trust. Hence, the dismissal is illegal.

With regard to the petitioners placed with P&G by SAPS, they were given no written notice of dismissal. The
records show that upon receipt by SAPS of P&G’s letter terminating their "Merchandising Services Contact"
effective March 11, 1993, they in turn verbally informed the concerned petitioners not to report for work anymore.
The concerned petitioners related their dismissal as follows:

xxxx

5. On March 11, 1993, we were called to a meeting at SAPS office. We were told by Mr. Saturnino A. Ponce that
we should already stop working immediately because that was the order of Procter and Gamble. According to
him he could not do otherwise because Procter and Gamble was the one paying us. To prove that Procter and
Gamble was the one responsible in our dismissal, he showed to us the letter51 dated February 24, 1993, x x x

February 24, 1993

Sales and Promotions Services

Armon’s Bldg., 142 Kamias Road,
Quezon City

Attention: Mr. Saturnino A. Ponce

President & General Manager

Gentlemen:

Based on our discussions last 5 and 19 February 1993, this formally informs you that we will not be renewing our
Merchandising Services Contract with your agency.

Please immediately undertake efforts to ensure that your services to the Company will terminate effective close
of business hours of 11 March 1993.

This is without prejudice to whatever obligations you may have to the company under the abovementioned
contract.

Very truly yours,

(Sgd.)
EMMANUEL M. NON
Sales Merchandising III

6. On March 12, 1993, we reported to our respective outlet assignments. But, we were no longer allowed to work
and we were refused entrance by the security guards posted. According to the security guards, all
merchandisers of Procter and Gamble under S[APS] who filed a case in the Dept. of Labor are already
dismissed as per letter of Procter and Gamble dated February 25, 1993. x x x52

Neither SAPS nor P&G dispute the existence of these circumstances. Parenthetically, unlike Promm-Gem which
dismissed its employees for grave misconduct and breach of trust due to disloyalty, SAPS dismissed its
employees upon the initiation of P&G. It is evident that SAPS does not carry on its own business because the
termination of its contract with P&G automatically meant for it also the termination of its employees’ services. It is
obvious from its act that SAPS had no other clients and had no intention of seeking other clients in order to
further its merchandising business. From all indications SAPS, existed to cater solely to the need of P&G for the
supply of employees in the latter’s merchandising concerns only. Under the circumstances prevailing in the
instant case, we cannot consider SAPS as an independent contractor.

Going back to the matter of dismissal, it must be emphasized that the onus probandi to prove the lawfulness of
the dismissal rests with the employer.53 In termination cases, the burden of proof rests upon the employer to
show that the dismissal is for just and valid cause.54 In the instant case, P&G failed to discharge the burden of
proving the legality and validity of the dismissals of those petitioners who are considered its employees. Hence,
the dismissals necessarily were not justified and are therefore illegal.

Damages

We now go to the issue of whether petitioners are entitled to damages. Moral

and exemplary damages are recoverable where the dismissal of an employee was attended by bad faith or fraud
or constituted an act oppressive to labor or was done in a manner contrary to morals, good customs or public
policy.55

With regard to the employees of Promm-Gem, there being no evidence of bad faith, fraud or any oppressive act
on the part of the latter, we find no support for the award of damages.

As for P&G, the records show that it dismissed its employees through SAPS in a manner oppressive to labor.
The sudden and peremptory barring of the concerned petitioners from work, and from admission to the work
place, after just a one-day verbal notice, and for no valid cause bellows oppression and utter disregard of the
right to due process of the concerned petitioners. Hence, an award of moral damages is called for.

Attorney’s fees may likewise be awarded to the concerned petitioners who were illegally dismissed in bad faith
and were compelled to litigate or incur expenses to protect their rights by reason of the oppressive acts56 of
P&G.

Lastly, under Article 279 of the Labor Code, an employee who is unjustly dismissed from work shall be entitled to
reinstatement without loss of seniority rights and other privileges, inclusive of allowances, and other benefits or
their monetary equivalent from the time the compensation was withheld up to the time of actual
reinstatement.57 Hence, all the petitioners, having been illegally dismissed are entitled to reinstatement without
loss of seniority rights and with full back wages and other benefits from the time of their illegal dismissal up to
the time of their actual reinstatement.1avvphi1

WHEREFORE, the petition is GRANTED. The Decision dated March 21, 2003 of the Court of Appeals in CA-
G.R. SP No. 52082 and the Resolution dated October 20, 2003 are REVERSED and SET ASIDE. Procter &
Gamble Phils., Inc. and Promm-Gem, Inc. are ORDERED to reinstate their respective employees immediately
without loss of seniority rights and with full backwages and other benefits from the time of their illegal dismissal
up to the time of their actual reinstatement. Procter & Gamble Phils., Inc. is further ORDERED to pay each of
those petitioners considered as its employees, namely Arthur Corpuz, Eric Aliviado, Monchito Ampeloquio,
Abraham Basmayor, Jr., Jonathan Mateo, Lorenzo Platon, Estanislao Buenaventura, Lope Salonga, Franz
David, Nestor Ignacio, Rolando Romasanta, Roehl Agoo, Bonifacio Ortega, Arsenio Soriano, Jr., Arnel Endaya,
Roberto Enriquez, Edgardo Quiambao, Santos Bacalso, Samson Basco, Alstando Montos, Rainer N. Salvador,
Pedro G. Roy, Leonardo F. Talledo, Enrique F. Talledo, Joel Billones, Allan Baltazar, Noli Gabuyo, Gerry Gatpo,
German Guevara, Gilbert Y. Miranda, Rodolfo C. Toledo, Jr., Arnold D. Laspoña, Philip M. Loza, Mario N.
Coldayon, Orlando P. Jimenez, Fred P. Jimenez, Restituto C. Pamintuan, Jr., Rolando J. De Andres, Artuz
Bustenera, Jr., Roberto B. Cruz, Rosedy O. Yordan, Orlando S. Balangue, Emil Tawat, Cresente J. Garcia,
Melencio Casapao, Romeo Vasquez, Renato dela Cruz, Romeo Viernes, Jr., Elias Basco and Dennis Dacasin,
₱25,000.00 as moral damages plus ten percent of the total sum as and for attorney’s fees.

Let this case be REMANDED to the Labor Arbiter for the computation, within 30 days from receipt of this
Decision, of petitioners’ backwages and other benefits; and ten percent of the total sum as and for attorney’s
fees as stated above; and for immediate execution.

SO ORDERED.
G.R. Nos. 184903 October 10, 2012

DIGITAL TELECOMMUNICATIONS PHILIPPINES, INC., Petitioner,

vs.
DIGITEL EMPLOYEES UNION (DEU), ARCELO RAFAEL A. ESPLANA, ALAN D. LICANDO, FELICITO C.
ROMERO, JR., ARNOLD D. GONZALES, REYNEL FRANCISCO B. GARCIA, ZOSIMO B. PERALTA,
REGINO T. UNIDAD and JIM L. JAVIER, Respondents.

DECISION

PEREZ, J.:

This treats of the petition for review filed by Digital Telecommunications Philippines, Inc. (Digitel) assailing the 18
June 2008 Decision1 and 9 October 2008 Resolution of the Court of Appeals 10th Division in CA-G.R. SP No.
91719, which affirms the Order of the Secretary of Labor and Employment directing Digitel to commence
Collective Bargaining Agreement (CBA) negotiations and in CA-G.R. SP No. 94825, which declares the
dismissal of affected Digitel employees as illegal.

The facts, as borne by the records, follow.

By virtue of a certification election, Digitel Employees Union (Union) became the exclusive bargaining agent of
all rank and file employees of Digitel in 1994. The Union and Digitel then commenced collective bargaining
negotiations which resulted in a bargaining deadlock. The Union threatened to go on strike, but then Acting
Labor Secretary Bienvenido E. Laguesma assumed jurisdiction over the dispute and eventually directed the
parties to execute a CBA.2

However, no CBA was forged between Digitel and the Union. Some Union members abandoned their
employment with Digitel. The Union later became dormant.

Ten (10) years thereafter or on 28 September 2004, Digitel received from Arceo Rafael A. Esplana (Esplana),
who identified himself as President of the Union, a letter containing the list of officers, CBA proposals and
ground rules.3The officers were respondents Esplana, Alan D. Licando (Vice-President), Felicito C. Romero, Jr.
(Secretary), Arnold D. Gonzales (Treasurer), Reynel Francisco B. Garcia (Auditor), Zosimo B. Peralta (PRO),
Regino T. Unidad (Sgt. at Arms), and Jim L. Javier (Sgt. at Arms).

Digitel was reluctant to negotiate with the Union and demanded that the latter show compliance with the
provisions of the Union’s Constitution and By-laws on union membership and election of officers.

On 4 November 2004, Esplana and his group filed a case for Preventive Mediation before the National
Conciliation and Mediation Board based on Digitel’s violation of the duty to bargain. On 25 November 2004,
Esplana filed a notice of strike.

On 10 March 2005, then Labor Secretary Patricia A. Sto. Tomas issued an Order4 assuming jurisdiction over the
labor dispute.

During the pendency of the controversy, Digitel Service, Inc. (Digiserv), a non-profit enterprise engaged in call
center servicing, filed with the Department of Labor and Employment (DOLE) an Establishment Termination
Report stating that it will cease its business operation. The closure affected at least 100 employees, 42 of whom
are members of the herein respondent Union.

Alleging that the affected employees are its members and in reaction to Digiserv’s action, Esplana and his group
filed another Notice of Strike for union busting, illegal lock-out, and violation of the assumption order.

On 23 May 2005, the Secretary of Labor ordered the second notice of strike subsumed by the previous
Assumption Order.5

Meanwhile, on 14 March 2005, Digitel filed a petition with the Bureau of Labor Relations (BLR) seeking
cancellation of the Union’s registration on the following grounds: 1) failure to file the required reports from 1994-
2004; 2) misrepresentation of its alleged officers; 3) membership of the Union is composed of rank and file,
supervisory and managerial employees; and 4) substantial number of union members are not Digitel
employees.6
In a Decision dated 11 May 2005, the Regional Director of the DOLE dismissed the petition for cancellation of
union registration for lack of merit. The Regional Director ruled that it does not have jurisdiction over the issue of
non-compliance with the reportorial requirements. He also held that Digitel failed to adduce substantial evidence
to prove misrepresentation and the mixing of non-Digitel employees with the Union. Finally, he declared that the
inclusion of supervisory and managerial employees with the rank and file employees is no longer a ground for
cancellation of the Union’s certificate of registration.7

The appeal filed by Digitel with the BLR was eventually dismissed for lack of merit in a Resolution dated 9 March
2007, thereby affirming the 11 May 2005 Decision of the Regional Director.

CA-G.R. SP No. 91719

In an Order dated 13 July 2005, the Secretary of Labor directed Digitel to commence the CBA negotiation with
the Union. Thus:

WHEREFORE, all the foregoing premises considered, this Office hereby orders:

1. DIGITEL to commence collective bargaining negotiation with DEU without further delay; and,

2. The issue of unfair labor practice, consisting of union-busting, illegal termination/lockout and violation of the
assumption of jurisdiction, specifically the return-to-work aspect of the 10 March 2005 and 03 June 2005 orders,
be CERTIFIED for compulsory arbitration to the NLRC.8

Digitel moved for reconsideration on the contention that the pendency of the petition for cancellation of the
Union’s certificate of registration is a prejudicial question that should first be settled before the DOLE could order
the parties to bargain collectively. On 19 August 2005, then Acting Secretary Manuel G. Imson of DOLE denied
the motion for reconsideration, affirmed the 13 July 2005 Order and reiterated the order directing parties to
commence collective bargaining negotiations.9

On 14 October 2005, Digitel filed a petition, docketed as CA-G.R. SP No. 91719, before the Court of Appeals
assailing the 13 July and 19 August 2005 Orders of the DOLE Secretary and attributing grave abuse of
discretion on the part of the DOLE Secretary for ordering Digitel to commence bargaining negotiations with the
Union despite the pendency of the issue of union legitimacy.

CA-G.R. SP No. 94825

In accordance with the 13 July 2005 Order of the Secretary of Labor, the unfair labor practice issue was certified
for compulsory arbitration before the NLRC, which, on 31 January 2006, rendered a Decision dismissing the
unfair labor practice charge against Digitel but declaring the dismissal of the 13 employees of Digiserv as illegal
and ordering their reinstatement. The Union manifested that out of 42 employees, only 13 remained, as most
had already accepted separation pay. The dispositive portion of the Decision reads:

WHEREFORE, premises considered, the charge of unfair labor practice is hereby DISMISSED for lack of merit.
However, the dismissal of the remaining thirteen (13) affected employees is hereby declared illegal and DIGITEL
is hereby ORDERED to reinstate them to their former position with full backwages up to the time they are
reinstated, computed as follows:

x x x x.10

Upon motion for reconsideration filed by Digitel, four (4) affected employees, namely Ma. Loreta Eser, Marites
Jereza, Leonore Tuliao and Aline G. Quillopras, were removed from entitlement to the awards pursuant to the
deed of quitclaim and release which they all signed.11

In view of this unfavorable decision, Digitel filed another petition on 9 June 2006 in CA-G.R. SP No. 94825
before the Court of Appeals, challenging the above NLRC Decision and Resolution and arguing mainly that
Digiserv employees are not employees of Digitel.

Ruling of the Court of Appeals

On 18 June 2008, the Tenth Division of the Court of Appeals consolidated the two petitions in CA-G.R. SP No.
91719 and CA-G.R. SP No. 94825, and disposed as follows:
WHEREFORE, the petition in CA-G.R. SP No. 91719 is DISMISSED. The July 13, 2005 Order and the August
19, 2005 Resolution of the DOLE Secretary are AFFIRMED in toto. With costs.

The petition in CA-G.R. SP No. 94825 is partially GRANTED, with the effect that the assailed dispositions must
be MODIFIED, as follows:

1) In addition to the order directing reinstatement and payment of full backwages to the nine (9) affected
employees, Digital Telecommunications Philippines, Inc. is furthered ORDERED, should reinstatement is no
longer feasible, to pay separation pay equivalent to one (1) month pay, or one-half (1/2) month pay for every
year of service, whichever is higher.

2) The one hundred thousand (Ph₱ 100,000.00) peso-fine imposed on Digital Telecommunications Philippines,
Inc. is DELETED. No costs.12

The Court of Appeals upheld the Secretary of Labor’s Order for Digitel to commence CBA negotiations with the
Union and emphasized that the pendency of a petition for the cancellation of a union’s registration does not bar
the holding of negotiations for a CBA. The Court of Appeals sustained the finding that Digiserv is engaged in
labor-only contracting and that its employees are actually employees of Digitel.

Digitel filed a motion for reconsideration but was denied in a Resolution dated 9 October 2008.

Hence, this petition for review on certiorari.

Digitel argues that the Court of Appeals seriously erred when it condoned the act of the Secretary of Labor in
issuing an assumption order despite the pendency of an appeal on the issue of union registration. Digitel
maintains that it cannot be compelled to negotiate with a union for purposes of collective bargaining when the
very status of the same as the exclusive bargaining agent is in question.

Digitel insists that had the Court of Appeals considered the nature of the activities performed by Digiserv, it
would reach the conclusion that Digiserv is a legitimate contractor. To bolster its claim, Digitel asserts that the
affected employees are registered with the Social Security System, Pag-ibig, Bureau of Internal Revenue and
Philhealth with Digiserv as their employer. Digitel further contends that assuming that the affected Digiserv
employees are employees of Digitel, they were nevertheless validly dismissed on the ground of closure of a
department or a part of Digitel’s business operation.

The three issues raised in this petition are: 1) whether the Secretary of Labor erred in issuing the assumption
order despite the pendency of the petition for cancellation of union registration; 2) whether Digiserv is a
legitimate contractor; and 3) whether there was a valid dismissal.

The pendency of a petition

for cancellation of union
registration does not preclude
collective bargaining.

The first issue raised by Digitel is not novel. It is well-settled that the pendency of a petition for cancellation of
union registration does not preclude collective bargaining.

The 2005 case of Capitol Medical Center, Inc. v. Hon. Trajano13 is apropos. The respondent union therein sent a
letter to petitioner requesting a negotiation of their CBA. Petitioner refused to bargain and instead filed a petition
for cancellation of the union’s certificate of registration. Petitioner’s refusal to bargain forced the union to file a
notice of strike. They eventually staged a strike. The Secretary of Labor assumed jurisdiction over the labor
dispute and ordered all striking workers to return to work. Petitioner challenged said order by contending that its
petition for cancellation of union’s certificate of registration involves a prejudicial question that should first be
settled before the Secretary of Labor could order the parties to bargain collectively. When the case eventually
reached this Court, we agreed with the Secretary of Labor that the pendency of a petition for cancellation of
union registration does not preclude collective bargaining, thus:

That there is a pending cancellation proceeding against the respondent Union is not a bar to set in motion the
mechanics of collective bargaining. If a certification election may still be ordered despite the pendency of a
petition to cancel the union’s registration certificate (National Union of Bank Employees vs. Minister of Labor,
110 SCRA 274), more so should the collective bargaining process continue despite its pendency. We must
emphasize that the majority status of the respondent Union is not affected by the pendency of the Petition for
Cancellation pending against it. Unless its certificate of registration and its status as the certified bargaining
agent are revoked, the Hospital is, by express provision of the law, duty bound to collectively bargain with the
Union.14

Trajano was reiterated in Legend International Resorts Limited v. Kilusang Manggagawa ng Legenda (KML-
Independent).15 Legend International Resorts reiterated the rationale for allowing the continuation of either a
CBA process or a certification election even during the pendency of proceedings for the cancellation of the
union’s certificate of registration. Citing the cases of Association of Court of Appeals Employees v. Ferrer-
Calleja16 and Samahan ng Manggagawa sa Pacific Plastic v. Hon. Laguesma,17 it was pointed out at the time of
the filing of the petition for certification election – or a CBA process as in the instant case – the union still had the
personality to file a petition for certification − or to ask for a CBA negotiation – as in the present case.

Digiserv is a labor-only contractor.

Labor-only contracting is expressly prohibited by our labor laws. Article 106 of the Labor Code defines labor-only
contracting as "supplying workers to an employer [who] 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."

Section 5, Rule VIII-A, Book III of the Omnibus Rules Implementing the Labor Code (Implementing Rules), as
amended by Department Order No. 18-02, expounds on the prohibition against labor-only contracting, thus:

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 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.

The foregoing provisions shall be without prejudice to the application of Article 248 (c) of the Labor Code, as
amended.

xxxx

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 law and its implementing rules allow contracting arrangements for the performance of specific jobs, works or
services. Indeed, it is management prerogative to farm out any of its 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.18

After an exhaustive review of the records, there is no showing that first, Digiserv has substantial investment in
the form of capital, equipment or tools. Under the Implementing Rules, 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 NLRC, as echoed by the Court of Appeals, did not
find substantial Digiserv’s authorized capital stock of One Million Pesos (₱ 1,000,000.00). It pointed out that only
Two Hundred Fifty Thousand Pesos (₱ 250,000.00) of the authorized capital stock had been subscribed and
only Sixty-Two Thousand Five Hundred Pesos (₱ 62,500.00) had been paid up. There was no increase in
capitalization for the last ten (10) years.19

Moreover, in the Amended Articles of Incorporation, as well as in the General Information Sheets for the years
1994, 2001 and 2005, the primary purpose of Digiserv is to provide manpower services. In PCI Automation
Center, Inc. v. National Labor Relations Commission,20 the Court made the following distinction: "the legitimate
job contractor provides services while the labor-only contractor provides only manpower. The legitimate job
contractor undertakes to perform a specific job for the principal employer while the labor-only contractor merely
provides the personnel to work for the principal employer." The services provided by employees of Digiserv are
directly related to the business of Digitel, as rationalized by the NLRC in this wise:

It is undisputed that as early as March 1994, the affected employees, except for two, were already performing
their job as Traffic Operator which was later renamed as Customer Service Representative (CSR). It is equally
undisputed that all throughout their employment, their function as CSR remains the same until they were
terminated effective May 30, 2005. Their long period of employment as such is an indication that their job is
directly related to the main business of DIGITEL which is telecommunications. Because, if it was not, DIGITEL
would not have allowed them to render services as Customer Service Representative for such a long period of
time.21

Furthermore, Digiserv does not exercise control over the affected employees. The NLRC highlighted the fact that
Digiserv shared the same Human Resources, Accounting, Audit and Legal Departments with Digitel which
manifested that it was Digitel who exercised control over the performance of the affected employees. The NLRC
also relied on the letters of commendation, plaques of appreciation and certification issued by Digitel to the
Customer Service Representatives as evidence of control.

Considering that Digiserv has been found to be engaged in labor-only contracting, the dismissed employees are
deemed employees of Digitel.

Section 7 of the Implementing Rules holds that labor-only contracting would give rise to: (1) the creation of an
employer-employee relationship between the principal and the employees of the contractor or sub-contractor;
and (2) the solidary liability of the principal and the contractor to the employees in the event of any violation of
the Labor Code.

Accordingly, Digitel is considered the principal employer of respondent employees.

The affected employees were

illegally dismissed.

In addition to finding that Digiserv is a labor-only contractor, records teem with proof that its dismissed
employees are in fact employees of Digitel. The NLRC enumerated these evidences, thus:

That the remaining thirteen (13) affected employees are indeed employees of DIGITEL is sufficiently established
by the facts and evidence on record.

It is undisputed that the remaining affected employees, except for two (2), were already hired by DIGITEL even
before the existence of DIGISERV. (The other two (2) were hired after the existence of DIGISERV). The UNION
submitted a sample copy of their appointment paper (Annex "A" of UNION’s Position Paper, Records, Vol. 1, p.
100) showing that they were appointed on March 1, 1994, almost three (3) months before DIGISERV came into
existence on May 30, 1994 (Annex "B", Ibid, Records, Vol. 1, p. 101). On the other hand, not a single
appointment paper was submitted by DIGITEL showing that these remaining affected employees were hired by
DIGISERV.

It is equally undisputed that the remaining, affected employees continuously held the position of Customer
Service Representative, which was earlier known as Traffic Operator, from the time they were appointed on
March 1, 1994 until they were terminated on May 30, 2005. The UNION alleges that these Customer Service
Representatives were under the Customer Service Division of DIGITEL. The UNION’s allegation is correct.
Sample of letter of commendations issued to Customer Service Representatives (Annexes "C" and "C-1" of
UNION’s Position Paper, Records, p. 100 and 111) indeed show that DIGITEL has a Customer Service Division
which handles its Call Center operations.

Further, the Certificates issued to Customer Service Representative likewise show that they are employees of
DIGITEL (Annexes "C-5", "C-6" - "C-7" of UNION’s Position Paper, Records, Vol. 1, pp. 115 to 117), Take for
example the "Service Award" issued to Ma. Loretta C. Esen, one of the remaining affected employees (Annex
"C-5", Supra). The "Service Award" was signed by the officers of DIGITEL – the VP-Customer Services Division,
the VP-Human Resources Division and the Group Head-Human Resources Division. It was issued by DIGITEL
to Esen thru the above named officers "In recognition of her seven (7) years continuous and valuable
contributions to the achievement of Digitel’s organization objectives". It cannot be gainsaid that it is only the
employer that issues service award to its employees.22 (Emphasis not supplied)

As a matter of fact, even before the incorporation of Digiserv, the affected employees were already employed by
Digitel as Traffic Operators, later renamed as Customer Service Representatives.

As an alternative argument, Digitel maintains that the affected employees were validly dismissed on the grounds
of closure of Digiserv, a department within Digitel.

In the recent case of Waterfront Cebu City Hotel v. Jimenez,23 we referred to the closure of a department or
division of a company as retrenchment. The dismissed employees were undoubtedly retrenched with the closure
of Digiserv.

For a valid retrenchment, the following elements must be present:

(1) That retrenchment is reasonably necessary and likely to prevent business losses which, if already incurred,
are not merely de minimis, but substantial, serious, actual and real, or if only expected, are reasonably imminent
as perceived objectively and in good faith by the employer;

(2) That the employer served written notice both to the employees and to the Department of Labor and
Employment at least one month prior to the intended date of retrenchment;

(3) That the employer pays the retrenched employees separation pay equivalent to one (1) month pay or at least
½ month pay for every year of service, whichever is higher;

(4) That the employer exercises its prerogative to retrench employees in good faith for the advancement of its
interest and not to defeat or circumvent the employees’ right to security of tenure; and

(5) That the employer used fair and reasonable criteria in ascertaining who would be dismissed and who would
be retained among the employees, such as status, efficiency, seniority, physical fitness, age, and financial
hardship for certain workers.24

Only the first 3 elements of a valid retrenchment had been here satisfied. Indeed, it is management prerogative
to close a department of the company. Digitel’s decision to outsource the call center operation of the company is
a valid reason to close down the operations of a department under which the affected employees were
employed. Digitel cited the decline in the volume of transaction of operator-assisted call services as supported
by Financial Statements for the years 2003 and 2004, during which Digiserv incurred a deficit of ₱ 163,624.00
and ₱ 164,055.00, respectively.25 All affected employees working under Digiserv were served with individual
notices of termination. DOLE was likewise served with the corresponding notice. All affected employees were
offered separation pay. Only 9 out of the 45 employees refused to accept the separation pay and chose to
contest their dismissal before this Court.

The fifth element regarding the criteria to be observed by Digitel clearly does not apply because all employees
under Digiserv were dismissed. The instant case is all about the fourth element, that is, whether or not the
affected employees were dismissed in good faith. We find that there was no good faith in the retrenchment.

Prior to the cessation of Digiserv’s operations, the Secretary of Labor had issued the first assumption order to
enjoin an impending strike. When Digiserv effected the dismissal of the affected employees, the Union filed
another notice of strike. Significantly, the Secretary of Labor ordered that the second notice of strike be
subsumed by the previous assumption order. Article 263(g) of the Labor Code provides:

When, in his opinion, there exists a labor dispute causing or likely to cause a strike or lockout in an industry
indispensable to the national interest, the Secretary of Labor and Employment may assume jurisdiction over the
dispute and decide it or certify the same to the Commission for compulsory arbitration. Such assumption or
certification shall have the effect of automatically enjoining the intended or impending strike or lockout as
specified in the assumption or certification order. If one has already taken place at the time of assumption or
certification, all striking or locked out employees shall immediately return to work and the employer shall
immediately resume operations and readmit all workers under the same terms and conditions prevailing before
the strike or lockout. The Secretary of Labor and Employment or the Commission may seek the assistance of
law enforcement agencies to ensure the compliance with this provision as well as with such orders as he may
issue to enforce the same.
The effects of the assumption order issued by the Secretary of Labor are two-fold. It enjoins an impending strike
on the part of the employees and orders the employer to maintain the status quo.

There is no doubt that Digitel defied the assumption order by abruptly closing down Digiserv. The closure of a
department is not illegal per se. What makes it unlawful is when the closure is undertaken in bad faith. In St.
John Colleges, Inc. v. St. John Academy Faculty and Employees Union,26 bad faith was evidenced by the timing
of and reasons for the closure and the timing of and reasons for the subsequent opening. There, the collective
bargaining negotiations between St. John and the Union resulted in a bargaining deadlock that led to the filing of
a notice of strike. The labor dispute was referred to the Secretary of Labor who assumed jurisdiction.

Pending resolution of the dispute, St. John closed the school prompting the Union to file a complaint for illegal
dismissal and unfair labor practice. The Union members alleged that the closure of the high school was done in
bad faith in order to get rid of the Union and render useless any decision of the SOLE on the CBA deadlocked
issues. We held that closure was done to defeat the affected employees’ security of tenure, thus:

The determination of whether SJCI acted in bad faith depends on the particular facts as established by the
evidence on record. Bad faith is, after all, an inference which must be drawn from the peculiar circumstances of
a case. The two decisive factors in determining whether SJCI acted in bad faith are (1) the timing of, and
reasons for the closure of the high school, and (2) the timing of, and the reasons for the subsequent opening of a
college and elementary department, and, ultimately, the reopening of the high school department by SJCI after
only one year from its closure.

Prior to the closure of the high school by SJCI, the parties agreed to refer the 1997 CBA deadlock to the SOLE
for assumption of jurisdiction under Article 263 of the Labor Code. As a result, the strike ended and classes
resumed. After the SOLE assumed jurisdiction, it required the parties to submit their respective position papers.
However, instead of filing its position paper, SJCI closed its high school, allegedly because of the "irreconcilable
differences between the school management and the Academy’s Union particularly the safety of our students
and the financial aspect of the ongoing CBA negotiations." Thereafter, SJCI moved to dismiss the pending labor
dispute with the SOLE contending that it had become moot because of the closure. Nevertheless, a year after
said closure, SJCI reopened its high school and did not rehire the previously terminated employees.

Under these circumstances, it is not difficult to discern that the closure was done to defeat the parties’
agreement to refer the labor dispute to the SOLE; to unilaterally end the bargaining deadlock; to render nugatory
any decision of the SOLE; and to circumvent the Union’s right to collective bargaining and its members’ right to
security of tenure. By admitting that the closure was due to irreconcilable differences between the Union and
school management, specifically, the financial aspect of the ongoing CBA negotiations, SJCI in effect admitted
that it wanted to end the bargaining deadlock and eliminate the problem of dealing with the demands of the
Union. This is precisely what the Labor Code abhors and punishes as unfair labor practice since the net effect is
to defeat the Union’s right to collective bargaining.27 (Emphasis not supplied)

As in St. John, bad faith was manifested by the timing of the closure of Digiserv and the rehiring of some
employees to Interactive Technology Solutions, Inc. (I-tech), a corporate arm of Digitel. The assumption order
directs employees to return to work, and the employer to reinstate the employees. The existence of the
assumption order should have prompted Digitel to observe the status quo. Instead, Digitel proceeded to close
down Digiserv. The Secretary of Labor had to subsume the second notice of strike in the assumption order. This
order notwithstanding, Digitel proceeded to dismiss the employees.

The timing of the creation of I-tech is dubious. It was incorporated on 18 January 2005 while the labor dispute
within Digitel was pending. I-tech’s primary purpose was to provide call center/customer contact service, the
same service provided by Digiserv. It conducts its business inside the Digitel office at 110 E. Rodriguez Jr.
Avenue, Bagumbayan, Quezon City. The former head of Digiserv, Ms. Teresa Taniega, is also an officer of I-
tech. Thus, when Digiserv was closed down, some of the employees presumably non-union members were
rehired by I-tech.

Thus, the closure of Digiserv pending the existence of an assumption order coupled with the creation of a new
corporation performing similar functions as Digiserv leaves no iota of doubt that the target of the closure are the
union member-employees. These factual circumstances prove that Digitel terminated the services of the affected
employees to defeat their security of tenure. The termination of service was not a valid retrenchment; it was an
illegal dismissal of employees.

It needs to be mentioned too that the dismissal constitutes an unfair labor practice under Article 248(c) of the
Labor Code which refers to contracting out services or functions being performed by union members when such
will interfere with, restrain or coerce employees in the exercise of their rights to self-organization. At the height of
the labor dispute, occasioned by Digitel’s reluctance to negotiate with the Union, I-tech was formed to provide,
as it did provide, the same services performed by Digiserv, the Union members’ nominal employer.

Under Article 279 of the Labor Code, an illegally dismissed employee is entitled to backwages and
reinstatement. Where reinstatement is no longer viable as an option, as in this case where Digiserv no longer
exists, separation pay equivalent to one (1) month salary, or one-half (1/2) month pay for every year of service,
whichever is higher, should be awarded as an alternative.28 The payment of separation pay is in addition to
payment of backwages.29

Indeed, while we have found that the closure of Digiserv was undertaken in bad faith, badges thereof evident in
the timing of Digiserv’s closure, hand in hand, with I-tech’s creation, the closure remains a foregone conclusion.
There is no finding, and the Union makes no such assertion, that Digiserv and I-tech are one and the same
corporation. The timing of Digiserv’s closure and I-tech’s ensuing creation is doubted, not the legitimacy of I-tech
as a business process outsourcing corporation providing both inbound and outbound services to an expanded
local and international clientele.30

The finding of unfair labor practice hinges on Digitel’s contracting-out certain services performed by union
member-employees to interfere with, restrain or coerce them in the exercise of their right to self-organization.

We have no basis to direct reinstatement of the affected employees to an ostensibly different corporation. The
surrounding circumstance of the creation of I-tech point to bad faith on the part of Digitel, as well as constitutive
of unfair labor practice in targeting the dismissal of the union member-employees. However, this bad faith does
not contradict, much less negate, the impossibility of the employees’ reinstatement because Digiserv has been
closed and no longer exists.

Even if it is a possibility that I-tech, as though Digitel, can absorb the dismissed union member-employees as I-
tech was incorporated during the time of the controversy with the same primary purpose as Digiserv, we would
be hard pressed to mandate the dismissed employees’ reinstatement given the lapse of more than seven (7)
years.

This length of time from the date the incident occurred to its Resolution31 coupled with the demonstrated
litigiousness of the disputants: (1) with all sorts of allegations thrown by either party against the other; (2) the two
separate filings of a notice of strike by the Union; (3) the Assumption Orders of the DOLE; (4) our own finding of
unfair labor practice by Digitel in targeting the union member-employees, abundantly show that the relationship
between Digitel and the union member-employees is strained. Indeed, such discordance between the parties
can very well be a necessary consequence of the protracted and branched out litigation. We adhere to the oft-
quoted doctrine that separation pay may avail in lieu of reinstatement if reinstatement is no longer practical or in
the best interest of the parties.32

Under the doctrine of strained relations, the payment of separation pay is considered an acceptable alternative
to reinstatement when the latter option is no longer desirable or viable. On one hand, such payment liberates the
employee from what could be a highly oppressive work environment. On the other hand, it releases the
employer from the grossly unpalatable obligation of maintaining in its employ a worker it could no longer trust.33

Finally, an illegally dismissed employee should be awarded moral and exemplary damages as their dismissal
was tainted with unfair labor practice.34 Depending on the factual milieu, jurisprudence has awarded varying
amounts as moral and exemplary damages to illegally dismissed employees when the dismissal is attended by
bad faith or fraud; or constitutes an act oppressive to labor; or is done in a manner contrary to good morals,
good customs or public policy; or if the dismissal is effected in a wanton, oppressive or malevolent
manner.35 1âwphi1

In Nueva Ecija I Electric Cooperative, Inc. (NEECO I) Employees Association v. National Labor Relations
Commission, we intoned:

Unfair labor practices violate the constitutional rights of workers and employees to self-organization, are inimical
to the legitimate interests of both labor and management, including their right to bargain collectively and
otherwise deal with each other in an atmosphere of freedom and mutual respect; and disrupt industrial peace
and hinder the promotion of healthy and stable labor-management relations. As the conscience of the
government, it is the Court’s sworn duty to ensure that none trifles with labor rights.36
We awarded moral damages in the amount of ₱ 10,000.00 and likewise awarded ₱ 5,000.00 as exemplary
damages for each dismissed employee.

In the recent case of Purefoods Corporation v. Nagkakaisang Samahang Manggagawa ng Purefoods Rank-and-
File,37 we awarded the aggregate amount of ₱ 500,000.00 as moral and exemplary damages to the illegally
dismissed union member-employees which exact number was undetermined.

In the case at hand, with the Union’s manifestation that only 13 employees remain as respondents, as most had
already accepted separation pay, and consistent with our finding that Digitel committed an unfair labor practice
in violation of the employees’ constitutional right to self-organization, we deem it proper to award each of the
illegally dismissed union member-employees the amount of ₱ 10,000.00 and ₱ 5,000.00 as moral and
exemplary damages, respectively.

WHEREFORE, the Petition is DENIED. The Decision of the Court of Appeals in CA-G.R. SP No. 91719
is AFFIRMED, while the Decision in CA-G.R. SP No. 94825 declaring the dismissal of affected union member-
employees as illegal is MODIFIED to include the payment of moral and exemplary damages in amount of ₱
10,000.00 and ₱ 5,000.00, respectively, to each of the thirteen (13) illegally dismissed union-member
employees.

Petitioner Digital Telecommunications Philippines, Inc. is ORDERED to pay the affected employees backwages
and separation pay equivalent to one (1) month salary, or one-half (1/2) month pay for every year of service,
whichever is higher.

Let this case be REMANDED to the Labor Arbiter for the computation of monetary claims due to the affected
employees.

SO ORDERED.

G.R. No. 186091 December 15, 2010

EMMANUEL BABAS, DANILO T. BANAG, ARTURO V. VILLARIN, SR., EDWIN JAVIER, SANDI BERMEO,
REX ALLESA, MAXIMO SORIANO, JR., ARSENIO ESTORQUE, and FELIXBERTO ANAJAO, Petitioners,
vs.
LORENZO SHIPPING CORPORATION, Respondent.

DECISION

NACHURA, J.:

Petitioners Emmanuel Babas, Danilo T. Banag, Arturo V. Villarin, Sr., Edwin Javier, Sandi Bermeo, Rex Allesa,
Maximo Soriano, Jr., Arsenio Estorque, and Felixberto Anajao appeal by certiorari under Rule 45 of the Rules of
Court the October 10, 2008 Decision1 of the Court of Appeals (CA) in CA-G.R. SP. No. 103804, and the January
21, 2009 Resolution,2 denying its reconsideration.

Respondent Lorenzo Shipping Corporation (LSC) is a duly organized domestic corporation engaged in the
shipping industry; it owns several equipment necessary for its business. On September 29, 1997, LSC entered
into a General Equipment Maintenance Repair and Management Services Agreement3 (Agreement) with Best
Manpower Services, Inc. (BMSI). Under the Agreement, BMSI undertook to provide maintenance and repair
services to LSC’s container vans, heavy equipment, trailer chassis, and generator sets. BMSI further undertook
to provide checkers to inspect all containers received for loading to and/or unloading from its vessels.

Simultaneous with the execution of the Agreement, LSC leased its equipment, tools, and tractors to BMSI.4 The
period of lease was coterminous with the Agreement.

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. On October 1, 2003, LSC terminated the Agreement, effective October 31, 2003. Consequently,
petitioners lost their employment.

BMSI asserted that it is an independent contractor. It averred that it was willing to regularize petitioners;
however, some of them lacked the requisite qualifications for the job. BMSI was willing to reassign petitioners
who were willing to accept reassignment. BMSI denied petitioners’ claim for underpayment of wages and non-
payment of 13th month pay and other benefits.

LSC, on the other hand, averred that petitioners were employees of BMSI and were assigned to LSC by virtue of
the Agreement. BMSI is an independent job contractor with substantial capital or investment in the form of tools,
equipment, and machinery necessary in the conduct of its business. The Agreement between LSC and BMSI
constituted legitimate job contracting. Thus, petitioners were employees of BMSI and not of LSC.

After due proceedings, the LA rendered a decision6 dismissing petitioners’ complaint. The LA found that
petitioners were employees of BMSI. It was BMSI which hired petitioners, paid their wages, and exercised
control over them.

Petitioners appealed to the National Labor Relations Commission (NLRC), arguing that BMSI was engaged in
labor-only contracting. They insisted that their employer was LSC.

On January 16, 2008, the NLRC promulgated its decision.7 Reversing the LA, the NLRC held:

We find from the records of this case 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 which states:

xxxx

VI. RENTAL OF EQUIPMENT

[6.01.] That the CLIENT has several forklifts and truck tractor, and has offered to the CONTRACTOR the use of
the same by way of lease, the monthly rental of which shall be deducted from the total monthly billings of the
CONTRACTOR for the services covered by this Agreement.

6.02. That the CONTRACTOR has agreed to rent the CLIENT’s forklifts and truck tractor.

6.03. The parties herein have agreed to execute a Contract of Lease for the forklifts and truck tractor that will be
rented by the CONTRACTOR. (p. 389, Records)

True enough, parties signed a Lease Contract (p. 392, Records) wherein respondent BMSI leased several
excess equipment of LSC to enable it to discharge its obligation under the Agreement. So without the equipment
which respondent BMSI leased from respondent LSC, the former would not be able to perform its commitments
in the Agreement.

In Phil. Fuji Xerox Corp. v. NLRC (254 SCRA 294) the Supreme Court held:

x x x. The phrase "substantial capital and investment in the form of tools, equipment, machineries, work
premises, and other materials which are necessary in the conduct of his business," in the Implementing Rules
clearly contemplates tools, equipment, etc., which are directly related to the service it is being contracted to
render. One who does not have an independent business for undertaking the job contracted for is just an agent
of the employer. (underscoring ours)

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. In view of the absence of such independent
business or activity or job to be performed by respondent BMSI in respondent LSC [petitioners] performed work
that was necessary and desirable to the main business of respondent LSC. Respondents were not able to refute
the allegations of [petitioners] that they performed the same work that the regular workers of LSC performed and
they stood side by side with regular employees of respondent LSC performing the same work. Necessarily, the
control on the manner and method of doing the work was exercised by respondent LSC and not by respondent
BMSI since the latter had no business of its own to perform in respondent LSC.

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.

After concluding that respondent BMSI is engaged in prohibited labor-only contracting, respondent LSC became
the employer of [petitioners] pursuant to DO 18-02.

[Petitioners] therefore should be reinstated to their former positions or equivalent positions in respondent LSC as
regular employees with full backwages and other benefits without loss of seniority rights from October 31, 2003,
when they lost their jobs, until actual reinstatement (Vinoya v. NLRC, 324 SCRA 469). If reinstatement is not
feasible, [petitioners] then should be paid separation pay of one month pay for every year of service or a fraction
of six months to be considered as one year, in addition to full backwages.

Concerning [petitioners’] prayer to be paid wage differentials and benefits under the CBA, We have no doubt that
[petitioners] would be entitled to them if they are covered by the said CBA. For this purpose, [petitioners] should
first enlist themselves as union members if they so desire, or pay agency fee. Furthermore, only [petitioners]
who signed the appeal memorandum are covered by this Decision. As regards the other complainants who did
not sign the appeal, the Decision of the Labor Arbiter dismissing this case became final and executory.8

The NLRC disposed thus:

WHEREFORE, the appeal of [petitioners] is GRANTED. The Decision of the Labor Arbiter is hereby
REVERSED, and a NEW ONE rendered finding respondent Best Manpower Services, Inc. is engaged in
prohibited labor-only-contracting and finding respondent Lorenzo Shipping Corp. as the employer of the
following [petitioners]:

1. Emmanuel B. Babas

2. Danilo Banag

3. Edwin L. Javier

4. Rex Allesa

5. Arturo Villarin, [Sr.]

6. Felixberto C. Anajao

7. Arsenio Estorque

8. Maximo N. Soriano, Jr.

9. Sandi G. Bermeo

Consequently, respondent Lorenzo Shipping Corp. is ordered to reinstate [petitioners] to their former positions
as regular employees and pay their wage differentials and benefits under the CBA.

If reinstatement is not feasible, both respondents Lorenzo Shipping Corp. and Best Manpower Services are
adjudged jointly and solidarily to pay [petitioners] separation pay of one month for every year of service, a
fraction of six months to be considered as one year.

In addition, respondent LSC and BMSI are solidarily liable to pay [petitioners’] full backwages from October 31,
2003 until actual reinstatement or, if reinstatement is not feasible, until finality of this Decision.

Respondent LSC and respondent BMSI are likewise adjudged to be solidarily liable for attorney’s fees equivalent
to ten (10%) of the total monetary award.
xxxx

SO ORDERED.9

LSC went to the CA via certiorari. On October 10, 2008, the CA rendered the now challenged
Decision,10 reversing the NLRC. In holding that BMSI was an independent contractor, the CA relied on the
provisions of the Agreement, wherein BMSI warranted that it is an independent contractor, with adequate capital,
expertise, knowledge, equipment, and personnel necessary for the services rendered to LSC. According to the
CA, the fact that BMSI entered into a contract of lease with LSC did not ipso facto make BMSI a labor-only
contractor; on the contrary, it proved that BMSI had substantial capital. The CA was of the view that the law only
required substantial capital orinvestment. Since BMSI had substantial capital, as shown by its ability to pay rents
to LSC, then it qualified as an independent contractor. It added that even under the control test, BMSI would be
the real employer of petitioners, since it had assumed the entire charge and control of petitioners’ services. The
CA further held that BMSI’s Certificate of Registration as an independent contractor was sufficient proof that it
was an independent contractor. Hence, the CA absolved LSC from liability and instead held BMSI as employer
of petitioners.

The fallo of the CA Decision reads:

WHEREFORE, premises considered, the instant petition is GRANTED and the assailed decision and resolution
of public respondent NLRC are REVERSED and SET ASIDE. Consequently, the decision of the Labor Arbiter
dated September 29, 2004 is REINSTATED.

SO ORDERED.11

Petitioners filed a motion for reconsideration, but the CA denied it on January 21, 2009.12

Hence, this appeal by petitioners, positing that:

THE HONORABLE COURT OF APPEALS ERRED IN IGNORING THE CLEAR EVIDENCE OF RECORD THAT
RESPONDENT WAS ENGAGED IN LABOR-ONLY CONTRACTING TO DEFEAT PETITIONERS’ RIGHT TO
SECURITY OF TENURE.13

Before resolving the petition, we note that only seven (7) of the nine petitioners signed the Verification and
Certification.14 Petitioners Maximo Soriano, Jr. (Soriano) and Felixberto Anajao (Anajao) did not sign the
Verification and Certification, because they could no longer be located by their co-petitioners.15

In Toyota Motor Phils. Corp. Workers Association (TMPCWA), et al. v. National Labor Relations
Commission,16citing Loquias v. Office of the Ombudsman,17 we stated that the petition satisfies the formal
requirements only with regard to the petitioner who signed the petition, but not his co-petitioner who did not sign
nor authorize the other petitioner to sign it on his behalf. Thus, the petition can be given due course only as to
the parties who signed it. The other petitioners who did not sign the verification and certificate against forum
shopping cannot be recognized as petitioners and have no legal standing before the Court. The petition should
be dismissed outright with respect to the non-conforming petitioners.

Thus, we dismiss the petition insofar as petitioners Soriano and Anajao are concerned.

Petitioners vigorously insist that they were employees of LSC; and that BMSI is not an independent contractor,
but a labor-only contractor. LSC, on the other hand, maintains that BMSI is an independent contractor, with
adequate capital and investment. LSC capitalizes on the ratiocination made by the CA.

In declaring BMSI as an independent contractor, the CA, in the challenged Decision, heavily relied on the
provisions of the Agreement, wherein BMSI declared that it was an independent contractor, with substantial
capital and investment.

De Los Santos v. NLRC18 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.
In San 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 as labor-only contractor, 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 permissible job 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 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. 21

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 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 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.22

Given the above standards, we sustain the petitioners’ contention that BMSI is engaged in labor-only
contracting.

First, petitioners worked at LSC’s premises, and nowhere else. Other than the provisions of the Agreement,
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 contractor’s 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.

In Mandaue 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, LSC’s 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 BMSI’s Certificate of Registration as sufficient proof that it is an independent
contractor. In San 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 contractor from arising.251avvphi1

Indubitably, BMSI can only be classified as a labor-only contractor. The CA, therefore, erred when it ruled
otherwise. 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.

Petitioners lost their employment when LSC terminated its Agreement with BMSI. However, the termination of
LSC’s Agreement with BMSI cannot be considered a just or an authorized cause for petitioners’ dismissal. In
Almeda v. Asahi Glass Philippines. Inc. v. Asahi Glass Philippines, Inc.,27 this Court declared:

The sole reason given for the dismissal of petitioners by SSASI was the termination of its service contract with
respondent. But since SSASI was a labor-only contractor, and petitioners were to be deemed the employees of
respondent, then the said reason would not constitute a just or authorized cause for petitioners’ dismissal. It
would then appear that petitioners were summarily dismissed based on the aforecited reason, without
compliance with the procedural due process for notice and hearing.

Herein petitioners, having been unjustly dismissed from work, are entitled to reinstatement without loss of
seniority rights and other privileges and to full back wages, inclusive of allowances, and to other benefits or their
monetary equivalents computed from the time compensation was withheld up to the time of actual reinstatement.
Their earnings elsewhere during the periods of their illegal dismissal shall not be deducted therefrom.

Accordingly, we hold that the NLRC committed no grave abuse of discretion in its decision. Conversely, the CA
committed a reversible error when it set aside the NLRC ruling.

WHEREFORE, the petition is GRANTED. The Decision and the Resolution of the Court of Appeals in CA-G.R.
SP. No. 103804 are REVERSED and SET ASIDE. Petitioners Emmanuel Babas, Danilo T. Banag, Arturo V.
Villarin, Sr., Edwin Javier, Sandi Bermeo, Rex Allesa, and Arsenio Estorque are declared regular employees of
Lorenzo Shipping Corporation. Further, LSC is ordered to reinstate the seven petitioners to their former position
without loss of seniority rights and other privileges, and to pay full backwages, inclusive of allowances, and other
benefits or their monetary equivalent, computed from the time compensation was withheld up to the time of
actual reinstatement.

No pronouncement as to costs.

SO ORDERED.

G.R. No. 94825. September 4, 1992.

PHILIPPINE FISHERIES DEVELOPMENT AUTHORITY, Petitioner, v. NATIONAL LABOR RELATIONS

COMMISSION, and ODIN SECURITY AGENCY, as representative of its Security Guards, Respondents.

DECISION

GUTIERREZ, JR., J.:

The petitioner questions the resolution of the National Labor Relations Commission (NLRC) dated January 17,
1983 setting aside the order of dismissal issued by the Labor Arbiter and the resolution dated June 25, 1990
denying petitioner’s motion for reconsideration.

The facts are as follows:chanrob1es virtual 1aw library

The petitioner is a government-owned or controlled corporation created by P.D. No. 977.

On November 11, 1985, it entered into a contract with the Odin Security Agency for security services of its Iloilo
Fishing Port Complex in Iloilo City. The pertinent provision of the contract provides:chanrobles.com : virtual law
library

OBLIGATION OF THE FISHING PORT COMPLEX:chanrob1es virtual 1aw library

1. For and in consideration of the services to be rendered by the AGENCY to the FISHING PORT COMPLEX,
the latter shall pay to the former per month for eight (8) hours work daily as follows:chanrob1es virtual 1aw
library

OUTSIDE METRO MANILA

Security Guard P1,990.00

Security Supervisor 2,090.00

Det. Commander 2,190.00.

The Security Group of the AGENCY will be headed by a detachment commander whose main function shall
consist of the administration and supervision control of the AGENCY’s personnel in the FISHING PORT
COMPLEX. There shall be one supervisor per shift who shall supervise the guards on duty during a particular
shift.

The above schedule of compensation includes among others, the following:chanrob1es virtual 1aw library

(a) Minimum wage (Wage Order No. 5)

(b) Rest Day Pay

(c) Night Differential Pay

(d) Incentive Leave Pay

(e) 13th Month Pay

(f) Emergency Cost of Living Allowance (up to Wage Order No. 5)

(g) 4% Contractor’s Tax

(h) Operational Expenses

(i) Overhead (Rollo, pp. 197-198)

The contract for security services also provided for a one year renewable period unless terminated by either of
the parties. It reads:chanrob1es virtual 1aw library

9. This agreement shall take effect upon approval for a period of one (1) year unless sooner terminated upon
notice of one party to the other provided, that should there be no notice of renewal within thirty (30) days before
the expiry date, the same shall be deemed renewed, and provided further, that the party desiring to terminate
the contract before the expiry date shall give thirty (30) days written advance notice to the other party. (Rollo, p.
198)
On October 24, 1987, and during the effectivity of the said Security Agreement, the private respondent
requested the petitioner to adjust the contract rate in view of the implementation of Wage Order No. 6 which took
effect on November 1, 1984.chanroblesvirtualawlibrary

The private respondent’s request for adjustment was anchored on the provision of Wage Order No. 6 which
states:chanrob1es virtual 1aw library

SECTION 9. In the case of contracts for construction projects and for security, janitorial and similar services, the
increases in the minimum wage and allowance rates of the workers shall be borne by the principal or client of
the construction/service contractor and the contracts shall be deemed amended accordingly, subject to the
provisions of Section 3(c) of this Order. (Rollo, p. 49)

Section 7, par. c of the Security Services Contract which calls for an automatic escalation of the rate per guard in
case of wage increase also reads:chanrob1es virtual 1aw library

The terms and conditions herein set forth shall be modified by the applicable provisions of subsequent laws or
decrees, especially as they pertain to increases in the minimum wage and occupational benefits to workers.
(Rollo, p. 46)

Requests for adjustment of the contract price were reiterated on January 14, 1988 and February 19, 1988 but
were ignored by the petitioner.

Thus on June 7, 1988, the private respondent filed with the Office of the Sub-Regional Arbitrator in Region VI,
Iloilo City a complaint for unpaid amount of re-adjustment rate under Wage Order No. 6 together with wage
salary differentials arising from the integration of the cost of living allowance under Wage Order No. 1, 2, 3 and 5
pursuant to Executive Order No. 178 plus the amount of P25,000.00 as attorney’s fees and cost of litigation.

On July 29, 1988, the petitioner filed a Motion to Dismiss on the following grounds:chanrob1es virtual 1aw library

(1) The Commission has no jurisdiction to hear and try the case;

(2) Assuming it has jurisdiction, the security guards of Odin Security Agency have no legal personality to sue or
be sued; and

(3) Assuming the individual guards have legal personality the action involves interpretation of contract over
which it has no authority. (Rollo, p. 75)

On August 19, 1988, the Labor Arbiter issued an Order dismissing the complaint stating that the petitioner’s
being a government-owned or controlled corporation would place it under the scope and jurisdiction of the Civil
Service Commission and not within the ambit of the NLRC.

This Order of dismissal was raised on Appeal to the NLRC and on January 17, 1989 the NLRC issued the
questioned resolution setting aside the order and entered a decision granting reliefs to the private Respondent.

A motion for reconsideration was subsequently filed raising among others that the resolution
is:chanroblesvirtualawlibrary

(1) In violation of the right of the respondent to due process under the Constitution;

(2) Granting arguendo that the due process clause was observed, the resolution granting relief is without any
legal basis; and

(3) Granting arguendo that there is legal basis for the award, the stipulation under the contract allowing an
increase of wage rate is void ab initio. (Rollo, p. 86)
On June 25, 1990, the motion for reconsideration was denied.

The petitioner now comes to this Court reiterating substantially the same grounds it raised in its motion for
reconsideration, to wit:chanrob1es virtual 1aw library

(1) The National Labor Relations Commission failed to observe due process.

(2) Granting the award of the National Labor Relations Commission is valid, reliefs granted are not legal.

(3) Assuming the award complies with the requirements of due process, the National Labor Relations
Commission erred when it failed to declare the contract for security services void. (Rollo, pp. 201-202)

The petitioner is a government-owned or controlled corporation with a special charter. This places it under the
scope of the civil service (Art. XI [B] [1] and [2], 1987 Constitution); Boy Scouts of the Philippines v. NLRC, 196
SCRA 176 [1991]; PNOC-Energy Development Corp. v. NLRC, 201 SCRA 487 [1991]). However, the guards are
not employees of the petitioner. The contract of services explicitly states that the security guards are not
considered employees of the petitioner (Rollo, p. 45). There being no employer-employee relationship between
the petitioner and the security guards, the jurisdiction of the Civil Service Commission may not be invoked in this
case.

The contract entered into by the petitioner which is merely job contracting makes the petitioner an indirect
employer. The issue, therefore, is whether or not an indirect employer is bound by the rulings of the NLRC.

Notwithstanding that the petitioner is a government agency, its liabilities, which are joint and solidary with that of
the contractor, are provided in Articles 106, 107 and 109 of the Labor Code. This places the petitioner’s liabilities
under the scope of the NLRC. Moreover, Book Three, Title II on Wages specifically provides that the term
"employer" includes any person acting directly or indirectly in the interest of an employer in relation to an
employee and shall include the Government and all its branches, subdivisions and instrumentalities, all
government-owned or controlled corporation and institutions as well as non-profit private institutions, or
organizations (Art. 97 [b], Labor Code; Eagle Security Agency, Inc. v. NLRC, 173 SCRA 479 [1989]; Rabago v.
NLRC, 200 SCRA 158 [1991]). The NLRC, therefore, did not commit grave abuse of discretion in assuming
jurisdiction to set aside the Order of dismissal by the Labor Arbiter.chanrobles virtual lawlibrary

The underlying issue in this case is who should carry the burden of the wage increases.

Settled is the rule that in job contracting, the petitioner as principal is jointly and severally liable with the
contractor for the payment of unpaid wages. The statutory basis for the joint and several liability is set forth in
Articles 107, and 109 in relation to Article 106 of the Labor Code. (Del Rosario and Sons Logging Enterprises,
Inc. v. NLRC, 136 SCRA 669 [1985]; Baguio v. NLRC, 202 SCRA 465 [1991]; Ecal v. NLRC, 195 SCRA 224
[1991]). In the case at bar, the action instituted by the private respondent was for the payment of unpaid wage
differentials under Wage Order No. 6. The liabilities of the parties were very well explained in the case of Eagle
Security v. NLRC, supra where the court held:chanrob1es virtual 1aw library

x x x

"The solidary liability of PTSI and EAGLE, however, does not preclude the right of reimbursement from his co-
debtor by the one who paid [See Article 1217, Civil Code]. It is with respect to this right of reimbursement that
petitioners can find support in the aforecited contractual stipulation and Wage Order provision.

"The Wage Orders are explicit that payment of the increases are `to be borne’ by the principal or client.’To be
borne’, however, does not mean that the principal, PTSI in this case, would directly pay the security guards the
wage and allowance increases because there is no privity of contract between them. The security guards’
contractual relationship is with their immediate employer, EAGLE. As an employer, EAGLE is tasked, among
others, with the payment of their wages [See Article VII Sec. 3 of the Contract for Security Services, supra and
Bautista v. Inciong, G.R. No. 52824, March 16, 1988, 158 SCRA 556].

"Premises considered, the security guards’ immediate recourse for the payment of the increases is with their
direct employer, EAGLE. However, in order for the security agency to comply with the new wage and allowance
rates it has to pay the security guards, the Wage Order made specific provision to amend existing contracts for
security services by allowing the adjustment of the consideration paid by the principal to the security agency
concerned. What the Wage Orders require, therefore, is the amendment of the contract as to the consideration
to cover the service contractor’s payment of the increases mandated. In the end, therefore, ultimate liability for
the payment of the increases rests with the principal."cralaw virtua1aw library

The Wage Orders are statutory and mandatory and can not be waived. The petitioner can not escape liability
since the law provides the joint and solidary liability of the principal and the contractor for the protection of the
laborers. The contention that it was deprived due process because no hearing was conducted does not deserve
merit. A decision on the merits is proper where the issues raised by the parties did not involve intricate questions
of law. (See Blue Bar Coconut Phils. Inc. v. Minister of Labor, 174 SCRA 25 [1989]) There can be no question
that the security guards are entitled to wage adjustments. The computation of the amount due to each individual
guard can be made during the execution of the decision where hearings can be held. (See Section 3, Rule VIII of
the New Rules of Procedure of the NLRC) Neither can the petitioner assail the contract for security services for
being void ab initio on the ground that it did not comply with the bidding requirements set by law. Undeniably,
services were rendered already and the petitioner benefitted from said contract for two (2) years now. The
petitioner is therefore estopped from assailing the contract.chanrobles law library : red

Quite noteworthy is the fact that the private respondent entered into the contract when Wage Order No. 6 had
already been in force. The contract was entered into in November 11, 1985 one year after the effectivity of Wage
Order No. 6 which was on November 1, 1984. The rates of the security guards as stipulated in the contract did
not consider the increases in the minimum wage mandated by Wage Order No. 6. Two years after, the private
respondent is now asking for an adjustment in the contract price pursuant to the wage order provision.

Such action of the private respondent is rather disturbing and must not remain unchecked. In the complaint filed,
the private respondent alleged that it requested the Regional Director, NCR Region of the Department of Labor
and Employment for their intercession in connection with the illegal bidding and award made by the petitioner in
favor of Triad Security Agency which was below the minimum wage law. Undeniably, the private respondent is
equally guilty when it entered into the contract with the petitioner without considering Wage Order No. 6.

The private respondent tries to explain that the Philippine Association of Detective and Protective Agency
Operators (PADPAO) which fixes the contract rate of the security agencies was unable to fix the new contract
rate until May 12, 1986.

We, however, agree with the posture that the setting of wages under PADPAO is of no moment. The PADPAO
memorandum was not necessary to make Wage Order No. 6 effective. The PADPAO memo was merely an
internal agreement among the operators to set the ceiling of the contract rates. It was aimed to curb the practice
of security agencies which were in cutthroat competition to request for wage adjustments after proposals were
accepted in good faith to the prejudice of the parties.chanrobles.com.ph : virtual law library

While it is true that security personnel should not be deprived of what is lawfully due them, it bears emphasis
that it was the private respondent which first deprived the security personnel of their rightful wage under Wage
Order No. 6. The private respondent is the employer of the security guards and as the employer, it is charged
with knowledge of labor laws and the adequacy of the compensation that it demands for contractual services is
its principal concern and not any other’s (Del Rosario & Sons Logging Enterprises, Inc. v. NLRC, 136 SCRA 669
[1985]).

Given this peculiar circumstance, the private respondent should also be faulted for the unpaid wage differentials
of the security guards. By filing the complaint in its own behalf and in behalf of the security guards, the private
respondent wishes to exculpate itself from liability on the strength of the ruling in the Eagle case that the ultimate
liability rests with the principal. Nonetheless, the inescapable fact is that the employees must be guaranteed
payment of the wages due them for the performance of any work, task, job or project. They must be given ample
protection as mandated by the Constitution (See Article II, Section 18 and Article XIII, Section 3). Thus, to
assure compliance with the provisions of the Labor Code including the statutory minimum wage, the joint and
several liability of the contractor and the principal is mandated.

We, therefore, hold the petitioner and the private respondent jointly and severally liable to the security guards for
the unpaid wage differentials under Wage Order No. 6. As held in the Eagle case, the security guards’
immediate recourse is with their direct employer, private respondent Odin Security Agency. The solidary liability
is, however, without prejudice to a claim for reimbursement by the private respondent against the petitioner for
only one-half of the amount due considering that the private respondent is also at fault for entering into the
contract without taking into consideration the minimum wage rates under Wage Order No. 6.chanrobles
lawlibrary : rednad

WHEREFORE, the questioned resolutions of the National Labor Relations Commission are hereby AFFIRMED
with the modification that both the petitioner and the private respondent are ORDERED to pay jointly and
severally the unpaid wage differentials under Wage Order No. 6 without prejudice to the right of reimbursement
for one-half of the amount which either the petitioner or the private respondent may have to pay to the security
guards. Costs against the petitioner.

SO ORDERED.