G.R. No.

208451, February 3, 2016

MANILA MEMORIAL PARK CEMETERY, INC., Petitioner, vs. EZARD D. LLUZ,
NORMAN CORRAL, ERWIN FUGABAN, VALDIMAR BALISI, EMILIO FABON,
JOHN MARK APLICADOR, MICHAEL CURIOSO, JUNLIN ESPARES, GA VINO
FARINAS, and WARD TRADING AND SERVICES, Respondents.

In order to determine whether there exists an employer-employee relationship between Manila

Memorial and respondents, relevant provisions of the labor law and rules must first be reviewed.
Article 106 of the Labor Code 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 and Employment 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 supplied)

Sections 3, 5 and 7 of Department Order No. 18-0212 distinguish between legitimate and labor-
only contracting and assume the existence of an employer-employee relationship if found to be
engaged in labor-only contracting. The provisions state:

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) 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.

"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.

xxxx

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 cases 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.isi (Emphasis supplied)

It is clear from these provisions that contracting arrangements for the performance of specific jobs
or services under the law and its implementing rules are allowed. However, contracting must be
made to a legitimate and independent job contractor since labor rules expressly prohibit labor-only
contracting.

Labor-only contracting exists when 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:

1) 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

2) The contractor does not exercise the right to control the performance of the work
of the contractual employee.13

G.R. No. 219435, January 17, 2018

ALLIED BANKING CORPORATION, now merged with PHILIPPINE NATIONAL
BANK, Petitioner vs. REYNOLD CALUMPANG, Respondent

Article 106 of the Labor Code provides the relations which may arise between an employer, a
contractor, and the contractors' employees, thus:
ART. 106. Contractor or subcontracting. - Whenever an employer enters into a contract with
another person for the performance of the 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 and Employment may, by appropriate regulations, restrict or prohibit the
contracting out of labor to protect the rights of workers established under the Code. In so
prohibiting or restricting, he may make appropriate distinctions between labor-only contracting
and job contracting as well as differentiations within these types of contracting and determine who
among the parties involved shall be considered the employer for purposes of this Code, to prevent
any violation or circumvention of any provision of this Code.
There is labor-only contracting where the person supplying workers to an employer does not have
substantial capital or investment in the form of tools, equipment, machineries, work premises,
among others, and the workers recruited and placed by such person are performing activities which
are directly related to the principal business of such employer. In such cases, the person or
intermediary shall be considered merely as an agent of the employer who shall be responsible to
the workers in the same manner and extent as if the latter were directly employed by him.

Permissible job contracting or subcontracting has been distinguished from labor-only contracting
such that permissible job contracting or subcontracting refers to an arrangement whereby a
principal agrees to put out or farm out to a contractor or subcontractor the performance or
completion of a specific job, work or service within a definite or predetermined period, regardless
of whether such job, work or service is to be performed or completed within or outside the premises
of the principal, while labor-only contracting, on the other hand, pertains to an arrangement where
the contractor or subcontractor merely recruits, supplies or places workers to perform a job, work
or service for a principal.35

These distinctions were laid out in the Omnibus Rules Implementing the Labor Code thus:

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

(a) 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

(b) 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.

SECTION 9. Labor-only contracting. - (a) Any person who undertakes to supply workers to an
employer shall be deemed to be engaged in labor-only contracting where such person:
(1) Does not have substantial capital or investment in the form of tools, equipment, machineries,
work premises and other materials; and
(2) The workers recruited and placed by such person are performing activities which are directly
related to the principal business or operations of the employer in which workers are habitually
employed.

(b) Labor-only contracting as defined herein is hereby prohibited and the person acting as
contractor shall be considered merely as an agent or intermediary of the employer who shall be
responsible to the workers in the same manner and extent as if the latter were directly employed
by him.
(c) For cases not falling under this Rule, the Secretary of Labor and Employment shall determine
through appropriate orders whether or not the contracting out of labor is permissible in the light of
the circumstances of each case and after considering the operating needs of the employer and the
rights of the workers involved. In such case, he may prescribe conditions and restrictions to insure
the protection and welfare of the workers.
As a general rule, a contractor is presumed to be a labor-only contractor, unless such contractor
overcomes the burden of proving that it has the substantial capital, investment, tools and the like.36
In the present case, petitioner failed to establish that RCI is a legitimate labor contractor as
contemplated under the Labor Code. Except for the bare allegation of petitioner that RCI had
substantial capitalization, it presented no supporting evidence to show the same. Petitioner never
submitted financial statements from RCI. Even the Service Agreement allegedly entered into
between petitioner and RCI, upon which petitioner relied to show that RCI was an independent
contractor, had lapsed in August 2005, as admitted by petitioner in its Position Paper. 37 Notably,
petitioner failed to allege when the Service Agreement was executed, thus, making its claim that
respondent was hired by RCI and assigned to petitioner in 2003 even more ambiguous.

Aside from this, petitioner's claim that RCI exercised control and supervision over respondent is
belied by the fact that petitioner admitted that its own Branch Manager had informed respondent
that his services would no longer be required at the Branch.38 This overt act shows that petitioner
had direct control over respondent while he was assigned at the Branch. Moreover, the CA is
correct in finding that respondent's work is related to petitioner's business and is characterized as
part of or in pursuit of its banking operations.

An employer-employee relationship exists between petitioner and respondent

A finding that a contractor is a labor-only contractor, as opposed to permissible job contracting, is
equivalent to declaring that there is an employer-employee relationship between the principal and
the employees of the supposed contractor, and the labor-only contractor is considered as a mere
agent of the principal, the real employer.39

In this case, petitioner bank is the principal employer and RCI is the labor-only contractor.
Accordingly, petitioner and RCI are solidarily liable for the rightful claims of respondent.

G.R. No. 154715 December 11, 2003

NEW GOLDEN CITY BUILDERS & DEVELOPMENT CORPORATION and MANUEL
SY, petitioners, vs. COURT OF APPEALS, NATIONAL LABOR RELATIONS
COMMISSION, LITO GALLO, TEOFANES ANORA, RICARDO CENTINALES,
ROBERTO QUIRINO, LORENZO DIVINAGRACIA, EUTIQUIO ANORA, TEFILO
ANORA, ANECITO VISTAL, DIONISIO VISTAL, ARNOLD DE VERA, ARNOLD
PAGENIO, ROGELIO MELENCIO, CECILIANO MELENCIO, OLYMPIO NENIZA,
MANUEL NENIZA, CASTOR ANORA, ROLAND TROBISO, FREDISVINDO DE VERA,
ANTONIO ARTUGUE, RENE EPIZ, PACIANO ROSAUPAN, JANELO REPOLEDON
and TORIBIO MELENCIO, respondents.

In Neri v. NLRC,13 we held that the labor contractor which sufficiently proved that it had
substantial capital was not engaged in labor-only contracting.1avvphi1 Thus:
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.

Moreover, the Court has taken judicial notice of the general practice adopted in several government
and private institutions and industries of hiring independent contractors to perform special
services.14

Anent the second issue, we hold that there existed an employer-employee relationship between
petitioner and private respondents albeit for a limited purpose.

In legitimate job contracting, the law creates an employer-employee relationship for a limited
purpose, i.e., to ensure that the employees are paid their wages. The principal employer becomes
jointly and severally liable with the job contractor only for the payment of the employees’ wages
whenever the contractor fails to pay the same. Other than that, the principal employer is not
responsible for any claim made by the employees.15

From the foregoing disquisition, the petitioner did not, as it could not, illegally dismissed the
private complainants. Hence, it could not be held liable for backwages and separation
pay.16 Nevertheless, it is jointly and severally liable with Nilo Layno Builders for the private
complainants’ wages, in the same manner and extent that it is liable to its direct employees. The
pertinent provisions of the Labor Code read:

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. (Emphasis ours)

xxx xxx xxx

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

In the case of Rosewood Processing, Inc. v. NLRC,17 it was held:

The joint and several liability of the employer or principal was enacted to ensure compliance with
the provisions of the Code, principally those on statutory minimum wage. The contractor or
subcontractor is made liable by virtue of his or her status as a direct employer, and the principal as
the indirect employer of the contractor’s employees. This liability facilitates, if not guarantees,
payment of the workers’ compensation, thus, giving the workers ample protection as mandated by
the 1987 Constitution. This is not unduly burdensome to the employer. Should the indirect
employer be constrained to pay the workers, it can recover whatever amount it had paid in
accordance with the terms of the service contract between itself and the contractor.

This liability covers the payment of service incentive leave and 13th month pay18 of the private
complainants during the time they were working at petitioners’ Prince David Project.1âwphi1 So
long as the work, task, job or project has been performed for petitioners’ benefit or on its behalf,
the liability accrues for such period even if, later on, the employees are eventually transferred or
reassigned elsewhere.19