COCA COLA VS DELA CRUZ 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
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
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, 2004,11 after 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.
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
Decision1 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;8 and (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 Agreement 17 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, 21 prepared by RB Chua, another supervisor of petitioner;
(5) Daily Sales Monitoring Report prepared by petitioner;22 and (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.39 But respondents were hired as
salesmen and leadman for petitioner. The Court cannot, under such ambiguous
circumstances, make a reasonable determination if Interserve had substantial capital or
investment to undertake the job it was contracting with petitioner.
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.
BAGUIO VS NLRC
.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, conduct of its business. Moreover, petitioners argue that they perform duties which are
Third Division, dated 27 February 1987, is hereby SET ASIDE, and the Decision of the Labor directly related to the principal business or operation of FEBTC. If the definition of "labor-
Arbiter, dated 21 November 1984, is hereby REINSTATED. 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
SO ORDERED. 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
NERI VS NLRC
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
BELLOSILLO, J.: of petitioners who are deemed its employees through its agent, "labor-only" contractor BCC.

Respondents are sued by two employees of Building Care Corporation, which provides We cannot sustain the petition.
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
Respondent BCC need not prove that it made investments in the form of tools, equipment,
employees receive.
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
Building Care Corporation (BCC, for brevity), in the proceedings below, established that it had of P1 million fully subscribed and paid for.7 BCC is therefore a highly capitalized venture and
substantial capitalization of P1 Million or a stockholders equity of P1.5 Million. Thus the cannot be deemed engaged in "labor-only" contracting.
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
It is well-settled that there is "labor-only" contracting where: (a) the person supplying
factual finding was affirmed by respondent National Labor Relations Commission (NLRC, for
workers to an employer does not have substantial capital or investment in the form of tools,
brevity). Nevertheless, petitioners insist before us that BCC is engaged in "labor-only"
equipment, machineries, work premises, among others; and, (b) the workers recruited and
contracting hence, they conclude, they are employees of respondent FEBTC.
placed by such person are performing activities which are directly related to the principal
business of the employer.8
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,
Article 106 of the Labor Code defines "labor-only" contracting thus —
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 Art. 106. Contractor or subcontractor. — . . . . There is "labor-only"
promoted to messenger on 1 April 1989. 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
On 28 June 1989, petitioners instituted complaints against FEBTC and BCC before Regional
such persons are performing activities which are directly related to the
Arbitration Branch No. 10 of the Department of Labor and Employment to compel the bank
principal business of such employer . . . . (emphasis supplied).
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. 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
On 16 November 1989, the Labor Arbiter dismissed the complaint for lack of
substantial capital, as was established before the Labor Arbiter as well as the NLRC. In other
merit.1 Respondent BCC was considered an independent contractor because it proved it had
words, the law does not require both substantial capital and investment in the form of tools,
substantial capital. Thus, petitioners were held to be regular employees of BCC, not FEBTC.
equipment, machineries, etc. This is clear from the use of the conjunction "or". If the
The dismissal was appealed to NLRC which on 28 September 1990 affirmed the decision on
intention was to require the contractor to prove that he has both capital and the requisite
appeal.2 On 22 October 1990, NLRC denied reconsideration of its affirmance,3 prompting
investment, then the conjunction "and" should have been used. But, having established that
petitioners to seek redress from this Court.
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
Petitioners vehemently contend that BCC in engaged in "labor-only" contracting because it need for it to refute petitioners' contention that the activities they perform are directly
failed to adduce evidence purporting to show that it invested in the form of tools, related to the principal business of respondent bank.
equipment, machineries, work premises and other materials which are necessary in the
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.
 ALVIADO VS P & G
9. Estanislao Buenaventura June, 1988 March 11, 1993

MARCH 10, 2010 10. Lope Salonga 1982 March 11, 1993

DECISION 11. Franz David 1989 March 11, 1993

DEL CASTILLO, J.: 12. Nestor Ignacio 1982 March 11, 1993

Labor laws expressly prohibit "labor-only" contracting. To prevent its circumvention, the 13. Julio Rey 1989 May 5, 1992
Labor Code establishes an employer-employee relationship between the employer and the
employees of the labor-only contractor.chanroblesvirtua|awlibary 14. Ruben [Vasquez], Jr. 1985 May 5, 1992

15. Maximino Pascual 1990 May 5, 1992

The instant petition for review assails the March 21, 2003 Decision1cЃa of the Court of
Appeals (CA) in CA-G.R. SP No. 52082 and its October 20, 2003 Resolution2cЃa denying the
16. Ernesto Calanao[, Jr.] 1987 May 5, 1992
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
17. Rolando Romasanta 1983 March 11, 1993
Labor Relations Commission (NLRC), which in turn affirmed the November 29, 1996
Decision3cЃa of the Labor Arbiter. All these decisions found Promm-Gem, Inc. (Promm-Gem)
18. [Roehl] Agoo 1988 March 11, 1993
and Sales and Promotions Services (SAPS) to be legitimate independent contractors and the
employers of the petitioners.
19. Bonifacio Ortega 1988 March 11, 1993

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

Petitioners worked as merchandisers of P&G from various dates, allegedly starting as early as 21. Arnel Endaya 1983 March 11, 1993
1982 or as late as June 1991, to either May 5, 1992 or March 11, 1993, more specifically as
follows: 22. Roberto Enriquez December, 1988 March 11, 1993

23. Nestor [Es]quila 1983 May 5, 1992

Name Date Employed Date Dismissed
24. Ed[g]ardo Quiambao 1989 March 11, 1993
1. Joeb M. Aliviado November, 1985 May 5, 1992
25. Santos Bacalso 1990 March 11, 1993
2. Arthur Corpuz 1988 March 11, 1993
26. Samson Basco 1984 March 11, 1993
3. Eric Aliviado 1985 March 11, 1993
27. Aladino Gregor[e], Jr. 1980 May 5, 1992
4. Monchito Ampeloquio September, 1988 March 11, 1993
28. Edwin Garcia 1987 May 5, 1992
5. Abraham Basmayor[, Jr.] 1987 March 11, 1993
29. Armando Villar 1990 May 5, 1992
6. Jonathan Mateo May, 1988 March 11, 1993
30. Emil Tawat 1988 March 11, 1993
7. Lorenzo Platon 1985 March 11, 1993
31. Mario P. Liongson 1991 May 5, 1992
8. Jose Fernando Gutierrez 1988 May 5, 1992
32. Cresente J. Garcia 1984 March 11, 1993
33. Fernando Macabent[a] 1990 May 5, 1992 57. Romeo Viernes, Jr. 1986

34. Melecio Casapao 1987 March 11, 1993 58. El[ia]s Bas[c]o 1989

35. Reynaldo Jacaban 1990 May 5, 1992 59. Wilfredo Torres 1986 May 5, 1992

36. Ferdinand Salvo 1985 May 5, 1992 60. Melchor Carda[ñ]o 1991 May 5, 1992

37. Alstando Montos 1984 March 11, 1993 61. [Marino] [Maranion] 1989 May 5, 1992

38. Rainer N. Salvador 1984 May 5, 1992 62. John Sumergido 1987 May 5, 1992

39. Ramil Reyes 1984 March 11, 1993 63. Roberto Rosales May, 1987 May 5, 1992

40. Pedro G. Roy 1987 64. Gerry [G]. Gatpo November, 1990 March 11, 1993

41. Leonardo [F]. Talledo 1985 March 11, 1993 65. German N. Guevara May, 1990 March 11, 1993

42. Enrique [F]. Talledo 1988 March 11, 1993 66. Gilbert Y. Miranda June, 1991 March 11, 1993

43. Willie Ortiz 1987 May 5, 1992 67. Rodolfo C. Toledo[, Jr.] May 14, 1991 March 11, 1993

44. Ernesto Soyosa 1988 May 5, 1992 68. Arnold D. [Laspoña] June 1991 March 11, 1993

45. Romeo Vasquez 1985 March 11, 1993 69. Philip M. Loza March 5, 1992 March 11, 1993

46. Joel Billones 1987 March 11, 1993 70. Mario N. C[o]ldayon May 14, 1991 March 11, 1993

47. Allan Baltazar 1989 March 11, 1993 71. Orlando P. Jimenez November 6, 1992 March 11, 1993

48. Noli Gabuyo 1991 March 11, 1993 72. Fred P. Jimenez September, 1991 March 11, 1993

49. Emmanuel E. Laban 1987 May 5, 1992 73. Restituto C. Pamintuan, Jr. March 5, 1992 March 11, 1993

50. Ramir[o] E. [Pita] 1990 May 5, 1992 74. Rolando J. de Andres June, 1991 March 11, 1993

51. Raul Dulay 1988 May 5, 1992 75. Artuz Bustenera[, Jr.] December, 1989 March 11, 1993

52. Tadeo Duran[o] 1988 May 5, 1992 76. Roberto B. Cruz May 4, 1990 March 11, 1993

53. Joseph Banico 1988 March 11, 1993 77. Rosedy O. Yordan June, 1991 May 5, 1992

54. Albert Leynes 1990 May 5, 1992 78. Dennis Dacasin May. 1990 May 5, 1992

55. Antonio Dacu[m]a 1990 May 5, 1992 79. Alejandrino Abaton 1988 May 5, 1992

56. Renato dela Cruz 1982


80. Orlando S. Balangue March, 1989 March 11, 19934cЃa
cralawThey all individually signed employment contracts with either Promm-Gem or SAPS for
periods of more or less five months at a time.5cЃa 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.6cЃa
SAPS and Promm-Gem imposed disciplinary measures on erring merchandisers for reasons
such as habitual absenteeism, dishonesty or changing day-off without prior notice.7cЃa
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.8cЃa 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.9cЃa
In December 1991, petitioners filed a complaint10cЃa against P&G for regularization, service
incentive leave pay and other benefits with damages. The complaint was later
amended11cЃa 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.12cЃa
Ruling of the NLRC
Appealing to the NLRC, petitioners disputed the Labor Arbiters findings. On July 27, 1998, the
NLRC rendered a Decision13cЃa disposing as follows:
WHEREFORE, premises considered, the appeal of complainants is hereby DISMISSED and the
decision appealed from AFFIRMED.
SO ORDERED.14cЃa
Petitioners filed a motion for reconsideration but the motion was denied in the November
19, 1998 Resolution.15cЃa
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.chanroblesvirtua|awlibary
SO ORDERED.16cЃa
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.chanroblesvirtua|awlibary
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.chanroblesvirtua|awlibary
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 ATTORNEYS FEES.17cЃa
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 attorneys 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.18cЃa
Petitioners further claim that P&G instigated their dismissal from work as can be gleaned
from its letter19cЃa to SAPS dated February 24, 1993, informing the latter that their
Merchandising Services Contract will no longer be renewed.chanroblesvirtua|awlibary
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.20cЃa
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.chanroblesvirtua|awlibary
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.chanroblesvirtua|awlibary
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.chanroblesvirtua|awlibary
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.21cЃa 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.22cЃa 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.chanroblesvirtua|awlibary
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.23cЃa 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 formers work, the employees of the contractor
and of the latters subcontractor, if any, shall be paid in accordance with the provisions of this
Code.chanroblesvirtua|awlibary
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. 18-02,24cЃa 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.chanroblesvirtua|awlibary
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.chanroblesvirtua|awlibary
The foregoing provisions shall be without prejudice to the application of Article 248 (c) of the
Labor Code, as amended.chanroblesvirtua|awlibary
"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.chanroblesvirtua|awlibary
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 an independent
contractor because the current labor rules expressly prohibit labor-only
contracting.chanroblesvirtua|awlibary
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
principal25cЃa 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. (Underscoring supplied)
In the instant case, the financial statements26cЃa of Promm-Gem show that it
has authorized capital stock of P1 million and a paid-in capital, or capital available for
operations, of P500,000.00 as of 1990.27cЃa It also has long term assets worth P432,895.28
and current assets of P719,042.32. Promm-Gem has also proven that it maintained its own
warehouse and office space with a floor area of 870 square meters.28cЃa It also had under its
name three registered vehicles which were used for its promotional/merchandising
business.29cЃa Promm-Gem also has other clients30cЃa aside from P&G.31cЃa 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.chanroblesvirtua|awlibary
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.32cЃa 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.33cЃa
Under the circumstances, Promm-Gem cannot be considered as a labor-only contractor. We
find that it is a legitimate independent contractor.chanroblesvirtua|awlibary
On the other hand, the Articles of Incorporation of SAPS shows that it has a paid-in capital of
only P31,250.00. 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.chanroblesvirtua|awlibary
In Vinoya v. National Labor Relations Commission,34cЃa the Court held that "[w]ith the
current economic atmosphere in the country, the paid-in capitalization of PMCI amounting
to P75,000.00 cannot be considered as substantial capital and, as such, PMCI cannot qualify
as an independent contractor."35cЃa Applying the same rationale to the present case, it is
clear that SAPS having a paid-in capital of only P31,250 - has no substantial capital. SAPS lack
of substantial capital is underlined by the records36cЃa which show that its payroll for its
merchandisers alone for one month would already total P44,561.00. It had 6-month
contracts with P&G.37cЃa 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
months payroll. SAPS failed to show that its paid-in capital of P31,250.00 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.chanroblesvirtua|awlibary
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,38cЃa 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".chanroblesvirtua|awlibary
"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."39cЃa 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.40cЃa
Consequently, the following petitioners, having been recruited and supplied by SAPS 41cЃa --
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.chanroblesvirtua|awlibary
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.42cЃa
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
just43cЃa or authorized44cЃa cause.chanroblesvirtua|awlibary
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.chanroblesvirtua|awlibary
x x x x45cЃa
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.46cЃa To be a just cause for dismissal, such misconduct (a) must be serious; (b)
must relate to the performance of the employees duties; and (c) must show that the
employee has become unfit to continue working for the employer. 47cЃa
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.48cЃa 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.chanroblesvirtua|awlibary
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.49cЃa
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.50cЃa 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.chanroblesvirtua|awlibary
All told, we find no valid cause for the dismissal of petitioners-employees of Promm-
Gem.chanroblesvirtua|awlibary
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.chanroblesvirtua|awlibary
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&Gs 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 letter51cЃa dated February 24, 1993, x x x
February 24, 1993
Sales and Promotions Services
Armons 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.chanroblesvirtua|awlibary
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
cralaw6. 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 x52cЃa
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 latters merchandising concerns only. Under
the circumstances prevailing in the instant case, we cannot consider SAPS as
an independent contractor.chanroblesvirtua|awlibary
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.53cЃa In termination cases, the
burden of proof rests upon the employer to show that the dismissal is for just and valid
cause.54cЃa 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 Let this case be REMANDED to the Labor Arbiter for the computation, within 30 days from
by bad faith or fraud or constituted an act oppressive to labor or was done in a manner receipt of this Decision, of petitioners backwages and other benefits; and ten percent of the
contrary to morals, good customs or public policy.55cЃa total sum as and for attorneys fees as stated above; and for immediate execution.

With regard to the employees of Promm-Gem, there being no evidence of bad faith, fraud or SO ORDERED.
any oppressive act on the part of the latter, we find no support for the award of
damages.chanroblesvirtua|awlibary ALVIADO VS P & G

As for P&G, the records show that it dismissed its employees through SAPS in a manner JUNE 6, 2011
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.chanroblesvirtua|awlibary DECISION

Attorneys fees may likewise be awarded to the concerned petitioners who were illegally DEL CASTILLO, J.:
dismissed in bad faith and were compelled to litigate or incur expenses to protect their rights
by reason of the oppressive acts56cЃa of P&G.chanroblesvirtua|awlibary Labor laws expressly prohibit "labor-only" contracting. To prevent its circumvention, the
Labor Code establishes an employer-employee relationship between the employer and the
Lastly, under Article 279 of the Labor Code, an employee who is unjustly dismissed from work employees of the ‘labor-only’ contractor.
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 The instant petition for review assails the March 21, 2003 Decision1 of the Court of Appeals
compensation was withheld up to the time of actual reinstatement.57cЃa Hence, all the (CA) in CA-G.R. SP No. 52082 and its October 20, 2003 Resolution2 denying the motions for
petitioners, having been illegally dismissed are entitled to reinstatement without loss of reconsideration separately filed by petitioners and respondent Procter & Gamble Phils. Inc.
seniority rights and with full back wages and other benefits from the time of their illegal (P&G). The appellate court affirmed the July 27, 1998 Decision of the National Labor
dismissal up to the time of their actual reinstatement. 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
WHEREFORE, the petition is GRANTED. The Decision dated March 21, 2003 of the Court of Promotions Services (SAPS) to be legitimate independent contractors and the employers of
Appeals in CA-G.R. SP No. 52082 and the Resolution dated October 20, 2003 the petitioners.
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 Factual Antecedents
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 Petitioners worked as merchandisers of P&G from various dates, allegedly starting as early as
pay each of those petitioners considered as its employees, namely Arthur Corpuz, Eric 1982 or as late as June 1991, to either May 5, 1992 or March 11, 1993, more specifically as
Aliviado, Monchito Ampeloquio, Abraham Basmayor, Jr., Jonathan Mateo, Lorenzo Platon, follows:
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. Name Date Employed Date Dismissed
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 1. Joeb M. Aliviado November, 1985 May 5, 1992
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. 2. Arthur Corpuz 1988 March 11, 1993
Balangue, Emil Tawat, Cresente J. Garcia, Melencio Casapao, Romeo Vasquez, Renato dela
Cruz, Romeo Viernes, Jr., Elias Basco and Dennis Dacasin, P25,000.00 as moral damages plus 3. Eric Aliviado 1985 March 11, 1993
ten percent of the total sum as and for attorneys fees.chanroblesvirtua|awlibary
4. Monchito Ampeloquio September, 1988 March 11, 1993
5. Abraham Basmayor[, Jr.] 1987 March 11, 1993 29. Armando Villar 1990 May 5, 1992

6. Jonathan Mateo May, 1988 March 11, 1993 30. Emil Tawat 1988 March 11, 1993

7. Lorenzo Platon 1985 March 11, 1993 31. Mario P. Liongson 1991 May 5, 1992

8. Jose Fernando Gutierrez 1988 May 5, 1992 32. Cresente J. Garcia 1984 March 11, 1993

9. Estanislao Buenaventura June, 1988 March 11, 1993 33. Fernando Macabent[a] 1990 May 5, 1992

10. Lope Salonga 1982 March 11, 1993 34. Melecio Casapao 1987 March 11, 1993

11. Franz David 1989 March 11, 1993 35. Reynaldo Jacaban 1990 May 5, 1992

12. Nestor Ignacio 1982 March 11, 1993 36. Ferdinand Salvo 1985 May 5, 1992

13. Julio Rey 1989 May 5, 1992 37. Alstando Montos 1984 March 11, 1993

14. Ruben [Vasquez], Jr. 1985 May 5, 1992 38. Rainer N. Salvador 1984 May 5, 1992

15. Maximino Pascual 1990 May 5, 1992 39. Ramil Reyes 1984 March 11, 1993

16. Ernesto Calanao[, Jr.] 1987 May 5, 1992 40. Pedro G. Roy 1987

17. Rolando Romasanta 1983 March 11, 1993 41. Leonardo [F]. Talledo 1985 March 11, 1993

18. [Roehl] Agoo 1988 March 11, 1993 42. Enrique [F]. Talledo 1988 March 11, 1993

19. Bonifacio Ortega 1988 March 11, 1993 43. Willie Ortiz 1987 May 5, 1992

20. Arsenio Soriano, Jr. 1985 March 11, 1993 44. Ernesto Soyosa 1988 May 5, 1992

21. Arnel Endaya 1983 March 11, 1993 45. Romeo Vasquez 1985 March 11, 1993

22. Roberto Enriquez December, 1988 March 11, 1993 46. Joel Billones 1987 March 11, 1993

23. Nestor [Es]quila 1983 May 5, 1992 47. Allan Baltazar 1989 March 11, 1993

24. Ed[g]ardo Quiambao 1989 March 11, 1993 48. Noli Gabuyo 1991 March 11, 1993

25. Santos Bacalso 1990 March 11, 1993 49. Emmanuel E. Laban 1987 May 5, 1992

26. Samson Basco 1984 March 11, 1993 50. Ramir[o] E. [Pita] 1990 May 5, 1992

27. Aladino Gregor[e], Jr. 1980 May 5, 1992 51. Raul Dulay 1988 May 5, 1992

28. Edwin Garcia 1987 May 5, 1992 52. Tadeo Duran[o] 1988 May 5, 1992
53. Joseph Banico 1988 March 11, 1993 77. Rosedy O. Yordan June, 1991 May 5, 1992

54. Albert Leynes 1990 May 5, 1992 78. Dennis Dacasin May. 1990 May 5, 1992

55. Antonio Dacu[m]a 1990 May 5, 1992 79. Alejandrino Abaton 1988 May 5, 1992

56. Renato dela Cruz 1982 80. Orlando S. Balangue March, 1989 March 11, 19934

57. Romeo Viernes, Jr. 1986

They all individually signed employment contracts with either Promm-Gem or SAPS for
58. El[ia]s Bas[c]o 1989 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
59. Wilfredo Torres 1986 May 5, 1992 wages from Promm-Gem or SAPS.6

60. Melchor Carda[ñ]o 1991 May 5, 1992 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
61. [Marino] [Maranion] 1989 May 5, 1992
P&G is principally engaged in the manufacture and production of different consumer and
62. John Sumergido 1987 May 5, 1992 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
63. Roberto Rosales May, 1987 May 5, 1992 into contracts with Promm-Gem and SAPS for the promotion and merchandising of its
products.9
64. Gerry [G]. Gatpo November, 1990 March 11, 1993
In December 1991, petitioners filed a complaint10 against P&G for regularization, service
65. German N. Guevara May, 1990 March 11, 1993 incentive leave pay and other benefits with damages. The complaint was later amended11 to
include the matter of their subsequent dismissal.
66. Gilbert Y. Miranda June, 1991 March 11, 1993
Ruling of the Labor Arbiter
67. Rodolfo C. Toledo[, Jr.] May 14, 1991 March 11, 1993

68. Arnold D. [Laspoña] June 1991 March 11, 1993 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
69. Philip M. Loza March 5, 1992 March 11, 1993 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
70. Mario N. C[o]ldayon May 14, 1991 March 11, 1993
Promm-Gem and SAPS were legitimate independent job contractors. The dispositive portion
of his Decision reads:
71. Orlando P. Jimenez November 6, 1992 March 11, 1993

72. Fred P. Jimenez September, 1991 March 11, 1993 WHEREFORE, premises considered, judgment is hereby rendered Dismissing the above-
entitled cases against respondent Procter & Gamble (Phils.), Inc. for lack of merit.
73. Restituto C. Pamintuan, Jr. March 5, 1992 March 11, 1993
SO ORDERED.12
74. Rolando J. de Andres June, 1991 March 11, 1993
Ruling of the NLRC
75. Artuz Bustenera[, Jr.] December, 1989 March 11, 1993
Appealing to the NLRC, petitioners disputed the Labor Arbiter’s findings. On July 27, 1998,
76. Roberto B. Cruz May 4, 1990 March 11, 1993 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 an independent
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 contractual employee. (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.29 Promm-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.
DIGITAL TELECOMMUNICATIONS PHILIPPINES, INC., Petitioner, v. 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 Decision1ςrνll 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.2ςrνll
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.3ςrνll The 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 Unions 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 Digitels 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
Order4ςrνll 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 Digiservs 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.5ςrνll
Meanwhile, on 14 March 2005, Digitel filed a petition with the Bureau of Labor Relations
(BLR) seeking cancellation of the Unions 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.6ςrνll
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 Unions certificate of
registration.7ςrνll
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:chanroblesvirtuallawlibrary
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.8ςrνll
Digitel moved for reconsideration on the contention that the pendency of the petition for
cancellation of the Unions 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.9ςrνll
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:chanroblesvirtuallawlibrary
x x x x.10ςrνll
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.11ςrνll
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:chanroblesvirtuallawlibrary
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 (PhP 100,000.00) peso-fine imposed on Digital
Telecommunications Philippines, Inc. is DELETED. No costs.12ςrνll
The Court of Appeals upheld the Secretary of Labors Order for Digitel to commence CBA
negotiations with the Union and emphasized that the pendency of a petition for the
cancellation of a unions 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 Digitels 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. Trajano13ςrνll 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 unions
certificate of registration. Petitioners 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 unions 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 unions 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.14ςrνll
Trajano was reiterated in Legend International Resorts Limited v. Kilusang Manggagawa ng
Legenda (KML-Independent).15ςrνll 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 unions certificate of registration. Citing
the cases of Association of Court of Appeals Employees v. Ferrer- Calleja16ςrνll and Samahan
ng Manggagawa sa Pacific Plastic v. Hon. Laguesma,17ςrνll 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:chanroblesvirtuallawlibrary
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.18ςrνll
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 Digiservs authorized capital stock of One Million Pesos
(P 1,000,000.00). It pointed out that only Two Hundred Fifty Thousand Pesos (P 250,000.00)
of the authorized capital stock had been subscribed and only Sixty-Two Thousand Five
Hundred Pesos (P 62,500.00) had been paid up. There was no increase in capitalization for
the last ten (10) years.19ςrνll
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,20ςrνll 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.21ςrνll
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 UNIONs 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 UNIONs allegation is correct. Sample of letter of
commendations issued to Customer Service Representatives (Annexes "C" and "C-1" of
UNIONs 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 UNIONs 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 Digitels organization objectives". It cannot be gainsaid
that it is only the employer that issues service award to its employees.22ςrνll (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,23ςrνll 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:chanroblesvirtuallawlibrary
(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 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.24ςrνll
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. Digitels 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 P 163,624.00 and P 164,055.00, respectively.25ςrνll 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 Digiservs 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,26ςrνll 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 Academys 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
Unions 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 Unions right to collective
bargaining.27ςrνll (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-techs 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 Digitels 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.28ςrνll The payment of separation pay is in addition to payment of
backwages.29ςrνll
Indeed, while we have found that the closure of Digiserv was undertaken in bad faith, badges
thereof evident in the timing of Digiservs closure, hand in hand, with I-techs 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 Digiservs
closure and I-techs 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.30ςrνll
The finding of unfair labor practice hinges on Digitels 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 Resolution31ςrνll 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.32ςrνll
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.33ςrνll
Finally, an illegally dismissed employee should be awarded moral and exemplary damages as
their dismissal was tainted with unfair labor practice.34ςrνll 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.35ςrνll
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 Courts sworn duty to ensure that none trifles with labor rights.36ςrνll
We awarded moral damages in the amount of P 10,000.00 and likewise awarded P 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,37ςrνll we awarded the aggregate amount of P 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 Unions 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 P 10,000.00 and P 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 P 10,000.00 and P 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.ςrαlαωlιbrαr
SO ORDERED.
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 or investment. 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,16 citing 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, PHILIPPINE FISHERIES DEVELOPMENT AUTHORITY, Petitioner, v. NATIONAL LABOR
the termination of LSC’s Agreement with BMSI cannot be considered a just or an authorized RELATIONS COMMISSION, and ODIN SECURITY AGENCY, as representative of its Security
cause for petitioners’ dismissal. In Almeda v. Asahi Glass Philippines. Inc. v. Asahi Glass Guards, Respondents.
Philippines, Inc.,27 this Court declared:
DECISION
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 GUTIERREZ, JR., J.:
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. 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.
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
The facts are as follows:chanrob1es virtual 1aw library
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
The petitioner is a government-owned or controlled corporation created by P.D. No. 977.
during the periods of their illegal dismissal shall not be deducted therefrom.
On November 11, 1985, it entered into a contract with the Odin Security Agency for security
Accordingly, we hold that the NLRC committed no grave abuse of discretion in its decision. services of its Iloilo Fishing Port Complex in Iloilo City. The pertinent provision of the contract
Conversely, the CA committed a reversible error when it set aside the NLRC ruling. provides:chanrobles.com : virtual law library

WHEREFORE, the petition is GRANTED. The Decision and the Resolution of the Court of OBLIGATION OF THE FISHING PORT COMPLEX:chanrob1es virtual 1aw library
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 1. For and in consideration of the services to be rendered by the AGENCY to the FISHING
Arsenio Estorque are declared regular employees of Lorenzo Shipping Corporation. Further, PORT COMPLEX, the latter shall pay to the former per month for eight (8) hours work daily as
LSC is ordered to reinstate the seven petitioners to their former position without loss of follows:chanrob1es virtual 1aw library
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 OUTSIDE METRO MANILA
withheld up to the time of actual reinstatement.
Security Guard P1,990.00
No pronouncement as to costs.
Security Supervisor 2,090.00

SO ORDERED. 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 complaint filed, the private respondent alleged that it requested the Regional Director,
"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
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.
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,
vs.
HON. LABOR ARBITER ARIEL C. SANTOS, PHILIPPINE ASSOCIATION OF FREE
LABOR UNIONS (PAFLU-RMC CHAPTER) and its members, MICHAEL
PENALOSA, ET AL., SAMAHANG DIWANG MANGGAGAWA SA RMC-FFW
CHAPTER, and its members, JAIME ARADA, ET AL., respondents.
GUTIERREZ, JR., J.:
This petition calls for the interpretation of Article 110 of the Labor Code which
gives the workers preferences as regards wages in case of liquidation or
bankruptcy of an employer's business. Petitioner Development Bank of the
Philippines (DBP) maintains the Article 110 does not apply where there has
been an extra-judicial foreclosure proceeding while the respondents claim
otherwise. Labor Arbiter Ariel C. Santos sustained the private respondent's
position. Petitioner DBP has now elevated the case to us by way of this petition
for certiorari.
On November 29,1984, in NLRC-NCR Case No. 2517-84 entitled "Philippine
Association of Free Labor Unions (PAFLU-RMC Chapter) and its Members v.
Riverside Mills Corporation, et al.", Labor Arbiter Manuel Caday awarded
separation pay, wage and/or living allowance increases and 13th month pay to
the individual complainants who comprise some of the respondents in this case.
On March 18, 1985, Labor Arbiter Teodorico Dogelio likewise awarded
separation pay, vacation and sick leave pay and unpaid increases in the basic
wage and allowances to the other private respondents herein in NLRC Case No.
NCR-7-2577-84 entitled "Michael Penalosa, Jose Garcia and Apolinar Ray, et al.,
v. Riverside Mills Corporation, et al., and Samahang Diwang Manggagawa sa
RMC-FFW Chapter, et al., v. Riverside Mills Corporation (RMC)." On March 29,
1985, after the judgment had become final and executory, Dogelio issued a writ
of execution directing NLRC Deputy Sheriff Juanita Atienza to collect the total
sum of Eighty Five Million Nine Hundred Sixty One thousand Fifty-Eight &
70/100 Pesos (P85,961,058.70). The Deputy Sheriff, however, failed to collect
the amount so he levied upon personal and real properties of RMC.
On April 25, 1985, a notice of levy on execution of certain real properties was
annotated on the certificate of title filed with the Register of Deeds of Pasig,
Metro Manila, where all the said properties are situated.
Meanwhile in the other development which led to this case, petitioner DBP
obtained a writ of possession on June 7, 1985 from the Regional Trial Court
(RTC) of Pasig of all the properties of RMC after having extra-judicially
foreclosed the same at public auction earlier in 1983. DBP subsequently leased
the said properties to Egret Trading and Manufacturing Corporation, Rosario
Textile Mills and General Textile Mills.
The writ of possession prevented the scheduled auction sale of the RMC
properties which were levied upon by the private respondents. As a result, on
June 19, 1985, the latter filed an incidental petition with the NLRC to declare
their preference over the levied properties. The petition entitled "PAFLU-RMC
Chapter and its members, Michael Penalosa, et al., and the Samahang Diwang
Manggagawa sa RMC-FFW Chapter and its members v. RMC and DBP, et al."
was docketed as NLRC Case No. NCR-7-2577-84. Petitioner DBP filed its position
paper and memorandum in answer to the petition.
On October 31, 1985, Dogelio issued an order recognizing and declaring the
respondents' first preference as regards wages and other benefits due them
over and above all earlier encumbrances on the aforesaid properties/assets of
said company, particulary those being asserted by respondent Development
Bank of the Philippines.' (p. 84, Rollo)
The petitioner appealed the order of Dogelio to the NLRC. The latter in turn, set
aside the order and remanded the case to public respondent Labor Arbiter
Santos for further proceedings.
Meanwhile, another set of complainants (who are also named as respondents
herein) filed, on April 7, 1986, a complaint for separation pay, underpayment,
damages, etc., entitled 'Jaime Arada, et al. v. RMC, DBP, Egret Trading and
Manufacturing Corp., docketed as NLRC Case No. NCR-4-1278-86." This case
was subsequently consolidated with the case pending before respondent
Santos. Accordingly, the latter conducted several hearings where the parties,
particulary DBP, General Textile Mills, Inc., and Rosario Textile Mills, Inc., were
given the opportunity to argue their respective theories of the case. Eventually,
all the parties agreed that the case shall be submitted for decision after their
filing of positions papers and/or memorandums.
On March 31, 1987, public respondent Santos rendered the questioned
decision, the dispositive portion of which reads:
WHEREFORE, it is hereby declared that all the complainants in
the above- entitled cases, as former employees of respondent
Riverside Mills Corporation, enjoy first preference as regards
separation pay, unpaid wages and other benefits due them
over and above all earlier encumbrances on all of the
assets/properties of RMC specifically those being asserted by
respondent DBP.
As a consequence of the above declaration, the decision dated
March 18, 1983 of the then Hon. Arbiter Teodorico Dogelio
should be immediately enforced against DBP who is hereby
directed to pay all the monetary claims of complainants who
were former employees of respondent RMC.
Anent the Arada case, DBP is hereby directed to pay all the
amounts as indicated opposite the names of complainants
listed from page I to page 5 of Annex "A" of complainants'
complaint provided that their names are not among those
listed in the Penalosa case.
It is hereby also declared that former employees whose names
are not listed in the complainants' position papers but can
prove that they were former employees of RMC prior to its
bankruptcy, should also be paid the same monetary benefits
being granted to herein complainants.
Finally, DBP is hereby ordered to deposit with the National
Labor Relations Commission the proceeds of the sale of the
assets of RMC between DBP on one hand and General Textile
Mills, Inc. and/ or Rosario Textile Mills, Inc., on the other hand
and that future payment being made by the latter to the
former should be deposited with the National Labor Relations
Commission for proper disposition. (pp. 174-175, Rollo)
Hence, this petition.
Petitioner DBP maintains that the public respondent misinterpreted Article 110
of the Labor Code and Section 10, Rule VIII, Book III of the Revised Rules and
Regulations Implementing the Labor Code in that the said respondent upheld
the existence of the worker's preference over and above earlier encumbrances
on the properties of RMC despite the absence of any bankruptcy or liquidation
proceeding instituted against the latter. The petitioner argues that there must
be a judicial declaration, or at the very least, a cognizance by an appropriate
court or administrative agency of bankruptcy or inability of the employer to
meet its obligations.
On the other hand, the respondents contend that under both Article 110 and its
implementing rule, the claims of the laborers for unpaid wages and other
monetary benefits due them for services rendered prior to bankruptcy enjoy
first preference in the satisfaction of credits against a bankrupt company; that
the word "bankruptcy" in the Labor Code is used in its generic sense, meaning
that condition of inability to pay one's debt; and that Article 110 of the Labor
Code is not confined to the situation contemplated in Articles 2236-2245 of the
Civil Code where all the preferred creditors must necessarily be convened and
the import of their claims ascertained.
We apply the rule expressed in Republic v. Peralta (150 SCRA 37 [1988] ), where
we stated:
Article 110 of the Labor Code, in determining the reach of its
terms, cannot be viewed in isolation. Rather, Article 110 must
be read in relation to the provisions of the Civil Code
concerning the classification, concurrence and preference of
credits, which provisions find particular application in
insolvency proceedings where the claims of all creditors, prefer
red or non-preferred, may be adjudicated in a binding manner.
(Barreto v. Villanueva, 1 SCRA 288 [ 1961] ). (pp. 44-45)
In the above quoted case, there was a voluntary insolvency proceeding
instituted by the employer. The respondents, however, contend that since in
the case at bar there is only an extra-judicial proceeding, Article 110 is still the
only law applicable without regard to the provisions of the Civil Code.
We do not agree with this contention.
Article 110 of the Labor Code and Section 10, Rule VIII, Book III of the Revised
Rules and Regulations Implementing the Labor Code provide:
Article 110. Worker preference in case of bankruptcy in the
event of bankruptcy or liquidation of an employer's business,
his workers shall enjoy first preference as regards wages due
them for services rendered during the period prior to the
bankruptcy or liquidation, any provision of law to the contrary
notwithstanding. Unpaid wages shall be paid in full before
other creditors may establish any claim to a share in the assets
of the employer.
Article 10. Payment of wages in case of bankruptcy. Unpaid
wages earned by the employee before the declaration of
bankruptcy or judicial liquidation of the employer's business
shall be given first preference and shall be paid in full before
other creditors may establish any claim to the assets of the
employer.
It is quite clear from the provisions that a declaration of bankruptcy or a judicial
liquidation must be present before the worker's preference may be enforced.
Thus, Article 110 of the Labor Code and its implementing rule cannot be
invoked by the respondents in this case absent a formal declaration of
bankruptcy or a liquidation order. Following the rule in Republic v.
Peralta, supra, to hold that Article 110 is also applicable in extra-judicial
proceedings would be putting the worker in a better position than the State
which could only assert its own prior preference in case of a judicial proceeding.
Therefore, as stated earlier, Article 110 must not be viewed in isolation and
must always be reckoned with the provisions of the Civil Code.
There was no issue of judicial vis-a-vis extra-judicial proceedings in the Republic
v. Peralta interpretation of Article 110 but the necessity of a judicial
adjudication was pointed out when we explained the impact of Article 110 on
the concurrence and preference of credits provided in the Civil Code.
We stated:
We come to the question of what impact Article 110 of the
Labor Code has had upon the complete scheme of
classification, concurrence and preference of credits in
insolvency set out in the Civil Code. We believe and so hold
that Article 110 of the Labor Code did not sweep away the
overriding preference accorded under the scheme of the Civil
Code to tax claims of the government or any subdivision
thereof which constitute a lien upon properties of the
Insolvent. ... It cannot be assumed simpliciter that the
legislative authority, by using Article 110 of the words 'first
preference' and any provisions of law to the contrary
 notwithstanding intended to disrupt the elaborate and
symmetrical structure set up in the Civil Code. Neither can it be
assumed casually that Article 110 intended to subsume the
sovereign itself within the term 'other creditors', in stating that
'unpaid wages shall be paid in full before other creditors may
establish any claim to a share in the assets of employer.'
Insistent considerations of public policy prevent us from giving
to 'other creditors a linguistically unlimited scope that would
embrace the universe of creditors save only unpaid employees.
Moreover, the reason behind the necessity for a judicial proceeding or a
proceeding in rem before the concurrence and preference of credits may be
applied was explained by this Court in the case of Philippine Savings Bank v.
Lantin (124 SCRA 476 [1983] ). We said:
The proceedings in the court below do not partake of the
nature of the insolvency proceedings or settlement of a
decedent's estate. The action filed by Ramos was only to
collect the unpaid cost of the construction of the duplex
apartment. It is far from being a general liquidation of the
estate of the Tabligan spouses.
Insolvency proceedings and settlement of a decedent's estate
are both proceedings in rem which are binding against the
whole world. All persons having interest in the subject matter
involved, whether they were notified or not, are equally
bound. Consequently, a liquidation of similar import or 'other
equivalent general liquidation must also necessarily be a
proceeding in rem so that all interested persons whether
known to the parties or not may be bound by such proceeding.
In the case at bar, although the lower court found that 'there
were no known creditors other than the plaintiff and the
defendant herein', this can not be conclusive. It will not bar
other creditors in the event they show up and present their
claim against the petitioner bank, claiming that they also have
preferred liens against the property involved. Consequently,
Transfer Certificate of Title No. 101864 issued in favor of the
bank which is supposed to be indefeasible would remain
constantly unstable and questionable. Such could not have
been the intention of Article 2243 of the Civil Code although it
considers claims and credits under Article 2242 as statutory
liens. Neither does the De Barreto case ... .
The claims of all creditors whether preferred or non-preferred, the
identification of the preferred ones and the totality of the employer's asset
should be brought into the picture, There can then be an authoritative, fair, and
binding adjudication instead of the piece meal settlement which would result
from the questioned decision in this case.
We, therefore, hold that Labor Arbiter Ariel C. Santos committed grave abuse of
discretion in ruling that the private respondents may enforce their first
preference in the satisfaction of their claims over those of the petitioner in the
absence of a declaration of bankruptcy or judicial liquidation of RMC. There is,
of course, nothing in this decision which prevents the respondents from
instituting involuntary insolvency or any other appropriate proceeding against
their employer RMC where respondents' claims can be asserted with respect to
their employer's assets.
WHEREFORE, the petition is hereby GRANTED. The questioned decision of the
public respondent is ANNULLED and SET ASIDE. The Temporary Restraining
Order we issued on May 20, 1987 enjoining the enforcement of the questioned
decision is made PERMANENT. No costs.
SO ORDERED.
A.N. BOLINAO, JR., JUAN A. AGSALON, JR., ZOSIMO L. CARREON AND REYNOLD P.
DANNUG, petitioners,
vs.
HON. MANUEL S. PADOLINA, PHELPS DODGE (PHILS.) INC., BANK OF AMERICA, AND
DEPUTY SHERIFF CARLOS G. MAOG, respondents.
PARAS, J.:
This is a petition for certiorari with preliminary injunction which seeks to reverse and to set
aside the order of the Regional Trial Court of Pasig, Metro Manila, dated January 5, 1988 in
Civil Case No. 50936 entitled "Phelps Dodge (Phils.) Inc. v. Sabena Mining Corporation"
denying the motion to intervene and dismissing the third party claim filed by herein
petitioners.
As gathered from the records, the facts of the case are as follows:
Petitioners A.N. Bolinao, Jr., Reynold P. Dannug, Juan A. Agsalon, Jr. and Zosimo L. Carreon
were all former employees of Sabena Mining Corporation, which had a copper and gold
project in operation, located in New Bataan, Davao del Norte. In 1982 and 1983 they were
laid off without being recalled (Rollo, Petition, pp. 3-4).
In September, 1983, petitioners filed a formal complaint for collection of unpaid salaries,
unused accrued vacation and sick leave benefits, 13th month pay and separation pay before
the National Labor Relations Commission (NLRC) against Sabena Mining Corporation and
Development Bank of the Philippines docketed as NCR Case No. 9-4178-83 (Rollo, Petition, p.
5).
On May 29,1984, a compromise agreement was entered into by the parties, wherein
petitioners were to be paid on a staggered basis the collective amount of P385,583.95 (Rollo,
Petition, Annex "A, pp. 22-24). The company faithfully complied with the scheduled
payments only up to March, 1985 because it ceased operations effective April 1, 1985. With
this development, petitioners moved for the issuance of a writ of execution in June, 1985
(Rollo, Petition, p. 6).
In an order dated June 21, 1985, the Labor Arbiter issued a writ of execution against the
company to collect the balance of P311,580.14 (Rollo, Annex "B", pp. 25-26). On June 27,
1985 Deputy Sheriff Antonio P. Soriano garnished the remaining amount of P150,279.64 in
the savings account of the company at the Development Bank of the Philippines (DBP) (Rollo,
Annex "B-1 ", p. 27). However, the same amount was previously garnished by two creditors
of the company; namely, Bank of America and Phelps Dodge (Phils.), Inc. Bank of America
garnished the amount in April, 1982 in Civil Case No. 45452 (Rollo, Petition , pp. 4-5 while
Phelps Dodge garnished the amount in June, 1984 in Civil Case No. 50936 (Rollo, Petition, p.
5). Both cases were filed in different branches of the Regional Trial Court in Pasig (Ibid.)
In an order dated September 30, 1987, the respondent court directed the DBP to release to
its Deputy Sheriff, herein respondent Carlos G. Maog, the amount of P150,279.64 declaring
that the writ of preliminary attachment made by Bank of America thru Deputy Sheriff
Norberto Doblado in Civil Case No. 45452 by the Pasig Regional Trial Court cannot prevail
over the garnishment pursuant to a writ of execution issued in Civil Case No. 50936 in favor
of respondent Phelps Dodge (Phils.) Inc., for failure of Bank of America to prosecute its hen
(Rollo, Petition, Annex "C", pp. 29-31).
The order came to the attention of the petitioners who then filed a "Motion to Intervene and
to Lift Order of September 30, 1987" on October 13, 1987 and a third party claim with the
deputy sheriff on October 19, 1987 (Rollo, Annex "D', p. 32-36; Annex "D-1 ", pp. 38-42).
DBP did not interpose any objection to the motion to intervene and the third party claim
(Reno, Annex "E', pp. 44-45). But respondent Phelps Dodge, Phils., Inc. opposed said Motion
to Intervene/Third Party Claim, on the ground among others:
xxx xxx xxx
b) That the rights of preference and first lien of petitioners, as former
employees of Sabena Mining Corporation, as provided for in Art. 110 of
the Labor Code and Art. 2244 of the Civil Code, are operative only in
insolvency court and in a bankruptcy case; (Rollo, Annex "F", pp. 47-53;
Annex "F-1", pp. 54-57).
Petitioners filed their reply to the opposition and at the same time filed a motion to resolve
the third party claim (Rollo, Annex "G, pp. 58-62; Annex "G-1", pp. 63- 67).
On January 5, 1988 the respondent court issued an order denying the motion to intervene
and dismissing the third party claim, declaring that the garnishment made by its Deputy
Sheriff in favor of respondent Phelps Dodge, Phils., Inc. superior to the rights of petitioners
(Rollo. Annex "I", pp. 70-77).
Hence, the petition.
The Second Division of this Court in its resolution dated August 10, 1989, gave due course to
the petition (Rollo, Petition, pp. 2-19; Resolution, p. 309)
The main thrust in this petition is whether or not petitioners enjoy preferential right or claim
over the funds of Sabena Mining Corporation as provided for under the provisions of Article
110 of the New Labor Code, as amended, and Section 10, Rule VIII, Book III of the
Implementing Rules and Regulations of the Labor Code.
The petitioners contend that under Article 110 and its implementing rules; and regulations of
the Labor Code, the claims of the laborers for unpaid wages and other monetary benefits due
them for services rendered prior to bankruptcy enjoy first preference in the satisfaction of
credits against a bankrupt company.
On the other hand, the respondent maintains that the rights of preference and first lien of
petitioners, as former employees of Sabena Mining Corporation, under aforesaid law and
rules, are operative only in an insolvency court and in a bankrupt case.
The petition is without merit.
It is quite clear from the provisions of Article 110 of the Labor Code and Section 10, Rule VIII,
Book H of the Revised Rules and Regulations Implementing the Labor Code, that
a declaration of bankruptcy or a judicial liquidation must be present before the worker's
preference may be enforced. Thus, it was held that Article 110 of the Labor Code and its
implementing rule cannot be invoked absent a formal declaration of bankruptcy or a
liquidation order (Development Bank of the Philippines v. Labor Arbiter, G.R. Nos. 78261-62,
March 8, 1989). (Emphasis supplied)
In the case at bar, there was no showing of any insolvency proceeding or declaration of
bankruptcy or judicial liquidation that was being filed by Sabena Mining Corporation. It is
only an extra-judicial foreclosure that was being enunciated as when DBP extra-judicially
foreclosed the assets of Sabena Mining Corporation. Conversely, to hold that Article 110 is
also applicable in extra-judicial proceedings would be putting the worker in a better position
than the State which could only assert its own prior preference in case of ajudicial
proceeding. Article 110 must not be viewed in isolation and must always be reckoned with
the provisions of the Civil Code (DBP v. Labor Arbiter, supra).
Quite recently, the rule enunciated in Republic v. Peralta (150 SCRA 37 [1987]) reads:
Article 110 of the Labor Code, in determining the reach of its terms,
cannot be viewed in isolation. Rather, Article 110 must be read in relation
to the provisions of the Civil Code concerning the classification,
concurrence and preference of credits, which provisions find particular
application in insolvency proceedings where the claims of all creditors,
preferred or non-preferred, may be adjudicated in a binding manner. ...
The reason behind the necessity for a judicial proceeding or a proceeding in rem before the
concurrence and preference of credits may be appealed is to bind all interested persons
whether known to the parties or not. The claims of all credits whether preferred or non
preferred, the Identification of the preferred ones and the totality of the employer's assets
should be brought into the picture. There can then be an authoritative, fair and binding
adjudication instead of the piece meal settlement which would result from the questioned
decision in this case 1 (DBP v. Labor Arbiter, supra).
PREMISES CONSIDERED, the petition is hereby DISMISSED for lack of merit and the
questioned Order dated January 5, 1988 issued by the respondent court is hereby AFFIRMED.
SO ORDERED.
REPUBLIC OF THE PHILIPPINES, represented by the Bureau of Customs and the Bureau of
Internal Revenue, petitioner,
vs.
HONORABLE E.L. PERALTA, PRESIDING JUDGE OF THE COURT OF FIRST INSTANCE OF
MANILA, BRANCH XVII, QUALITY TABACCO CORPORATION, FRANCISCO, FEDERACION
OBRERO DE LA INDUSTRIA TABAQUERA Y OTROS TRABAJADORES DE FILIPINAS (FOITAF)
USTC EMPLOYEES ASSOCIATION WORKERS UNION-PTGWO, respondents.
FELICIANO, J.:
The Republic of the Philippines seeks the review on certiorari of the Order dated 17
November 1980 of the Court of First Instance of Manila in its Civil Case No. 108395 entitled
"In the Matter of Voluntary Insolvency of Quality Tobacco Corporation, Quality Tobacco
Corporation, Petitioner," and of the Order dated 19 January 1981 of the same court denying
the motion for reconsideration of the earlier Order filed by the Bureau of Internal Revenue
and the Bureau of Customs for the Republic.
In the voluntary insolvency proceedings commenced in May 1977 by private respondent
Quality Tobacco Corporation (the "Insolvent"), the following claims of creditors were filed:
(i) P2,806,729.92, by the USTC Association of Employees and workers Union-PTGWO USTC as
separation pay for their members. This amount plus an additional sum of P280,672.99 as
attorney's fees had been awarded by the National Labor Relations Commission in NLRC Case
No. RB-IV-9775-77. 1
(ii) P53,805.05 by the Federacion de la Industria Tabaquera y Otros Trabajadores de Filipinas
("FOITAF), as separation pay for their members, an amount similarly awarded by the NLRC in
the same NLRC Case.
(iii) P1,085,188.22 by the Bureau of Internal Revenue for tobacco inspection fees covering
the period 1 October 1967 to 28 February 1973;
(iv) P276,161.00 by the Bureau of Customs for customs duties and taxes payable on various
importations by the Insolvent. These obligations appear to be secured by surety
bonds. 2 Some of these imported items are apparently still in customs custody so far as the
record before this Court goes.
In its questioned Order of 17 November 1980, the trial court held that the above-
enumerated claims of USTC and FOITAF (hereafter collectively referred to as the "Unions")
for separation pay of their respective members embodied in final awards of the National
Labor Relations Commission were to be preferred over the claims of the Bureau of Customs
and the Bureau of Internal Revenue. The trial court, in so ruling, relied primarily upon Article
110 of the Labor Code which reads thus:
Article 110. Worker preference in case of bankruptcy — In the event of
bankruptcy or liquidation of an employer's business, his workers shall
enjoy first preference as regards wages due them for services rendered
during the period prior to the bankruptcy or liquidation, any provision of
law to the contrary notwithstanding. Union paid wages shall be paid in
full before other creditors may establish any claim to a share in the assets
of the employer.
The Solicitor General, in seeking the reversal of the questioned Orders, argues that Article
110 of the Labor Code is not applicable as it speaks of "wages," a term which he asserts does
not include the separation pay claimed by the Unions. "Separation pay," the Solicitor General
contends,
is given to a laborer for a separation from employment computed on the basis of the number concerning the classification, concurrence and preference of credits, which provisions find
of years the laborer was employed by the employer; it is a form of penalty or damage against particular application in insolvency proceedings where the claims of all creditors, preferred or
the employer in favor of the employee for the latter's dismissal or separation from service. 3 non-preferred, may be adjudicated in a binding manner. 7 It is thus important to begin by
outlining the scheme constituted by the provisions of the Civil Code on this subject.
Article 97 (f) of the Labor Code defines "wages" in the following terms:
Those provisions may be seen to classify credits against a particular insolvent into three
Wage' paid to any employee shall mean the remuneration or earnings, general categories, namely:
however designated, capable of being expressed in terms of money,
whether fixed or ascertained on a time, task, piece, or commission basis, (a) special preferred credits listed in Articles 2241 and 2242,
or other method of calculating the same, which is payable by an employer
to an employee under a written or unwritten contract of employment for (b) ordinary preferred credits listed in Article 2244; and
work done or to be done, or for services rendered or to be rendered, and
includes the fair and reasonable value, as determined by the Secretary of
(c) common credits under Article 2245.
Labor, of board, lodging, or other facilities customarily furnished by the
employer to the employee. 'Fair and reasonable value' shall not include
any profit to the employer or to any person affiliated with the Turning first to special preferred credits under Articles 2241 and 2242, it should be noted at
employer.(emphasis supplied) once that these credits constitute liens or encumbrances on the specific movable or
immovable property to which they relate. Article 2243 makes clear that these credits "shall
be considered as mortgages or pledges of real or personal property, or liens within the
We are unable to subscribe to the view urged by the Solicitor General. We note, in this
purview of legal provisions governing insolvency." It should be emphasized in this connection
connection, that in Philippine Commercial and Industrial Bank (PCIB) us. National Mines and
that "duties, taxes and fees due [on specific movable property of the insolvent] to the State
Allied Workers Union, 4 the Solicitor General took a different view and there urged that the
or any subdivision thereof" (Article 2241 [1]) and "taxes due upon the [insolvent's] land or
term "wages" under Article 110 of the Labor Code may be regarded as embracing within its
building (2242 [1])"stand first in preference in respect of the particular movable or
scope severance pay or termination or separation pay. In PCIB, this Court agreed with the
immovable property to which the tax liens have attached. Article 2243 is quite
position advanced by the Solicitor General.5 We see no reason for overturning this particular
explicit: "[T]axes mentioned in number 1, Article 2241 and number 1, Article 2242 shall first
position. We continue to believe that, for the specific purposes of Article 110 and in the
be satisfied. " The claims listed in numbers 2 to 13 in Article 2241 and in numbers 2 to 10 in
context of insolvency termination or separation pay is reasonably regarded as forming part of
Articles 2242, all come after taxes in order of precedence; such claims enjoy their privileged
the remuneration or other money benefits accruing to employees or workers by reason of
character as liens and may be paid only to the extent that taxes have been paid from the
their having previously rendered services to their employer; as such, they fall within the
proceeds of the specific property involved (or from any other sources) and only in respect of
scope of "remuneration or earnings — for services rendered or to be rendered — ." Liability
the remaining balance of such proceeds. What is more, these other (non-tax) credits,
for separation pay might indeed have the effect of a penalty, so far as the employer is
although constituting liens attaching to particular property, are not preferred one over
concerned. So far as concerns the employees, however, separation pay is additional
another inter se. Provided tax liens shall have been satisfied, non-tax liens or special
remuneration to which they become entitled because, having previously rendered services,
preferred credits which subsist in respect of specific movable or immovable property are to
they are separated from the employer's service. The relationship between separation pay
be treated on an equal basis and to be satisfied concurrently and proportionately. 8 Put
and services rendered is underscored by the fact that separation pay is measured by the
succintly, Articles 2241 and 2242 jointly with Articles 2246 to 2249 establish a two-tier order
amount (i.e., length) of the services rendered. This construction is sustained both by the
of preference. The first tier includes only taxes, duties and fees due on specific movable or
specific terms of Article 110 and by the major purposes and basic policy embodied in the
immovable property. All other special preferred credits stand on the same second tier to be
Labor Code. 6 It is also the construction that is suggested by Article 4 of the Labor Code which
satisfied, pari passu and pro rata, out of any residual value of the specific property to which
directs that doubts — assuming that any substantial rather than merely frivolous doubts
such other credits relate.
remain-in the interpretation of the provisions of the labor Code and its implementing rules
and regulations shall be "resolved in favor of labor."
Credits which are specially preferred because they constitute liens (tax or non-tax) in turn,
take precedence over ordinary preferred credits so far as concerns the property to which the
The resolution of the issue of priority among the several claims filed in the insolvency
liens have attached. The specially preferred credits must be discharged first out of the
proceedings instituted by the Insolvent cannot, however, rest on a reading of Article 110 of
proceeds of the property to which they relate, before ordinary preferred creditors may lay
the labor Code alone.
claim to any part of such proceeds. 9

Article 110 of the Labor Code, in determining the reach of its terms, cannot be viewed in
If the value of the specific property involved is greater than the sum total of the tax liens and
isolation. Rather, Article 110 must be read in relation to the provisions of the Civil Code
other specially preferred credits, the residual value will form part of the "free property" of
the insolvent — i.e., property not impressed with liens by operation of Articles 2241 and
2242. If, on the other hand, the value of the specific movable or immovable is less than the
aggregate of the tax liens and other specially preferred credits, the unsatisfied balance of the
tax liens and other such credits are to the treated as ordinary credits under Article 2244 and
to be paid in the order of preference there set up. 10
In contrast with Articles 2241 and 2242, Article 2244 creates no liens on determinate
property which follow such property. What Article 2244 creates are simply rights in favor of
certain creditors to have the cash and other assets of the insolvent applied in a certain
sequence or order of priority. 11
Only in respect of the insolvent's "free property" is an order of priority established by Article
2244. In this sequence, certain taxes and assessments also figure but these do not have the
same kind of overriding preference that Articles 2241 No. 1 and 2242 No. I create for taxes
which constituted liens on the taxpayer's property. Under Article 2244,
(a) taxes and assessments due to the national
government, excluding those which result in tax liens under Articles 2241
No. 1 and 2242 No. 1 but including the balance thereof not satisfied out
of the movable or immovable property to which such liens attached, are
ninth in priority;
(b) taxes and assessments due any province, excluding those impressed
as tax liens under Articles 2241 No. 1 and 2242 No. 1, but including the
balance thereof not satisfied out of the movable or immovable property
to which such liens attached, are tenth in priority; and
(c) taxes and assessments due any city or municipality, excluding those
impressed as tax liens under Articles 2241 No. I and 2242 No. 2
but including the balance thereof not satisfied out of the movable or
immovable property to which such liens attached, are eleventh in
priority.
It is within the framework of the foregoing rules of the Civil Code that the question of the
relative priority of the claims of the Bureau of Customs and the Bureau of Internal Revenue,
on the one hand, and of the claims of the Unions for separation pay of their members, on the
other hand, is to be resolved. A related vital issue is what impact Article 110 of the labor
Code has had on those provisions of the Civil Code.
A. Claim of the Bureau of Customs for Unpaid Customs Duties and Taxes-
Under Section 1204 of the Tariff and Customs Code, 12 the liability of an importer
for duties, taxes and fees and other charges attaching on importation constitute a personal
debt due from the importer to the government which can be discharged only by payment in
full of all duties, taxes, fees and other charges legally accruing It also constitutes a lien upon
the articles imported which may be enforced while such articles are in the custody or subject
to the control of the government. (emphasis supplied)
Clearly, the claim of the Bureau of Customs for unpaid customs duties and taxes enjoys the
status of a specially preferred credit under Article 2241, No. 1, of the Civil Code. only in
respect of the articles importation of which by the Insolvent resulted in the assessment of
the unpaid taxes and duties, and which are still in the custody or subject to the control of the
Bureau of Customs. The goods imported on one occasion are not subject to a lien for
customs duties and taxes assessed upon other importations though also effected by the
Insolvent. Customs duties and taxes which remain unsatisfied after levy upon the imported
articles on which such duties and taxes are due, would have to be paid out of the Insolvent's
"free property" in accordance with the order of preference embodied in Article 2244 of the
Civil Code. Such unsatisfied customs duties and taxes would fall within Article 2244, No. 9, of
the Civil Code and hence would be ninth in priority.
B. Claims of the Bureau of Internal Revenue for Tabacco Inspection Fees —
Under Section 315 of the National Internal Revenue Code ("old Tax Code"), 13 later
reenacted in Identical terms as Section 301 of the Tax Code of 1977, 14 an unpaid "internal
revenue tax," together with related interest, penalties and costs, constitutes a lien in favor of
the Government from the time an assessment therefor is made and until paid, "upon all
property and rights to property belonging to the taxpayer."
Tobacco inspection fees are specifically mentioned as one of the miscellaneous taxes
imposed under the National Internal Revenue Code, specifically Title VIII, Chapter IX of the
old Tax Code and little VIII, Chapter VII of the Tax Code of 1977. 15 Tobacco inspection fees
are collected both for purposes of regulation and control and for purposes of revenue
generation: half of the said fees accrues to the Tobacco Inspection Fund created by Section
12 of Act No. 2613, as amended by Act No. 3179, while the other half accrues to the Cultural
Center of the Philippines. Tobacco inspection fees, in other words, are imposed both as a
regulatory measure and as a revenue-raising measure. In Commissioner of Internal Revenue
us. Guerrero, et al 16 this Court held, through Mr. Chief Justice Concepcion, that the term
"tax" is used in Section 315 of the old Tax Code:
not in the limited sense [of burdens imposed upon persons and/or
properties, by way of contributions to the support of the Government, in
consideration of general benefits derived from its operation], but, in
a broad sense, encompassing all government revenues collectible by the
Commissioner of Internal Revenue under said Code, whether involving
taxes, in the strict technical sense thereof, or not. x x x As used in Title IX
of said Code, the term 'tax' includes 'any national internal revenue tax,
fee or charge imposed by the Code. 17
It follows that the claim of the Bureau of Internal Revenue for unpaid tobacco inspection fees
constitutes a claim for unpaid internal revenue taxes 18 which gives rise to a tax lien upon all
the properties and assets, movable and immovable, of the Insolvent as taxpayer. Clearly,
under Articles 2241 No. 1, 2242 No. 1, and 2246-2249 of the Civil Code, this tax claim must be
given preference over any other claim of any other creditor, in respect of any and all
properties of the Insolvent. 19
C. Claims of the Unions for Separation Pay of Their Members —
Article 110 of the Labor Code does not purport to create a lien in favor of workers or
employees for unpaid wages either upon all of the properties or upon any particular property
owned by their employer. Claims for unpaid wages do not therefore fall at all within the
category of specially preferred claims established under Articles 2241 and 2242 of the Civil
Code, except to the extent that such claims for unpaid wages are already covered by Article
2241, number 6. "claims for laborers' wages, on the goods manufactured or the work done;"
or by Article 2242, number 3: "claims of laborers and other workers engaged in the
construction, reconstruction or repair of buildings, canals and other works, upon said
buildings, canals or other works." To the extent that claims for unpaid wages fall outside the
scope of Article 2241, number 6 and 2242, number 3, they would come within the ambit of
the category of ordinary preferred credits under Article 2244.
Applying Article 2241, number 6 to the instant case, the claims of the Unions for separation
pay of their members constitute liens attaching to the processed leaf tobacco, cigars and
cigarettes and other products produced or manufactured by the Insolvent, but not to other
assets owned by the Insolvent. And even in respect of such tobacco and tobacco products
produced by the Insolvent, the claims of the Unions may be given effect only after the
Bureau of Internal Revenue's claim for unpaid tobacco inspection fees shall have been
satisfied out of the products so manufactured by the Insolvent.
Article 2242, number 3, also creates a lien or encumbrance upon a building or other real
property of the Insolvent in favor of workmen who constructed or repaired such building or
other real property. Article 2242, number 3, does not however appear relevant in the instant
case, since the members of the Unions to whom separation pay is due rendered services to
the Insolvent not (so far as the record of this case would show) in the construction or repair
of buildings or other real property, but rather, in the regular course of the manufacturing
operations of the Insolvent. The Unions' claims do not therefore constitute a lien or
encumbrance upon any immovable property owned by the Insolvent, but rather, as already
indicated, upon the Insolvent's existing inventory (if any of processed tobacco and tobacco
products.
We come to the question of what impact Article 110 of the Labor Code has had upon the
complete scheme of classification, concurrence and preference of credits in insolvency set
out in the Civil Code. We believe and so hold that Article 110 of the Labor Code did not
sweep away the overriding preference accorded under the scheme of the Civil Code to tax
claims of the government or any subdivision thereof which constitute a lien upon properties
of the Insolvent. It is frequently said that taxes are the very lifeblood of government. The
effective collection of taxes is a task of highest importance for the sovereign. It is critical
indeed for its own survival. It follows that language of a much higher degree of specificity
than that exhibited in Article 110 of the Labor Code is necessary to set aside the intent and
purpose of the legislator that shines through the precisely crafted provisions of the Civil
Code. It cannot be assumed simpliciter that the legislative authority, by using in Article 110
the words "first preference" and "any provision of law to the contrary notwithstanding"
intended to disrupt the elaborate and symmetrical structure set up in the Civil Code. Neither
can it be assumed casually that Article 110 intended to subsume the sovereign itself within
the term "other creditors" in stating that "unpaid wages shall be paid in full before other
creditors may establish any claim to a share in the assets of employer." Insistent
considerations of public policy prevent us from giving to "other creditors" a linguistically
unlimited scope that would embrace the universe of creditors save only unpaid employees.
We, however, do not believe that Article 110 has had no impact at all upon the provisions of
the Civil Code. Bearing in mind the overriding precedence given to taxes, duties and fees by
the Civil Code and the fact that the Labor Code does not impress any lien on the property of
an employer, the use of the phrase "first preference" in Article 110 indicates that what
Article 110 intended to modify is the order of preference found in Article 2244, which order
relates, as we have seen, to property of the Insolvent that is not burdened with the liens or
encumbrances created or recognized by Articles 2241 and 2242. We have noted that Article
2244, number 2, establishes second priority for claims for wages for services rendered by
employees or laborers of the Insolvent "for one year preceding the commencement of the
proceedings in insolvency." Article 110 of the Labor Code establishes "first preference" for
services rendered "during the period prior to the bankruptcy or liquidation, " a period
not limited to the year immediately prior to the bankruptcy or liquidation. Thus, very
substantial effect may be given to the provisions of Article 110 without grievously distorting
the framework established in the Civil Code by holding, as we so hold, that Article 110 of the
Labor Code has modified Article 2244 of the Civil Code in two respects: (a) firstly,
by removing the one year limitation found in Article 2244, number 2; and (b) secondly, by
moving up claims for unpaid wages of laborers or workers of the Insolvent from second
priority to first priority in the order of preference established I by Article 2244.
Accordingly, and by way of recapitulating the application of Civil Code and Labor Code
provisions to the facts herein, the trial court should inventory the properties of the Insolvent
so as to determine specifically: (a) whether the assets of the Insolvent before the trial court
includes stocks of processed or manufactured tobacco products; and (b) whether the Bureau
of Customs still has in its custody or control articles imported by the Insolvent and subject to
the lien of the government for unpaid customs duties and taxes.
In respect of (a), if the Insolvent has inventories of processed or manufactured tobacco
products, such inventories must be subjected firstly to the claim of the Bureau of Internal
Revenue for unpaid tobacco inspection fees. The remaining value of such inventories after
satisfaction of such fees (or should such inspection fees be satisfied out of other properties of
the Insolvent) will be subject to a lien in favor of the Unions by virtue of Article 2241, number
6. In case, upon the other hand, the Insolvent no longer has any inventory of processed or
manufactured product, then the claim of the Unions for separation pay would have to be
satisfied out of the "free property" of the Insolvent under Article 2244 of the Civil Code. as
modified by Article 110 of the Labor Code.
Turning to (b), should the Bureau of Customs no longer have any importations by the
Insolvent still within customs custody or control, or should the importations still held by the
Bureau of Customs be or have become insufficient in value for the purpose, customs duties
and taxes remaining unpaid would have only ninth priority by virtue of Article 2244, number
9. In respect therefore of the Insolvent's "free property, " the claims of the Unions will enjoy
first priority under Article 2244 as modified and will be paid ahead of the claims of the
Bureau of Customs for any customs duties and taxes still remaining unsatisfied.

It is understood that the claims of the Unions referred to above do not include the 10% claim
for attorney's fees. Attorney's fees incurred by the Unions do not stand on the same footing
as the Unions' claims for separation pay of their members.

WHEREFORE, the petition for review is granted and the Orders dated 17 November 1980 and
19 January 1981 of the trial court are modified accordingly. This case is hereby remanded to
the trial court for further proceedings in insolvency compatible with the rulings set forth
above. No pronouncement as to costs.

SO ORDERED.