Marvin executed a Service Contract dated September 9, 2010 with Generation One Resource Service and Multi-Purpose Cooperative (Generation One) and assigned to work as a counter crew and cashier of its client, Southgate Foods, Inc. (Southgate), the owner of a Jollibee franchise located in Alphaland Southgate Mall, Makati City (Jollibee Alphaland). Generation One and Southgate had a Service Agreement where the former was to provide “specified non-core functions and operational activities” for the latter’s Jollibee Alphaland branch. Prior to his employment in Generation One, Marvin was directly employed by Southgate from March 12, 2010 to August 26, 2010 as counter crew.
Later, Marvin filed a complaint for illegal dismissal against Generation One and Southgate. The latter alleged, among others, that they had a legitimate contracting arrangement and that their Service Agreement was valid.
The labor tribunals ruled that Generation One was a legitimate contractor, having been a registered cooperative with substantial capital, investment, or equipment to perform its business. Said tribunals also ruled that Generation One had its own office where its members met and conducted activities.
The Court of Appeals held that Generation One was a legitimate contractor as it was issued a Certificate of Registration by the Department of Labor and Employment. The Court of Appeals also found that the Service Agreement between Generation One and Southgate clearly stated that the former was to provide specific non-core functions and operational activities which included management and supervision of the food chain system, assistance in food preparation and quality control, cleaning of the dining area, comfort room, and other areas of the restaurant, assistance in cash control activities and warehouse and utilities management.
Marvin filed a petition with the Supreme Court to assail, among others, the finding of legitimate contracting between Generation One and Southgate.
Was Generation One a legitimate contractor?
The Court ruled in the negative. It considered Generation One as a labor-only contractor.
The Court first stated that outsourcing of services is not prohibited in all instances. The rules1Rules Implementing Articles 106 to 109 of the Labor Code, As Amended (P.D. No. 442, as amended), Department of Labor and Employment Order No. 18-02, February 21, 2002) relevant to the case provided that legitimate contracting or subcontracting refers to an arrangement whereby a principal agrees to put out or farm out with a contractor or subcontractor the performance or completion of a specific job, work or service within a definite or predetermined period, regardless of whether such job, work or service is to be performed or completed within or outside the premises of the principal. The principal refers to any employer who puts out or farms out a job, service or work to a contractor or subcontractor.
The Court then cited relevant rules on the prohibition against labor-only contracting, which describes the arrangement as one 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 is present:
- 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
- The contractor does not exercise the right to control over the performance of the work of the contractual employee.
The Court stated that based on the foregoing rules, a factor in determining whether there is labor-only contracting is the nature of the employee’s job, i.e., whether the work he performs is necessary and desirable to the business of the principal. Another factor is the ownership of substantial capital in the form of tools, equipment, machinery, work premises, and other properties by the contractor.
In the present case, the Court disagreed with the assertion that Marvin performed “non-core” functions or peripheral activities. According to the Court, the assertion was simply preposterous and contrary to the basic business model of a fast food restaurant. Instead, the Court found that Marvin’s cash control activities which involved order-taking, food-assembling, receiving payments, and giving change were necessary and desirable to the business of a fast food restaurant, such as the franchise owned by Southgate.
Furthermore, the Court disagreed with the labor tribunals’ findings that Generation One was able to prove that it had substantial capital.
The Court found that Generation One’s Income Tax Return for the year ended December 2010 showing a gross income of around P9.5 million was hardly substantial evidence to prove substantial capitalization because the same was not submitted to the Bureau of Internal Revenue. The Court also found that Generation One only submitted the Notes to the Audited Financial Statements for the year ended 2010, and not the actual Audited Financial Statements itself. For the Court, the said Notes failed to show a complete picture of its financial standing.
The Court then ruled that the Certificate of Registration relied upon by the Court of Appeals was not conclusive evidence of legitimate contracting status. According to the Court, registration with Department of Labor and Employment as an independent contractor does not automatically vest status of a legitimate contractor; it is merely presumptive proof. The fact of registration simply prevents the legal presumption of being a mere labor-only contractor from arising.2San Miguel Corporation v. Semillano, G.R. No. 164257, July 5, 2010.
With regard to control, the Court noticed that Southgate took it upon itself to discipline Marvin for an alleged violation of its company rules, regulations, and policies. For the Court, this validated the presence of its right to control Marvin. The Court also looked into Marvin’s Service Contract and discovered that his work responsibilities were to be specified at the designated place of assignment. This suggested that the right to determine not only the end to be achieved, but also the manner and means to achieve that end, was reposed in Southgate.
Finally, it did not accept the reliance by the Court of Appeals on the provision in the Service Agreement between Generation One and Southgate which stated the absence of an employment relation between Southgate and the employees of Generation One. The reason was that the character of the business, whether as labor-only contractor or as a job contractor, should be determined by the criteria set by statute and the parties cannot dictate by the mere expedience of a unilateral declaration in a contract the character of their business.3Petron Corp. v. Caberte, G.R. No. 182255, June 15, 2015.
The Court stated that in distinguishing between permissible job contracting and prohibited labor-only contracting, the totality of the facts and the surrounding circumstances of the case are to be considered. Here, the Court found that ruled that the badges of labor-only contracting were too blatant to ignore.
With the finding that Generation One was a labor-only contractor, the Court applied the rule that the principal shall be deemed the employer of the contractual employee where there is labor-only contracting. Marvin was thus declared to be a regular employee of Southgate.
Further reading:
- Daguinod v. Southgate Foods, Inc., G.R. No. 227795, February 20, 2019.
