Paulino Ungos III

Lawyer | Law Professor | Author

Tag: labor-only contracting

  • Based on Two Supreme Court Decisions, the Contractor Is Legitimate

    Rico alleged that on October 2, 2002, PPI Holdings, Inc. (PPI), the sole franchisee of Pizza Hut in the Philippines, hired him as a messenger for its human resources department, and later on, for its accounting department.

    Rico stated that his employment was transferred to a manpower agency, a certain Human Resources, Inc., and subsequently, to Consolidated Buildings Maintenance, Inc. (CBMI), now Atalian Global Services.

    Rico also stated that despite such transfer, nothing changed with his employment in that he continued to be PPI’s messenger in its accounting department until CBMI sent him, along with other coworkers, a letter dated August 1, 2016 informing him of the termination of his services with PPI.

    Rico thus filed an illegal dismissal case with money claims against PPI, CBMI, and their owners, arguing that he was a regular employee of PPI for having worked with it for 14 years, and that there was no just cause for his dismissal.

    PPI denied having an employer-employee relationship with Rico. It posited that Rico was merely assigned to it by CBMI, a legitimate contractor that had rendered janitorial, sanitation, warehousing services, and allied services to PPI until the termination of their latest Contract of Services Agreement on September 1, 2016. Invoking the service agreement with CBMI, PPI averred that it was CBMI which relayed the company rules, regulations, and working terms and conditions upon Rico’s engagement, and which paid Rico’s salary, Social Security System, Pag-IBIG, and PhilHealth contributions.

    For its part, CBMI acknowledged Rico as its employee assigned to PPI. It asserted that it is a legitimate contractor engaged in the business of providing janitorial, kitchen, elevator maintenance, and allied services to various entities, including PPI. However, while it recognized Rico’s employment, CBMI denied having terminated his services. Instead, it alleged that Rico, along with his other co-employees, was merely placed on floating status when it decided to terminate its latest service contract with PPI effective September 1, 2016 due to certain financial disagreements. Hence, for CBMI, Rico’s complaint should be dismissed for being prematurely filed.

    The Office of the Labor Arbiter considered CBMI as a legitimate contractor based on the following documents:

    • CBMI Securities and Exchange Commission (SEC) Registration;
    • CBMI Company Profile;
    • Contracts of Services entered into with PPI for several years;
    • CBMI Certificates of Registration with the Department of Labor and Employment under such Department’s Orders numbered 18-A, Series of 2011 and 18-02, Series of 2002; and
    • Audited Financial Statement filed with the SEC showing substantial capital or investment.

    The Office of the Labor Arbiter further found that, as stipulated in the service agreements, CBMI carried out its work/service independently from its principal in accordance with its own means, method, and manner.

    Nonetheless, the Office of the Labor Arbiter ruled that Rico was PPI’s regular employee as it found no evidence of the existence of an employer-employee relationship between CBMI and Rico. Such Office found that Rico’s 14 years of service with PPI, performing tasks which are usually necessary or desirable to PPI’s main business as messenger, proved that Rico was PPI’s employee. Since PPI failed to present any just or authorized cause in terminating his employment, the Office of the Labor Arbiter directed PPI to reinstate Rico and held PPI and CBMI solidarily liable for payment of his backwages.

    PPI filed a partial appeal from the Office of the Labor Arbiter’s Decision, insisting that Rico was not its employee but that of CBMI, which is a legitimate contractor as found by said Office.

    The National Labor Relations Commission ruled that CBMI is a labor-only contractor. The Commission found that, despite proof of substantial capitalization, there was no showing that CBMI carried on an independent business or undertook the performance of its service contracts according to its own manner and method, free from PPI’s control and supervision. The Commission added that the contracts of services between PPI and CBMI clearly showed that CBMI undertook to merely supply manpower. The Commission further added that CBMI’s registration with the DOLE as an independent contractor was not conclusive of such status.

    Further, the Commission agreed with the Office of the Labor Arbiter’s ruling that Rico was PPI’s regular employee. The Commission found that Rico’s job as a messenger was necessary and vital to PPI’s business as the only franchisee of Pizza Hut, which requires food and kitchen services, sanitation, delivery, warehousing, commissary, and related services for its various restaurants. The Commission also took note of Rico’s 14 years of uninterrupted service with PPI.

    Finally, the Commission upheld the Office of the Labor Arbiter’s finding that PPI failed to adduce evidence that Rico’s dismissal was for a just or authorized cause, and that procedural due process was observed in his dismissal from employment.

    When the case reached the Court of Appeals, such Court declared CBMI as a legitimate contractor, based solely on two cases decided by the Supreme Court concerning PPI and CBMI, specifically, Consolidated Building Maintenance, Inc. v. Asprec, Jr.1G.R. No. 217301, June 6, 2018 and Philippine Pizza, Inc. v. Cayetano.2G.R. No. 230030, August 29, 2018] On that premise, the Court of Appeals concluded that Rico was CBMI’s direct employer. Nevertheless, the Court of Appeals sustained the labor tribunals’ uniform ruling that Rico was illegally dismissed from employment.

    Rico filed a petition for review on certiorari to assail the ruling of the Court of Appeals.

    Did PPI and CBMI engage in labor-only contracting?

    The Supreme Court ruled that PPI and CBMI engaged in labor-only contracting.

    The Court began by stating that outsourcing of services is not totally prohibited in the Philippines. It pointed out that Articles 106 to 109 of the Labor Code of the Philippines, Department of Labor and Employment Orders numbered 18-02, Series of 2002 and 18-A, Series of 2011, or the implementing rules in force at the time of Rico’s employment, provided the legal basis for service contracting and delineated the situations when it is not permitted. Considering such laws and rules, the Court stated that the following must be considered in determining whether CBMI was a legitimate contractor or engaged in labor-only contracting:

    • registration with the proper government agencies;
    • existence of substantial capital or investment;
    • service agreement that ensures compliance with all the rights and benefits under labor laws;
    • nature of the activities performed by the employees, i.e., if they are usually necessary or desirable to the operation of the principal’s company or directly related to the main business of the principal within a definite predetermined period; and
    • the exercise of the right to control the performance of the employees’ work.3Barretto v. Amber Golden Pot Restaurant, G.R. No. 254596-97, November 24, 2021

    In the present case, the Supreme Court found the certificates of registration, financial statements, and service agreements insufficient in supporting PPI and CBMI’s claim of legitimate contracting. The Court mentioned the following reasons:

    • A certificate of registration as an independent contractor is not conclusive evidence of such status, as such registration merely prevents the legal presumption of being a labor-only contractor from arising;4Daguinod v. Southgate Foods, Inc., G.R. No. 227795, February 20, 2019
    • It is settled that, despite proof of substantial capital, a contractor is still considered engaged in labor-only contracting whenever it is established that the principal actually controls the manner of the employee’s work;5Mago v. Sun Power Manufacturing Limited, G.R. No. 210961, January 24, 2018 and
    • The true nature of the relationship between the principal, contractor, and employee cannot be dictated by mere expedience of a unilateral declaration in a contract;6Daguinod v. Southgate Foods, Inc., G.R. No. 227795, February 20, 2019

    The Supreme Court added that the totality of attendant circumstances led to a finding that PPI and CBMI engaged in labor-only contracting.

    First, there was no evidence that CBMI carried on an independent business or undertook the performance of its service contracts according to its own manner and method, free from the control and supervision of PPI. While the various service agreements between PPI and CBMI contained the latter’s undertaking for the employees’ qualification and training, hiring and payroll, as well as their supervision, discipline, suspension or termination, said clauses were still but empty words that hardly helped PPI’s case, in absence of concrete proof that CBMI indeed carried on an independent business.

    Second, there was also no evidence that CBMI hired Rico. In fact, there was no contract of employment showing that Rico was an employee of CBMI, nor were there records submitted in evidence to show such relationship.

    Third, the fact that PPI exercised the right of control over Rico’s work was clear and unmistakable. As messenger, Rico had been performing his tasks at PPI’s premises for about fourteen (14) years. All those times, all the tools and equipment which he used in the performance of his work were owned by PPI and the latter’s managers and supervisors controlled his work inside the company premises.

    Fourth, the various contract of services executed between PPI and CBMI, which spanned for several years from 1999 to 2012, showed that CBMI undertook to supply manpower only.

    And fifth, Rico’s job as messenger was necessary and vital to PPI’s business as the Philippine franchisee of Pizza Hut which requires waitering, food and kitchen services, sanitation, delivery, warehousing, commissary and related services for its various restaurants. Otherwise, Rico would not have been repeatedly and continuously hired by PPI for fourteen (14) years. The Court stressed that such repeated and continuing need for the performance of the job is sufficient evidence of the necessity, if not indispensability, of the activity to the business.

    The Supreme Court added that the Court of Appeals gravely erred in declaring CBMI as a legitimate contractor solely on the basis of the pronouncements in Consolidated Building Maintenance, Inc. v. Asprec, Jr.7G.R. No. 217301, June 6, 2018 and Philippine Pizza, Inc. v. Cayetano.8G.R. No. 230030, August 29, 2018]

    The Supreme Court emphasized that the principle of stare decisis cannot be applied in determining whether one is engaged in permissible contracting or otherwise, since such characterization should be based on the distinct features of the relationship between the parties, and the totality of the facts and attendant circumstances of each case, then measured against the terms of and criteria set by the statute.9San Miguel Foods, Inc. v. Rivera, G.R. No. 220103, January 31, 2018 and 7K Corp. v. National Labor Relations Commission, G.R. No. 148490, November 22, 2006, 537 PHIL 664-681 Specifically, the Court mentioned while those two cases also involved PPI and CBMI, the nature of work and treatment of employment of the employees in those cases may be different from Rico’s. Hence, the Court found it necessary to independently determine Rico’s case, which was aptly undertaken by the Commission in this case.

    The Supreme Court further pointed out that the Court of Appeals merely made inference from previous cases without reference to the evidence on hand in concluding that CBMI was a legitimate contractor, and as such was Rico’s direct employer. The Supreme Court reiterated that the totality of the facts and the surrounding circumstances of the case must be considered in distinguishing prohibited contracting from permissible contracting.10Philippine Pizza, Inc. v. Cayetano, G.R. No. 230030, August 29, 2018]

    With the finding that CBMI was a labor-only contractor, such company was considered as a mere agent of PPI, which, in turn, was deemed to be Rico’s employer. Consequently, PPI and CBMI were held solidarily liable for payment of Rico’s awards.

    This is because of the established principle that in labor-only contracting, the statute creates an employer-employee relationship for a comprehensive purpose: to prevent a circumvention of labor laws. The contractor is considered merely an agent of the principal employer and the latter is responsible to the employees of the labor-only contractor as if such employees had been directly employed by the principal employer. The principal employer therefore becomes solidarily liable with the labor-only contractor for all the rightful claims of the employees.11San Miguel Corp. v. MAERC Integrated Services Inc., G.R. No. 144672, July 10, 2003, 453 PHIL 543-576

    Further reading:

    • Conjusta v. PPI Holdings, Inc., G.R. No. 252720, August 22, 2022.

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  • The Second Company’s Deceitful Purpose

    The Supreme Court reiterated the doctrine of piercing the corporate veil in that it applies in three (3) basic areas, namely: 1) defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; 2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or 3) alter ego cases, where a corporation merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.

    It is the act of hiding behind the separate and distinct personalities of juridical entities to perpetuate fraud, commit illegal acts and evade one’s obligations, that the equitable piercing doctrine was formulated to address and prevent. A settled formulation of the doctrine of piercing the corporate veil is that when two business enterprises are owned, conducted and controlled by the same parties, both law and equity will, when necessary to protect the rights of third parties, disregard the legal fiction that these two entities are distinct and treat them as identical or as one and the same. However, [an employer’s] attempt to isolate [itself] from and hide behind the supposed separate and distinct personality of [a different company] so as to evade [its] liabilities is precisely what the classical doctrine of piercing the veil of corporate entity seeks to prevent and remedy.1De Castro v. Court of Appeals, G.R. No. 204261, October 5, 2016, 796 PHIL 681-713.

    In Nextphase International, Inc. v. National Labor Relations Commission — Third Division,2G.R. No. 249046, December 9, 2020., Nextphase International, Inc. (NPI) was found to have used the corporate veil to perpetrate a fraud against certain employees. Thus:

    In this instance, petitioner denies committing fraud to defeat legal processes and deny private respondents of what is legally theirs, alleging merely that the evidence adduced by the latter is not sufficient to determine fraud or misuse of corporate fiction. However, it must be remembered that allegation is not equivalent to proof and, as such, the party who asserts a particular fact or affirmative defense is duty-bound to support the same with the requisite quantum of evidence.

    Here, petitioner miserably failed to support its denial of the commission of fraud to evade liability to private respondents or of the fact that it created NGII at around the same time as the conclusion of the case before the CA where being made to pay for P2,735,722.82 was likely. The deceitful purpose for which the second company was created was made clear by the fact that the sheriff was barred from serving the writ of execution to petitioner because its official address was suddenly under a new management whereas the banks to which he had sent notices of garnishment had all but refused. If the two companies were, indeed, separate and distinct from one another, the execution of the judgment would not have encountered a hitch, which it did. Thankfully, the private respondents inquired into the problem that led to the discovery of the surreptitious change in name cum creation of NGII for the purpose of thwarting the enforcement of the judgment award.

    In view thereof, there is no doubt that petitioner’s attempt to hide behind a new identity constitutes fraud within the meaning of the law. Fraud in this context proceeds from the intentional deception practiced by means of misrepresentation or concealment of a material fact. Petitioner did it by cloaking itself with a new legal personality in the hope that by hiding behind the legal fiction it could evade existing obligations and defeat the rights of the claimants to which it was held liable.

    As last ditch effort, petitioner contends that it has a different purpose than that of NGII’s. It claims that its main objective is to engage in the business of trading goods such as but not limited to novelty items on wholesale or retail basis whereas NGII is not. However, a reading of its petition yields to the fact that its nature of business is essentially the same as NGII’s. “[T]o engage in, conduct and carry on business of manufacturing, importing, exporting, marketing at retail/wholesale” is practically just a stretched-out itemization of the word “trading.” The identity of each of the companies’ business model (apart from their corporate names, address, contact numbers and website as well as directors, officers and shareholders) is rendered even more plainly and unambiguously by the subject of their enterprise which is plastic.

    Further reading:

    • Nextphase International, Inc. v. National Labor Relations Commission — Third Division, G.R. No. 249046, December 9, 2020.

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  • Totality of Circumstances and Contracting Arrangements

    The employer here was unorganized and had no exclusive bargaining agent. A labor union soon filed a petition for certification election before the regional office of the Department of Labor and Employment. The employer opposed the petition asserting that the members of the said union were employees of their contractor. The petition was still granted despite the opposition and certification elections were conducted.

    The employer then filed a protest with the Med-Arbiter, which then granted the same. In justifying the grant of the protest, the Med-Arbiter found that the contractor was legitimate and accordingly the employer of the challenged voters during the certification elections. The Med-Arbiter thus declared the relevant votes cast invalid for the purpose of certifying the labor union as exclusive bargaining agent to the employer.

    The Department of Labor and Employment reversed the order of the Med-Arbiter and found that the contractor was a labor-only contractor. It ruled that the challenged votes should be considered.

    The Court of Appeals reversed the decision of the Department of Labor and Employment, as the contractor was considered as legitimate. According to the Court of Appeals, the employer had presented substantial evidence that the contractor was legitimate. Specifically, it presented a Certificate of Registration issued by the Department of Labor and Employment, which declared the legitimacy of the contractor. Furthermore, it found that the contractor had substantial capitalization. Also the contractor had other clients from various industries. For the Court of Appeals, the fact that the contractor had other clients negated the conclusion that it is a labor-only contractor.

    Should the contractor be considered as a labor-only contractor?

    The Supreme Court ruled in the affirmative.

    The Court stated that although a contractor possesses badges of legitimate contracting by having substantial capitalization and catering to other clients, the Court stressed that such situation does not automatically convert a labor-only contractor to a legitimate contractor because in the issue of labor-only contracting, the totality of the facts and the surrounding circumstances of the case must still be considered.

    In the present case, the Court found that the employer entered into a Memorandum of Agreement with contractor even before the latter was issued a Certificate of Registration by the Department of Labor and Employment. The contractor had supplied manpower to various clients even without the stamp of imprimatur from the Department of Labor and Employment.

    Furthermore, although the contractor complied with capitalization requirements, there was a showing that the said contractor exercised control over the employee’s work performance and output. According to the Court, proof of substantial capital does not make an entity immune to a finding of labor-only contracting when there is showing that control over the employees resides in the principal and not in the contractor.

    The Court accordingly declared that since the contractor was a labor-only contractor, this created an employer-employee relationship between the employer as a principal, and workers whose votes were invalidated as its alleged employees.

    Further reading:

    • Manila Cordage Company-Employees Labor Union-Organized Labor Union in Line Industries and Agriculture v. Manila Cordage Co., G.R. Nos. 242495-96, September 16, 2020.

  • Returning to the Same Employer

    Z was hired in 1985 by LS, Inc. He filed a case on 4 January 1991 for illegal dismissal and regularization against LS, Inc. and SM Corp. before the National Labor Relations Commission.

    In its Decision dated 15 December 1994, the Office of the Labor Arbiter ruled that Z was a regular employee of SM Corp., as LS, Inc. was declared to be a labor-only contractor. It was also ruled that Z was illegally dismissed from employment in 1990. Thus, SM Corp. (the true employer) was ordered to reinstate Z to his former position as regular employee, his regular status “effective as of the date of the Office of the Labor Arbiter’s decision.” Z was also awarded backwages.

    Should Z’s employment be reckoned from 15 December 1994 (the date of the Office of the Labor Arbiter’s decision), or should it be reckoned from 1985 (the year when Z was hired to work in SM Corp)?

    The Supreme Court ruled that Z’s employment started from 1985. This is because service to an employer is presumed continuous unless there is evidence that employer-employee relations were validly severed in the interim. If an employee returns to work upon an order of reinstatement, he or she is not considered a new hire.

    Following this principle, the employment relationship between Z and SM Corp. should have been considered as continuous and not validly severed when Z was illegally dismissed from employment. When Z was returned to work upon an order of reinstatement, Z was not a new hire. Thus, the reckoning point of his length of service must be in 1985, or that date when he first started working in SM Corp.

    Further reading:

    • Cuadra v. San Miguel Corp., G.R. No. 194467, July 13, 2020.

  • But He Only Performed “Non-Core” Functions

    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.

  • Contractor’s Supervision Over Its Employees Found to Be Dependent Upon Principal’s Needs

    Contracting arrangements for the performance of specific jobs or services under the law are allowed. However, jurisprudence dictates that contracting must be made to a legitimate and independent contractor since labor rules expressly prohibit labor-only contracting.

    Labor-only contracting exists when the contractor or subcontractor merely recruits, supplies or places workers to perform a job, work or service for a principal and any of the following elements are present:

    a)

    i. The contractor or subcontractor does not have substantial capital, or

    ii. The contractor or subcontractor does not have investments in the form of tools, equipment, machineries, supervision, work premises, among others; and

    iii. The contractor’s or subcontractor’s employees recruited and placed are performing activities which are directly related to the main business operation of the principal; or

    b)

    The contractor or subcontractor does not exercise the right to control over the performance of the work of the employee.1now Section 5, Rules Implementing Articles 106 to 109 of the Labor Code, as Amended, Department of Labor and Employment Order No. 174-17, March 16, 2017 (formerly Section 6, Department Order No. 18-A-11 and Section 5, Department Order No. 18-02).

    The Supreme Court ruled that the complainants in this case were regular employees of Manila Memorial Park Cemetery, Inc. (Manila Memorial) despite having been engaged by Ward Trading and Services (Ward Trading).

    • Ward Trading did not have substantial capital or investment in the form of tools, equipment, machinery, work premises and other material, as it was Manila Memorial which owned the equipment used by Ward Trading’s interment and exhumation services.
    • Ward Trading could not have raised substantial capital from its income alone without the inclusion of the equipment owned and allegedly sold to it by Manila Memorial.
    • Manila Memorial admitted that the complainants performed various interment services at one of its branches. Said activities were directly related to Manila Memorial’s business of developing, selling and maintaining memorial parks and interment functions.
    • Manila Memorial retained the right to control complainants’ performance of their work. Although Ward Trading was still in charge of the supervising the complainants, the exercise of its supervision was heavily dependent upon the needs of Manila Memorial.
    • The service contract between Manila Memorial and Ward Trading further provided that the former had the option to take over the functions of the complainants if it finds any part or aspect of their work or service to be unsatisfactory.

    According to the Supreme Court, Manila Ward Trading was a labor-only contractor. Consequently, Manila Memorial was deemed the employer of the complainants. Said complainants, as regular employees of Manila Memorial, were entitled to their claims for wages and other benefits.

    Further reading:

    • Manila Memorial Park Cemetery, Inc. v. Lluz, G.R. No. 208451, February 3, 2016.

  • Employees of the Principal

    Diamond Farms Agrarian Reform Beneficiaries Multi-Purpose Cooperative (DARBMUPCO) was a multi-purpose cooperative composed of agrarian reform beneficiaries who were awarded portions of the banana plantation of Diamond Farms, Inc. (DFI).

    DARBMUPCO entered into a Banana Production and Purchase Agreement (BPPA) with DFI. Under the BPPA, DARBMUPCO and its members, as owners of the awarded plantation, agreed to grow and cultivate only high grade quality exportable bananas to be sold exclusively to DFI.

    DARBMUPCO was, however, hampered by lack of manpower to undertake the agricultural operation under the BPPA because some of its members were not willing to work. Hence, to assist DARBMUPCO in meeting its production obligations under the BPPA, DFI engaged the services of contractors. Said contractors recruited workers for the agricultural operation under the BPPA.

    The legitimate labor organization representing the workers filed a petition for certification election in the Office of the Med-Arbiter. DARBMUPCO and DFI, however, denied that they were the employers of the workers. They claimed, instead, that the workers were the employees of the contractors.

    A group of workers then filed a case for money claims and attorney’s fees against DFI, DARBMUPCO, and the contractors before the National Labor Relations Commission (NLRC). DARBMUPCO and DFI also averred that they were not the employers of the workers. They asserted that the money claims should be directed against the true employer, the contractors.

    Who among DFI, DARBMUPCO, and the contractors is the employer of the workers?

    Job contracting is permissible if the following conditions are met:

    • 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
    • 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.

    By contrast, there is labor-only contracting if a person who undertakes to supply workers to an employer:

    • Does not have substantial capital or investment in the form of tools, equipment, machineries, work premises and other materials; and
    • The workers recruited and placed by such person are performing activities which are directly related to the principal business or operations of the employer in which workers are habitually employed.

    In this case, the Supreme Court held that DFI was the true employer of the workers and that the contractors were labor-only contractors.

    First, the Court found no evidence showing that herein contractors could be considered as independent contractors. The contractors, DFI, and DARBMUPCO also did not offer any proof that the contractors were not engaged in labor-only contracting.

    Second, the Court found that the contractors also admitted and even insisted that they were engaged in labor-only contracting.

    Record showed it was DFI which hired the contractors, who, in turn, hired their own men to work in the land of DARBMUPCO and in the plantation.

    DFI did not deny that it engaged the services of the contractors. It did not dispute the claims of the contractors that they sent their billing to DFI for payment, and that DFI’s managers and personnel were in close consultation with the contractors.

    DFI admitted that the contractors worked under the direction and supervision of the DFI managers and personnel. DFI paid the contractors for the services rendered in the plantation and the contractors, in turn, paid their workers after the contractors received payment from DFI. DARBMUPCO had nothing to do with the hiring, supervision and payment of the wages of the workers thru the contractors.

    That DFI was the employer of the workers was bolstered by the fact that DFI exercised control over the workers. DFI, through its manager and supervisors, provided for the work assignments and performance targets of the workers. The managers and supervisors also had the power to directly hire and terminate the workers. Evidently, DFI wielded control over the workers.

    During the proceedings before the Office of the Labor Arbiter, the contractors categorically stated that they are “labor-only” contractors who have been engaged by DFI and DARBMUPCO. They admitted that they did not have substantial capital or investment in the form of tools, equipment, machineries, work premises and other materials, and they recruited workers to perform activities directly related to the principal operations of their employer.

    In their petition before the Supreme Court, the contractors again admitted that they were labor-only contractors by way of the following narration:

    1. Herein respondents, Voltaire Lopez, Jr., et al., were commissioned and contracted by petitioner, Diamond Farms, Inc. (DFI) to recruit farm workers, who are the complaining [respondent-workers] (as represented by Southern Philippines Federation of Labor (SPFL) in this appeal by certiorari), in order to perform specific farm activities, such as pruning, deleafing, fertilizer application, bud inject, stem spray, drainage, bagging, etc., on banana plantation lands awarded to private respondent, Diamond Farms Agrarian Reform Beneficiaries Multi-Purpose Cooperative (DARBMUPCO) and on banana planted lands owned and managed by petitioner, DFI.
    2. All farm tools, implements and equipment necessary to performance of such farm activities were supplied by petitioner DFI to respondents Voltaire Lopez, Jr., et al. as well as to respondents-SPFL, et al. Herein respondents Voltaire Lopez, Jr. et al. had no adequate capital to acquire or purchase such tools, implements, equipment, etc.
    3. Herein respondents Voltaire Lopez, Jr., et al. as well as respondents-SPFL, et al. were being directly supervised, controlled and managed by petitioner DFI farm managers and supervisors, specifically on work assignments and performance targets. DFI managers and supervisors, at their sole discretion and prerogative, could directly hire and terminate any or all of the respondents-SPFL, et al., including any or all of the herein respondents Voltaire Lopez, Jr., et al.
    4. Attendance/Time sheets of respondents-SPFL, et al. were being prepared by herein respondents Voltaire Lopez, Jr., et al., and correspondingly submitted to petitioner DFI. Payment of wages to respondents-SPFL, et al. were being paid for by petitioner DFI thru herein respondents Voltaire Lopez, [Jr.], et al. The latter were also receiving their wages/salaries from petitioner DFI for monitoring/leading/recruiting the respondents-SPFL, et al.
    5. No monies were being paid directly by private respondent DARBMUPCO to respondents-SPFL, et al., nor to herein respondents Voltaire Lopez, [Jr.], et al. Nor did respondent DARBMUPCO directly intervene much less supervise any or all of [the] respondents-SPFL, et al. including herein respondents Voltaire Lopez, Jr., et al.

    According to the Court, the contractors voluntarily pleaded that they were labor-only contractors. Such admissions had bound them.

    Third, the Court ruled that DFI could not argue that DARBMUPCO was the principal of the contractors because it (DARBMUPCO) owned the awarded plantation where contractors and workers were working; and therefore DARBMUPCO was the ultimate beneficiary of the employment of the workers.

    That DARBMUPCO owned the awarded plantation where the contractors and workers were working was immaterial. This did not change the situation of the parties. DFI, as the principal, hired the contractors and the latter, in turn, engaged the services of the workers.

    And fourth, the Court stated that neither could DFI argue that it was only the purchaser of the bananas produced in the awarded plantation under the BPPA, and that under the terms of the BPPA, no employer-employee relationship existed between DFI and the workers, to wit:

    UNDERTAKING OF THE FIRST PARTY

    x x x

    THE FIRST PARTY [DARBMUPCO] shall be responsible for the proper conduct, safety, benefits and general welfare of its members working in the plantation and specifically render free and harmless the SECOND PARTY [DFI] of any expense, liability or claims arising therefrom. It is clearly recognized by the FIRST PARTY that its members and other personnel utilized in the performance of its function under this agreement are not employees of the SECOND PARTY.

    In labor-only contracting, it is the law which creates an employer-employee relationship between the principal and the workers of the labor-only contractor.

    Inasmuch as it is the law that forms the employment ties, the stipulation in the BPPA that workers were not employees of DFI was not controlling, as the proven facts showed otherwise. The Court stressed that the law prevails over the stipulations of the parties. The existence of an employer-employees relation is a question of law and being such, it cannot be made the subject of agreement.

    A finding that a contractor is a labor-only contractor is equivalent to a declaration that there is an employer-employee relationship between the principal, and the workers of the labor-only contractor; the labor-only contractor is deemed only as the agent of the principal.

    Thus, in this case, contractors were found to be labor-only contractors, and DFI was declared the true employer of the workers. Under the law, DFI should be solidarily liable with the contractors for the rightful claims of the workers, to the same manner and extent as if the latter were directly employed by DFI.

    Further reading:

    • Diamond Farms, Inc. v. Southern Philippines Federation of Labor-Workers Solidarity of DARBMUPCO/Diamond-SPFL, G.R. Nos. 173254-55 & 173263, January 13, 2016.

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