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179546

THIRD DIVISION

COCA-COLA BOTTLERS G.R. No. 179546

PHILS., INC.,
Petitioner, Present:

- versus - YNARES-SANTIAGO, J.,

Chairperson,
ALAN M. AGITO, REGOLO AUSTRIA-MARTINEZ, ,
S. OCA III, ERNESTO G. CHICO-NAZARIO,
ALARIAO, JR., ALFONSO NACHURA, and
PAA, JR., DEMPSTER P. PERALTA, JJ.
ONG, URRIQUIA T. ARVIN,
GIL H. FRANCISCO, and
EDWIN M. GOLEZ, Promulgated:
Respondents.
February 13, 2009
x-------------------------------------------------x

DECISION

CHICO-NAZARIO, J.:

This is a Petition for Review on Certiorari, under Rule 45 of the Rules of Court, assailing the
[1]
Decision dated 19 February 2007, promulgated by the Court of Appeals in CA-G.R. SP No.
[2]
85320, reversing the Resolution 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 13thmonth 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

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process. However, they failed to state the reason/s for filing a complaint against Interserve;
[3]
Peerless Integrated Services, Inc.; Better Builders, Inc.; and Excellent Partners, Inc.

[4]
Petitioner filed its Position Paper (with Motion to Dismiss), where it averred that
respondents were employees of Interserve who were tasked to perform contracted services in
[5]
accordance with the provisions of the Contract of Services 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

[6]
following pieces of evidence: (1) the Articles of Incorporation of Interserve; (2) the Certificate
[7]
of Registration of Interserve with the Bureau of Internal Revenue; (3) the Income Tax Return,
[8]
with Audited Financial Statements, of Interserve for 2001; and (4) the Certificate of
Registration of Interserve as an independent job contractor, issued by the Department of Labor
[9]
and Employment (DOLE).

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)
[10]
respondents Personal Data Files in the records of Interserve; (2) respondents Contract of
[11] [12]
Temporary Employment with Interserve; and (3) the payroll records of Interserve.

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
[13]
relationship between petitioner and the respondents.

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 P1,439,785.00 as
of 31 December 2001. It was Interserve that kept and maintained respondents employee records,

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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
Arbiters 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
[14]
13th month benefits for the period of January 2002 until April 2002.

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
[15]
this Decision.

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

[16]
In their Memorandum of Appeal, respondents maintained that contrary to the finding
of the Labor Arbiter, their work was indispensable to the principal business of
[17]
petitioner. Respondents supported their claim with copies of the Delivery Agreement 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,
[18]
respondents submitted copies of: (1) a Memorandum dated 11 August 1998 issued by

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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
[19]
during work hours; (2) a Memorandum dated 12 August 1998 again issued by Dy to
Arenajo, informing the latter that the company had taken a more lenient and tolerant position
[20]
regarding his offense despite having found cause for his dismissal; (3) Memorandum 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
[21]
Schedules, prepared by RB Chua, another supervisor of petitioner; (5) Daily Sales
[22]
Monitoring Report prepared by petitioner; and (6) the Conventional Route System Proposed
[23]
Set-up of petitioner.
The NLRC, in a Resolution dated 30 October 2003, affirmed the Labor Arbiters 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
[24]
exercised control over respondents as their employer. The dispositive part of the NLRC
[25]
Resolution states:

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 P510,000.00 invested in its service vehicles and P200,000.00
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

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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 latters undertaking did
not involve a specific job, but rather the supply of manpower.

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

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
[27]
Resolution, dated 31 August 2007.

[28]
Hence, the present Petition, in which the following issues are raised :

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

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resolve an issue of fact herein due to the incongruent findings of the Labor Arbiter and the
[29]
NLRC and those of the Court of Appeals.

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 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.

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 formers 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
contractors 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,
[30]
the employer is not responsible for any claim made by the contractors employees.

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
contractors employees and the former becomes solidarily liable for all the rightful claims of the
[31]
employees.

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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 petitioners 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.

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The law clearly establishes an employer-employee relationship between the principal

employer and the contractors 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
[32]
Francisco whose job was designated as leadman. In the Delivery Agreement 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
[33]
this finding. 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
[34]
control the salesmen and sales route helpers.

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
[35]
amounting to P2,000,000.00. It cites as authority Filipinas Synthetic Fiber Corp. v. National
[36]
Labor Relations Commission and Frondozo v. National Labor Relations Commission,
[37]
where the contractors authorized capital stock of P1,600,000.00 and P2,000,000.00
respectively, were considered substantial for the purpose of concluding that they were legitimate
[38]
job contractors. Petitioner also refers to Neri v. National Labor Relations Commission 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 P2,000,000.00, only P625,000.00 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 latters employees, and uses the dubious
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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
[39]
janitorial and allied services. 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
[40]
Integrated Services, Inc., therein petitioner San Miguel Corporation similarly invoked Neri,
[41]
but was rebuffed by the Court based on the following ratiocination :

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 P4,608,080.00 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 P4,000,000.00 did not impress the Court,
which still declared MAERC to be a labor-only contractor. In another case, Dole Philippines,
[42]
Inc. v. Esteva, the Court did not recognize the contractor therein as a legitimate job

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contractor, despite its paid-up capital of over P4,000,000.00, 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 P510,000.00 and P200,000.00, 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,
[43]
investment, and tool to engage in job contracting. 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 P510,000.00 and P200,000.00, 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
[44]
labor-only contractor under Section 5(ii) 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;
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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
CONTRACTORS 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 CONTRACTORS personnel will comply with
CLIENT, CLIENTS policies, rules and regulations and will be subjected on-the-spot search by
CLIENT, CLIENTS 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
[45]
personnel.

Paragraph 3 of the Contract specified that the personnel of contractor Interserve, which
included the respondents, would comply with CLIENT as well as CLIENTs 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 CONTRACTORS 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

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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
[46]
of a companys right of control as direct employer.

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 latters 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
[47]
the Articles of Incorporation 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

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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
[48]
out in accordance with law and, therefore, illegal.

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.

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