A.

Legitimate Job Contracting

Trilateral Relationship in Legitimate Contracting

1. Coca-Cola Bottlers Phils. Inc. v. Dela Cruz (184977, December 7, 2009)

Facts:

Respondents filed for regularization against Coca-Cola Bottlers Philippines, Inc. They are route helpers
assigned to work in petitioner’s trucks. They go from the sales offices or plants to customer outlets. They
were hired either directly or by contractors, but they do not enjoy the full benefits and privileges granted
to regular sales force.

Petitioner contended that it entered into contracts of services with Peerless and Excellent Partners
Cooperative, Inc., who both retained the right to select, hire, dismiss, supervise, control and discipline and
pay the salaries of all personnel they assign to petitioner, all for a fee. Hence, there is no employer-
employee relationship between it and respondents and the complaints should be dismissed for lack of
jurisdiction on the part of the NLRC. Respondents countered that they worked under the control and
supervision of supervisors who prepared their work schedules; and, that Peerless and Excellent did not
have sufficient capital or investment to provide services to the petitioner. Hence, these are in nature of
labor-only contracts prohibited by law.

Petitioner claimed that its main business is soft drinks manufacturing and the respondents’ tasks of
handling, loading and unloading them are not part of the manufacturing process. It stressed that its only
interest in the respondents is in the result of their work, and left to them the means and the methods of
achieving this result.

Issue:

Whether or not the contracts for services are valid contracting for employee services

Held:

No, Peerless and Excellent were suppliers of labor who had no sufficient capitalization and equipment to
undertake sales and distribution of soft drinks as independent activities separate from the manufacture
of soft drinks, and who had no control and supervision over the contracted personnel. They are therefore
labor-only contractors and the contracted personnel, engaged in component functions in the main
business of the company under the latter’s supervision and control, are regular employees of petitioner.

In a legitimate contracting relationship, the principal controls the contractor and his employees with
respect to the ultimate results or output of the contract. On the other hand, a contractor controls his
employees, not only to the results to be obtained, but with respect to the means and manner of achieving
this result. There results in an employer-employee relationship between them. This is different from the
relationship in a labor-only contracting situation where the contractor simply becomes an agent of the
principal. Either directly or through the agent, the principal then controls the results as well as the means
and manner of achieving the desired results.

There is labor-only contracting where the person supplying workers to an employer does not have
substantial capital or investment in the form of tools, equipment, machineries, work premises, among
others, and the workers recruited and placed by such persons are performing activities which are directly
related to the principal business of such employer. In such cases, the intermediary shall be considered 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. A legitimate job contractor must have the capitalization and
equipment to undertake the sale and distribution of the manufacturer’s products, and must do it on its
own using its own means and selling methods.

The contracts of services provide that that the contractors shall provide petitioner the services of
employees for a temporary period for tasks or activities and they shall have exclusive discretion in the
selection, engagement and discharge of their employees. The determination of the compensation of the
personnel shall also be within their full control. The contracts also stated that the employees’ work is
subject to the control and direction of petitioner merely as to result to be accomplished, and not as to the
means and methods of accomplishing such result.

Here, respondents worked by helping in the sale and distribution of company products. They provided the
muscle that sale and distribution required and were under petitioner’s control and supervision in doing
these tasks. Also, the contractors were not independently selling and distributing company products,
using their own equipment, means and methods. They only supplied the manpower in the handing of
products for sale and distribution. The contracting for sale and distribution as an independent and self-
contained operation is a legitimate contract, but the pure supply of manpower with the task of assisting
in sales and distribution controlled by a principal fall within prohibited labor-only contracting.

2. Temic Automotive Philippines v. Temic Automotive Philippines Inc. Employees Union – FFW
(186965, December 23, 2009)

Facts:

Petitioner manufactures electronic brake systems and comfort body electronics for automotive vehicles;
while respondent is the exclusive bargaining agent of petitioner's employees.

Petitioner is composed of several departments, one of which is the warehouse department consisting of
two warehouses - the electronic braking system and the comfort body electronics. These warehouses are
further divided into four sections - receiving section, raw materials warehouse section, indirect warehouse
section and finished goods section. The union members are regular rank-and-file employees working in
these sections as clerks, material handlers, system encoders and general clerks.

Since 1998, petitioner contracts out some of the work in the warehouse department, specifically those in
the receiving and finished goods sections, to three independent forwarders, namely: Diversified, Airfreight
Airfreight and KNI. They also have their own employees who hold the positions of clerk, material handler,
system encoder and general clerk. The regular employees of petitioner and those of the forwarders share
the same work area and use the same equipment, tools and computers all belonging to petitioner.

The union demanded that the forwarders' employees be absorbed as regular employees and be given
positions within the bargaining unit. Petitioner contends that the arrangement is a valid exercise of its
management prerogative.

Issue:
Whether or not the the forwarders' employees are covered by the CBA

Held:

The job of forwarding consists of several services that complement one another and can best be viewed
as one whole process involving a package of services. These services include packing, loading, materials
handling and support clerical activities, all of which are directed at the transport of company goods,
usually to foreign destinations.

It is in the appreciation of these forwarder services that a basic misunderstanding results in the error of
equating the functions of the forwarders’ employees with those of regular employees. A clerical job, for
example, may be done on the same company products that the forwarders’ employees and company
employees may work on, but these similarities do not necessarily mean that all these employees work for
the company. The regular company employees work for petitioner under its supervision and control, but
forwarder employees work for the forwarders in their own operation that is they contracted work from
the company. The company controls its employees in the means, method and results of their work, in the
same manner that the forwarder controls its own employees in the means, manner and results of their
work. Complications and confusion result because the company at the same time controls the forwarder
in the results of the latter’s work, without controlling however the means and manner of the forwarder
employees’ work.

From the perspective of the union, the forwarding agreements were already in place when the CBA was
signed. In this sense, it agreed implicitly by its silence and acceptance, that jobs related to the contracted
forwarding activities are not regular company activities and are not to be undertaken by regular
employees falling within the scope of the bargaining unit but by the forwarders’ employees. Thus, the
skills requirements and job content between forwarders’ jobs and bargaining unit jobs may be the same,
and they may even work on the same company products, but their work for different purposes and for
different entities completely distinguish forwarder and company employees.

At this point, the union cannot simply turn around and claim the contrary position that some forwarder
employees should be regular employees and should be part of its bargaining unit because they undertake
regular company functions. This is a more appropriate action before the NLRC impleading the proper
parties, but not a voluntary arbitration that does not implead the affected parties. Before the inclusion of
the forwarders’ employees in the bargaining unit can be considered, these employees must first be proven
to be regular company employees. The union does not have the personality to make this claim for these
forwarders’ employees.

Forwarding includes a whole range of activities that may duplicate company activities in terms of the exact
character and content of the job done and even of the skills required, but cannot be legitimately labeled
as company activities because they properly pertain to forwarding that the company has contracted out.
The union’s own evidence, in fact, speaks against the point the union wishes to prove. Specifically, the
affidavits of forwarder employees confirm that the work they were doing was predominantly related to
forwarding or the shipment or transport of the petitioner’s finished goods to overseas destinations. The
nature of the outsourced services is not substantially altered by the claim that they occasionally do work
that pertains to the company’s finished goods supervisor or a company employee such as the inspection
of goods to be shipped and inventory of finished goods.
 3. Alviado v. Procter & Gamble (160506, March 9, 2010)

Facts:

P&G manufactures different consumer and health products. To enhance consumer awareness and
acceptance of the products, P&G entered into contracts with Promm-Gem and SAPS for the promotion
and merchandising of its products. Petitioners worked as merchandisers of P&G from various dates, from
1982 to 1993. They all individually signed employment contracts with either Promm-Gem or SAPS for
periods of more or less five months at a time. They were assigned at different outlets, supermarkets and
stores where they handled all the products of P&G. They received their wages from Promm-Gem or SAPS
which imposed disciplinary measures on erring merchandisers.

Petitioners filed a complaint against P&G for regularization and subsequently, for illegal dismissal. They
insist that they were recruited by P&G and were engaged to undertake merchandising chores even before
the existence of Promm-Gem and SAPS. They further claim that they were instructed to fill up application
forms to the agencies which P&G created. They further claim that P&G instigated their dismissal,
informing the latter that their Merchandising Services Contract will no longer be renewed and that
Promm-Gem and SAPS are labor-only contractors providing services of manpower to their client.

On the other hand, P&G argues that there is no employment relationship between it and petitioners. It
was Promm-Gem or SAPS that (1) selected petitioners and engaged their services; (2) paid their salaries;
(3) wielded the power of dismissal; and (4) had the power of control over their conduct of work.

Issue:

Whether or not petitioners were employees of P&G

Held:

Those supplied by SAPS, which engaged in labor-only contracting, are considered as employees of P&G.
However, those having worked under, and been dismissed by Promm-Gem, are considered the employees
of Promm-Gem, not of P&G.

Labor-only contracting is prohibited. The elements are: i) the contractor 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 are performing activities which are directly related to the main
business of the principal; or ii) the contractor does not exercise the right to control over the performance
of the work of the contractual employee. "Substantial capital or investment" refers to capital stocks and
subscribed capitalization in the case of corporations, tools, equipment, implements, machineries and
work premises, actually and directly used by the contractor or subcontractor in the performance or
completion of the job, work or service contracted out. The "right to control" shall refer to the right
reserved to the person for whom the services of the contractual workers are performed, to determine not
only the end to be achieved, but also the manner and means to be used.

Clearly, the law and its implementing rules allow contracting arrangements for the performance of specific
jobs, works or services. Indeed, it is management prerogative to farm out any of its activities, regardless
of whether such activity is peripheral or core in nature. However, in order for such outsourcing to be valid,
it must be made to an independent contractor because the current labor rules expressly prohibit labor-
only contracting.
Promm-Gem

The FS of Promm-Gem show that it has authorized capital stock of P1 million and a paid-in capital of
P500,000. It also has long term assets worth P432,895 and current assets of P719,042. Promm-Gem has
also proven that it maintained its own warehouse and office space with a floor area of 870 square meters.
It also had three registered vehicles used for its merchandising business. Promm-Gem also has other
clients aside from P&G. Under the circumstances, Promm-Gem has substantial capital and investment
which relates to the work to be performed. Also, Promm-Gem supplied its workers with the relevant
materials, such as markers, tapes, liners and cutters, necessary for them to perform their work. It also
issued uniforms to them. It already considered the complainants working under it as its regular
employees. This circumstance shows it exercises control over its workers. Under the circumstances,
Promm-Gem cannot be considered as a labor-only contractor. It is a legitimate independent contractor.

SAPS

The Articles of Incorporation of SAPS shows that it has a paid-in capital of only P31,250. There is no other
evidence presented to show how much its working capital and assets are. Furthermore, there is no
showing of substantial investment in tools, equipment or other assets.

Jurisprudence dictates that with the current economy, the paid-in capitalization amounting to P75,000
cannot be considered as substantial. Applying the same rationale, it is clear that SAPS – having a paid-in
capital of only P31,250 - has no substantial capital. Its payroll for its merchandisers alone for one month
would already total P44,561. It had 6-month contracts with P&G. Its capital is not even sufficient for one
month’s payroll. SAPS failed to show that its paid-in capital is sufficient for the period required for it to
generate its needed revenue to sustain its operations independently. Substantial capital refers to
capitalization used in the performance of the job. Thus, SAPS has failed to show substantial capital.

Furthermore, petitioners have been charged with the merchandising and promotion of the products of
P&G, an activity directly related to the principal business of P&G. Considering that SAPS has no substantial
capital or investment and the workers it recruited are performing activities which are directly related to
the principal business of P&G, we find that the former is engaged in "labor-only contracting".

"Where ‘labor-only’ contracting exists, an employer-employee relationship is established between the

employer and the employees of the ‘labor-only’ contractor." The purpose is to prevent a circumvention
of labor laws. The contractor is considered merely an agent of the employer and the latter is responsible
to the employees as if such employees had been directly employed by it.
Elements of Legitimate Contracting

4. Neri v. NLRC (97008-09, July 23, 1993)

Facts:

Far East Bank and Trust Company (Bank) and Building Care Corporation (BCC) are sued by two employees
of BBC, which provides janitorial and other specific services to various firms, for regularization. BBC,

Virginia Neri and Jose Cabelin were hired by Building Care Corporation (BCC), a corporation engaged in
providing technical, maintenance, engineering, housekeeping, security and other specific services to its
clientele, as telex operator and as janitor, respectively. They were assigned to work in the Far East Bank
and Trust Company (Bank).

Petitioners filed complaints against the Bank and BCC to compel the Bank to accept them as regular
employees. They contend that BCC is engaged in "labor-only" contracting because it failed to adduce
evidence purporting to show that it invested in the form of tools, equipment, machineries, work premises
and other materials which are necessary in the conduct of its business. Moreover, they perform duties
which are directly related to the principal business or operation of the Bank.

Issue:

Whether or not BBC is engaged in labor-only contracting when it has no investment in the form of tools,
equipment, machineries, work premises, among others

Held:

There is "labor-only" contracting where: (a) the person supplying workers to an employer does not have
substantial capital or investment in the form of tools, equipment, machineries, work premises, among
others; and, (b) the workers recruited and placed by such person are performing activities which are
directly related to the principal business of the employer.

Here, BBC is not a labor-only contractor. While there is no evidence that it has investment, it is enough
that it has substantial capital. The law does not require both substantial capital and investment. This is
clear from the use of the conjunction "or". If the intention was otherwise, then the conjunction "and"
should have been used. Furthermore, the hiring of independent contractors to perform special services,
ranging from janitorial, security and even technical or other specific services such as those performed by
petitioners are not necessary in the conduct of the principal business of the employer. In fact, the status
of BCC as an independent contractor was previously confirmed in ALU-TUCP v. NLRC. Besides, petitioners
do not deny that they were selected and hired by BCC which likewise acknowledges that they are its
employees. BCC maintained supervision and control over petitioners: petitioners reported for work
wearing the prescribed uniform of BCC; leaves of absence were filed directly with BCC; and, salaries were
drawn only from BCC.

More importantly, under the contract, it was BCC which had the power to reassign petitioners. Their
deployment to the Bank was not subject to the bank's acceptance. Cabelin was promoted to messenger
because the Bank promised BCC that two additional janitors would be hired if the promotion was to be
effected.
 5. Vinoya v. NLRC (126586, February 2, 2000)

Facts:

Regent Food Corporation (RFC) manufactures various food products. Alexander Vinoya claims that he was
hired by RFC as sales representative. An ID card was issued to him and he reported daily to the office of
RFC to take the latter's van for the delivery of its products. During his employ, he was assigned to various
supermarkets and grocery stores where he booked sales orders and collected payments for RFC. For this
task, he was required by RFC to put up a monthly bond of P200 as security deposit to guarantee the
performance of his obligation. Petitioner contends that he was under the direct control and supervision
of the plant manager and the senior salesman of RFC, respectively. Thereafter, he avers that he was
transferred by RFC to Peninsula Manpower Company, Inc. (PMCI), an agency which provides RFC with
additional contractual workers pursuant to a contract for the supply of manpower services. Subsequently,
he was informed by RFC, that his services were terminated and he was asked to surrender his ID card.
Consequently, he filed a case for illegal dismissal.

RFC maintains that no employer-employee relationship existed between petitioner and itself. It insists
that petitioner is actually an employee of PMCI, allegedly an independent contractor, which had a
Contract of Service with RFC. It presents an Employment Contract signed by petitioner, wherein PMCI
appears as his employer. RFC denies that petitioner was ever employed by it prior to this. It avers that
petitioner was issued an ID card so that its clients would recognize him as a duly authorized
representative. With regard to the bond, RFC asserts that it was required in order to guarantee the
turnover of his collection since he handled funds of RFC. Finally, RFC contends that the termination of its
relationship with petitioner was brought about by the expiration of the Contract of Service between itself
and PMCI and not because petitioner was dismissed from employment.

Issue:

Whether or not petitioner is an employee of RFC

Held:

Yes, since PMCI is a labor-only contractor, it is deemed an agent of RFC which ultimately hired petitioner.

Jurisprudence dictates that it is not enough to show substantial capitalization or investment in the form
of tools, equipment, machineries and work premises, among others, to be considered as an independent
contractor. In fact, several factors might be considered such as, but not necessarily confined to, whether
the contractor is 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.

First, PMCI does not have substantial capitalization or investment. It only has P75,000 in paid-in capital,
which cannot be considered as substantial capitalization. With the current economic atmosphere in the
country, the paid-in capitalization of PMCI amounting to P75,000 cannot be considered as substantial
capital and, as such, PMCI cannot qualify as an independent contractor.
Second, PMCI did not carry on an independent business nor did it undertake the performance of its
contract according to its own manner and method, free from the control and supervision of its principal,
RFC. The Contract of Service itself provides that RFC can require the workers assigned by PMCI to render
services even beyond the regular eight hour working day when deemed necessary. Furthermore, RFC
undertook to assist PMCI in making sure that the daily time records of its alleged employees faithfully
reflect the actual working hours.

Third, PMCI was not engaged to perform a specific and special job or service, which is one of the strong
indicators that an entity is an independent contractor. The sole undertaking of PMCI was to provide RFC
with a temporary workforce able to carry out whatever service may be required by it. Obviously, PMCI
merely acted as a recruitment agency for RFC. PMCI clearly conducted itself as labor-only contractor.

Lastly, in labor-only contracting, the employees recruited by the contractor perform activities which are
directly related to the main business of its principal. In this case, the work of petitioner as sales
representative is directly related to the business of RFC. Being in the business of food manufacturing and
sales, it is necessary for RFC to hire a sales representative to take charge of booking its sales orders and
collecting payments for such. Thus, the work of petitioner as sales representative in RFC can only be
categorized as clearly related to the latter's business.

Based on the foregoing, PMCI can only be classified as a labor-only contractor and, as such, cannot be
considered as the employer of petitioner.

However, even granting that PMCI is an independent contractor, a perusal of the Contract of Service
entered into between RFC and PMCI reveals that petitioner is actually not included in the enumeration of
the workers to be assigned to RFC, not including the position of petitioner as sales representative. This
only shows that petitioner was never intended to be a part of those to be contracted out.

Even if we use the "four-fold test" to ascertain whether RFC is the true employer of petitioner that same
result would be achieved. With regard the power to hire, petitioner presented the identification card
issued to him as proof that it was the latter who engaged his services. This is enough proof that petitioner
was previously hired by RFC prior to his transfer as agency worker to PMCI. The ID card issued was dated
more than one year before the Employment Contract. Thus, it follows that it was RFC who hired petitioner
to be its employee.

With respect to the payment of wages, RFC disputes that petitioner did not submit any evidence to prove
that his salary was paid by it. On the contrary, RFC asserts that the invoices presented by it, show that it
was PMCI who paid petitioner his wages through its regular monthly billings charged to RFC. The Court
takes judicial notice of the practice of employers who, in order to evade the liabilities under the Labor
Code, do not issue pay slips directly to their employees, but through a third person, usually the purported
contractor (service or manpower placement agency). For this reason, the lowly worker is unable to show
proof that it was directly paid by the true employer. Nevertheless, for the workers, it is enough that they
actually receive their pay, oblivious of the need for payslips, unaware of its legal implications. Applying
this principle, even though the wages were coursed through PMCI, we note that the funds actually came
from the pockets of RFC.

As to the power to dismiss, RFC avers that it was PMCI who terminated the employment of petitioner.
The facts on record, however, disprove the allegation of RFC. First of all, the Contract of Service gave RFC
the right to terminate the workers assigned to it by PMCI without the latter's approval. In furtherance of
the this, RFC requested PMCI to terminate petitioner from his employment with the company.

Finally, the power of control refers to the authority of the employer to control the employee not only
with regard to the result of work to be done but also to the means and methods by which the work is to
be accomplished. It should be borne in mind, that the "control test" calls merely for the existence of the
right to control the manner of doing the work, and not necessarily to the actual exercise of the right. In
the case, RFC raises the defense that the power of control was jointly exercised with PMCI. On the other
hand, petitioner was under the direct control and supervision of the personnel of RFC and not PMCI. The
admission of RFC that it exercised control and supervision over petitioner, the same being a declaration
against interest, is sufficient enough to prove that the power of control truly exists.
 6. San Miguel Corporation v. Semillano (164257, July 5, 2010)

Facts:

Alilgilan Multi-Purpose Coop (AMPCO) hired the services of respondents on different dates in December
in 1991 and 1994. All of them were assigned to work in SMC’s Bottling Plant in order to perform the
following tasks: segregating bottles, removing dirt therefrom, filing them in designated places, loading
and unloading the bottles to and from the delivery trucks, and performing other tasks as may be ordered
by SMC’s officers, for six months. They were required to work inside the premises of the plant using its
equipment.

Subsequently, SMC entered into a Contract of Services with AMPCO designating the latter as the employer
of respondents. As a result, the employees failed to claim the rights and benefits ordinarily accorded a
regular employee of SMC. In fact, they were not paid their 13th month pay. The project manager of
AMPCO, Merlyn Polidario, told them to wait for further instructions from the SMC’s supervisor. They
waited for one month, unfortunately, they never heard a word from SMC.

Consequently, respondents filed complaints for illegal dismissal. They alleged that they performed
activities necessary and desirable in the usual business of SMC. They claim that they were under the
control and supervision of SMC personnel and have worked for more than six months in the company. As
such, they assert that they are regular employees of SMC. Respondent SMC raised the defense that
AMPCO is their employer because the latter is an independent contractor. Also, SMC alleged that it was
AMPCO that directly paid their salaries and remitted their contributions to the SSS.

Issue:

Whether or not AMPCO is a legitimate job contractor

Held:

No, it is engaged in labor-only contracting deeming an employment relationship between SMC and
respondents.

The existence of an independent and permissible contractor relationship is generally established by the
following criteria: whether or not the contractor is 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 a specified piece of work; the control and supervision of the work to another; the
employer's power with respect to the hiring, firing and payment of the contractor's workers; the control
of the premises; the duty to supply the premises, tools, appliances, materials, and labor; and the mode,
manner and terms of payment.

Here, an examination its Statement of Income and Changes in Undivided Savings show that its income for
the year 1994 was P2,777,603 while its operating expenses for said year is P2,718,315 or a net income of
P59,288 for the year 1994; that its cash on hand for 1994 is ₱22,154. AMPCO’s main business activity is
trading, maintaining a store catering to members and the public. Its job contracting with SMC is only a
minor activity or sideline. The component of AMPCO’s substantial capital is invested and used in the
trading business. This is shown in the sizable amount of its accounts receivable amounting to more than
P600,000 out of its members’ capital of only P470,000 in 1994.
Neither did petitioner prove that AMPCO had substantial equipment, tools, machineries, and supplies
actually and directly used by it in the performance or completion of the segregation and piling job. In fact,
as correctly pointed out by the NLRC in its original decision, there is nothing in AMPCO’s list of fixed assets,
machineries, tools, and equipment which it could have used, actually and directly, in the performance or
completion of its contracted job, work or service with petitioner. For said reason, there can be no other
logical conclusion but that the tools and equipment utilized by respondents are owned by petitioner SMC.
Also, AMPCO had no clients other than petitioner. Therefore, AMPCO has no independent business.

The evidence is clear that respondents performed activities which were directly related to petitioner’s
main line of business. Petitioner is primarily engaged in manufacturing and marketing of beer products,
and respondents’ work of segregating and cleaning bottles is unarguably an important part of its
manufacturing and marketing process.

Control over Operations

DOLE Department Order No. 10 also states that an independent 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, and 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.

Here, SMC fails to show how AMPCO took entire charge, control and supervision of the work and service
agreed upon. Moreover, AMPCO did not wield exclusive discretion in the discharge of respondents as its
project manager, even told respondents to wait for further instructions from the SMC’s supervisor after
they were prevented from entering petitioner SMC’s premises. Based on the foregoing, no other logical
conclusion can be reached than that it was petitioner, not AMPCO, who wielded power of control.

Thus, petitioner SMC, as principal employer, is solidarily liable with AMPCO, the labor-only contractor, for
all the rightful claims of respondents. Under this set-up, AMPCO is deemed an agent of SMC. The law
makes the principal responsible over the employees of the labor-only contractor as if the principal itself
directly hired the employees.
 7. Baguio v. NLRC (79004, October 4, 1991)

Facts:

General Milling Corporation (GMC) is engaged in flour and feeds manufacturing for the construction of an
annex building inside the its plant in Cebu City. Feliciano Lupo entered into a contract of services with
GMC and hired petitioners either as carpenters, masons or laborers. Subsequently, Lupo terminated
petitioners' services, on different dates. As a result, petitioners filed complaints before the NLRC for
unpaid wages, cost of living allowances, bonus and overtime pay. Petitioners contend that GMC is jointly
and severally liable with Lupo for the latter's obligations to them. They seek recovery from GMC based on
Article 106 of the Labor Code which holds the employer solidary liable with his contractor for unpaid
wages of employees of the latter.

Issue:

Whether or not petitioners may hold GMC solidary liable with Lupo

Held:

Yes, they should be solidary liable to petitioners. However, recovery should not be based on Article 106
of the Labor Code. This provision treats specifically of "labor-only" contracting, which is not the set-up
between GMC and Lupo.

A person is deemed to be engaged in "labor only" contracting where (1) the person supplying workers to
an employer does not have substantial capital or investment in the form of tools, equipment, machineries,
work premises, among others; and (2) the workers recruited and placed by such person are performing
activities which are directly related to the principal business of such employer. Here, the construction of
an annex building inside the company plant has no relation whatsoever with the employer's business of
flour and feeds manufacturing, "labor-only" contracting does not exist. Article 106 is thus inapplicable.

Instead, this case involves "job contracting," covered by Article 107. Specifically, there is "job contracting"
where (1) the contractor carries on an independent business and undertakes the contract work on his
own account under his own responsibility according to his own manner and method, free from the control
and direction of his employer or principal in all matters connected with the performance of the work
except as to the results thereof; and (2) the contractor has substantial capital or investment in the form
of tools, equipment, machineries, work premises, and other materials which are necessary in the conduct
of his business. It may be that Lupo was unable to satisfy his liabilities. However, this does not detract his
status as independent contractor.

Based on the foregoing, GMC qualifies as an "indirect employer." It entered into a contract with an
independent contractor, for the construction of an annex building, a work, task, job or project not directly
related to GMC's business of flour and feeds manufacturing. Being an "indirect employer," GMC is solidary
liable with Lupo for any violation of the Labor Code pursuant to Article 109 thereof.

The distinction between Articles 106 and 107 was in the fact that Article 106 deals with "labor-only"
contracting, where the contractor is considered as an agent of the employer, who is deemed responsible
to the workers to the same extent as if the latter were directly employed by him. On the other hand,
Article 107 deals with "job contracting,” where the contractor himself is the direct employer of the
employees, the employer is deemed as an indirect employer.
Mandatory Registration Requirement and Effect of Non-registration

8. San Miguel Corporation v. Semillano (164257, July 5, 2010)

Facts:

Alilgilan Multi-Purpose Coop (AMPCO) hired the services of respondents on different dates in December
in 1991 and 1994. All of them were assigned to work in SMC’s Bottling Plant in order to perform the
following tasks: segregating bottles, removing dirt therefrom, filing them in designated places, loading
and unloading the bottles to and from the delivery trucks, and performing other tasks as may be ordered
by SMC’s officers, for six months. They were required to work inside the premises of the plant using its
equipment.

Subsequently, SMC entered into a Contract of Services with AMPCO designating the latter as the employer
of respondents. As a result, the employees failed to claim the rights and benefits ordinarily accorded a
regular employee of SMC. In fact, they were not paid their 13th month pay. The project manager of
AMPCO, Merlyn Polidario, told them to wait for further instructions from the SMC’s supervisor. They
waited for one month, unfortunately, they never heard a word from SMC.

Consequently, respondents filed complaints for illegal dismissal. They alleged that they performed
activities necessary and desirable in the usual business of SMC. They claim that they were under the
control and supervision of SMC personnel and have worked for more than six months in the company. As
such, they assert that they are regular employees of SMC. Respondent SMC raised the defense that
AMPCO is their employer because the latter is an independent contractor. Also, SMC alleged that it was
AMPCO that directly paid their salaries and remitted their contributions to the SSS.

Issue:

Whether or not AMPCO is a legitimate job contractor when its COR classified it as independent contractor

Held:

No, AMPCO will still be considered as a labor-only contractor.

Despite the fact that the service contracts contain stipulations which are earmarks of independent
contractor relationship, they do not make it legally so. Petitioner SMC and AMPCO cannot dictate, by a
declaration in a contract, the character of AMPCO’s business. AMPCO’s character should be measured in
terms of, and determined by, the criteria set by statute.

Petitioner cannot rely either on AMPCO’s COR as an Independent Contractor issued by the proper
Regional Office of the DOLE to prove its claim. It is not conclusive evidence of such status. The fact of
registration simply prevents the legal presumption of being a mere labor-only contractor from arising.

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.
 9. Consolidated Building Maintenance, Inc. v. Asprec, Jr. (217301, June 6, 2018)

Facts:

Petitioner is in the business of providing janitorial, kitchen, messengerial, elevator maintenance and allied
services to various entities. Among its clients is Pizza Hut. Rolando Asprec, Jr. and Jonalen Bataller alleged
that they are regular employees of Pizza Hut, Asprec having commenced work as a "Rider" in January 2001
and Bataller as "team member/slice cashier" in March 2008.

Asprec averred that after the expiration of his contract, Pizza Hut advised him to go on leave. Thereafter,
he was told to sign a contract. Except for the fact that the pay slips were then issued by petitioner, work
proceeded as usual. Also, Bataller related that before the expiration of her contract, she was informed by
Pizza Hut that for her continued employment, she must submit a resignation letter and take a vacation.
Thereafter, she passed an interview, Pizza Hut prepared her documents and then forwarded the same to
petitioner. She then resumed employment under the same conditions.

Thereafter, petitioner posited that respondents are its employees, and they were investigated based on
a report for an attempted theft. Accordingly, Jessie Revilla supposedly delivered an excess of two boxes
to Pizza Hut’s slice booth at the LRT Santolan Station, which the respondents failed to report. Asprec
claimed not to have known the incident. On the other hand, Bataller, who was manning the slice booth,
claimed that, she was busy attending to customers and did not notice the excess in the delivery. Revilla
allegedly went back to get the extra pizza boxes later that day. Respondents were thereafter dismissed.

Issue:

Whether or not petitioner is a labor-only contractor

Held:

No, petitioner is an independent contractor. As evidence that it is engaged in legitimate job contracting,
petitioner submitted COR with the DOLE. Furthermore, it has been in operation for almost 50 years.

DOLE DO No. 18-02, Series of 2002 reiterates the prohibition against labor-only contracting, which is an
arrangement where the contractor merely recruits, supplies or places workers to perform a job, work or
service for a principal and any of the following elements are present: i. the contractor 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. In addition, DO No. 18-02
requires that contractors be registered with the DOLE Regional Offices. This is to regulate and monitor
contracting arrangements that those contractors operate in accordance with law. However, the absence
of registration merely gives rise to the presumption that the contractor is engaged in labor-only
contracting. Conversely, in the absence of evidence to the contrary, the existence of registration in favor
of a contractor is a strong badge of legitimacy in favor of the contractor.

It is not disputed that petitioner is a duly licensed labor contractor by the DOLE. As the primary agency
tasked to regulate job contracting, DOLE is presumed to have acted in accordance with its mandate and
after due evaluation of rules and regulations in its registration of petitioner. The COR issued by DOLE
recognizes petitioner as an independent contractor. In this light, it then becomes incumbent upon
respondents to rebut the presumption of regularity to prove that petitioner is not a legitimate contractor
as determined by the DOLE, which they failed to do.

Capital or Investment

While the COR offered as evidence pertains only to a period of three years, case law dictates that the
status of petitioner may be evaluated on the basis of its activities and status prior to their registration.
Here, petitioner has established compliance with the requirements of legitimate job contracting. Its total
assets amount to P79,203,902 in 2008, P76,189,554 in 2009, and P84,351,349 in 2010. This consists of
cash, receivables, and property and equipment. Likewise, it has an authorized capital stock of P1,000,000
shares, half of which have been subscribed. Its retained earnings amount to P6,433,525 and P10,988,890
for the years 2009 and 2010, respectively. Incidentally, its paid-up capital amounted to P3,500,000, which
is even beyond by the standard set by the DOLE D.0. No. 18-A, series of 2011, of what constitutes
"substantial capital." Clearly, petitioner has substantial capital to maintain its manpower business.

Independent Business

Petitioner runs a business independent from the PPL Based on its registration with the Securities and
Exchange Commission (SEC), CBMI has been in existence since 1967; and has since provided a variety of
services to entities in various fields, such as banking, hospitals, and even government institutions.

Right to Control

Above all, petitioner maintains the "right of control" over the respondents. The "right of control" is the
right reserved to the person for whom the services of the contractual workers are performed, to
determine not only the end to be achieved, but also the manner and means in achieving that end. The
contract of service, while of itself is not determinative of the relationship between the parties, provides
useful leads into the relationship between the principal and the job contractor.

Here, the "Contract of Services" between petitioner and Pizza Hut, imposes upon the former the
obligation to provide not only the necessary personnel but as well to provide tools and equipment
necessary for the rendition of such services. Also, it is understood under the agreement that upon
deployment, the personnel are already qualified and possessed of the necessary skills for their assigned
tasks. It mentioned that petitioner has the sole authority to control and direct the performance of the
details of the work of its employees. Further, that any complaints or reports regarding the performance,
misconduct, or negligence of the persons so deployed shall be made in writing and addressed by Pizza Hut
to petitioner, the latter having the sole authority to discipline its employees.

Control over respondents is manifested by the fact that petitioner has the following powers over them:
"selection and engagement, payment of wages, dismissal, and control over their conduct." Therefore,
they were hired by petitioner, which assigned them to Pizza Hut after they were briefed of company
policies and their duties. It is also the one which pays respondents their salaries, and remits to PhilHealth
and SSS. Moreover, petitioner maintains the power to discipline the respondents. Pursuant to its power
of supervision over respondents, it initiated investigations and on the basis thereof imposed upon
respondents preventive suspension.

All these indicate that petitioner possesses the power of control over respondents; which in tum supports
the conclusion that it carries a business independent of Pizza Hut.
 10. Mago v. Sun Power Manufacturing Limited (210961, January 24, 2018)

Facts:

Petitioners were employees of Jobcrest Manufacturing, Inc., engaged in contracting management

consultancy and services, licensed by the DOLE. Jobcrest and respondent entered into a Service Contract
Agreement, which assigned petitioners to Sunpower's plant in Laguna Technopark. Leo Mago was tasked
as a Production Operator in the Coinstacking Station, while Leilanie Colobong was assigned as a
Production Operator, tasked with final visual inspection in the Packaging Station. Jobcrest's On-site
Supervisor supervised them. Thereafter, Sunpower and terminated the Coinstacking/Material Handling
segment and the Visual Inspection segment. Meanwhile, Mago and Colobong were on paternity and
maternity leave for the birth to their common child.

When Mago reported for work, he was informed that his employment was terminated due to his
absences. Jobcrest served Mago with a "Notice of Admin Charge/Explanation Slip." The notice stated that
Leo violated the policy against falsification or tampering because he failed to disclose his relationship with
Colobong. On the other hand, Colobong alleged that when she reported for work at Jobcrest, she was
informed by one of the Jobcrest personnel that she will be transferred to another client company. She
was likewise provided a referral slip for a medical examination, pursuant to her new assignment. She was
likewise served with a similar "Notice of Admin Charge/Explanation Slip," requiring her to explain why she
failed to disclose her co-habitation status with Mago. Petitioners filed a complaint for illegal dismissal and
regularization with the NLRC.

During the mandatory conference, Jobcrest clarified that petitioners were not dismissed from
employment and offered to accept them when they report back to work. Petitioners refused and insisted
that they were regular employees of Sunpower, not Jobcrest.

Issue:

Whether or not Jobcrest is a legitimate and independent contractor

Held:

Yes, it is a legitimate job contractor and thus, petitioners are not employees of Sunpower, but of Jobcrest.

To be a legitimate contractor, one must have substantial capital or investment, and must carry a distinct
and independent business free from the control of the principal. In addition, the agreement between the
principal and the contractor to assure the contractual employees' entitlement to all labor and
occupational safety and health standards, free exercise of the right to self-organization, security of tenure,
and social welfare benefits.

Furthermore, job contracting is permissible when the principal agrees to farm out the performance of a
specific job, work or service to the contractor, for a definite or predetermined period of time, regardless
of whether such job, work, or service is to be performed or completed within or outside the premises of
the principal. Ordinarily, a contractor is presumed to be a labor-only contractor, unless the contractor is
able to discharge the burden of overcoming this presumption. In cases when it's the principal claiming the
legitimacy of the contractor, then the burden is borne by the principal.
There is no such burden resting on either Sunpower or Jobcrest in this case. It is true that Sunpower
maintained its position that Jobcrest is a legitimate and independent contractor. But since the petitioners
do not dispute that Jobcrest was a duly-registered contractor under Section 11 of DOLE DO No. 18-02,
there is no operative presumption that Jobcrest is a labor-only contractor.

Conversely, registration with DOLE does not necessarily create a presumption that Jobcrest is a legitimate
and independent contractor. However, the DOLE COR issued in favor of Jobcrest is presumed to have been
issued in the regular performance of official duty. In other words, the DOLE officer who issued the
certificate in favor of Jobcrest is presumed to have evaluated the application for registration in accordance
with the applicable rules and regulations. The petitioners must overcome the presumption of regularity
accorded to the official act of DOLE, which is no less than the agency primarily tasked with the regulation
of job contracting.

Substantial Capital or Investment

Substantial capital or investment was defined in DOLE DO No. 18-02 as 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. DOLE DO No. 18-A, that substantial capital refers to paid-up capital
stocks/shares of at least Php 3,000,000.

Here, Jobcrest established that it had an authorized capital stock of P8,000,000, P2,000,000 of which was
subscribed, and a paid-up capital stock of P500,000. For the year 2011, the paid-up capital of Jobcrest
increased to Php 8,000,000, notably more than the required capital. The balance sheet for the year 2010
also reveals that its total assets for 2009 amounted to P11,280,597, and P16,825,271 for the year 2010,
which were comprised of office furniture, fixtures and equipment, land, building, and motor vehicles,
among others. As of 2012, the total assets for the years 2011 and 2012 also increased to P35,631,498 and
P42,603,167, respectively. Evidently, Jobcrest had substantial capital to perform the business process
services it provided Sunpower. It has its own office, to which the petitioners admittedly reported to,
possessed numerous assets for the conduct of its business, and even continuously earned profit as a
result.

The petitioners argue that the amount of substantial capital is irrelevant because Sunpower provided the
tools and owned the work premises. DOLE DO No. 18-02 and DO No. 18-A, as well as Article 106 of the
Labor Code itself, all use the conjunctive term "or" in prescribing that the contractor should have
substantial capital or investment. Having established that Jobcrest had substantial capital, it is
unnecessary to determine whether it had sufficient investment.
Liability of Principal to the Contractor’s Employees

11. Jaguar Security and Investigation Agency v. Sales (162420, April 22, 2008)

Facts:

Petitioner is a private corporation engaged in the business of providing security services to its clients, one
of whom is Delta Milling Industries, Inc. Respondents were hired as security guards by Jaguar. They were
assigned at the premises of Delta. Caranyagan and Tamayo were dismissed by Jaguar. Allegedly, their
dismissals were arbitrary and illegal. Sales, Moron, Fetalvero and Silva remained with Jaguar. All the guard-
employees, claim for monetary benefits such as underpayment, overtime pay, rest day and holiday
premium pay, underpaid 13th month pay, night shift differential, five days service and incentive leave pay.
In addition to these money claims, Caranyagan and Tamayo argue that they were entitled to separation
pay and back wages, for the time they were illegally dismissed until finality of the decision.

The LA rendered a decision in favor of respondents ordering petitioner and Delta under solidary liability.
Now, petitioner contends that Delta Milling should be liable to it for payments to the complainants being
solidary liable debtors.

Issue:

Whether petitioner may claim reimbursement from Delta Milling

Held:

No, petitioner may not claim from Delta Milling.

Jurisdiction

The RTC has jurisdiction over the subject matter. Where no employer-employee relationship exists
between the parties and no issue is involved which may be resolved by reference to the Labor Code, other
labor statutes or any CBA, it is the RTC that has jurisdiction. The action is within the realm of civil law
hence jurisdiction over the case belongs to the regular courts. While the resolution of the issue involves
the application of labor laws, reference to the labor code was only for the determination of the solidary
liability of Delta Milling to respondent where no employer-employee relation exists. The jurisdiction of
labor courts extends only to cases where an employer-employee relationship exists.

Here, there exists no employer-employee relationship between petitioner and Delta Milling. Petitioner is
not seeking any relief under the Labor Code but merely reimbursement of the monetary benefits claims
awarded and to be paid to the guard employees. There is no labor dispute involved. Petitioner's cross-
claim is within the realm of civil law, and jurisdiction over it belongs to the regular courts.

Reimbursement

The liability of Delta Milling to reimburse petitioner will only arise if and when petitioner actually pays its
employees the adjudged liabilities. Payment is the operative fact which will entitle either of the solidary
debtors to seek reimbursement for the share which corresponds to each of the debtors. In this case,
petitioner has yet to pay the guard employees. Accordingly, petitioner has no cause of action against Delta
Milling. There must first be payment to the laborers, otherwise, the contractor would be unduly enriching
itself by recovering wage increases, for its own benefit.
 B. Labor-only Contracting

Elements of Labor-only Contracting

12. Coca-Cola Bottlers Phils., Inc. v. Agito (179546, February 13, 2009)

Facts:

Respondents were hired as salesmen for Coca-Cola, but through a job contractor, Interserve Management
and Manpower Resources, Inc. When they were dismissed, they filed a case for illegal dismissal against
petitioner and against Interserve.

Petitioner averred that respondents were employees of Interserve who were tasked to perform
contracted services in accordance with the provisions of the contract of services executed between it and
Interserve. It argued that this contract 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. Petitioner presented as evidence: (1) the Articles
of Incorporation of Interserve; (2) the COR of Interserve with the BIR; (3) the ITR and AFS of Interserve for
2001; and (4) the COR of Interserve as an independent job contractor, issued by the DOLE.

Issue:

Whether or not there exists a legitimate job contracting

Held:

No, this case involves a labor-only contracting. There are two prerequisites to find that there is labor-only
contracting: (1) the person supplying workers does not have substantial capital or investment in the form
of tools, equipment, machineries, work premises, among others, and (2) the workers recruited and placed
by such persons are performing activities directly related to the principal business of the principal.

As regards the first requirement, while Interserve may have capital stock amounting to P2M, only P625k
was paid up. In determining what amount of capital is “substantial” for an independent job contractor;
the figure is determined as against the type of work the contractor is obligated to perform. However, this
is impossible in this case because the contract between petitioner and Interserve does not describe the
type of work to be performed; it only says “tasks and activities considered contractible under the laws.”
Petitioner never submitted evidence regarding the amount that Interserve has invested for its service
vehicles and equipment. On the second requirement, the Delivery Agreement between petitioner and
TRMD Inc. stated that petitioner is engaged in the manufacture, distribution, and sale of soft drinks.
Clearly, the work of respondents, which is selling the soft drinks, is directly related to petitioner’s principal
business. This is supported by the fact that they were repeatedly re-hired, and that it has numerous
departments and offices dedicated to Sales.

Power of control

In addition, Interserve did not exert control over respondents, in order to support that Interserve was
merely a labor-only contractor. Interserve’s personnel were obliged to comply with petitioner’s rules &
regulations, and that they are subject to on-the-spot searches by petitioner’s security guards every time
they leave or enter company premises.
The contract manifested petitioner’s control over respondents. It did not specify exactly what kind of jobs
respondents should be doing, this effectively allowed petitioner to remove/replace contracted workers
at will, in the guise of inability to perform their functions. This equates to the power to dismiss, which is
the strongest indication of power of control.

Furthermore, it stated that Interserve would provide for replacement personnel in case of absences. But
this is a red flag. An independent job contractor answers only for the results of the work that was
contracted. It has no obligation to adhere to policies of the employer on attendance and on how the
workers should perform their jobs.

The contract also stated that it will employ the necessary personnel, further showing that it had no
personnel of its own. In other words, Interserve did not bind itself to perform an identifiable service for
petitioner, it merely bound itself to provide the latter with specific types of employees.

Irrelevance of the DOLE certification

The DOLE certification that Interserve is an independent job contractor is likewise misleading because the
Articles of Incorporation of Interserve states that its principal business is to provide janitorial and allied
services. Thus, the DOLE certification merely shows that Interserve has substantial capital and equipment
for janitorial and allied services, but not necessarily for sales services.
 13. Garden of Memories Park and Life Plan, Inc. v. NLRC (160278, February 8, 2012)

Facts:

Petitioner is engaged in the business of operating a memorial park and selling memorial plan and services.
Hilaria Cruz worked with it as a utility worker from August 1991 until her dismissal in February 1998. She
filed a complaint for illegal dismissal. Upon motion of petitioner, Paulina Requiño was impleaded on the
ground that she was its service contractor and the employer of Cruz.

Cruz averred that she was in charge of the cleaning and maintenance of the ground facilities of the
memorial park. Sometime in February 1998, she had a misunderstanding with Adoracion Requiño
regarding the use of a garden water hose. Thereafter, Paulina Requiño instructed them to go home and
not to return anymore. After three days, Cruz reported for work but she was told that she had been
replaced. She immediately manifested her protest.

Cruz argued that as a regular employee of the Garden of Memories, she could not be terminated without
just or valid cause. Also, her dismissal was violative of due process as she was not afforded the opportunity
to explain her side before her employment was terminated. However, petitioner denied liability and
asserted that she was not its employee but that of Requiño, its independent service contractor, who
maintained the park for a contract price. In her defense, Requiño prayed for the dismissal of the complaint
stating that it was Victoriana, her mother, who hired Cruz, and she merely took over the supervision and
management of the workers of the memorial park when her mother got ill. Requiño further stated that
Cruz was not dismissed from her employment but that she abandoned her work.

Issue:

Whether or not Paulina Requiño is a labor-only contractor

Held:

Yes, Requiño is engaged in labor-only contracting thus deeming her an agent of petitioner. There is labor-
only contracting where: (a) the person supplying workers to an employer does not have substantial capital
or investment in the form of tools, equipment, machineries, work premises, among others; and (b) the
workers recruited and placed by such person are performing activities which are directly related to the
principal business of the employer.

Capital or Investment

Generally, the presumption is that the contractor is a labor-only contracting unless such contractor
overcomes the burden of proving that it has the substantial capital or investment. In this case, petitioner
has the burden of proving that Requiño has sufficient capital or investment since it is claiming the
supposed status of Requiño as independent contractor. It, however, failed to adduce evidence purporting
to show that she had sufficient capitalization. Neither did it show that she had investments necessary in
the completion of the service contract.

Furthermore, Requiño was not a licensed contractor. Her explanation that her business was a mere
livelihood program akin to a cottage industry provided by petitioner as part of its contribution to the
upliftment of the underprivileged residing near the memorial park proves that her capital investment was
not substantial. Obviously, Requiño is a labor-only contractor. Another determinant factor was her failure
to exercise the right to control the performance of the work of Cruz. This can be gleaned from the Service
Contract Agreement.

Control

The requirement of the law in determining the existence of independent contractorship is that the
contractor should undertake the work on his own account, under his own responsibility, according to his
own manner and method, free from the control and direction of the employer except as to the results
thereof.

In this case, however, the Service Contract Agreement clearly indicates that Requiño has no discretion to
determine the means and manner by which the work is performed. Rather, the work should be in strict
compliance with, and subject to, all requirements and standards of petitioner. Under these circumstances,
there is no doubt that Requiño is engaged in labor-only contracting, and is considered merely an agent of
petitioner. As such, the workers she supplies should be considered as employees of petitioner.
Consequently, the latter, as principal employer, is responsible to the employees of the labor-only
contractor as if such employees have been directly employed by it.
 14. Aliviado v. Procter & Gamble Phils., Inc. (160506, March 9, 2010)

Facts:

P&G manufactures different consumer and health products. To enhance consumer awareness and
acceptance of the products, P&G entered into contracts with Promm-Gem and SAPS for the promotion
and merchandising of its products. Petitioners worked as merchandisers of P&G from various dates, from
1982 to 1993. They all individually signed employment contracts with either Promm-Gem or SAPS for
periods of more or less five months at a time. They were assigned at different outlets, supermarkets and
stores where they handled all the products of P&G. They received their wages from Promm-Gem or SAPS
which imposed disciplinary measures on erring merchandisers.

Petitioners filed a complaint against P&G for regularization and subsequently, for illegal dismissal. They
insist that they were recruited by P&G and were engaged to undertake merchandising chores even before
the existence of Promm-Gem and SAPS. They further claim that they were instructed to fill up application
forms to the agencies which P&G created. They further claim that P&G instigated their dismissal,
informing the latter that their Merchandising Services Contract will no longer be renewed and that
Promm-Gem and SAPS are labor-only contractors providing services of manpower to their client.

On the other hand, P&G argues that there is no employment relationship between it and petitioners. It
was Promm-Gem or SAPS that (1) selected petitioners and engaged their services; (2) paid their salaries;
(3) wielded the power of dismissal; and (4) had the power of control over their conduct of work.

Issue:

Whether or not petitioners were employees of P&G

Held:

Those supplied by SAPS, which engaged in labor-only contracting, are considered as employees of P&G.
However, those having worked under, and been dismissed by Promm-Gem, are considered the employees
of Promm-Gem, not of P&G.

Labor-only contracting is prohibited. The elements are: i) the contractor 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 are performing activities which are directly related to the main
business of the principal; or ii) the contractor does not exercise the right to control over the performance
of the work of the contractual employee. "Substantial capital or investment" refers to capital stocks and
subscribed capitalization in the case of corporations, tools, equipment, implements, machineries and
work premises, actually and directly used by the contractor or subcontractor in the performance or
completion of the job, work or service contracted out. The "right to control" shall refer to the right
reserved to the person for whom the services of the contractual workers are performed, to determine not
only the end to be achieved, but also the manner and means to be used.

Clearly, the law and its implementing rules allow contracting arrangements for the performance of specific
jobs, works or services. Indeed, it is management prerogative to farm out any of its activities, regardless
of whether such activity is peripheral or core in nature. However, in order for such outsourcing to be valid,
it must be made to an independent contractor because the current labor rules expressly prohibit labor-
only contracting.
Promm-Gem

The FS of Promm-Gem show that it has authorized capital stock of P1 million and a paid-in capital of
P500,000. It also has long term assets worth P432,895 and current assets of P719,042. Promm-Gem has
also proven that it maintained its own warehouse and office space with a floor area of 870 square meters.
It also had three registered vehicles used for its merchandising business. Promm-Gem also has other
clients aside from P&G. Under the circumstances, Promm-Gem has substantial capital and investment
which relates to the work to be performed. Also, Promm-Gem supplied its workers with the relevant
materials, such as markers, tapes, liners and cutters, necessary for them to perform their work. It also
issued uniforms to them. It already considered the complainants working under it as its regular
employees. This circumstance shows it exercises control over its workers. Under the circumstances,
Promm-Gem cannot be considered as a labor-only contractor. It is a legitimate independent contractor.

SAPS

The Articles of Incorporation of SAPS shows that it has a paid-in capital of only P31,250. There is no other
evidence presented to show how much its working capital and assets are. Furthermore, there is no
showing of substantial investment in tools, equipment or other assets.

Jurisprudence dictates that with the current economy, the paid-in capitalization amounting to P75,000
cannot be considered as substantial. Applying the same rationale, it is clear that SAPS – having a paid-in
capital of only P31,250 - has no substantial capital. Its payroll for its merchandisers alone for one month
would already total P44,561. It had 6-month contracts with P&G. Its capital is not even sufficient for one
month’s payroll. SAPS failed to show that its paid-in capital is sufficient for the period required for it to
generate its needed revenue to sustain its operations independently. Substantial capital refers to
capitalization used in the performance of the job. Thus, SAPS has failed to show substantial capital.

Furthermore, petitioners have been charged with the merchandising and promotion of the products of
P&G, an activity directly related to the principal business of P&G. Considering that SAPS has no substantial
capital or investment and the workers it recruited are performing activities which are directly related to
the principal business of P&G, we find that the former is engaged in "labor-only contracting".

"Where ‘labor-only’ contracting exists, an employer-employee relationship is established between the

employer and the employees of the ‘labor-only’ contractor." The purpose is to prevent a circumvention
of labor laws. The contractor is considered merely an agent of the employer and the latter is responsible
to the employees as if such employees had been directly employed by it.
 15. Manila Memorial Park Cemetery, Inc. v. Lluz (208451, February 3, 2016)

Facts:

Petitioner entered into a Contract of Services with Ward Trading and Services. The Contract of Services
provided that Ward Trading, as an independent contractor, will render interment and exhumation
services and other related work in order to supplement operations at Manila Memorial Park. Among those
assigned by Ward Trading to the contract were respondents. They worked six days a week for eight hours
daily and were paid P250 per day.

Respondents alleged that they have asked petitioner to consider them as regular workers within the
appropriate bargaining unit established in its CBA with its union. Manila Memorial refused the request
since respondents were employed by Ward Trading, an independent labor contractor. Thereafter,
respondents joined the MMP Union. The MMP Union, in their behalf, sought their regularization which
petitioner again declined. Respondents filed a complaint for regularization and CBA benefits against
petitioner and Ward Trading.

Subsequently, respondents were dismissed by petitioner. Thus, respondents amended the complaint to
include the prayer for their reinstatement and payment of back wages. Meanwhile, petitioner sought the
dismissal of the complaint for lack of jurisdiction since there was no employer-employee relationship. It
argued that respondents were the employees of Ward Trading.

Issue:

Whether or not an employment relationship exists between petitioner and respondents

Held:

Yes, as Ward Trading is a labor-only contractor, petitioner is deemed the employer of respondents.

Contracting arrangements for the performance of specific jobs or services under the law and its
implementing rules are allowed. However, contracting must be made to a legitimate and independent job
contractor since labor rules expressly prohibit labor-only contracting, which exists when the contractor
merely recruits, supplies or places workers to perform a job, work or service for a principal and any of the
following elements are present: 1) the contractor does not have substantial capital or investment which
relates to the job, work or service to be performed and the employees recruited, supplied or placed by
such contractor or subcontractor are performing activities which are directly related to the main business
of the principal; or 2) the contractor does not exercise the right to control the performance of the work
of the contractual employee.

Capital or Investment

A closer look at the Contract of Services reveals that Ward Trading does not have substantial capital or
investment in the form of tools, equipment, machinery, work premises and other materials since it is
petitioner which owns the equipment used in the performance of work needed for interment and
exhumation services.

First, the sale of equipment was a regular business transaction between parties. However, petitioner did
not present any showing that the sale actually pushed through or that payments were made by Ward
Trading to prove an ordinary arm’s length transaction. In a contract to sell, title is retained by the vendor
until full payment of the price.

Second, the Contract of Service provides that petitioner reserves the right to rent all or any of the
CONTRACTOR’s equipment in the event the COMPANY requires the use of said equipment. This provision
is proof that Ward Trading does not have an absolute right to use or enjoy subject equipment, considering
that its right to do so is subject to petitioner’s use thereof at any time the latter requires it. It is plain to
see that Ward Trading is not the owner of the equipment that is being actually and directly used in the
performance of the services contracted out.

Third, the Service Contract states that petitioner agrees to provide spaces for storage of equipment and
for office of staff and personnel. This is proof that even the work premises actually and directly used by
Ward Trading in the performance of the services contracted out is owned by petitioner.

Fourth, the difference in the value of the equipment in the total amount of P1,400,000.00 can be seen in
Ward Trading’s financial statements for the year 2006. These financial statements were submitted
without any certification that they were actually audited. Ward Trading’s Balance Sheet for showed that
it had total assets in the amount of P534,705 for 2005. A year later, the Balance Sheet showed that it had
total assets in the amount of P1,491,052 for 2006. The Income Statements for the years 2005 and 2006,
showed it only earned a net income of P53,800 for 2005 and P68,141 for 2006. Obviously, it could not
have raised a substantial capital of P1,400,000 from its income alone without the inclusion of the
equipment owned and allegedly obtained from petitioner after they signed the Contract of Services.

Right of Control

Petitioner retained the right to control the performance of the work of the employees concerned. Ward
Trading is still subject to petitioner’s control as the Contract of Services specifically provides that the
exercise of its supervisory function is heavily dependent upon the needs of petitioner. The contract further
provides that petitioner has the option to take over the functions of Ward Trading’s personnel if it finds
any part or aspect of the work or service provided to be unsatisfactory.

Registry with DOLE

While petitioner was able to present copies of the Certificate of Business Name Registration, Sanitary
Permit to Operate and Permit from the Office of the Mayor, it failed to present any proof that Ward is
duly registered as a contractor with the DOLE. DOLE DO No. 18-02 mandates registration of contractors
with the DOLE. The registration shall be necessary for purposes of establishing an effective labor market
information and monitoring. Failure to register shall give rise to the presumption that the contractor is
engaged in labor-only contracting. However, the contractor may overcome the burden by proving that it
has substantial capital, investment, tools and the like.

In this case, however, petitioner failed to adduce evidence to prove that Ward Trading had any substantial
capital, investment or assets to perform the work contracted for. Thus, the presumption that Ward
Trading is a labor-only contractor stands. Consequently, petitioner is deemed the employer of
respondents.
 16. W.M. Manufacturing, Inc. v. Dalag (209418, December 7, 2015)

Facts:

Petitioner and Golden Rock Manpower Services executed a contract in which the contractor shall render,
and employ the necessary number of workers as the petitioner may need, at such dates and times as the
latter may deem necessary. Petitioner has the right to request for replacement as the need arises for any
reason whatsoever. Pursuant to this, petitioner shall have the right to report and protest any untoward
act of the personnel and the contractor shall have the right to discipline the personnel. Golden Rock
engaged the services of Richard Dalag as a factory worker in relation to the contract. For this purpose, he
was a contractual employee under petitioner. It was agreed that his services may be terminated at any
time for any cause, which may arise due to inability to undertake the responsibilities of his position.

Dalag, in his complaint for illegal dismissal, alleges that one of petitioner’s security guards prevented him
from going to his work station, notwithstanding that his contract is yet to expire. He claims that he was
illegally dismissed, his employment having been terminated without either notice or cause. He further
claims that his assignment as side seal machine operator was necessary and desirable for petitioner’s
plastic manufacturing business. He likewise alleged Golden Rock was a labor-only contractor because all
the equipment, machine and tools that he needed to perform his job were furnished by petitioner; that
the jobs are to be performed at petitioner’s workplace; and that he was under petitioner’s supervision.

Petitioner argued that it was Dalag who abandoned his work. They offered as proof memos addressed to
Dalag, which ordered him to answer accusations relating to alleged infractions: gross negligence, qualified
theft, malicious mischief, incompetence, grave misbehavior, insubordination, dishonesty, and machine
sabotage. He allegedly repeatedly failed to report to management the breakdowns of the side-seal
machine he operates; and that he pocketed spare parts of petitioner's machines without management's
consent.

Both companies claim that Golden Rock is a legitimate contractor for manpower services, relying on its
COR and their stipulation leaving Golden Rock with the power to discipline its employees.

Issue:

Whether or not Golden Rock is engaged in labor-only contracting

Held:

Yes, Golden Rock is a labor-only contractor, thus deeming petitioner liable as employer of Dalag.

DOLE DO 18-02 laid down the criteria in determining whether or not labor-only contracting exists between
two parties. Labor-only contracting shall refer to an arrangement where the contractor or subcontractor
merely recruits, supplies or places workers to perform a job, work or service for a principal, and any of the
following elements are present: i) the contractor or subcontractor does not have substantial capital or
investment which relates to the job, work or service to be performed and the employees recruited,
supplied or placed by such contractor or subcontractor are performing activities which are directly related
to the main business of the principal; or ii) the contractor does not exercise the right to control over the
performance of the work of the contractual employee.
The essential element in labor-only contracting is that the contractor merely recruits, supplies or places
workers to perform a job, work or service for a principal. However, the presence of this essential element
is not enough and must, in fact, be accompanied by any one of the confirmatory elements to be
considered a labor-only contractor within the contemplation of the rule.

Essential Element

The presence of the essential element in the extant case cannot be gainsaid. This much is clearly provided
in the service agreement that the Golden Rock shall render, undertake, perform and employ the necessary
number of workers as petitioner may need, at such dates and times as the petitioner may deem necessary.

Capital or Investment

Petitioner and Golden Rock refuted the alleged lack of substantial capital by presenting its COR from the
DOLE. Although not conclusive proof of legitimacy as a manpower provider, the certification nevertheless
prevented the presumption of labor-only contracting from arising. In its stead, the certification gave rise
to a disputable presumption that the contractor's operations are legitimate. Among the requirements for
registration is a copy of the AFS, if the applicant is a corporation, partnership, cooperative or a union, or
a copy of the latest ITR if the applicant is a sole proprietorship. Upon submission, the DOLE Regional
Director concerned will then have seven days to evaluate the information supplied and determine
whether the application ought to be approved or denied. Since Golden Rock's application was approved,
the DOLE found Golden Rock's capitalization to be satisfactory and substantial, contrary to Dalag's claim.
Petitioner and Golden Rock's contentions are unmeritorious.

It may be that the DOLE Regional Director was satisfied by Golden Rock's capitalization as reflected on its
financial documents, but the basis for determining the substantiality of a company's "capital" rests not
only thereon but also on the tools and equipment it owns in relation to the job, work, or service it provides.
DO 18-02 defines "substantial capital or investment" in the context of labor-only contracting as referring
not only to a contractor's financial capability, but also encompasses the 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.

Here, the COR may have prevented the presumption of labor-only contracting from arising, but the
evidence Dalag adduced was sufficient to overcome the disputable presumption that Golden Rock is an
independent contractor. To be sure, in performing his tasks, Dalag made use of the raw materials and
equipment that petitioner supplied. He also operated the side-seal machine in the workplace of
petitioner, not of Golden Rock. With these attendant circumstances, the first element exists.

Right of Control

As to the second confirmatory element, petitioner argues that the Service Agreement it forged with
Golden Rock specifically provides that the latter exclusively exercises control over employees assigned.
Furthermore, it is Golden Rock who paid for Dalag's salaries and wages. Petitioner's claim is unmeritorious.

The second element under DO 18-02 does not require the application of the economic test and, even
more so, the four-fold test to determine whether or not the relation between the parties is one of labor-
only contracting. All it requires is that the contractor does not exercise control over the employees it
supplies, making the control test of paramount consideration. The fact that Golden Rock pays for Dalag's
wages and salaries then has no bearing in resolving the issue.

Under DO 18-02, the "right to control" refers to the right to determine not only the end to be achieved,
but also the manner and means to be used in reaching that end. Here, notwithstanding the stipulation
leaving Golden Rock the exclusive right to control the working bodies it provides petitioner, evidence
suggests that it was petitioner who actually exercised supervision over Dalag's work performance. As
culled from the records, Dalag was supervised by petitioner’s employees. Petitioner even went as far as
furnishing Dalag with not less than seven memos directing him to explain within his alleged work
infractions. The company likewise took pains in issuing investigation reports detailing its findings on
Dalag's culpability. Clearly, petitioner took it upon itself to discipline Dalag for violation of company rules,
regulations, and policies, validating the presence of the second confirmatory element.

Conclusion

Having ascertained that the essential element and at least one confirmatory element obtain in the extant
case, petitioner and Golden Rock are engaged in labor-only contracting. As such, they are, by legal fiction,
considered principal and agent, respectively, jointly and severally liable to their illegally dismissed
employees.
Effects of Labor-only Contracting

17. Diamond Farms, Inc. v. Southern Philippines Federation of Labor (173254-55, January 13, 2016)

Facts:

DFI owns an 800-hectare banana plantation. Pursuant to the CARL, commercial farms shall be subject to
compulsory acquisition and distribution. However, the DAR granted DFI a deferment privilege to continue
agricultural operations until 1998. Due to adverse marketing problems and observance of the so-called
"lay-follow", DFI closed some areas of operation in the original plantation and laid off its employees. These
employees petitioned the DAR for the cancellation of DFI’s deferment privilege alleging that DFI already
abandoned its area of operations. The DAR recalled DFI’s deferment privilege resulting in the original
plantation’s automatic compulsory acquisition and distribution under the CARL.

To minimize losses, DFI offered to give up its rights and interest over the original plantation in favor of the
government by way of a Voluntary Offer to Sell. The DAR accepted DFI’s offer to sell the original
plantation. However, the DAR only approved the disposition of 689.88 hectares. Hence, the original
plantation was split into two. The managed area is subject to the outcome of the appeal on the
cancellation of the deferment privilege before the DAR Secretary.

The awarded plantation was turned over to qualified agrarian reform beneficiaries (ARBs), who were
working in the original plantation. They subsequently organized themselves into a multi-purpose
cooperative named DARBMUPCO, which entered into a Banana Production and Purchase Agreement
(MOA) with DFI. Under the MOA, DARBMUPCO and its members, agreed to grow and cultivate only high-
grade quality exportable bananas to be sold exclusively to DFI. The MOA is effective for 10 years.

DARBMUPCO and DFI executed a "Supplemental to Memorandum Agreement" (SMA) that DFI shall take
care of the labor cost arising from the packaging operation, cable maintenance, irrigation pump and
irrigation maintenance that the workers of DARBMUPCO shall conduct for DFI’s account.

From the start, DARBMUPCO was hampered by lack of manpower to undertake the agricultural operation
under the MOA because some of its members were not willing to work. Hence, to assist DARBMUPCO in
meeting its production obligations, DFI engaged the services of the respondent-contractors, who in turn
recruited the respondent-workers. The engagement of the respondent-workers started a series of labor
disputes among DARBMUPCO, DFI and the respondent-contractors.

Issue:

Whether or not DFI is the employer of respondent-workers

Held:

Yes, respondent-contractors are deemed engaged in labor-only contracting. DFI is deemed the employer
of respondent-workers.

Job Contracting and Labor-Only Contracting, Distinguished

The Omnibus Rules Implementing the Labor Code distinguishes between permissible job contracting and
labor-only contracting. Job contracting is permissible under the Code if the following conditions are met:
(a) The contractor carries on an independent business and undertakes the contract work on his own
account under his own responsibility according to his own manner and method, free from the control and
direction of his employer or principal in all matters connected with the performance of the work except
as to the results thereof; and (b) The contractor has substantial capital or investment in the form of tools,
equipment, machineries, work premises, and other materials which are necessary in the conduct of his
business.

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

As a general rule, a contractor is presumed to be a labor-only contractor, unless such contractor

overcomes the burden of proving that it has the substantial capital, investment, tools and the like.

Respondent-Contractors Are Labor-Only Contractors

There is no evidence showing that respondent-contractors are independent contractors. The respondent-
contractors, DFI, and DARBMUPCO did not offer any proof that respondent-contractors were not engaged
in labor-only contracting. An independent contractor is defined as one who exercises independent
employment and contracts to do a piece of work according to his own methods and without being subject
to control of his employer except as to result of the work. If the employer claims that the workman is an
independent contractor, the burden is on him to show his independence.

Further, respondent-contractors admit, and even insist that they are engaged in labor-only contracting.
They narrated that they were engaged to recruit workers to perform specific farm activities on banana
plantation lands awarded to DARBMUPCO and on banana planted lands owned by DFI. All farm tools,
implements and equipment necessary to performance of such farm activities were supplied by DFI and
they had no adequate capital to acquire or purchase such tools, implements, equipment, etc. Respondent-
workers were being directly supervised, controlled and managed by DFI farm managers and supervisors.
DFI managers and supervisors, at their sole discretion and prerogative, could directly hire and terminate
any or all of the respondents-workers. Time sheets were being prepared and submitted to DFI. Payment
of wages were paid by DFI thru respondent-contractors. The foregoing admissions are legally binding on
respondent-contractors.

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. In this case, respondent-contractors
are the labor-only contractors and either DFI or DARBMUPCO is their principal.

DFI is the Principal

A principal refers to the person who enters into an agreement with a job contractor, either for the
performance of a specified work or for the supply of manpower.

The records show that it is DFI which hired the respondent-contractors who in turn hired their own men
to work in the 689.88 hectares land of DARBMUPCO as well as in the remaining land for DFI. DFI admits
that these respondent-contractors worked under the direction and supervision of the DFI managers and
personnel. DFI paid respondent-contractors for the services rendered in the plantation and the latter in
turn pay their workers. DARBMUPCO did not have anything to do with the hiring, supervision and payment
of the wages of the workers-respondents thru the contractors-respondents.

DFI cannot argue that DARBMUPCO is the principal of the respondent-contractors because it owns the
awarded plantation; and therefore, DARBMUPCO is the ultimate beneficiary of the employment of the
respondent-workers.

Power of Control

The presence of the power of control on the part of the principal over the workers of the contractor,
under the facts, prove the employer-employee relationship between the former and the latter. A finding
that a contractor is a ‘labor-only’ contractor is equivalent to declaring that there is an employer-employee
relationship between the principal and the employees of the supposed contractor.

The "four-fold test" must be used to determine whether there exists an employer-employee relationship
between the parties. The four elements of an employment relationship are: (a) the selection and
engagement of the employee; (b) the payment of wages; (c) the power of dismissal; and (d) the power to
control the employee’s conduct. Of these four elements, it is the power to control which is the most crucial
and most determinative factor, so important, in fact, that, the other elements may even be disregarded.

That DFI is the employer of the respondent-workers is bolstered by the finding that DFI exercises control
over the respondent-workers. DFI, through its manager and supervisors provides for the work
assignments and performance targets of the respondent-workers. The managers and supervisors also
have the power to directly hire and terminate the respondent-workers. Evidently, DFI wields control over
respondent-workers.

Stipulation that There Is No Employment Relationship

Neither can DFI argue that it is only the purchaser of the bananas produced in the awarded plantation
under the MOA and that under the terms of the MOA, no employer-employee relationship exists between
DFI and the respondent-workers. 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 MOA that respondent-
workers are not employees of DFI is not controlling, as the proven facts show otherwise. 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.

Clearly, DFI is the true employer of the respondent-workers; respondent-contractors are only agents of
DFI. Under Article 106 of the Labor Code, DFI shall be solidarily liable with the respondent-contractors for
the rightful claims of the respondent-workers, to the same manner and extent as if the latter are directly
employed by DFI.