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Mar 28, 2016

G.R. No. 179546, February 13, 2009


FACTS:

Agito, et al. are salesmen assigned at the Lagro Sales Office of Coca-Cola for a number of years but were not regularized. Their employment was terminated without just cause and due process. They filed complaints against Coca-Cola, Interserve, Peerless Integrated Services, Inc. Better Builders, Inc., and Excellent Partners, Inc. However, they failed to state a reason for filing complaints against Interserve, Peerless, Better Builders and Excellent Partners.

Coca-Cola averred that Agito, et al. were employees of Interserve who were tasked to perform contracted services in accordance with the provision of the Contract of Services. The contract covering the period of April 1, 2002 to September 30, 2002 constituted legitimate job contracting.

To prove that Interserve is an independent contractor, Coca-Cola presented the following: (1) AOI of Interserve; (2) Certificate of Registration of Interserve with BIR; (3) ITR with Audited Financial Statements of Interserve for 2001; and (4) Certificate of Registration of Interserve as an independent contractor issued by DOLE.

As a result, Coca-Cola asserted that Agito, et al. were employees of Interserve since it was the latter which hired them, paid their wages and supervised their work, as proven by: (1) PDFs are in the records of Interserve; (2) Contracts of Temporary Employment with Interserve; and (3) payroll records of Interserve.

LA found for Coca-Cola and held that Interserve was a legitimate job contractor. The complaints against Peerless, Better Building and Excellent Partners was dismissed for failure to pursue the case.

On appeal, NLRC affirmed LA's decision.

CA reversed the NLRC decision and ruled that Interserve was a labor-only contractor with insufficient capital and investments for the services which it was contracted to perform. Additionally, CA determined that Coca-Cola had effective control over the means and method of Agito, et al.'s work as evidenced by the Daily Sales Monitoring Report, the Conventional Route System Proposed Set-Up, and the memoranda issued by the supervisor of petitioner addressed to workers. Respondents' tasks were directly related and necessary to the main business of Coca-Cola. Finally, certain provisions of the Contract of Service between Coca-Cola and Interserve suggested that the latter's undertaking did not involve a specific job but rather the supply of manpower.

ISSUE: Whether or not Interserve is a legitimate job contractor

HELD:

Legitimate Contracting vs. Labor-Only Contracting

The relations which may arise in a situation, where there is an employer, a contractor, and employees of the contractor, are identified and distinguished under Article 106 of the Labor Code:

Article 106. Contractor or subcontractor. - Whenever an employer enters into a contract with another person for the performance of the formers work, the employees of the contractor and of the latters subcontractor, if any, shall be paid in accordance with the provisions of this Code.

In the event that the contractor or subcontractor fails to pay the wages of his employees in accordance with this Code, the employer shall be jointly and severally liable with his contractor or subcontractor to such employees to the extent of the work performed under the contract, in the same manner and extent that he is liable to employees directly employed by him.

The Secretary of Labor may, by appropriate regulations, restrict or prohibit the contracting out of labor to protect the rights of workers established under this Code. In so prohibiting or restriction, he may make appropriate distinctions between labor-only contracting and job contracting as well as differentiations within these types of contracting and determine who among the parties involved shall be considered the employer for purposes of this Code, to prevent any violation or circumvention of any provision of this Code.

There is labor-only contracting where the person supplying workers to an employee does not have substantial capital or investment in the form of tools, equipment, machineries, work premises, among others, and the workers recruited and placed by such persons are performing activities which are directly related to the principal business of such employer. In such cases, the person or intermediary shall be considered merely as an agent of the employer who shall be responsible to the workers in the same manner and extent as if the latter were directly employed by him.


The afore-quoted provision recognizes two possible relations among the parties: (1) the permitted legitimate job contract, or (2) the prohibited labor-only contracting.

A legitimate job contract, wherein an employer enters into a contract with a job contractor for the performance of the formers work, is permitted by law. Thus, the employer-employee relationship between the job contractor and his employees is maintained. In legitimate job contracting, the law creates an employer-employee relationship between the employer and the contractors employees only for a limited purpose, i.e., to ensure that the employees are paid their wages. The employer becomes jointly and severally liable with the job contractor only for the payment of the employees wages whenever the contractor fails to pay the same. Other than that, the employer is not responsible for any claim made by the contractors employees.

On the other hand, labor-only contracting is an arrangement wherein the contractor merely acts as an agent in recruiting and supplying the principal employer with workers for the purpose of circumventing labor law provisions setting down the rights of employees. It is not condoned by law.A finding by the appropriate authorities that a contractor is a labor-only contractor establishes an employer-employee relationship between the principal employer and the contractors employees and the former becomes solidarily liable for all the rightful claims of the employees. 

Section 5 of the Rules Implementing Articles 106-109 of the Labor Code, as amended, provides the guidelines in determining whether labor-only contracting exists:

Section 5. Prohibition against labor-only contracting. Labor-only contracting is hereby declared prohibited. For this purpose, labor-only contracting shall refer to an arrangement where the contractor or subcontractor merely recruits, supplies, or places workers to perform a job, work or service for a principal, and any of the following elements are [is] present:

i)                    The contractor or subcontractor does not have substantial capital or investment which relates to the job, work, or service to be performed and the employees recruited, supplied or placed by such contractor or subcontractor are performing activities which are directly related to the main business of the principal; or

ii)                   The contractor does not exercise the right to control the performance of the work of the contractual employee.

The foregoing provisions shall be without prejudice to the application of Article 248(C) of the Labor Code, as amended.

Substantial capital or investment refers to capital stocks and subscribed capitalization in the case of corporations, tools, equipment, implements, machineries and work premises, actually and directly used by the contractor or subcontractor in the performance or completion of the job, work, or service contracted out.

The right to control shall refer to the right reversed to the person for whom the services of the contractual workers are performed, to determine not only the end to be achieved, but also the manner and means to be used in reaching that end. (Emphasis supplied.)

When there is labor-only contracting, there is employer-employee relationship between the principal and the contractual employee

When there is labor-only contracting, Section 7 of the same implementing rules, describes the consequences thereof:

Section 7. Existence of an employer-employee relationship. The contractor or subcontractor shall be considered the employer of the contractual employee for purposes of enforcing the provisions of the Labor Code and other social legislation. The principal, however, shall be solidarily liable with the contractor in the event of any violation of any provision of the Labor Code, including the failure to pay wages.

The principal shall be deemed the employer of the contractual employee in any of the following case, as declared by a competent authority:

a.                   where there is labor-only contracting; or
b.                  where the contracting arrangement falls within the prohibitions provided in Section 6 (Prohibitions) hereof.


According to the foregoing provision, labor-only contracting would give rise to: (1) the creation of an employer-employee relationship between the principal and the employees of the contractor or sub-contractor; and (2) the solidary liability of the principal and the contractor to the employees in the event of any violation of the Labor Code.

Even if employees are not performing activities indispensable to the business of the principal, labor-contracting may still exist if the contractor does not demonstrate substantial capital or investment

The law clearly establishes an employer-employee relationship between the principal employer and the contractors employee upon a finding that the contractor is engaged in labor-only contracting. Article 106 of the Labor Code categorically states: There is labor-only contracting where the person supplying workers to an employee does not have substantial capital or investment in the form of tools, equipment, machineries, work premises, among others, and the workers recruited and placed by such persons are performing activities which are directly related to the principal business of such employer. Thus, performing activities directly related to the principal business of the employer is only one of the two indicators that labor-only contracting exists; the other is lack of substantial capital or investment. The Court finds that both indicators exist in the case at bar.

Interserve has no substantial capital; it is impossible to measure whether or not there is substantial capital because the Contract between Coca-Cola and Interserve does not specify the work or the project that needs to be performed or completed.

At the outset, the Court clarifies that although Interserve has an authorized capital stock amounting toP2,000,000.00, only P625,000.00 thereof was paid up as of 31 December 2001. The Court does not set an absolute figure for what it considers substantial capital for an independent job contractor, but it measures the same against the type of work which the contractor is obligated to perform for the principal. However, this is rendered impossible in this case since the Contract between petitioner and Interserve does not even specify the work or the project that needs to be performed or completed by the latters employees, and uses the dubious phrase tasks and activities that are considered contractible under existing laws and regulations. Even in its pleadings, petitioner carefully sidesteps identifying or describing the exact nature of the services that Interserve was obligated to render to petitioner. The importance of identifying with particularity the work or task which Interserve was supposed to accomplish for petitioner becomes even more evident, considering that the Articles of Incorporation of Interserve states that its primary purpose is to operate, conduct, and maintain the business of janitorial and allied services. But respondents were hired as salesmen and leadman for petitioner. The Court cannot, under such ambiguous circumstances, make a reasonable determination if Interserve had substantial capital or investment to undertake the job it was contracting with petitioner.

Burden of proof of substantial capital rests in the contractor, or in its absence, the principal claiming it to be an independent contractor

The contractor, not the employee, has the burden of proof that it has the substantial capital, investment, and tool to engage in job contracting. Although not the contractor itself (since Interserve no longer appealed the judgment against it by the Labor Arbiter), said burden of proof herein falls upon petitioner who is invoking the supposed status of Interserve as an independent job contractor. Noticeably, petitioner failed to submit evidence to establish that the service vehicles and equipment of Interserve, valued at P510,000.00 and P200,000.00, respectively, were sufficient to carry out its service contract with petitioner. Certainly, petitioner could have simply provided the courts with records showing the deliveries that were undertaken by Interserve for the Lagro area, the type and number of equipment necessary for such task, and the valuation of such equipment. Absent evidence which a legally compliant company could have easily provided, the Court will not presume that Interserve had sufficient investment in service vehicles and equipment, especially since respondents allegation that they were using equipment, such as forklifts and pallets belonging to petitioner, to carry out their jobs was uncontroverted.

Interserve did not exercise the right to control the performance of the work of the respondents

The lack of control of Interserve over the respondents can be gleaned from the Contract of Services between Interserve (as the CONTRACTOR) and petitioner (as the CLIENT).

Paragraph 3 of the Contract specified that the personnel of contractor Interserve, which included the respondents, would comply with CLIENT as well as CLIENTs policies, rules and regulations. It even required Interserve personnel to subject themselves to on-the-spot searches by petitioner or its duly authorized guards or security men on duty every time the said personnel entered and left the premises of petitioner. Said paragraph explicitly established the control of petitioner over the conduct of respondents. Although under paragraph 4 of the same Contract, Interserve warranted that it would exercise the necessary and due supervision of the work of its personnel, there is a dearth of evidence to demonstrate the extent or degree of supervision exercised by Interserve over respondents or the manner in which it was actually exercised. There is even no showing that Interserve had representatives who supervised respondents work while they were in the premises of petitioner.

Also significant was the right of petitioner under paragraph 2 of the Contract to request the replacement of the CONTRACTORS personnel. True, this right was conveniently qualified by the phrase if from its judgment, the jobs or the projects being done could not be completed within the time specified or that the quality of the desired result is not being achieved, but such qualification was rendered meaningless by the fact that the Contract did not stipulate what work or job the personnel needed to complete, the time for its completion, or the results desired. The said provision left a gap which could enable petitioner to demand the removal or replacement of any employee in the guise of his or her inability to complete a project in time or to deliver the desired result. The power to recommend penalties or dismiss workers is the strongest indication of a companys right of control as direct employer.

Paragraph 4 of the same Contract, in which Interserve warranted to petitioner that the former would provide relievers and replacements in case of absences of its personnel, raises another red flag. An independent job contractor, who is answerable to the principal only for the results of a certain work, job, or service need not guarantee to said principal the daily attendance of the workers assigned to the latter. An independent job contractor would surely have the discretion over the pace at which the work is performed, the number of employees required to complete the same, and the work schedule which its employees need to follow.

As the Court previously observed, the Contract of Services between Interserve and petitioner did not identify the work needed to be performed and the final result required to be accomplished. Instead, the Contract specified the type of workers Interserve must provide petitioner (Route Helpers, Salesmen, Drivers, Clericals, Encoders & PD) and their qualifications (technical/vocational course graduates, physically fit, of good moral character, and have not been convicted of any crime). The Contract also states that, to carry out the undertakings specified in the immediately preceding paragraph, the CONTRACTOR shall employ the necessary personnel, thus, acknowledging that Interserve did not yet have in its employ the personnel needed by petitioner and would still pick out such personnel based on the criteria provided by petitioner. In other words, Interserve did not obligate itself to perform an identifiable job, work, or service for petitioner, but merely bound itself to provide the latter with specific types of employees. These contractual provisions strongly indicated that Interserve was merely a recruiting and manpower agency providing petitioner with workers performing tasks directly related to the latters principal business.

Certification issued by DOLE is not sufficient to prove independent contractorship

The certification issued by the DOLE stating that Interserve is an independent job contractor does not sway this Court to take it at face value, since the primary purpose stated in the Articles of Incorporation of Interserve is misleading. According to its Articles of Incorporation, the principal business of Interserve is to provide janitorial and allied services. The delivery and distribution of Coca-Cola products, the work for which respondents were employed and assigned to petitioner, were in no way allied to janitorial services. While the DOLE may have found that the capital and/or investments in tools and equipment of Interserve were sufficient for an independent contractor for janitorial services, this does not mean that such capital and/or investments were likewise sufficient to maintain an independent contracting business for the delivery and distribution of Coca-Cola products.



  • Legitimate Contracting vs. Labor-only Contracting
  • When there is labor-only contracting, an employer-employee exists between the contractual employee and the principal
  • Even if employees are not performing activities indispensable to the business of the principal, labor-only contracting may still exist if the contractor does not demonstrate substantial capital or investment
  • To determine whether or not there is substantial capital for purposes of legitimate contracting, one must examine the specific job, work or service provided in the Service Agreement
  • The burden of proof that the contractor is a legitimate contractor rests with the contractor, or in its absence, the principalCertification from DOLE is not sufficient to prove independent contractorship

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