1

G.R. No. 146408 February 29, 2008

PHILIPPINE AIRLINES, INC., petitioner,

vs.
ENRIQUE LIGAN, EMELITO SOCO, ALLAN PANQUE, JOLITO OLIVEROS, RICHARD GONCER,
NONILON PILAPIL, AQUILINO YBANEZ, BERNABE SANDOVAL, RUEL GONCER, VIRGILIO P.
CAMPOS, JR., ARTHUR M. CAPIN, RAMEL BERNARDES, LORENZO BUTANAS, BENSON CARESUSA,
JEFFREY LLENOS, ROQUE PILAPIL, ANTONIO M. PAREJA, CLEMENTE R. LUMAYNO, NELSON
TAMPUS, ROLANDO TUNACAO, CHERRIE ALEGRES, BENEDICTO AUXTERO, EDUARDO
MAGDADARAUG, NELSON M. DULCE, and ALLAN BENTUZAL, respondents.

CARPIO MORALES, J.:

Petitioner Philippine Airlines as Owner, and Synergy Services Corporation (Synergy) as Contractor, entered
into an Agreement1 on July 15, 1991 whereby Synergy undertook to "provide loading, unloading, delivery
of baggage and cargo and other related services to and from [petitioner]'s aircraft at the Mactan
Station."2

The Agreement specified the following "Scope of Services" of Contractor Synergy:

1.2 CONTRACTOR shall furnish all the necessary capital, workers, loading, unloading and
delivery materials, facilities, supplies, equipment and tools for the satisfactory performance and
execution of the following services (the Work):

a. Loading and unloading of baggage and cargo to and from the aircraft;

b. Delivering of baggage from the ramp to the baggage claim area;

c. Picking up of baggage from the baggage sorting area to the designated parked aircraft;

d. Delivering of cargo unloaded from the flight to cargo terminal;

e. Other related jobs (but not janitorial functions) as may be required and necessary;

CONTRACTOR shall perform and execute the aforementioned Work at the following areas
located at Mactan Station, to wit:

a. Ramp Area

b. Baggage Claim Area

c. Cargo Terminal Area, and

d. Baggage Sorting Area3 (Underscoring supplied)

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And it expressly provided that Synergy was "an independent contractor and . . . that there w[ould] be no
employer-employee relationship between CONTRACTOR and/or its employees on the one hand, and
OWNER, on the other."4

On the duration of the Agreement, Section 10 thereof provided:

10. 1 Should at any time OWNER find the services herein undertaken by CONTRACTOR to be
unsatisfactory, it shall notify CONTRACTOR who shall have fifteen (15) days from such notice
within which to improve the services. If CONTRACTOR fails to improve the services under this
Agreement according to OWNER'S specifications and standards, OWNER shall have the right to
terminate this Agreement immediately and without advance notice.

10.2 Should CONTRACTOR fail to improve the services within the period stated above or should
CONTRACTOR breach the terms of this Agreement and fail or refuse to perform the Work in such
a manner as will be consistent with the achievement of the result therein contracted for or in any
other way fail to comply strictly with any terms of this Agreement, OWNER at its option, shall have
the right to terminate this Agreement and to make other arrangements for having said Work
performed and pursuant thereto shall retain so much of the money held on the Agreement as is
necessary to cover the OWNER's costs and damages, without prejudice to the right of OWNER to
seek resort to the bond furnished by CONTRACTOR should the money in OWNER's possession be
insufficient.

x x x x (Underscoring supplied)

Except for respondent Benedicto Auxtero (Auxtero), the rest of the respondents, who appear to have been
assigned by Synergy to petitioner following the execution of the July 15, 1991 Agreement, filed on March
3, 1992 complaints before the NLRC Regional Office VII at Cebu City against petitioner, Synergy and their
respective officials for underpayment, non-payment of premium pay for holidays, premium pay for rest
days, service incentive leave pay, 13th month pay and allowances, and for regularization of employment
status with petitioner, they claiming to be "performing duties for the benefit of [petitioner] since their job
is directly connected with [its] business x x x."5

Respondent Auxtero had initially filed a complaint against petitioner and Synergy and their respective
officials for regularization of his employment status. Later alleging that he was, without valid ground,
verbally dismissed, he filed a complaint against petitioner and Synergy and their respective officials for
illegal dismissal and reinstatement with full backwages.6

The complaints of respondents were consolidated.

By Decision7 of August 29, 1994, Labor Arbiter Dominador Almirante found Synergy an independent
contractor and dismissed respondents' complaint for regularization against petitioner, but granted their
money claims. The fallo of the decision reads:

WHEREFORE, foregoing premises considered, judgment is hereby rendered as follows:

(1) Ordering respondents PAL and Synergy jointly and severally to pay all the complainants herein
their 13thmonth pay and service incentive leave benefits;
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xxxx

(3) Ordering respondent Synergy to pay complainant Benedicto Auxtero a financial assistance in
the amount of P5,000.00.

The awards hereinabove enumerated in the aggregate total amount of THREE HUNDRED
TWENTY-TWO THOUSAND THREE HUNDRED FIFTY NINE PESOS AND EIGHTY SEVEN CENTAVOS
(P322,359.87) are computed in detail by our Fiscal Examiner which computation is hereto attached
to form part of this decision.

The rest of the claims are hereby ordered dismissed for lack of merit.8 (Underscoring supplied)

On appeal by respondents, the NLRC, Fourth Division, Cebu City, vacated and set aside the decision of the
Labor Arbiter by Decision9 of January 5, 1996, the fallo of which reads:

WHEREFORE, the Decision of the Labor Arbiter Dominador A. Almirante, dated August 29, 1994, is
hereby VACATED and SET ASIDE and judgment is hereby rendered:

1. Declaring respondent Synergy Services Corporation to be a 'labor-only' contractor;

2. Ordering respondent Philippine Airlines to accept, as its regular employees, all the
complainants, . . . and to give each of them the salaries, allowances and other employment
benefits and privileges of a regular employee under the Collective Bargaining Agreement
subsisting during the period of their employment;

xxxx

4. Declaring the dismissal of complainant Benedicto Auxtero to be illegal and ordering his
reinstatement as helper or utility man with respondent Philippine Airlines, with full backwages,
allowances and other benefits and privileges from the time of his dismissal up to his actual
reinstatement; and

5. Dismissing the appeal of respondent Synergy Services Corporation, for lack of

merit.10 (Emphasis and underscoring supplied)

Only petitioner assailed the NLRC decision via petition for certiorari before this Court.

By Resolution11 of January 25, 1999, this Court referred the case to the Court of Appeals for appropriate
action and disposition, conformably with St. Martin Funeral Homes v. National Labor Relations
Commission which was promulgated on September 16, 1998.

The appellate court, by Decision of September 29, 2000, affirmed the Decision of the NLRC. 12 Petitioner's
motion for reconsideration having been denied by Resolution of December 21, 2000,13 the present
petition was filed, faulting the appellate court

I.
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. . . IN UPHOLDING THE NATIONAL LABOR RELATIONS COMMISSION DECISION

WHICH IMPOSED THE RELATIONSHIP OF EMPLOYER-EMPLOYEE BETWEEN PETITIONER AND THE
RESPONDENTS HEREIN.

II.

. . . IN AFFIRMING THE RULING OF THE NATIONAL LABOR RELATIONS COMMISSION ORDERING

THE REINSTATEMENT OF RESPONDENT AUXTERO DESPITE THE ABSENCE [OF] ANY FACTUAL
FINDINGIN THE DECISION THAT PETITIONER ILLEGALLY TERMINATED HIS EMPLOYMENT.

III.

. . . [IN ANY EVENT IN] COMMITT[ING] A PATENT AND GRAVE ERROR IN UPHOLDING THE
DECISION OF THE NATIONAL LABOR RELATIONS COMMISSION WHICH
COMPELLED THE PETITIONER TO EMPLOY THE RESPONDENTS AS REGULAR EMPLOYEES DESPITE
THE FACT THAT THEIR SERVICES ARE IN EXCESS OF PETITIONER COMPANY'S OPERATIONAL
REQUIREMENTS.14(Underscoring supplied)

Petitioner argues that the law does not prohibit an employer from engaging an independent contractor,
like Synergy, which has substantial capital in carrying on an independent business of contracting, to
perform specific jobs.

Petitioner further argues that its contracting out to Synergy various services like janitorial, aircraft
cleaning, baggage-handling, etc., which are directly related to its business, does not make respondents its
employees.

Petitioner furthermore argues that none of the four (4) elements of an employer-employee relationship
between petitioner and respondents, viz: selection and engagement of an employee, payment of wages,
power of dismissal, and the power to control employee's conduct, is present in the case. 15

Finally, petitioner avers that reinstatement of respondents had been rendered impossible because it had
reduced its personnel due to heavy losses as it had in fact terminated its service agreement with Synergy
effective June 30, 199816 as a cost-saving measure.

The decision of the case hinges on a determination of whether Synergy is a mere job-only contractor or a
legitimate contractor. If Synergy is found to be a mere job-only contractor, respondents could be
considered as regular employees of petitioner as Synergy would then be a mere agent of petitioner in
which case respondents would be entitled to all the benefits granted to petitioner's regular employees;
otherwise, if Synergy is found to be a legitimate contractor, respondents' claims against petitioner must
fail as they would then be considered employees of Synergy.

The statutory basis of legitimate contracting or subcontracting is provided in Article 106 of the Labor
Code which reads:

ART. 106. CONTRACTOR OR SUBCONTRACTOR. - Whenever an employer enters into a contract

with another person for the performance of the former's work, the employees of the contractor
and of the latter's subcontractor, if any, shall be paid in accordance with the provisions of this
Code.
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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 the Code. In so prohibiting or restricting,
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 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 person
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. (Emphasis,
capitalization and underscoring supplied)

Legitimate contracting and labor-only contracting are defined in Department Order (D.O.) No. 18-02,
Series of 2002 (Rules Implementing Articles 106 to 109 of the Labor Code, as amended) as follows:

Section 3. Trilateral relationship in contracting arrangements. In legitimate contracting, there

exists a trilateral relationship under which there is a contract for a specific job, work or service
between the principal and the contractor or subcontractor, and a contract of employment
between the contractor or subcontractor and its workers. Hence, there are three parties involved
in these arrangements, the principal which decides to farm out a job or service to a contractor or
subcontractor, the contractor or subcontractor which has the capacity to independently undertake
the performance of the job, work or service, and the contractual workersengaged by the
contractor or subcontractor to accomplish the job, work or service. (Emphasis and underscoring
supplied)

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 [sic] 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. (Emphasis, underscoring and capitalization supplied)
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"Substantial capital or investment" and the "right to control" are defined in the same Section 5 of the
Department Order as follows:

"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 in reaching that end. (Emphasis and underscoring supplied)

From the records of the case, it is gathered that the work performed by almost all of the respondents -
loading and unloading of baggage and cargo of passengers - is directly related to the main business of
petitioner. And the equipment used by respondents as station loaders, such as trailers and conveyors, are
owned by petitioner.17

Petitioner asserts, however, that mere compliance with substantial capital requirement suffices for Synergy
to be considered a legitimate contractor, citing Neri v. National Labor Relations Commission.18 Petitioner's
reliance on said case is misplaced.

In Neri, the Labor Arbiter and the NLRC both determined that Building Care Corporation had a capital
stock of P1 million fully subscribed and paid for.19 The corporation's status as independent contractor had
in fact been previously confirmed in an earlier case20 by this Court which found it to be serving, among
others, a university, an international bank, a big local bank, a hospital center, government agencies, etc."

In stark contrast to the case at bar, while petitioner steadfastly asserted before the Labor Arbiter and the
NLRC that Synergy has a substantial capital to engage in legitimate contracting, it failed to present
evidence thereon. As the NLRC held:

The decision of the Labor Arbiter merely mentioned on page 5 of his decision that respondent
SYNERGY has substantial capital, but there is no showing in the records as to how much is that
capital. Neither had respondents shown that SYNERGY has such substantial capital. x x
x21 (Underscoring supplied)

It was only after the appellate court rendered its challenged Decision of September 29, 2002 when
petitioner, in its Motion for Reconsideration of the decision, sought to prove, for the first time, Synergy's
substantial capitalization by attaching photocopies of Synergy's financial statements, e.g., balance sheets,
statements of income and retained earnings, marked as "Annexes 'A' - 'A-4.'"22

More significantly, however, is that respondents worked alongside petitioner's regular employees who
were performing identical work.23 As San Miguel Corporation v. Aballa24 and Dole Philippines, Inc. v. Esteva,
et al.25teach, such is an indicium of labor-only contracting.

For labor-only contracting to exist, Section 5 of D.O. No. 18-02 which requires any of two elements to be
present is, for convenience, re-quoted:
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(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. (Emphasis and CAPITALIZATION supplied)

Even if only one of the two elements is present then, there is labor-only contracting.

The control test element under the immediately-quoted paragraph (ii), which was not present in the old
Implementing Rules (Department Order No. 10, Series of 1997),26 echoes the prevailing jurisprudential
trend27elevating such element as a primary determinant of employer-employee relationship in job
contracting agreements.

One who claims to be an independent contractor has to prove that he contracted to do the work
according to his own methods and without being subject to the employer's control except only as to the
results.28

While petitioner claimed that it was Synergy's supervisors who actually supervised respondents, it failed to
present evidence thereon. It did not even identify who were the Synergy supervisors assigned at the
workplace.

Even the parties' Agreement does not lend support to petitioner's claim, thus:

Section 6. Qualified and Experienced Worker: Owner's Right to Dismiss Workers.

CONTRACTOR shall employ capable and experienced workers and foremen to carry out the
loading, unloading and delivery Work as well as provide all equipment, loading, unloading and
delivery equipment, materials, supplies and tools necessary for the performance of the Work.
CONTRACTOR shall upon OWNER'S request furnish the latter with information regarding the
qualifications of the former's workers, to prove their capability and experience. Contractor shall
require all its workers, employees, suppliers and visitors to comply with OWNER'S rules,
regulations, procedures and directives relative to the safety and security of OWNER'S
premises, properties and operations. For this purpose, CONTRACTOR shall furnish its
employees and workers identification cards to be countersigned by OWNER and uniforms
to be approved by OWNER. OWNER may require CONTRACTOR to dismiss immediately and
prohibit entry into OWNER'S premises of any person employed therein by CONTRACTOR
who in OWNER'S opinion is incompetent or misconducts himself or does not comply with
OWNER'S reasonable instructions and requests regarding security, safety and other matters and
such person shall not again be employed to perform the services hereunder without OWNER'S
permission.29 (Underscoring partly in the original and partly supplied; emphasis supplied)

Petitioner in fact admitted that it fixes the work schedule of respondents as their work was dependent on
the frequency of plane arrivals.30 And as the NLRC found, petitioner's managers and supervisors approved
respondents' weekly work assignments and respondents and other regular PAL employees were all
referred to as "station attendants" of the cargo operation and airfreight services of petitioner. 31
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Respondents having performed tasks which are usually necessary and desirable in the air transportation
business of petitioner, they should be deemed its regular employees and Synergy as a labor-only
contractor.32

The express provision in the Agreement that Synergy was an independent contractor and there would be
"no employer-employee relationship between [Synergy] and/or its employees on one hand, and
[petitioner] on the other hand" is not legally binding and conclusive as contractual provisions are not valid
determinants of the existence of such relationship. For it is the totality of the facts and surrounding
circumstances of the case33 which is determinative of the parties' relationship.

Respecting the dismissal on November 15, 199234 of Auxtero, a regular employee of petitioner who had
been working as utility man/helper since November 1988, it is not legally justified for want of just or
authorized cause therefor and for non-compliance with procedural due process. Petitioner's claim that he
abandoned his work does not persuade.35 The elements of abandonment being (1) the failure to report
for work or absence without valid or justifiable reason, and (2) a clear intention to sever the employer-
employee relationship manifested by some overt acts,36 the onus probandi lies with petitioner which,
however, failed to discharge the same.

Auxtero, having been declared to be a regular employee of petitioner, and found to be illegally dismissed
from employment, should be entitled to salary differential37 from the time he rendered one year of service
until his dismissal, reinstatement plus backwages until the finality of this decision. 38 In view, however, of
the long period of time39 that had elapsed since his dismissal on November 15, 1992, it would be
appropriate to award separation pay of one (1) month salary for each year of service, in lieu of
reinstatement.40

As regards the remaining respondents, the Court affirms the ruling of both the NLRC and the appellate
court, ordering petitioner to accept them as its regular employees and to give each of them the salaries,
allowances and other employment benefits and privileges of a regular employee under the pertinent
Collective Bargaining Agreement.

Petitioner claims, however, that it has become impossible for it to comply with the orders of the NLRC and
the Court of Appeals, for during the pendency of this case, it was forced to reduce its personnel due to
heavy losses caused by economic crisis and the pilots' strike of June 5, 1998. 41 Hence, there are no
available positions where respondents could be placed.

And petitioner informs that "the employment contracts of all if not most of the respondents . . . were
terminated by Synergy effective 30 June 1998 when petitioner terminated its contract with Synergy."42

Other than its bare allegations, petitioner presented nothing to substantiate its impossibility of
compliance. In fact, petitioner waived this defense by failing to raise it in its Memorandum filed on June
14, 1999 before the Court of Appeals.43 Further, the notice of termination in 1998 was in disregard of a
subsisting temporary restraining order44to preserve the status quo, issued by this Court in 1996 before it
referred the case to the Court of Appeals in January 1999. So as to thwart the attempt to subvert the
implementation of the assailed decision, respondents are deemed to be continuously employed by
petitioner, for purposes of computing the wages and benefits due respondents.

Finally, it must be stressed that respondents, having been declared to be regular employees of petitioner,
Synergy being a mere agent of the latter, had acquired security of tenure. As such, they could only be
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dismissed by petitioner, the real employer, on the basis of just or authorized cause, and with observance
of procedural due process.

WHEREFORE, the Court of Appeals Decision of September 29, 2000 is AFFIRMED with MODIFICATION.

Petitioner PHILIPPINE AIRLINES, INC. is ordered to:

(a) accept respondents ENRIQUE LIGAN, EMELITO SOCO, ALLAN PANQUE, JOLITO OLIVEROS, RICHARD
GONCER, NONILON PILAPIL, AQUILINO YBANEZ, BERNABE SANDOVAL, RUEL GONCER, VIRGILIO P.
CAMPOS, JR., ARTHUR M. CAPIN, RAMEL BERNARDES, LORENZO BUTANAS, BENSON CARESUSA, JEFFREY
LLENOS, ROQUE PILAPIL, ANTONIO M. PAREJA, CLEMENTE R. LUMAYNO, NELSON TAMPUS, ROLANDO
TUNACAO, CHERRIE ALEGRES, EDUARDO MAGDADARAUG, NELSON M. DULCE and ALLAN BENTUZAL as
its regular employees in their same or substantially equivalent positions, and pay the wages and benefits
due them as regular employees plus salary differential corresponding to the difference between the
wages and benefits given them and those granted to petitioner's other regular employees of the same
rank; and

(b) pay respondent BENEDICTO AUXTERO salary differential; backwages from the time of his dismissal
until the finality of this decision; and separation pay, in lieu of reinstatement, equivalent to one (1) month
pay for every year of service until the finality of this decision.

There being no data from which this Court may determine the monetary liabilities of petitioner, the case is
REMANDED to the Labor Arbiter solely for that purpose.

SO ORDERED.
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G.R. No. 149011 June 28, 2005

SAN MIGUEL CORPORATION, petitioner

vs.

PROSPERO A. ABALLA, BONNY J. ABARING, EDWIN M. ADLA-ON, ALVIN C. ALCALDE, CELANIO D.

ARROLLADO, EDDIE A. ARROLLADO, REYNALDO T. ASONG, RENE A. ASPERA, JOEL D. BALATERIA,
JOSEPH D. BALATERIA, JOSE JOLLEN BALLADOS, WILFREDO B. BASAS, EDWIN E. BEATINGO,
SONNY V. BERONDO, CHRISTOPHER D. BRIONES, MARLON D. BRIONES, JOEL C. BOOC, ENRIQUE
CABALIDA, DIOSCORO R. CAHINOD, ERNESTO P. CAHINOD, RENANTE S. CAHINOD, RUDERICK R.
CALIXTON, RONILO C. CALVEZ, PANCHO CAÑETE, JUNNY CASTEL, JUDY S. CELESTE, ROMEO
CHUA, DANILO COBRA, ARMANDO C. DEDOYCO, JOEY R. DELA CRUZ, JOHN D. DELFIN, RENELITO
P. DEON, ARNEL C. DE PEDRO, ORLANDO DERDER, CLIFFORD A. DESPI, RAMIE A. DESPI, SR.,
VICTOR A. DESPI, ROLANDO L. DINGLE, ANTONIO D. DOLORFINO, LARRY DUMA-OP, NOEL
DUMOL, CHITO L. DUNGOG, RODERICK C. DUQUEZA, ROMMEL ESTREBOR, RIC E. GALPO,
MANSUETO GILLE, MAXIMO L. HILA-US, GERARDO J. JIMENEZ, ROBERTLY Y. HOFILEÑA, ROBERTO
HOFILEÑA, VICENTE INDENCIO, JONATHAN T. INVENTOR, PETER PAUL T. INVENTOR, JOEBERT G.
LAGARTO, RENATO LAMINA, ALVIN LAS POBRES, ALBERT LAS POBRES, LEONARD LEMONCHITO,
JERRY LIM, JOSE COLLY S. LUCERO, ROBERTO E. MARTIL, HERNANDO MATILLANO, VICENTE M.
MATILLANO, TANNY C. MENDOZA, WILLIAM P. NAVARRO, WILSON P. NAVARRO, LEO A. OLVIDO,
ROBERTO G. OTERO, BIENVENIDO C. PAROCHILIN, REYNALDO C. PAROCHILIN, RICKY PALANOG,
BERNIE O. PILLO, ALBERTO O. PILLO, JOE-MARIE S. PUGNA, EDWIN G. RIBON, RAUL A. RUBIO,
HENRY S. SAMILLANO, EDGAR SANTIAGO, ROLAND B. SANTILLANA, ROLDAN V. SAYAM, JOSEPH
S. SAYSON, RENE SUARNABA, ELMAR TABLIGAN, JERRY D. TALITE, OSCAR TALITE, WINIFREDO
TALITE, CAMILO N. TEMPOROSA, JOSE TEMPOROSA, RANDY TINGALA, TRISTAN A. TINGSON,
ROGELIO TOMESA, DIONISE A. TORMIS, ADELINO C. UNTAL, FELIX T. UNTAL, RONILO E. VISTA,
JOAN C. VIYO and JOSE JOFER C. VIYO and the COURT OF APPEALS, respondents.

CARPIO-MORALES, J.:

Petitioner San Miguel Corporation (SMC), represented by its Assistant Vice President and Visayas Area
Manager for Aquaculture Operations Leopoldo S. Titular, and Sunflower Multi-Purpose Cooperative
(Sunflower), represented by the Chairman of its Board of Directors Roy G. Asong, entered into a one-year
Contract of Services1 commencing on January 1, 1993, to be renewed on a month to month basis until
terminated by either party. The pertinent provisions of the contract read:

1. The cooperative agrees and undertakes to perform and/or provide for the company, on a non-exclusive
basis for a period of one year the following services for the Bacolod Shrimp Processing Plant:

A. Messengerial/Janitorial

B. Shrimp Harvesting/Receiving
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C. Sanitation/Washing/Cold Storage2

2. To carry out the undertaking specified in the immediately preceding paragraph, the cooperative shall
employ the necessary personnel and provide adequate equipment, materials, tools and apparatus, to
efficiently, fully and speedily accomplish the work and services undertaken by the cooperative. xxx

3. In consideration of the above undertaking the company expressly agrees to pay the cooperative the
following rates per activity:

A. Messengerial/Janitorial Monthly Fixed Service Charge of: Nineteen Thousand Five Hundred Pesos Only
(P19,500.00)

B. Harvesting/Shrimp Receiving. – Piece rate of P0.34/kg. Or P100.00 minimum per person/activity

whichever is higher, with provisions as follows:

P25.00 Fixed Fee per person

Additional meal allowance P15.00 every meal time in case harvest duration exceeds one meal.

This will be pre-set every harvest based on harvest plan approved by the Senior Buyer.

C. Sanitation/Washing and Cold Storage P125.00/person for 3 shifts.

One-half of the payment for all services rendered shall be payable on the fifteenth and the other half, on
the end of each month. The cooperative shall pay taxes, fees, dues and other impositions that shall
become due as a result of this contract.

The cooperative shall have the entire charge, control and supervision of the work and services herein
agreed upon. xxx

4. There is no employer-employee relationship between the company and the cooperative, or the
cooperative and any of its members, or the company and any members of the cooperative. The
cooperative is an association of self-employed members, an independent contractor, and an
entrepreneur. It is subject to the control and direction of the company only as to the result to be
accomplished by the work or services herein specified, and not as to the work herein contracted. The
cooperative and its members recognize that it is taking a business risk in accepting a fixed service fee to
provide the services contracted for and its realization of profit or loss from its undertaking, in relation to
all its other undertakings, will depend on how efficiently it deploys and fields its members and how they
perform the work and manage its operations.

5. The cooperative shall, whenever possible, maintain and keep under its control the premises where the
work under this contract shall be performed.

6. The cooperative shall have exclusive discretion in the selection, engagement and discharge of its
member-workers or otherwise in the direction and control thereof. The determination of the wages,
salaries and compensation of the member-workers of the cooperative shall be within its full control. It is
further understood that the cooperative is an independent contractor, and as such, the cooperative agrees
to comply with all the requirements of all pertinent laws and ordinances, rules and regulations. Although it
is understood and agreed between the parties hereto that the cooperative, in the performance of its
obligations, is subject to the control or direction of the company merely as a (sic) result to be
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accomplished by the work or services herein specified, and not as to the means and methods of
accomplishing such result, the cooperative hereby warrants that it will perform such work or services in
such manner as will be consistent with the achievement of the result herein contracted for.

8. The cooperative undertakes to pay the wages or salaries of its member-workers, as well as all benefits,
premiums and protection in accordance with the provisions of the labor code, cooperative code and other
applicable laws and decrees and the rules and regulations promulgated by competent authorities,
assuming all responsibility therefor.

The cooperative further undertakes to submit to the company within the first ten (10) days of every
month, a statement made, signed and sworn to by its duly authorized representative before a notary
public or other officer authorized by law to administer oaths, to the effect that the cooperative has paid all
wages or salaries due to its employees or personnel for services rendered by them during the month
immediately preceding, including overtime, if any, and that such payments were all in accordance with the
requirements of law.

12. Unless sooner terminated for the reasons stated in paragraph 9 this contract shall be for a period of
one (1) year commencing on January 1, 1993. Thereafter, this Contract will be deemed renewed on a
month-to-month basis until terminated by either party by sending a written notice to the other at least
thirty (30) days prior to the intended date of termination.

xxx3 (Underscoring supplied)

Pursuant to the contract, Sunflower engaged private respondents to, as they did, render services at SMC’s
Bacolod Shrimp Processing Plant at Sta. Fe, Bacolod City. The contract was deemed renewed by the
parties every month after its expiration on January 1, 1994 and private respondents continued to perform
their tasks until September 11, 1995.

In July 1995, private respondents filed a complaint before the NLRC, Regional Arbitration Branch No. VI,
Bacolod City, praying to be declared as regular employees of SMC, with claims for recovery of all benefits
and privileges enjoyed by SMC rank and file employees.

Private respondents subsequently filed on September 25, 1995 an Amended Complaint4 to include illegal
dismissal as additional cause of action following SMC’s closure of its Bacolod Shrimp Processing Plant on
September 15, 19955 which resulted in the termination of their services.

SMC filed a Motion for Leave to File Attached Third Party Complaint6 dated November 27, 1995 to
implead Sunflower as Third Party Defendant which was, by Order7 of December 11, 1995, granted by
Labor Arbiter Ray Alan T. Drilon.

In the meantime, on September 30, 1996, SMC filed before the Regional Office at Iloilo City of the
Department of Labor and Employment (DOLE) a Notice of Closure8 of its aquaculture operations effective
on even date, citing serious business losses.

By Decision of September 23, 1997, Labor Arbiter Drilon dismissed private respondents’ complaint for lack
of merit, ratiocinating as follows:
13

We sustain the stand of the respondent SMC that it could properly exercise its management prerogative
to contract out the preparation and processing aspects of its aquaculture operations. Judicial notice has
already been taken regarding the general practice adopted in government and private institutions and
industries of hiring independent contractors to perform special services. xxx

Indeed, the law allows job contracting. Job contracting is permissible under the Labor Code under specific
conditions and we do not see how this activity could not be legally undertaken by an independent service
cooperative like the third-party respondent herein.

There is no basis to the demand for regularization simply on the theory that complainants performed
activities which are necessary and desirable in the business of respondent. It has been held that the
definition of regular employees as those who perform activities which are necessary and desirable for the
business of the employer is not always determinative because any agreement may provide for one (1)
party to render services for and in behalf of another for a consideration even without being hired as an
employee.

The charge of the complainants that third-party respondent is a mere labor-only contractor is a sweeping
generalization and completely unsubstantiated. xxx In the absence of clear and convincing evidence
showing that third-party respondent acted merely as a labor only contractor, we are firmly convinced of
the legitimacy and the integrity of its service contract with respondent SMC.

In the same vein, the closure of the Bacolod Shrimp Processing Plant was a management decision purely
dictated by economic factors which was (sic) mainly serious business losses. The law recognizes the right
of the employer to close his business or cease his operations for bonafide reasons, as much as it
recognizes the right of the employer to terminate the employment of any employee due to closure or
cessation of business operations, unless the closing is for the purpose of circumventing the provisions of
the law on security of tenure. The decision of respondent SMC to close its Bacolod Shrimp Processing
Plant, due to serious business losses which has (sic) clearly been established, is a management prerogative
which could hardly be interfered with.

xxx The closure did affect the regular employees and workers of the Bacolod Processing Plant, who were
accordingly terminated following the legal requisites prescribed by law. The closure, however, in so far as
the complainants are concerned, resulted in the termination of SMC’s service contract with their
cooperative xxx9 (Underscoring supplied)

Private respondents appealed to the NLRC.

By Decision of December 29, 1998, the NLRC dismissed the appeal for lack of merit, it finding that third
party respondent Sunflower was an independent contractor in light of its observation that "[i]n all the
activities of private respondents, they were under the actual direction, control and supervision of third
party respondent Sunflower, as well as the payment of wages, and power of dismissal."10

Private respondents’ Motion for Reconsideration11 having been denied by the NLRC for lack of merit by
Resolution of September 10, 1999, they filed a petition for certiorari12 before the Court of Appeals (CA).

Before the CA, SMC filed a Motion to Dismiss13 private respondents’ petition for non-compliance with the
Rules on Civil Procedure and failure to show grave abuse of discretion on the part of the NLRC.
14

SMC subsequently filed its Comment14 to the petition on March 30, 2000.

By Decision of February 7, 2001, the appellate court reversed the NLRC decision and accordingly found for
private respondents, disposing as follows:

WHEREFORE, the petition is GRANTED. Accordingly, judgment is hereby RENDERED: (1) REVERSING and
SETTING ASIDE both the 29 December 1998 decision and 10 September 1999 resolution of the National
Labor Relations Commission (NLRC), Fourth Division, Cebu City in NLRC Case No. V-0361-97 as well as the
23 September 1997 decision of the labor arbiter in RAB Case No. 06-07-10316-95; (2) ORDERING the
respondent, San Miguel Corporation, to GRANT petitioners: (a) separation pay in accordance with the
computation given to the regular SMC employees working at its Bacolod Shrimp Processing Plant with full
backwages, inclusive of allowances and other benefits or their monetary equivalent, from 11 September
1995, the time their actual compensation was withheld from them, up to the time of the finality of this
decision; (b) differentials pays (sic) effective as of and from the time petitioners acquired regular
employment status pursuant to the disquisition mentioned above, and all such other and further benefits
as provided by applicable collective bargaining agreement(s) or other relations, or by law, beginning such
time up to their termination from employment on 11 September 1995; and ORDERING private respondent
SMC to PAY unto the petitioners attorney’s fees equivalent to ten (10%) percent of the total award.

No pronouncement as to costs.

SO ORDERED.15 (Underscoring supplied)

Justifying its reversal of the findings of the labor arbiter and the NLRC, the appellate court reasoned:

Although the terms of the non-exclusive contract of service between SMC and [Sunflower] showed a clear
intent to abstain from establishing an employer-employee relationship between SMC and [Sunflower] or
the latter’s members, the extent to which the parties successfully realized this intent in the light of the
applicable law is the controlling factor in determining the real and actual relationship between or among
the parties.

With respect to the power to control petitioners’ conduct, it appears that petitioners were under the direct
control and supervision of SMC supervisors both as to the manner they performed their functions and as
to the end results thereof. It was only after petitioners lodged a complaint to have their status declared as
regular employees of SMC that certain members of [Sunflower] began to countersign petitioners’ daily
time records to make it appear that they (petitioners) were under the control and supervision of
[Sunflower] team leaders (rollo, pp. 523-527). xxx

Even without these instances indicative of control by SMC over the petitioners, it is safe to assume that
SMC would never have allowed the petitioners to work within its premises, using its own facilities,
equipment and tools, alongside SMC employees discharging similar or identical activities unless it
exercised a substantial degree of control and supervision over the petitioners not only as to the manner
they performed their functions but also as to the end results of such functions.

xxx it becomes apparent that [Sunflower] and the petitioners do not qualify as independent contractors.
[Sunflower] and the petitioners did not have substantial capital or investment in the form of tools,
equipment, implements, work premises, et cetera necessary to actually perform the service under their
own account, responsibility, and method. The only "work premises" maintained by [Sunflower] was a small
office within the confines of a small "carinderia" or refreshment parlor owned by the mother of its chair,
15

Roy Asong; the only equipment it owned was a typewriter (rollo, pp. 525-525) and, the only assets it
provided SMC were the bare bodies of its members, the petitioners herein (rollo, p. 523).

In addition, as shown earlier, petitioners, who worked inside the premises of SMC, were under the control
and supervision of SMC both as to the manner and method in discharging their functions and as to the
results thereof.

Besides, it should be taken into account that the activities undertaken by the petitioners as cleaners,
janitors, messengers and shrimp harvesters, packers and handlers were directly related to the aquaculture
business of SMC (See Guarin vs. NLRC, 198 SCRA 267, 273). This is confirmed by the renewal of the service
contract from January 1993 to September 1995, a period of close to three (3) years.

Moreover, the petitioners here numbering ninety seven (97), by itself, is a considerable workforce and
raises the suspicion that the non-exclusive service contract between SMC and [Sunflower] was "designed
to evade the obligations inherent in an employer-employee relationship" (See Rhone-Poulenc
Agrochemicals Philippines, Inc. vs. NLRC, 217 SCRA 249, 259).

Equally suspicious is the fact that the notary public who signed the by-laws of [Sunflower] and its
[Sunflower] retained counsel are both partners of the local counsel of SMC (rollo, p. 9).

With these observations, no other logical conclusion can be reached except that [Sunflower] acted as an
agent of SMC, facilitating the manpower requirements of the latter, the real employer of the petitioners.
We simply cannot allow these two entities through the convenience of a non-exclusive service contract to
stipulate on the existence of employer-employee relation. Such existence is a question of law which
cannot be made the subject of agreement to the detriment of the petitioners (Tabas vs. California
Manufacturing, Inc., 169 SCRA 497, 500).

There being a finding of "labor-only" contracting, liability must be shouldered either by SMC or
[Sunflower] or shared by both (See Tabas vs. California Manufacturing, Inc., supra, p. 502). SMC however
should be held solely liable for [Sunflower] became non-existent with the closure of the aquaculture
business of SMC.

Furthermore, since the closure of the aquaculture operations of SMC appears to be valid, reinstatement is
no longer feasible. Consistent with the pronouncement in Bustamante, et al., vs. NLRC, G.R. No. 111651,
28 November 1996, petitioners are thus entitled to separation pay (in the computation similar to those
given to regular SMC employees at its Bacolod Shrimp Processing Plant) "with full backwages, inclusive of
allowances and other benefits or their monetary equivalent, from the time their actual compensation was
withheld from them" up to the time of the finality of this decision. This is without prejudice to differentials
pays (sic) effective as of and from the time petitioners acquired regular employment status pursuant to
the discussion mentioned above, and all such other and further benefits as provided by applicable
collective bargaining agreement(s) or other relations, or by law, beginning such time up to their
termination from employment on 11 September 1995.16 (Emphasis and underscoring supplied)

SMC’s Motion for Reconsideration17 having been denied for lack of merit by Resolution of July 11, 2001,
it comes before this Court via the present petition for review on certiorari assigning to the CA the
following errors:
16

THE COURT OF APPEALS GRAVELY ERRED IN GIVING DUE COURSE AND GRANTING RESPONDENTS’
PATENTLY DEFECTIVE PETITION FOR CERTIORARI. IN DOING SO, THE COURT OF APPEALS DEPARTED
FROM THE ACCEPTED AND USUAL COURSE OF JUDICIAL PROCEEDINGS.

II

THE COURT OF APPEALS GRAVELY ERRED IN RECOGNIZING ALL THE RESPONDENTS AS COMPLAINANTS
IN THE CASE BEFORE THE LABOR ARBITER. IN DOING SO, THE COURT OF APPEALS DECIDED THIS CASE
IN A MANNER NOT IN ACCORD WITH LAW OR WITH THE APPLICABLE DECISIONS OF THE SUPREME
COURT.

III

THE COURT OF APPEALS GRAVELY ERRED IN FINDING THAT RESPONDENTS ARE EMPLOYEES OF SMC.

IV

THE COURT OF APPEALS GRAVELY ERRED IN NOT FINDNG (sic) THAT RESPONDENTS ARE NOT ENTITLED
TO ANY RELIEF. THE CLOSURE OF THE BACOLOD SHRIMP PROCESSING PLANT WAS DUE TO SERIOUS
BUSINESS LOSSES.18 (Underscoring supplied)

SMC bewails the failure of the appellate court to outrightly dismiss the petition for certiorari as only three
out of the ninety seven named petitioners signed the verification and certification against forum-
shopping.

While the general rule is that the certificate of non-forum shopping must be signed by all the plaintiffs or
petitioners in a case and the signature of only one of them is insufficient,19 this Court has stressed that
the rules on forum shopping, which were designed to promote and facilitate the orderly administration of
justice, should not be interpreted with such absolute literalness as to subvert its own ultimate and
legitimate objective.20 Strict compliance with the provisions regarding the certificate of non-forum
shopping merely underscores its mandatory nature in that the certification cannot be altogether
dispensed with or its requirements completely disregarded.21 It does not, however, thereby interdict
substantial compliance with its provisions under justifiable circumstances.22

Thus in the recent case of HLC Construction and Development Corporation v. Emily Homes Subdivision
Homeowners Association,23 this Court held:

Respondents (who were plaintiffs in the trial court) filed the complaint against petitioners as a group,
represented by their homeowners’ association president who was likewise one of the plaintiffs, Mr.
Samaon M. Buat. Respondents raised one cause of action which was the breach of contractual obligations
and payment of damages. They shared a common interest in the subject matter of the case, being the
aggrieved residents of the poorly constructed and developed Emily Homes Subdivision. Due to the
collective nature of the case, there was no doubt that Mr. Samaon M. Buat could validly sign the certificate
of non-forum shopping in behalf of all his co-plaintiffs. In cases therefore where it is highly impractical to
require all the plaintiffs to sign the certificate of non-forum shopping, it is sufficient, in order not to defeat
the ends of justice, for one of the plaintiffs, acting as representative, to sign the certificate provided that
xxx the plaintiffs share a common interest in the subject matter of the case or filed the case as a
"collective," raising only one common cause of action or defense.24 (Emphasis and underscoring supplied)
17

Given the collective nature of the petition filed before the appellate court by herein private respondents,
raising one common cause of action against SMC, the execution by private respondents Winifredo Talite,
Renelito Deon and Jose Temporosa in behalf of all the other private respondents of the certificate of non-
forum shopping constitutes substantial compliance with the Rules.25 That the three indeed represented
their co-petitioners before the appellate court is, as it correctly found, "subsequently proven to be true as
shown by the signatures of the majority of the petitioners appearing in their memorandum filed before
Us."26

Additionally, the merits of the substantive aspects of the case may also be deemed as "special
circumstance" or "compelling reason" to take cognizance of a petition although the certification against
forum shopping was not executed and signed by all of the petitioners.27

SMC goes on to argue that the petition filed before the CA is fatally defective as it was not accompanied
by "copies of all pleadings and documents relevant and pertinent thereto" in contravention of Section 1,
Rule 65 of the Rules of Court.28

This Court is not persuaded. The records show that private respondents appended the following
documents to their petition before the appellate court: the September 23, 1997 Decision of the Labor
Arbiter,29 their Notice of Appeal with Appeal Memorandum dated October 16, 1997 filed before the
NLRC,30 the December 29, 1998 NLRC D E C I S I O N,31 their Motion for Reconsideration dated March
26, 1999 filed with the NLRC32 and the September 10, 1999 NLRC Resolution.33

It bears stressing at any rate that it is the appellate court which ultimately determines if the supporting
documents are sufficient to make out a prima facie case.34 It discerns whether on the basis of what have
been submitted it could already judiciously determine the merits of the petition.35 In the case at bar, the
CA found that the petition was adequately supported by relevant and pertinent documents.

At all events, this Court has allowed a liberal construction of the rule on the accomplishment of a
certificate of non-forum shopping in the following cases: (1) where a rigid application will result in
manifest failure or miscarriage of justice; (2) where the interest of substantial justice will be served; (3)
where the resolution of the motion is addressed solely to the sound and judicious discretion of the court;
and (4) where the injustice to the adverse party is not commensurate with the degree of his
thoughtlessness in not complying with the procedure prescribed.36

Rules of procedure should indeed be viewed as mere tools designed to facilitate the attainment of justice.
Their strict and rigid application, which would result in technicalities that tend to frustrate rather than
promote substantial justice, must always be eschewed.37

SMC further argues that the appellate court exceeded its jurisdiction in reversing the decisions of the
labor arbiter and the NLRC as "findings of facts of quasi-judicial bodies like the NLRC are accorded great
respect and finality," and that this principle acquires greater weight and application in the case at bar as
the labor arbiter and the NLRC have the same factual findings.

The general rule, no doubt, is that findings of facts of an administrative agency which has acquired
expertise in the particular field of its endeavor are accorded great weight on appeal.38 The rule is not
absolute and admits of certain well-recognized exceptions, however. Thus, when the findings of fact of the
labor arbiter and the NLRC are not supported by substantial evidence or their judgment was based on a
18

misapprehension of facts, the appellate court may make an independent evaluation of the facts of the
case.39

SMC further faults the appellate court in giving due course to private respondents’ petition despite the
fact that the complaint filed before the labor arbiter was signed and verified only by private respondent
Winifredo Talite; that private respondents’ position paper40 was verified by only six41 out of the ninety
seven complainants; and that their Joint-Affidavit42 was executed only by twelve43 of the complainants.

Specifically with respect to the Joint-Affidavit of private respondents, SMC asserts that it should not have
been considered by the appellate court in establishing the claims of those who did not sign the same,
citing this Court’s ruling in Southern Cotabato Development and Construction, Inc. v. NLRC.44

SMC’s position does not lie.

A perusal of the complaint shows that the ninety seven complainants were being represented by their
counsel of choice. Thus the first sentence of their complaint alleges: "xxx complainants, by counsel and
unto this Honorable Office respectfully state xxx." And the complaint was signed by Atty. Jose Max S. Ortiz
as "counsel for the complainants." Following Section 6, Rule III of the 1990 Rules of Procedure of the
NLRC, now Section 7, Rule III of the 1999 NLRC Rules, Atty. Ortiz is presumed to be properly authorized by
private respondents in filing the complaint.

That the verification wherein it is manifested that private respondent Talite was one of the complainants
and was causing the preparation of the complaint "with the authority of my co-complainants" indubitably
shows that Talite was representing the rest of his co-complainants in signing the verification in
accordance with Section 7, Rule III of the 1990 NLRC Rules, now Section 8, Rule 3 of the 1999 NLRC Rules,
which states:

Section 7. Authority to bind party. – Attorneys and other representatives of parties shall have authority to
bind their clients in all matters of procedure; but they cannot, without a special power of attorney or
express consent, enter into a compromise agreement with the opposing party in full or partial discharge
of a client’s claim. (Underscoring supplied)

As regards private respondents’ position paper which bore the signatures of only six of them, appended
to it was an Authority/Confirmation of Authority45 signed by the ninety one others conferring authority to
their counsel "to file RAB Case No. 06-07-10316-95, entitled Winifredo Talite et al. v. San Miguel
Corporation presently pending before the sala of Labor Arbiter Ray Alan Drilon at the NLRC Regional
Arbitration Branch No. VI in Bacolod City" and appointing him as their retained counsel to represent them
in the said case.

That there has been substantial compliance with the requirement on verification of position papers under
Section 3, Rule V of the 1990 NLRC Rules of Procedure46 is not difficult to appreciate in light of the
provision of Section 7, Rule V of the 1990 NLRC Rules, now Section 9, Rule V of the 1999 NLRC Rules
which reads:

Section 7. Nature of Proceedings. – The proceedings before a Labor Arbiter shall be non-litigious in
nature. Subject to the requirements of due process, the technicalities of law and procedure and the rules
obtaining in the courts of law shall not strictly apply thereto. The Labor Arbiter may avail himself of all
reasonable means to ascertain the facts of the controversy speedily, including ocular inspection and
examination of well-informed persons. (underscoring supplied)
19

As regards private respondents’ Joint-Affidavit which is being assailed in view of the failure of some
complainants to affix their signatures thereon, this Court quotes with approval the appellate court’s
ratiocinations:

A perusal of the Southern Cotabato Development Case would reveal that movant did not quote the whole
text of paragraph 5 on page 865 of 280 SCRA. The whole paragraph reads:

"Clearly then, as to those who opted to move for the dismissal of their complaints, or did not submit their
affidavits nor appear during trial and in whose favor no other independent evidence was adduced, no
award for back wages could have been validly and properly made for want of factual basis. There is no
showing at all that any of the affidavits of the thirty-four (34) complainants were offered as evidence for
those who did not submit their affidavits, or that such affidavits had any bearing at all on the rights and
interest of the latter. In the same vein, private respondent’s position paper was not of any help to these
delinquent complainants.

The implication is that as long as the affidavits of the complainants were offered as evidence for those
who did not submit theirs, or the affidavits were material and relevant to the rights and interest of the
latter, such affidavits may be sufficient to establish the claims of those who did not give their affidavits.

Here, a reading of the joint affidavit signed by twelve (12) of the ninety-seven (97) complainants
(petitioners herein) would readily reveal that the affidavit was offered as evidence not only for the
signatories therein but for all of the complainants. (These ninety-seven (97) individuals were previously
identified during the mandatory conference as the only complainants in the proceedings before the labor
arbiter) Moreover, the affidavit touched on the common interest of all of the complainants as it supported
their claim of the existence of an employer-employee relationship between them and respondent SMC.
Thus, the said affidavit was enough to prove the claims of the rest of the complainants.47 (Emphasis
supplied, underscoring in the original)

In any event, SMC is reminded that the rules of evidence prevailing in courts of law or equity do not
control proceedings before the Labor Arbiter. So Article 221 of the Labor Code enjoins:

ART. 221. Technical rules not binding and prior resort to amicable settlement. – In any proceeding before
the Commission or any of the Labor Arbiters, the rules of evidence prevailing in courts of law or equity
shall not be controlling and it is the spirit and intention of this Code that the Commission and its
members and the Labor Arbiters shall use every and all reasonable means to ascertain the facts in each
case speedily and objectively and without regard to technicalities of law or procedure, all in the interest of
due process. xxx

As such, their application may be relaxed to serve the demands of substantial justice.48

On the merits, the petition just the same fails.

SMC insists that private respondents are the employees of Sunflower, an independent contractor. On the
other hand, private respondents assert that Sunflower is a labor-only contractor.

Article 106 of the Labor Code provides:

20

ART. 106. Contractor or subcontracting. – Whenever an employer enters into a contract with another
person for the performance of the former’s work, the employees of the contractor and of the latter’s
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 the Code. In so prohibiting or restricting, 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 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 person 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.

Rule VIII-A, Book III of the Omnibus Rules Implementing the Labor Code, as amended by Department
Order No. 18, distinguishes between legitimate and labor-only contracting:

Section 3. Trilateral Relationship in Contracting Arrangements. In legitimate contracting, there exists a

trilateral relationship under which there is a contract for a specific job, work or service between the
principal and the contractor or subcontractor, and a contract of employment between the contractor or
subcontractor and its workers. Hence, there are three parties involved in these arrangements, the principal
which decides to farm out a job or service to a contractor or subcontractor, the contractor or
subcontractor which has the capacity to independently undertake the performance of the job, work or
service, and the contractual workers engaged by the contractor or subcontractor to accomplish the job,
work or service.

Section 5. Prohibition against labor-only contracting. Labor-only contracting Sis 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 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.
21

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 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 in reaching that end.

The test to determine the existence of independent contractorship is whether one claiming to be an
independent contractor has contracted to do the work according to his own methods and without being
subject to the control of the employer, except only as to the results of the work.49

In legitimate labor contracting, the law creates an employer-employee relationship for a limited purpose,
i.e., to ensure that the employees are paid their wages. The principal 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 principal employer is not responsible for any claim
made by the employees.50

In labor-only contracting, the statute creates an employer-employee relationship for a comprehensive

purpose: to prevent a circumvention of labor laws. The contractor is considered merely an agent of the
principal employer and the latter is responsible to the employees of the labor-only contractor as if such
employees had been directly employed by the principal employer.51

The Contract of Services between SMC and Sunflower shows that the parties clearly disavowed the
existence of an employer-employee relationship between SMC and private respondents. The language of
a contract is not, however, determinative of the parties’ relationship; rather it is the totality of the facts
and surrounding circumstances of the case.52 A party cannot dictate, by the mere expedient of a
unilateral declaration in a contract, the character of its business, i.e., whether as labor-only contractor or
job contractor, it being crucial that its character be measured in terms of and determined by the criteria
set by statute.53

SMC argues that Sunflower could not have been issued a certificate of registration as a cooperative if it
had no substantial capital.54

While indeed Sunflower was issued Certificate of Registration No. IL0-87555 on February 10, 1992 by the
Cooperative Development Authority, this merely shows that it had at least ₱2,000.00 in paid-up share
capital as mandated by Section 5 of Article 1456 of Republic Act No. 6938, otherwise known as the
Cooperative Code, which amount cannot be considered substantial capitalization.

What appears is that Sunflower does not have substantial capitalization or investment in the form of tools,
equipment, machineries, work premises and other materials to qualify it as an independent contractor.
22

On the other hand, it is gathered that the lot, building, machineries and all other working tools utilized by
private respondents in carrying out their tasks were owned and provided by SMC. Consider the following
uncontroverted allegations of private respondents in the Joint Affidavit:

[Sunflower], during the existence of its service contract with respondent SMC, did not own a single
machinery, equipment, or working tool used in the processing plant. Everything was owned and provided
by respondent SMC. The lot, the building, and working facilities are owned by respondent SMC. The
machineries and equipments (sic) like washer machine, oven or cooking machine, sizer machine, freezer,
storage, and chilling tanks, push carts, hydrolic (sic) jack, tables, and chairs were all owned by respondent
SMC. All the boxes, trays, molding pan used in the processing are also owned by respondent SMC. The
gloves and boots used by the complainants were also owned by respondent SMC. Even the mops, electric
floor cleaners, brush, hoose (sic), soaps, floor waxes, chlorine, liquid stain removers, lysol and the like used
by the complainants assigned as cleaners were all owned and provided by respondent SMC.

Simply stated, third-party respondent did not own even a small capital in the form of tools, machineries,
or facilities used in said prawn processing

The alleged office of [Sunflower] is found within the confines of a small "carinderia" or "refreshment" (sic)
owned by the mother of the Cooperative Chairman Roy Asong.

xxx In said . . . office, the only equipment used and owned by [Sunflower] was a typewriter. 57

And from the job description provided by SMC itself, the work assigned to private respondents was
directly related to the aquaculture operations of SMC. Undoubtedly, the nature of the work performed by
private respondents in shrimp harvesting, receiving and packing formed an integral part of the shrimp
processing operations of SMC. As for janitorial and messengerial services, that they are considered
directly related to the principal business of the employer58 has been jurisprudentially recognized.

Furthermore, Sunflower did not carry on an independent business or undertake the performance of its
service contract according to its own manner and method, free from the control and supervision of its
principal, SMC, its apparent role having been merely to recruit persons to work for SMC.

Thus, it is gathered from the evidence adduced by private respondents before the labor arbiter that their
daily time records were signed by SMC supervisors Ike Puentebella, Joemel Haro, Joemari Raca, Erwin
Tumonong, Edison Arguello, and Stephen Palabrica, which fact shows that SMC exercised the power of
control and supervision over its employees.59 And control of the premises in which private respondents
worked was by SMC. These tend to disprove the independence of the contractor.60

More. Private respondents had been working in the aqua processing plant inside the SMC compound
alongside regular SMC shrimp processing workers performing identical jobs under the same SMC
supervisors.61 This circumstance is another indicium of the existence of a labor-only contractorship.62

And as private respondents alleged in their Joint Affidavit which did not escape the observation of the CA,
no showing to the contrary having been proffered by SMC, Sunflower did not cater to clients other than
SMC,63 and with the closure of SMC’s Bacolod Shrimp Processing Plant, Sunflower likewise ceased to
exist. This Court’s ruling in San Miguel Corporation v. MAERC Integrated Services, Inc.64 is thus instructive.
23

xxx Nor do we believe MAERC to have an independent business. Not only was it set up to specifically
meet the pressing needs of SMC which was then having labor problems in its segregation division, none
of its workers was also ever assigned to any other establishment, thus convincing us that it was created
solely to service the needs of SMC. Naturally, with the severance of relationship between MAERC and SMC
followed MAERC’s cessation of operations, the loss of jobs for the whole MAERC workforce and the
resulting actions instituted by the workers.65 (Underscoring supplied)

All the foregoing considerations affirm by more than substantial evidence the existence of an employer-
employee relationship between SMC and private respondents.

Since private respondents who were engaged in shrimp processing performed tasks usually necessary or
desirable in the aquaculture business of SMC, they should be deemed regular employees of the latter66
and as such are entitled to all the benefits and rights appurtenant to regular employment.67 They should
thus be awarded differential pay corresponding to the difference between the wages and benefits given
them and those accorded SMC’s other regular employees.1awphi1.zw+

Respecting the private respondents who were tasked with janitorial and messengerial duties, this Court
quotes with approval the appellate court’s ruling thereon:

Those performing janitorial and messengerial services however acquired regular status only after
rendering one-year service pursuant to Article 280 of the Labor Code. Although janitorial and
messengerial services are considered directly related to the aquaculture business of SMC, they are
deemed unnecessary in the conduct of its principal business; hence, the distinction (See Coca Cola
Bottlers Phils., Inc. v. NLRC, 307 SCRA 131, 136-137 and Philippine Bank of Communications v. NLRC,
supra, p. 359).68

The law of course provides for two kinds of regular employees, namely: (1) those who are engaged to
perform activities which are usually necessary or desirable in the usual business or trade of the employer;
and (2) those who have rendered at least one year of service, whether continuous or broken, with respect
to the activity in which they are employed.69

As for those of private respondents who were engaged in janitorial and messengerial tasks, they fall under
the second category and are thus entitled to differential pay and benefits extended to other SMC regular
employees from the day immediately following their first year of service.70

Regarding the closure of SMC’s aquaculture operations and the consequent termination of private
respondents, Article 283 of the Labor Code provides:

ART. 283. Closure of establishment and reduction of personnel. – The employer may also terminate the
employment of any employee due to the installation of labor saving devices, redundancy, retrenchment to
prevent losses or the closing or cessation of operation of the establishment or undertaking unless the
closing is for the purpose of circumventing the provisions of this Title, by serving a written notice on the
workers and the Department of Labor and Employment at least one (1) month before the intended date
thereof. In case of termination due to the installation of labor saving devices or redundancy, the worker
affected thereby shall be entitled to a separation pay equivalent to at least his one (1) month pay or to at
least one (1) month pay for every year of service, whichever is higher. In case of retrenchment to prevent
losses and in cases of closures or cessation of operations of establishment or undertaking not due to
serious business losses or financial reverses, the separation pay shall be equivalent to one (1) month pay
24

or to at least one-half (1/2) month pay for every year of service, whichever is higher. A fraction of at least
six (6) months shall be considered one (1) whole year. (Underscoring supplied)

In the case at bar, a particular department under the SMC group of companies was closed allegedly due
to serious business reverses. This constitutes retrenchment by, and not closure of, the enterprise or the
company itself as SMC has not totally ceased operations but is still very much an on-going and highly
viable business concern.71

Retrenchment is a management prerogative consistently recognized and affirmed by this Court. It is,
however, subject to faithful compliance with the substantive and procedural requirements laid down by
law and jurisprudence.72

For retrenchment to be considered valid the following substantial requirements must be met: (a) the
losses expected should be substantial and not merely de minimis in extent; (b) the substantial losses
apprehended must be reasonably imminent such as can be perceived objectively and in good faith by the
employer; (c) the retrenchment must be reasonably necessary and likely to effectively prevent the
expected losses; and (d) the alleged losses, if already incurred, and the expected imminent losses sought
to be forestalled, must be proved by sufficient and convincing evidence.73

In the discharge of these requirements, it is the employer who has the onus, being in the nature of an
affirmative defense.74

Normally, the condition of business losses is shown by audited financial documents like yearly balance
sheets, profit and loss statements and annual income tax returns. The financial statements must be
prepared and signed by independent auditors failing which they can be assailed as self-serving
documents.75

In the case at bar, company losses were duly established by financial documents audited by Joaquin
Cunanan & Co. showing that the aquaculture operations of SMC’s Agribusiness Division accumulated
losses amounting to ₱145,848,172.00 in 1992 resulting in the closure of its Calatrava Aquaculture Center
in Negros Occidental, ₱11,393,071.00 in 1993 and ₱80,325,608.00 in 1994 which led to the closure of its
San Fernando Shrimp Processing Plant in Pampanga and the Bacolod Shrimp Processing Plant in 1995.

SMC has thus proven substantial business reverses justifying retrenchment of its employees.

For termination due to retrenchment to be valid, however, the law requires that written notices of the
intended retrenchment be served by the employer on the worker and on the DOLE at least one (1) month
before the actual date of the retrenchment,76 in order to give employees some time to prepare for the
eventual loss of their jobs, as well as to give DOLE the opportunity to ascertain the verity of the alleged
cause of termination.77

Private respondents, however, were merely verbally informed on September 10, 1995 by SMC Prawn
Manager Ponciano Capay that effective the following day or on September 11, 1995, they were no longer
to report for work as SMC would be closing its operations.78

Where the dismissal is based on an authorized cause under Article 283 of the Labor Code but the
employer failed to comply with the notice requirement, the sanction should be stiff as the dismissal
process was initiated by the employer’s exercise of his management prerogative, as opposed to a
dismissal based on a just cause under Article 282 with the same procedural infirmity where the sanction to
25

be imposed upon the employer should be tempered as the dismissal process was, in effect, initiated by an
act imputable to the employee.79

In light of the factual circumstances of the case at bar, this Court awards ₱50,000.00 to each private
respondent as nominal damages.

The grant of separation pay as an incidence of termination of employment due to retrenchment to

prevent losses is a statutory obligation on the part of the employer and a demandable right on the part of
the employee. Private respondents should thus be awarded separation pay equivalent to at least one (1)
month pay or to at least one-half month pay for every year of service, whichever is higher, as mandated
by Article 283 of the Labor Code or the separation pay awarded by SMC to other regular SMC employees
that were terminated as a result of the retrenchment, depending on which is most beneficial to private
respondents.

Considering that private respondents were not illegally dismissed, however, no backwages need be
awarded. It is well settled that backwages may be granted only when there is a finding of illegal
dismissal.80 The appellate court thus erred in awarding backwages to private respondents upon the
authority of Bustamante v. NLRC,81 what was involved in that case being one of illegal dismissal.

With respect to attorney’s fees, in actions for recovery of wages or where an employee was forced to
litigate and thus incurred expenses to protect his rights and interests,82 a maximum of ten percent (10%)
of the total monetary award83 by way of attorney’s fees is justifiable under Article 111 of the Labor
Code,84 Section 8, Rule VIII, Book III of its Implementing Rules,85 and paragraph 7, Article 2208 of the
Civil Code.86 Although an express finding of facts and law is still necessary to prove the merit of the
award, there need not be any showing that the employer acted maliciously or in bad faith when it
withheld the wages. There need only be a showing that the lawful wages were not paid accordingly, as in
this case.87

Absent any evidence showing that Sunflower has been dissolved in accordance with law, pursuant to Rule
VIII-A, Section 1988 of the Omnibus Rules Implementing the Labor Code, Sunflower is held solidarily liable
with SMC for all the rightful claims of private respondents.

WHEREFORE, the petition is DENIED. The assailed Decision dated February 7, 2001 and Resolution dated
July 11, 2001 of the Court of Appeals are AFFIRMED with MODIFICATION.

Petitioner San Miguel Corporation and Sunflower Multi-Purpose Cooperative are hereby ORDERED to
jointly and severally pay each private respondent differential pay from the time they became regular
employees up to the date of their termination; separation pay equivalent to at least one (1) month pay or
to at least one-half month pay for every year of service, whichever is higher, as mandated by Article 283 of
the Labor Code or the separation pay awarded by SMC to other regular SMC employees that were
terminated as a result of the retrenchment, depending on which is most beneficial to private respondents;
and ten percent (10%) attorney’s fees based on the herein modified award.

Petitioner San Miguel Corporation is further ORDERED to pay each private respondent the amount of
₱50,000.00, representing nominal damages for non-compliance with statutory due process.

The award of backwages is DELETED. SO ORDERED.

26

G.R. No. 145402 March 14, 2008

MERALCO INDUSTRIAL ENGINEERING SERVICES CORPORATION, Petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION, OFELIA P. LANDRITO GENERAL SERVICES and/or
OFELIA P. LANDRITO, Respondents.
CHICO-NAZARIO, J.:

Before this Court is a Petition for Review on Certiorari under Rule 45 of the 1997 Revised Rules of Civil
Procedure seeking to reverse and set aside (1) the Decision1 of the Court of Appeals in CA-G.R. SP No.
50806, dated 24 April 2000, which modified the Decision2 of the National Labor Relations Commission
(NLRC), dated 30 January 1996 in NLRC NCR CA No. 001737-91 (NLRC NCR Case No. 00-09-04432-89),
and thereby held the petitioner solidarily liable with the private respondents for the satisfaction of the
separation pay of the latter’s employees; and (2) the Resolution3 of the appellate court, dated 27
September 2000, in the same case which denied the petitioner’s Motion for Reconsideration.

Petitioner Meralco Industrial Engineering Services Corporation (MIESCOR) is a corporation duly organized
and existing under the laws of the Republic of the Philippines and a client of private respondents. Private
respondent Ofelia P. Landrito General Services (OPLGS) is a business firm engaged in providing and
rendering general services, such as janitorial and maintenance work to its clients, while private respondent
Ofelia P. Landrito is the Proprietor and General Manager of OPLGS.

The factual milieu of the present case is as follows:

On 7 November 1984, petitioner and private respondents executed Contract Order No. 166-84,4 whereby
the latter would supply the petitioner janitorial services, which include labor, materials, tools and
equipment, as well as supervision of its assigned employees, at petitioner’s Rockwell Thermal Plant in
Makati City. Pursuant thereto, private respondents assigned their 49 employees as janitors to petitioner’s
Rockwell Thermal Plant with a daily wage of ₱51.50 per employee.

On 20 September 1989, however, the aforesaid 49 employees (complainants) lodged a Complaint for
illegal deduction, underpayment, non-payment of overtime pay, legal holiday pay, premium pay for
holiday and rest day and night differentials5 against the private respondents before the Labor Arbiter. The
case was docketed as NLRC NCR Case No. 00-09-04432-89.

In view of the enactment of Republic Act No. 6727,6 the contract between the petitioner and the private
respondents was amended7 for the 10th time on 3 November 1989 to increase the minimum daily wage
per employee from ₱63.55 to ₱89.00 or ₱2,670.00 per month. Two months thereafter, or on 2 January
1990,8 petitioner sent a letter to private respondents informing them that effective at the close of
business hours on 31 January 1990, petitioner was terminating Contract Order No. 166-84. Accordingly, at
the end of the business hours on 31 January 1990, the complainants were pulled out from their work at
the petitioner’s Rockwell Thermal Plant. Thus, on 27 February 1990, complainants amended their
Complaint to include the charge of illegal dismissal and to implead the petitioner as a party respondent
therein.

Since the parties failed to settle amicably before the Labor Arbiter, they submitted their respective
position papers and other pleadings together with their documentary evidence. Thereafter, a Decision was
rendered by the Labor Arbiter on 26 March 1991, dismissing the Complaint against the petitioner for lack
27

of merit, but ordering the private respondents to pay the complainants the total amount of ₱487,287.07
representing unpaid wages, separation pay and overtime pay; as well as attorney’s fees in an amount
equivalent to 10% of the award or ₱48,728.70. All other claims of the complainants against the private
respondents were dismissed. 9

Feeling aggrieved, private respondents appealed the aforesaid Decision to the NLRC. Private respondents
alleged, among other things, that: (1) 48 of the 49 complainants had executed affidavits of desistance and
they had never attended any hearing nor given any authority to anyone to file a case on their behalf; (2)
the Labor Arbiter erred in not conducting a full-blown hearing on the case; (3) there is only one
complainant in that case who submitted a position paper on his own; (4) the complainants were not
constructively dismissed when they were not given assignments within a period of six months, but had
abandoned their jobs when they failed to report to another place of assignment; and (5) the petitioner,
being the principal, was solidarily liable with the private respondents for failure to make an adjustment on
the wages of the complainants.10 On 28 May 1993, the NLRC issued a Resolution11 affirming the
Decision of the Labor Arbiter dated 26 March 1991 with the modification that the petitioner was solidarily
liable with the private respondents, ratiocinating thus:

We, however, disagree with the dismissal of the case against [herein petitioner]. Under Art. 10712 of the
Labor Code of the Philippines, [herein petitioner] is considered an indirect employer and can be held
solidarily liable with [private respondents] as an independent contractor. Under Art. 109,13 for purposes
of determining the extent of its liability, [herein petitioner] is considered a direct employer, hence, it is
solidarily liable for complainant’s (sic) wage differentials and unpaid overtime. We find this situation
obtaining in this case in view of the failure of [private respondents] to pay in full the labor standard
benefits of complainants, in which case liability is limited thereto and does not extend to the
establishment of employer-employee relations.14 [Emphasis supplied].

Both private respondents and petitioner separately moved for reconsideration of the aforesaid Resolution
of the NLRC. In their Motion for Reconsideration, private respondents reiterated that the complainants
abandoned their work, so that private respondents should not be liable for separation pay; and that
petitioner, not private respondents, should be liable for complainants’ other monetary claims, i.e., for
wage differentials and unpaid overtime. The petitioner, in its own Motion for Reconsideration, asked that
it be excluded from liability. It averred that private respondents should be solely responsible for their acts
as it sufficiently paid private respondents all the benefits due the complainants.

On 30 July 1993, the NLRC issued an Order15 noting that based on the records of the case, the judgment
award in the amount of ₱487,287.07 was secured by a surety bond posted by the private respondents;16
hence, there was no longer any impediment to the satisfaction of the complainants’ claims. Resultantly,
the NLRC denied the private respondents’ Motion for Reconsideration. The NLRC likewise directed the
Labor Arbiter to enforce the monetary award against the private respondents’ surety bond and to
determine who should finally shoulder the liability therefor.17

Alleging grave abuse of discretion of the NLRC in its issuance of the Resolution and Order dated 28 May
1993 and 30 July 1993, respectively, private respondents filed before this Court a Petition for Certiorari
with prayer for the issuance of a writ of preliminary injunction. The same was docketed as G.R. No. 111506
entitled Ofelia Landrito General Services v. National Labor Relations Commission. The said Petition
suspended the proceedings before the Labor Arbiter.
28

On 23 May 1994, however, this Court issued a Resolution18 dismissing G.R. No. 111506 for failure of
private respondents to sufficiently show that the NLRC had committed grave abuse of discretion in
rendering its questioned judgment. This Court’s Resolution in G.R. No. 111506 became final and executory
on 25 July 1994.19

As a consequence thereof, the proceedings before the Labor Arbiter resumed with respect to the
determination of who should finally shoulder the liability for the monetary awards granted to the
complainants, in accordance with the NLRC Order dated 30 July 1993.

On 5 October 1994, the Labor Arbiter issued an Order,20 which reads:

As can be gleaned from the Resolution dated [28 May 1993], there is that necessity of clarifying the
respective liabilities of [herein petitioner] and [herein private respondents] insofar as the judgment award
in the total sum of ₱487,287.07 is concerned.

The judgment award in the total sum of ₱487,287.07 as contained in the Decision dated [26 March 1991]
consists of three (3) parts, as follows: First, the judgment award on the underpayment; Second, the
judgment award on separation pay; and Third, the judgment award on the overtime pay.

The question now is: Which of these awards is [petitioner] solidarily liable with [private respondents]?

An examination of the record elicits the finding that [petitioner] is solidarily liable with [private
respondents] on the judgment awards on the underpayment and on the non-payment of the overtime
pay. xxx. This joint and several liability of the contractor [private respondents] and the principal
[petitioner] is mandated by the Labor Code to assure compliance of the provisions therein, including the
statutory minimum wage (Art. 99,21 Labor Code). The contractor-agency is made liable by virtue of his
status as direct employer. The principal, on the other hand, is made the indirect employer of the
contractor-agency’s employees for purposes of paying the employees their wages should the contractor-
agency be unable to pay them. This joint and several liability facilitates, if not guarantees, payment of the
workers performance of any work, task, job or project, thus giving the workers ample protection as
mandated by the 1987 Constitution.

In sum, the complainants may enforce the judgment award on underpayment and the non-payment of
overtime pay against either [private respondents] and/or [petitioner].

However, in view of the finding in the Decision that [petitioner] had adjusted its contract price for the
janitorial services it contracted with [private respondents] conforming to the provisions of Republic Act
No. 6727, should the complainants enforce the judgment on the underpayment and on the non-payment
of the overtime pay aginst (sic) [petitioner], the latter can seek reimbursement from the former [meaning
(private respondents)], but should the judgment award on the underpayment and on the non-payment of
the overtime pay be enforced against [private respondents], the latter cannot seek reimbursement against
[petitioner].

The judgment award on separation pay is the sole liability of [private respondents].
29

WHEREFORE, [petitioner] is jointly and severally liable with [private respondents] in the judgment award
on underpayment and on the non-payment of overtime pay. Should the complainants enforce the above
judgment award against [petitioner], the latter can seek reimbursement against [private respondents], but
should the aforementioned judgment award be enforced against [private respondents], the latter cannot
seek reimbursement from the [petitioner].

The judgment award on the payment of separation pay is the sole liability of [private respondents].

Let an alias writ of execution be issued. [Emphasis supplied].

Again, both the private respondents and the petitioner appealed the afore-quoted Order of the Labor
Arbiter to the NLRC. On 25 April 1995, the NLRC issued a Resolution22 affirming the Order dated 5
October 1994 of the Labor Arbiter and dismissing both appeals for non-posting of the appeal or surety
bond and/or for utter lack of merit.23 When the private respondents and the petitioner moved for
reconsideration, however, it was granted by the NLRC in its Order24 dated 27 July 1995. The NLRC thus
set aside its Resolution dated 25 April 1995, and directed the private respondents and the petitioner to
each post an appeal bond in the amount of ₱487,287.62 to perfect their respective appeals.25 Both
parties complied.26

On 30 January 1996, the NLRC rendered a Decision modifying the Order of the Labor Arbiter dated 5
October 1994, the dispositive portion of which reads:

WHEREFORE, the [21 November 1994] appeal of [herein petitioner] is hereby granted. The [5 October
1994] Order of Labor Arbiter Donato G. Quinto, Jr., is modified to the extent that it still held [petitioner] as
"jointly and severally liable with [herein private respondents] in the judgment award on underpayment
and on the non-payment of overtime pay," our directive being that the Arbiter should now satisfy said
labor-standards award, as well as that of the separation pay, exclusively through the surety bond posted
by [private respondents].27 [Emphasis supplied].

Dissatisfied, private respondents moved for the reconsideration of the foregoing Decision, but it was
denied by the NLRC in an Order28 dated 30 October 1996. This NLRC Order dated 30 October 1996
became final and executory on 29 November 1996.

On 4 December 1996, private respondents filed a Petition for Certiorari29 before this Court assailing the
Decision and the Order of the NLRC dated 30 January 1996 and 30 October 1996, respectively. On 9
December 1998, this Court issued a Resolution30 referring the case to the Court of Appeals conformably
with its ruling in St. Martin Funeral Home v. National Labor Relations Commission.31 The case was
docketed before the appellate court as CA-G.R. SP No. 50806.

The Petition made a sole assignment of error, to wit:

THE HONORABLE COMMISSION GRAVELY ERRED AND GRAVELY ABUSED ITS DISCRETION IN FINDING
THAT THE ULTIMATE LIABILITY SHOULD FALL ON THE [HEREIN PRIVATE RESPONDENTS] ALONE,
WITHOUT REIMBURSEMENT FROM THE [HEREIN PETITIONER], IN ORDER TO SATISFY THE MONETARY
AWARDS OF THE [THEREIN COMPLAINANTS].32
30

After due proceedings, the Court of Appeals rendered the assailed Decision on 24 April 2000, modifying
the Decision of the NLRC dated 30 January 1996 and holding the petitioner solidarily liable with the
private respondents for the satisfaction of the laborers’ separation pay. According to the Court of Appeals:

The [NLRC] adjudged the payment of separation pay to be the sole responsibility of [herein private
respondents] because (1) there is no employer-employee relationship between [herein petitioner] and the
forty-nine (49) [therein complainants]; (2) the payment of separation pay is not a labor standard benefit.
We disagree.

Again, We quote Article 109 of the Labor Code, as amended, viz:

"The provisions of existing laws to the contrary notwithstanding, every employer or indirect employer shall
be held responsible with his contractor or subcontractor for any violation of any provision of this Code…"

The abovementioned statute speaks of "any violation of any provision of this Code." Thus, the existence or
non-existence of employer-employee relationship and whether or not the violation is one of labor
standards is immaterial because said provision of law does not make any distinction at all and, therefore,
this Court should also refrain from making any distinction. Concomitantly, [herein petitioner] should be
jointly and severally liable with [private respondents] for the payment of wage differentials, overtime pay
and separation pay of the [therein complainants]. The joint and several liability imposed to [petitioner] is,
again, without prejudice to a claim for reimbursement by [petitioner] against [private respondents] for
reasons already discusses (sic).

WHEREFORE, premises studiedly considered, the assailed 30 January 1996 decision of [the NLRC] is
hereby modified insofar as [petitioner] should be held solidarily liable with [the private respondents] for
the satisfaction of the laborers’ separation pay. No pronouncement as to costs.33 [Emphasis supplied].

The petitioner filed a Motion for Reconsideration of the aforesaid Decision but it was denied by the Court
of Appeals in a Resolution dated 27 September 2000.

Petitioner now comes before this Court via a Petition for Review on Certiorari, docketed as G.R. No.
145402, raising the sole issue of "whether or not the Honorable Court of Appeals palpably erred when it
went beyond the issues of the case as it modified the factual findings of the Labor Arbiter which attained
finality after it was affirmed by Public Respondent NLRC and by the Supreme Court which can no longer
be disturbed as it became the law of the case."34

Petitioner argues that in the assailed Decision dated 24 April 2000, the Court of Appeals found that the
sole issue for its resolution was whether the ultimate liability to pay the monetary awards in favor of the
49 employees falls on the private respondents without reimbursement from the petitioner. Hence, the
appellate court should have limited itself to determining the right of private respondents to still seek
reimbursement from petitioner for the monetary awards on the unpaid wages and overtime pay of the
complainants.

According to petitioner, the NLRC, in its Resolution dated 28 May 1993, already found that petitioner had
fully complied with its salary obligations to the complainants. Petitioner invokes the same NLRC
Resolution to support its claim that it was not liable to share with the private respondents in the payment
of separation pay to complainants. When private respondents questioned the said NLRC Resolution in a
Petition for Certiorari with this Court, docketed as G.R. No. 111506, this Court found that the NLRC did not
commit grave abuse of discretion in the issuance thereof and accordingly dismissed private respondents’
31

Petition. Said NLRC Resolution, therefore, has since become final and executory and can no longer be
disturbed for it now constitutes the law of the case.

Assuming for the sake of argument that the Court of Appeals can still take cognizance of the issue of
petitioner’s liability for complainants’ separation pay, petitioner asserts that the appellate court seriously
erred in concluding that it is jointly and solidarily liable with private respondents for the payment thereof.
The payment of separation pay should be the sole responsibility of the private respondents because there
was no employer-employee relationship between the petitioner and the complainants, and the payment
of separation pay is not a labor standards benefit.

Law of the case has been defined as the opinion delivered on a former appeal. It is a term applied to an
established rule that when an appellate court passes on a question and remands the case to the lower
court for further proceedings, the question there settled becomes the law of the case upon subsequent
appeal. It means that whatever is once irrevocably established as the controlling legal rule or decision
between the same parties in the same case continues to be the law of the case, whether correct on
general principles or not, so long as the facts on which such decision was predicated continue to be the
facts of the case before the court.35 Indeed, courts must adhere thereto, whether the legal principles laid
down were "correct on general principles or not" or "whether the question is right or wrong" because
public policy, judicial orderliness and economy require such stability in the final judgments of courts or
tribunals of competent jurisdiction.36

Petitioner’s application of the law of the case principle to the case at bar as regards its liability for
payment of separation pay is misplaced.

The only matters settled in the 23 May 1994 Resolution of this Court in G.R. No. 111506, which can be
regarded as the law of the case, were (1) both the petitioner and the private respondents were jointly and
solidarily liable for the judgment awards due the complainants; and (2) the said judgment awards shall be
enforced against the surety bond posted by the private respondents. However, the issue as regards the
liability of the petitioner for payment of separation pay was yet to be resolved because precisely, the
NLRC, in its Order dated 30 July 1993, still directed the Labor Arbiter to make a determination on who
should finally shoulder the monetary awards granted to the complainants. And it was only after G.R. No.
111506 was dismissed by this Court that the Labor Arbiter promulgated his Decision dated 5 October
1994, wherein he clarified the respective liabilities of the petitioner and the private respondents for the
judgment awards. In his 5 October 1994 Decision, the Labor Arbiter explained that the solidary liability of
the petitioner was limited to the monetary awards for wage underpayment and non-payment of overtime
pay due the complainants, and it did not, in any way, extend to the payment of separation pay as the
same was the sole liability of the private respondents.

Nonetheless, this Court finds the present Petition meritorious.

The Court of Appeals indeed erred when it ruled that the petitioner was jointly and solidarily liable with
the private respondents as regards the payment of separation pay.

The appellate court used as basis Article 109 of the Labor Code, as amended, in holding the petitioner
solidarily liable with the private respondents for the payment of separation pay:
32

ART. 109. Solidary Liability. - The provisions of existing laws to the contrary notwithstanding, every
employer or indirect employer shall be held responsible with his contractor or subcontractor for any
violation of any provision of this Code. For purposes of determining the extent of their civil liability under
this Chapter, they shall be considered as direct employers. [Emphasis supplied].1avvphi1

However, the afore-quoted provision must be read in conjunction with Articles 106 and 107 of the Labor
Code, as amended.

Article 107 of the Labor Code, as amended, defines an indirect employer as "any person, partnership,
association or corporation which, not being an employer, contracts with an independent contractor for
the performance of any work, task, job or project." To ensure that the contractor’s employees are paid
their appropriate wages, Article 106 of the Labor Code, as amended, provides:

ART. 106. CONTRACTOR OR SUBCONTRACTOR. – x x x.

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. [Emphasis supplied].

Taken together, an indirect employer (as defined by Article 107) can only be held solidarily liable with the
independent contractor or subcontractor (as provided under Article 109) in the event that the latter fails
to pay the wages of its employees (as described in Article 106).

Hence, while it is true that the petitioner was the indirect employer of the complainants, it cannot be held
liable in the same way as the employer in every respect. The petitioner may be considered an indirect
employer only for purposes of unpaid wages. As this Court succinctly explained in Philippine Airlines, Inc.
v. National Labor Relations Commission37:

While USSI is an independent contractor under the security service agreement and PAL may be
considered an indirect employer, that status did not make PAL the employer of the security guards in
every respect. As correctly posited by the Office of the Solicitor General, PAL may be considered an
indirect employer only for purposes of unpaid wages since Article 106, which is applicable to the situation
contemplated in Section 107, speaks of wages. The concept of indirect employer only relates or refers to
the liability for unpaid wages. Read together, Articles 106 and 109 simply mean that the party with whom
an independent contractor deals is solidarily liable with the latter for unpaid wages, and only to that
extent and for that purpose that the latter is considered a direct employer. The term "wage" is defined in
Article 97(f) of the Labor Code as "the remuneration of earnings, however designated, capable of being
expressed in terms of money, whether fixed or ascertained on a time, task, piece, or commission basis, or
other method of calculating the unwritten contract of employment for work done or to be done, or for
services rendered or to be rendered and includes the fair and reasonable value, as determined by the
Secretary of Labor, of board, lodging, or other facilities customarily furnished by the employer to the
employee."

Further, there is no question that private respondents are operating as an independent contractor and
that the complainants were their employees. There was no employer-employee relationship that existed
between the petitioner and the complainants and, thus, the former could not have dismissed the latter
from employment. Only private respondents, as the complainants’ employer, can terminate their services,
33

and should it be done illegally, be held liable therefor. The only instance when the principal can also be
held liable with the independent contractor or subcontractor for the backwages and separation pay of the
latter’s employees is when there is proof that the principal conspired with the independent contractor or
subcontractor in the illegal dismissal of the employees, thus:

The liability arising from an illegal dismissal is unlike an order to pay the statutory minimum wage,
because the workers’ right to such wage is derived from law. The proposition that payment of back wages
and separation pay should be covered by Article 109, which holds an indirect employer solidarily
responsible with his contractor or subcontractor for "any violation of any provision of this Code," would
have been tenable if there were proof - there was none in this case - that the principal/employer had
conspired with the contractor in the acts giving rise to the illegal dismissal. 38

It is the established fact of conspiracy that will tie the principal or indirect employer to the illegal dismissal
of the contractor or subcontractor’s employees. In the present case, there is no allegation, much less
proof presented, that the petitioner conspired with private respondents in the illegal dismissal of the
latter’s employees; hence, it cannot be held liable for the same.

Neither can the liability for the separation pay of the complainants be extended to the petitioner based
on contract. Contract Order No. 166-84 executed between the petitioner and the private respondents
contains no provision for separation pay in the event that the petitioner terminates the same. It is basic
that a contract is the law between the parties and the stipulations therein, provided that they are not
contrary to law, morals, good customs, public order or public policy, shall be binding as between the
parties.39 Hence, if the contract does not provide for such a liability, this Court cannot just read the same
into the contract without possibly violating the intention of the parties.

It is also worth noting that although the issue in CA-G.R. SP No. 50806 pertains to private respondents’
right to reimbursement from petitioner for the "monetary awards" in favor of the complainants, they
limited their arguments to the monetary awards for underpayment of wages and non-payment of
overtime pay, and were conspicuously silent on the monetary award for separation pay. Thus, private
respondents’ sole liability for the separation pay of their employees should have been deemed settled and
already beyond the power of the Court of Appeals to resolve, since it was an issue never raised before
it.40

Although petitioner is not liable for complainants’ separation pay, the Court conforms to the consistent
findings in the proceedings below that the petitioner is solidarily liable with the private respondents for
the judgment awards for underpayment of wages and non-payment of overtime pay.

In this case, however, private respondents had already posted a surety bond in an amount sufficient to
cover all the judgment awards due the complainants, including those for underpayment of wages and
non-payment of overtime pay. The joint and several liability of the principal with the contractor and
subcontractor were enacted to ensure compliance with the provisions of the Labor Code, principally those
on statutory minimum wage. This liability facilitates, if not guarantees, payment of the workers’
compensation, thus, giving the workers ample protection as mandated by the 1987 Constitution.41 With
private respondents’ surety bond, it can therefore be said that the purpose of the Labor Code provision
on the solidary liability of the indirect employer is already accomplished since the interest of the
complainants are already adequately protected. Consequently, it will be futile to continuously hold the
34

petitioner jointly and solidarily liable with the private respondents for the judgment awards for
underpayment of wages and non-payment of overtime pay.

But while this Court had previously ruled that the indirect employer can recover whatever amount it had
paid to the employees in accordance with the terms of the service contract between itself and the
contractor,42 the said ruling cannot be applied in reverse to this case as to allow the private respondents
(the independent contractor), who paid for the judgment awards in full, to recover from the petitioner (the
indirect employer).

Private respondents have nothing more to recover from petitioner.

Petitioner had already handed over to private respondent the wages and other benefits of the
complainants. Records reveal that it had complied with complainants’ salary increases in accordance with
the minimum wage set by Republic Act No. 6727 by faithfully adjusting the contract price for the janitorial
services it contracted with private respondents. 43 This is a finding of fact made by the Labor Arbiter,44
untouched by the NLRC45 and explicitly affirmed by the Court of Appeals,46 and which should already
bind this Court.

This Court is not a trier of facts. Well-settled is the rule that the jurisdiction of this Court in a petition for
review on certiorari under Rule 45 of the Revised Rules of Court is limited to reviewing only errors of law,
not of fact, unless the factual findings complained of are completely devoid of support from the evidence
on record, or the assailed judgment is based on a gross misapprehension of facts. Besides, factual findings
of quasi-judicial agencies like the NLRC, when affirmed by the Court of Appeals, are conclusive upon the
parties and binding on this Court.47

Having already received from petitioner the correct amount of wages and benefits, but having failed to
turn them over to the complainants, private respondents should now solely bear the liability for the
underpayment of wages and non-payment of the overtime pay.

WHEREFORE, premises considered, the instant Petition is hereby GRANTED. The Decision and Resolution
of the Court of Appeals dated 24 April 2000 and 27 September 2000, respectively, in CA-G.R. SP No.
50806, are hereby REVERSED AND SET ASIDE. The Decision dated 30 January 1996 of the National Labor
Relations Commission in NLRC NCR CA No. 001737-91 (NLRC NCR Case No. 00-09-04432-89) is hereby
REINSTATED. No costs.

SO ORDERED.
35

[G.R. NO. 145271 July 14, 2005]

MANILA ELECTRIC COMPANY, Petitioner, v. ROGELIO BENAMIRA, ERNIE DE SAGUN1, DIOSDADO

YOGARE, FRANCISCO MORO2, OSCAR LAGONOY3, Rolando Beni, Alex Beni, Raul4 Guia, Armed
Security & Detective Agency, Inc., (ASDAI) and Advance FORCES Security & INVESTIGATION
Services, Inc., (AFSISI), Respondents.

AUSTRIA-MARTINEZ, J.:

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court assailing the Decision,5
dated September 27, 2000, of the Court of Appeals (CA) in CA-G.R. SP No. 50520 which declared
petitioner Manila Electric Company (MERALCO) as the direct employer of individual respondents Rogelio
Benamira, Ernie De Sagun, Diosdado Yogare, Francisco Moro, Oscar Lagonoy, Rolando Beni, Alex Beni and
Raul De Guia (individual respondents for brevity).

The factual background of the case is as follows:

The individual respondents are licensed security guards formerly employed by People's Security, Inc. (PSI)
and deployed as such at MERALCO's head office in Ortigas Avenue, Pasig, Metro Manila.

On November 30, 1990, the security service agreement between PSI and MERALCO was terminated.

Immediately thereafter, fifty-six of PSI's security guards, including herein eight individual respondents,
filed a complaint for unpaid monetary benefits against PSI and MERALCO, docketed as NLRC-NCR Case
No. 05-02746-90.

Meanwhile, the security service agreement between respondent Armed Security & Detective Agency, Inc.,
(ASDAI) and MERALCO took effect on December 1, 1990. In the agreement, ASDAI was designated as the
AGENCY while MERALCO was designated as the COMPANY. The pertinent terms and conditions of the
agreement are as follows:

1. The AGENCY shall initially provide the COMPANY with TWO HUNDRED TWENTY (220) licensed,
uniformed, bonded and armed security guards to be assigned at the COMPANY's "MERALCO CENTER,"
complete with nightsticks, flashlights, raincoats, and other paraphernalias to work on eight (8) hours duty.
The COMPANY shall determine the number of security guards in accordance with its needs and the areas
of responsibility assigned to each, and shall have the option to increase or decrease the number of guards
at any time provided the AGENCY is notified within twenty four (24) hours of the contemplated reduction
or increase of the guards in which case the cost or consideration shall be adjusted accordingly.

2. The COMPANY shall furnish the AGENCY copies of written specific instruction to be followed or
implemented by the latter's personnel in the discharge of their duties and responsibilities and the
AGENCY shall be responsible for the faithful compliance therewith by its personnel together with such
general and specific orders which shall be issued from time to time.

3. For and in consideration of the services to be rendered by the AGENCY to the COMPANY, the
COMPANY during the term of this contract shall pay the AGENCY the amount of THREE THOUSAND
EIGHT HUNDRED PESOS (P3,800.00) a month per guard, FOUR THOUSAND PESOS (P4,000.00) for the
Shift Leader and FOUR THOUSAND TWO HUNDRED PESOS (P4,200.00) for the Detachment Commander
for eight (8) hours work/day, Saturdays, Sundays and Holidays included, payable semi-monthly.
36

5. The AGENCY shall assume the responsibility for the proper and efficient performance of duties by the
security guards employed by it and it shall be solely responsible for any act of said security guards during
their watch hours, the COMPANY being specifically released from any and all liability to third parties
arising from the acts or omission of the security guards of the AGENCY.

6. The AGENCY also agrees to hold the COMPANY entirely free from any liability, cause or causes of action
or claims which may be filed by said security guards by reason of their employment with the AGENCY
pursuant to this Agreement or under the provisions of the Labor Code, the Social Security Act, and other
laws, decrees or social legislations now enacted or which hereafter may be enacted.

7. Discipline and Administration of the security guards shall conform with the rules and regulations of the
AGENCY, and the COMPANY reserves the right to require without explanation the replacement of any
guard whose behavior, conduct or appearance is not satisfactory to the COMPANY and that the AGENCY
cannot pull-out any security guard from the COMPANY without the consent of the latter.

8. The AGENCY shall conduct inspections through its duly authorized inspector at least two (2) times a
week of guards assigned to all COMPANY installations secured by the AGENCY located in the
Metropolitan Manila area and at least once a week of the COMPANY's installations located outside of the
Metropolitan Manila area and to further submit its inspection reports to the COMPANY. Likewise, the
COMPANY shall have the right at all times to inspect the guards of the AGENCY assigned to the
COMPANY.

9. The said security guards shall be hired by the AGENCY and this contract shall not be deemed in any way
to constitute a contract of employment between the COMPANY and any of the security guards hired by
the AGENCY but merely as a contract specifying the conditions and manner under which the AGENCY
shall render services to the COMPANY.

10. Nothing herein contained shall be understood to make the security guards under this Agreement,
employees of the COMPANY, it being clearly understood that such security guards shall be considered as
they are, employees of the AGENCY alone, so that the AGENCY shall be responsible for compliance with
all pertinent labor laws and regulations included but not limited to the Labor Code, Social Security Act,
and all other applicable laws and regulations including that providing for a withholding tax on income.

13. This contract shall take effect on the 1st day of December, 1990 and shall continue from year to year
unless sooner terminated by the COMPANY for cause or otherwise terminated by either party without
cause upon thirty (30) days written notice by one party to the other.6

Subsequently, the individual respondents were absorbed by ASDAI and retained at MERALCO's head
office.

On June 29, 1992, Labor Arbiter Manuel P. Asuncion rendered a decision in NLRC-NCR Case No. 05-
02746-90 in favor of the former PSI security guards, including the individual respondents.

Less than a month later, or on July 21, 1992, the individual respondents filed another complaint for unpaid
monetary benefits, this time against ASDAI and MERALCO, docketed as NLRC-NCR Case No. 00-07-
03953-92.
37

On July 25, 1992, the security service agreement between respondent Advance Forces Security &
Investigation Services, Inc. (AFSISI) and MERALCO took effect, terminating the previous security service
agreement with ASDAI.7 Except as to the number of security guards,8 the amount to be paid the agency,9
and the effectivity of the agreement,10 the terms and conditions were substantially identical with the
security service agreement with ASDAI.

On July 29, 1992, the individual respondents amended their complaint to implead AFSISI as party
respondent. On August 11, 1992 they again amended their complaint to allege that AFSISI terminated
their services on August 6, 1992 without notice and just cause and therefore guilty of illegal dismissal.

The individual respondents alleged that: MERALCO and ASDAI never paid their overtime pay, service
incentive leave pay, premium pay for Sundays and Holidays, P50.00 monthly uniform allowance and
underpaid their 13th month pay; on July 24, 1992, when the security service agreement of ASDAI was
terminated and AFSISI took over the security functions of the former on July 25, 1992, respondent security
guard Benamira was no longer given any work assignment when AFSISI learned that the former has a
pending case against PSI, in effect, dismissing him from the service without just cause; and, the rest of the
individual respondents were absorbed by AFSISI but were not given any assignments, thereby dismissing
them from the service without just cause.

ASDAI denied in general terms any liability for the claims of the individual respondents, claiming that
there is nothing due them in connection with their services.

On the other hand, MERALCO denied liability on the ground of lack of employer-employee relationship
with individual respondents. It averred that the individual respondents are the employees of the security
agencies it contracted for security services; and that it has no existing liability for the individual
respondents' claims since said security agencies have been fully paid for their services per their respective
security service agreement

For its part, AFSISI asserted that: it is not liable for illegal dismissal since it did not absorb or hire the
individual respondents, the latter were merely hold-over guards from ASDAI; it is not obliged to employ
or absorb the security guards of the agency it replaced since there is no provision in its security service
agreement with MERALCO or in law requiring it to absorb and hire the guards of ASDAI as it has its own
guards duly trained to service its various clients.

On January 3, 1994, after the submission of their respective evidence and position papers, Labor Arbiter
Pablo C. Espiritu, Jr. rendered a Decision holding ASDAI and MERALCO jointly and solidarily liable to the
monetary claims of individual respondents and dismissing the complaint against AFSISI. The dispositive
portion of the decision reads as follows:

WHEREFORE, conformably with the above premises, judgment is hereby rendered:

1. Declaring ASDAI as the employer of the complainants and as such complainants should be reinstated as
regular security guards of ASDAI without loss of seniority rights, privileges and benefits and for ASDAI to
immediately post the complainants as security guards with their clients. The complaint against AFSISI is
Dismissed for lack of merit.
38

2. Ordering both respondents, ASDAI and MERALCO to jointly and solidarily pay complainants monetary
claims (underpayment of actual regular hours and overtime hours rendered, and premium pay for holiday
and rest day) in the following amounts:

NAME OVERTIME DIFFERENTIALS AND PREMIUM PAY FOR HOLIDAY & REST DAY

1. Rogelio Benamira P14,615.75

2. Ernie De Sagun 21,164.31

3. Diosdado Yogare 7,108.77

4. Francisco Maro 26,567.11

5. Oscar Lagonay 18,863.36

6. Rolando Beni 21,834.12

7. Alex Beni 21,648.80

8. Ruel De Guia 14,200.33

3. Ordering Respondents ASDAI and MERALCO to jointly and solidarily pay complainants 10% attorney's
fees in the amount of P14,600.25 based on the total monetary award due to the complainants in the
amount of P146,002.55.

All other claims of the complainants are hereby DISMISSED for lack of merit.

The counter-claim of respondent AFSISI for damages is hereby dismissed for want of substantial evidence
to justify the grant of damages.

SO ORDERED.11

All the parties, except AFSISI, appealed to the National Labor Relations Commission (NLRC).

Individual respondents' partial appeal assailed solely the Labor Arbiter's declaration that ASDAI is their
employer. They insisted that AFSISI is the party liable for their illegal dismissal and should be the party
directed to reinstate them.

For its part, MERALCO attributed grave abuse of discretion on the part of the Labor Arbiter in failing to
consider the absence of employer-employee relationship between MERALCO and individual respondents.

On the other hand, ASDAI took exception from the Labor Arbiter's finding that it is the employer of the
individual respondents and therefore liable for the latter's unpaid monetary benefits.

On April 10, 1995, the NLRC affirmed in toto the decision of the Labor Arbiter.12 On April 19, 1995, the
individual respondents filed a motion for partial reconsideration but it was denied by the NLRC in a
Resolution dated May 23, 1995.13

On August 11, 1995, the individual respondents filed a Petition for Certiorari before us, docketed as G.R.
No. 121232.14 They insisted that they were absorbed by AFSISI and the latter effected their termination
without notice and just cause.
39

After the submission of the responsive pleadings and memoranda, we referred the petition, in accordance
with St. Martin Funeral Homes v. NLRC,15 to the CA which, on September 27, 2000, modified the decision
of the NLRC by declaring MERALCO as the direct employer of the individual respondents.

The CA held that: MERALCO changed the security agency manning its premises three times while
engaging the services of the same people, the individual respondents; MERALCO employed a scheme of
hiring guards through an agency and periodically entering into service contract with one agency after
another in order to evade the security of tenure of individual respondents; individual respondents are
regular employees of MERALCO since their services as security guards are usually necessary or desirable in
the usual business or trade of MERALCO and they have been in the service of MERALCO for no less than
six years; an employer-employee relationship exists between MERALCO and the individual respondents
because: (a) MERALCO had the final say in the selection and hiring of the guards, as when its advice was
proved to have carried weight in AFSISI's decision not to absorb the individual respondents into its
workforce; (b) MERALCO paid the wages of individual respondents through ASDAI and AFSISI; (c)
MERALCO's discretion on matters of dismissal of guards was given great weight and even finality since
the record shows that the individual respondents were replaced upon the advice of MERALCO; and, (d)
MERALCO has the right, at any time, to inspect the guards, to require without explanation the
replacement of any guard whose behavior, conduct or appearance is not satisfactory and ASDAI and
AFSISI cannot pull out any security guard from MERALCO without the latter's consent; and, a labor-only
contract existed between ASDAI and AFSISI and MERALCO, such that MERALCO is guilty of illegal
dismissal without just cause and liable for reinstatement of individual respondents to its workforce.

The dispositive portion of the CA's Decision reads as follows:

WHEREFORE, in view of the foregoing premises, the Resolution subject of this petition is hereby
AFFIRMED with MODIFICATION in the sense that MERALCO is declared the employer of the petitioners.
Accordingly, private respondent MERALCO is hereby ordered as follows:

1. To reinstate petitioners into MERALCO's work force as regular security guards without loss of seniority
rights and other privileges; andcralawlibrary

2. To pay the petitioners' full backwages, inclusive of allowances, and other benefits or their monetary
equivalent computed from the time their compensation was withheld from them up to the time of their
actual reinstatement, for which the Labor Arbiter Pablo C. Espiritu, Jr. is hereby directed to undertake the
necessary computation and enforcement thereof.

With respect to the rest of the dispositive portion of the assailed Resolution which affirmed the decision
of the Labor Arbiter Pablo C. Espiritu, Jr., particularly the joint and solidary liabilities of both ASDAI and
MERALCO to the petitioners, the same are hereby AFFIRMED.

SO ORDERED.16

Hence, the present Petition for Review on certiorari, filed by MERALCO, anchored on the following
grounds:
40

A. THE COURT OF APPEALS COMMITTED SERIOUS REVERSIBLE ERROR AND GRAVE ABUSE OF
DISCRETION IN HOLDING THAT AN EMPLOYER-EMPLOYEE RELATIONSHIP EXISTS BETWEEN PETITIONER
MERALCO AND INDIVIDUAL RESPONDENTS.

B. THE COURT OF APPEALS GRAVELY ABUSED ITS DISCRETION IN HOLDING THAT INDIVIDUAL
RESPONDENTS ARE REGULAR EMPLOYEES OF PETITIONER MERALCO.

C. THE COURT OF APPEALS COMMITTED SERIOUS REVERSIBLE ERROR IN ALLOWING INDIVIDUAL

RESPONDENTS TO RAISE FOR THE FIRST TIME ON APPEAL, THE ISSUE THAT PETITIONER WAS THEIR
DIRECT EMPLOYER.

D. THE COURT OF APPEALS COMMITTED SERIOUS ERROR IN FINDING THAT PETITIONER MERALCO IS
GUILTY OF ILLEGAL DISMISSAL.

E. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT INDIVIDUAL RESPONDENTS ARE
ENTITLED TO REINSTATEMENT INTO PETITIONER'S WORKFORCE.

F. THE COURT OF APPEALS SERIOUSLY ERRED IN NOT FINDING THAT PETITIONER MERALCO IS ENTITLED
TO REIMBURSEMENT FROM RESPONDENT ASDAI FOR THE MONETARY CLAIMS PETITIONER PAID TO
INDIVIDUAL RESPONDENTS PURSUANT TO THE SECURITY SERVICE AGREEMENT.17

Anent the first ground, MERALCO submits that the elements of "four-fold" test to determine the existence
of an employer-employee relation, namely: (1) the power to hire, (2) the payment of wages, (3) the power
to dismiss, and (4) the power to control, are not present in the instant case.

Regarding the power to hire, MERALCO contends that the records are bereft of any evidence that shows
that it participated in or influenced the decision of PSI and ASDAI to hire or absorb the individual
respondents.

As to the payment of wages, MERALCO maintains that the individual respondents received their wages
from their agency.

With regard to the power to dismiss, MERALCO argues that the security service agreement clearly
provided that the discipline and administration of the security guards shall conform to the rules and
regulations of the agency.

Concerning the power of control, MERALCO asserts that there is no evidence that individual respondents
were subjected to its control as to the manner or method by which they conduct or perform their work of
guarding of MERALCO's premises.

Furthermore, MERALCO insists that ASDAI and AFSISI are not labor-only contractors since they have their
own equipment, machineries and work premises which are necessary in the conduct of their business and
the duties performed by the security guards are not necessary in the conduct of MERALCO's principal
business.

With respect to the second ground, MERALCO argues that the individual respondents cannot be
considered as regular employees as the duties performed by them as security guards are not necessary in
the conduct of MERALCO's principal business which is the distribution of electricity.
41

As regards the third ground, MERALCO argues that it was denied due process when the individual
respondents raised for the first time in the CA the issue that MERALCO is their direct employer since the
individual respondents have always considered themselves as employees of AFSISI and nowhere in the
Labor Arbiter or the NLRC did they raise the argument that MERALCO is their direct employer.

Regarding the fourth ground, MERALCO asserts that it is not guilty of illegal dismissal because it had no
direct hand or participation in the termination of the employment of individual respondents, who even
insisted in their Petition for Certiorari in the CA that it was AFSISI which terminated their employment.

As to the fifth ground, MERALCO maintains that the individual respondents are not entitled to
reinstatement into its workforce because no employer-employee relationship exists between it and the
individual respondents.

With regard to the sixth ground, MERALCO asserts that since it is not the direct employer of the individual
respondents, it has a right of reimbursement from ASDAI for the full amount it may pay to the individual
respondents under Articles 106 and 107 of the Labor Code.

In contrast, the individual respondents maintain that the CA aptly found that all the elements in employer-
employee relationship exist between them and MERALCO and there is no cogent reason to deviate from
such factual findings.

For its part, ASDAI contends that the instant petition raises factual matters beyond the jurisdiction of this
Court to resolve since only questions of law may be raised in a Petition for Review on certiorari. It submits
that while the rule admits of exceptions, MERALCO failed to establish that the present case falls under any
of the exceptions.

On the other hand, AFSISI avers that there is no employer-employee relationship between MERALCO and
the security guards of any of the security agencies under contract with MERALCO.

It is a settled rule that in the exercise of the Supreme Court's power of review, the Court is not a trier of
facts and does not normally undertake the re-examination of the evidence presented by the contending
parties during the trial of the case considering that the findings of facts of the CA are conclusive and
binding on the Court. However, jurisprudence has recognized several exceptions in which factual issues
may be resolved by this Court, to wit:

(1) when the findings are grounded entirely on speculation, surmises or conjectures; (2) when the
inference made is manifestly mistaken, absurd or impossible; (3) when there is grave abuse of discretion;
(4) when the judgment is based on a misapprehension of facts; (5) when the findings of facts are
conflicting; (6) when in making its findings the Court of Appeals went beyond the issues of the case, or its
findings are contrary to the admissions of both the appellant and the appellee; (7) when the findings are
contrary to the trial court; (8) when the findings are conclusions without citation of specific evidence on
which they are based; (9) when the facts set forth in the petition as well as in the petitioner's main and
reply briefs are not disputed by the respondent; (10) when the findings of fact are premised on the
supposed absence of evidence and contradicted by the evidence on record; and (11) when the Court of
Appeals manifestly overlooked certain relevant facts not disputed by the parties, which, if properly
considered, would justify a different conclusion.18
42

In the present case, the existence of an employer-employee relationship is a question of fact which is well
within the province of the CA. Nonetheless, given the reality that the CA's findings are at odds to those of
the NLRC, the Court is constrained to look deeper into the attendant circumstances obtaining in the
present case, as appearing on record.

At the outset, we note that the individual respondents never alleged in their complaint in the Labor
Arbiter, in their appeal in the NLRC and even in their Petition for Certiorari in the CA that MERALCO was
their employer. They have always advanced the theory that AFSISI is their employer. A perusal of the
records shows it was only in their Memorandum in the CA that this thesis was presented and discussed for
the first time. We cannot ignore the fact that this position of individual respondents runs contrary to their
earlier submission in their pleadings filed in the Labor Arbiter, NLRC and even in the Petition for Certiorari
in the CA that AFSISI is their employer and liable for their termination. As the object of the pleadings is to
draw the lines of battle, so to speak, between the litigants and to indicate fairly the nature of the claims or
defenses of both parties, a party cannot subsequently take a position contrary to, or inconsistent, with his
pleadings.19

Moreover, it is a fundamental rule of procedure that higher courts are precluded from entertaining
matters neither alleged in the pleadings nor raised during the proceedings below, but ventilated for the
first time only in a motion for reconsideration or on appeal.20 The individual respondents are bound by
their submissions that AFSISI is their employer and they should not be permitted to change their theory.
Such a change of theory cannot be tolerated on appeal, not due to the strict application of procedural
rules but as a matter of fairness. A change of theory on appeal is objectionable because it is contrary to
the rules of fair play, justice and due process.21

Thus, the CA should not have considered the new theory offered by the individual respondents in their
memorandum.

The present Petition for Review on Certiorari is far from novel and, in fact, not without precedence. We
have ruled in Social Security System v. Court of Appeals22 that:

...The guards or watchmen render their services to private respondent by allowing themselves to be
assigned by said respondent, which furnishes them arms and ammunition, to guard and protect the
properties and interests of private respondent's clients, thus enabling that respondent to fulfill its
contractual obligations. Who the clients will be, and under what terms and conditions the services will be
rendered, are matters determined not by the guards or watchmen, but by private respondent. On the
other hand, the client companies have no hand in selecting who among the guards or watchmen shall be
assigned to them. It is private respondent that issues assignment orders and instructions and exercises
control and supervision over the guards or watchmen, so much so that if, for one reason or another, the
client is dissatisfied with the services of a particular guard, the client cannot himself terminate the services
of such guard, but has to notify private respondent, which either substitutes him with another or metes
out to him disciplinary measures. That in the course of a watchman's assignment the client conceivably
issues instructions to him, does not in the least detract from the fact that private respondent is the
employer of said watchman, for in legal contemplation such instructions carry no more weight than mere
requests, the privity of contract being between the client and private respondent, not between the client
and the guard or watchman. Corollarily, such giving out of instructions inevitably spring from the client's
right predicated on the contract for services entered into by it with private respondent.
43

In the matter of compensation, there can be no question at all that the guards or watchmen receive
compensation from private respondent and not from the companies or establishments whose premises
they are guarding. The fee contracted for to be paid by the client is admittedly not equal to the salary of a
guard or watchman; such fee is arrived at independently of the salary to which the guard or watchman is
entitled under his arrangements with private respondent.23 and reiterated in American President Lines v.
Clave,24 thus:

In the light of the foregoing standards, We fail to see how the complaining watchmen of the Marine
Security Agency can be considered as employees of the petitioner. It is the agency that recruits, hires, and
assigns the work of its watchmen. Hence, a watchman can not perform any security service for the
petitioner's vessels unless the agency first accepts him as its watchman. With respect to his wages, the
amount to be paid to a security guard is beyond the power of the petitioner to determine. Certainly, the
lump sum amount paid by the petitioner to the agency in consideration of the latter's service is much
more than the wages of any one watchman. In point of fact, it is the agency that quantifies and pays the
wages to which a watchman is entitled.

Neither does the petitioner have any power to dismiss the security guards. In fact, We fail to see any
evidence in the record that it wielded such a power. It is true that it may request the agency to change a
particular guard. But this, precisely, is proof that the power lies in the hands of the agency.

Since the petitioner has to deal with the agency, and not the individual watchmen, on matters pertaining
to the contracted task, it stands to reason that the petitioner does not exercise any power over the
watchmen's conduct. Always, the agency stands between the petitioner and the watchmen; and it is the
agency that is answerable to the petitioner for the conduct of its guards.25

In this case, the terms and conditions embodied in the security service agreement between MERALCO and
ASDAI expressly recognized ASDAI as the employer of individual respondents.

Under the security service agreement, it was ASDAI which (a) selected, engaged or hired and discharged
the security guards; (b) assigned them to MERALCO according to the number agreed upon; (c) provided
the uniform, firearms and ammunition, nightsticks, flashlights, raincoats and other paraphernalia of the
security guards; (d) paid them salaries or wages; and, (e) disciplined and supervised them or principally
controlled their conduct. The agreement even explicitly provided that "[n]othing herein contained shall be
understood to make the security guards under this Agreement, employees of the COMPANY, it being
clearly understood that such security guards shall be considered as they are, employees of the AGENCY
alone." Clearly, the individual respondents are the employees of ASDAI.

As to the provision in the agreement that MERALCO reserved the right to seek replacement of any guard
whose behavior, conduct or appearance is not satisfactory, such merely confirms that the power to
discipline lies with the agency. It is a standard stipulation in security service agreements that the client
may request the replacement of the guards to it. Service-oriented enterprises, such as the business of
providing security services, generally adhere to the business adage that "the customer or client is always
right" and, thus, must satisfy the interests, conform to the needs, and cater to the reasonable impositions
of its clients.
44

Neither is the stipulation that the agency cannot pull out any security guard from MERALCO without its
consent an indication of control. It is simply a security clause designed to prevent the agency from
unilaterally removing its security guards from their assigned posts at MERALCO's premises to the latter's
detriment.

The clause that MERALCO has the right at all times to inspect the guards of the agency detailed in its
premises is likewise not indicative of control as it is not a unilateral right. The agreement provides that the
agency is principally mandated to conduct inspections, without prejudice to MERALCO's right to conduct
its own inspections.

Needless to stress, for the power of control to be present, the person for whom the services are rendered
must reserve the right to direct not only the end to be achieved but also the means for reaching such
end.26 Not all rules imposed by the hiring party on the hired party indicate that the latter is an employee
of the former.27 Rules which serve as general guidelinestowards the achievement of the mutually desired
result are not indicative of the power of control.28

Verily, the security service agreements in the present case provided that all specific instructions by
MERALCO relating to the discharge by the security guards of their duties shall be directed to the agency
and not directly to the individual respondents. The individual respondents failed to show that the rules of
MERALCO controlled their performance.

Moreover, ASDAI and AFSISI are not "labor-only" contractors. There is "labor only" contract when the
person acting as contractor is considered merely as an agent or intermediary of the principal who is
responsible to the workers in the same manner and to the same extent as if they had been directly
employed by him. On the other hand, "job (independent) contracting" is present 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 to the result thereof; and (b) the contractor has substantial capital or investments in
the form of tools, equipment, machineries, work premises and other materials which are necessary in the
conduct of his business.29 Given the above distinction and the provisions of the security service
agreements entered into by petitioner with ASDAI and AFSISI, we are convinced that ASDAI and AFSISI
were engaged in job contracting.

The individual respondents can not be considered as regular employees of the MERALCO for, although
security services are necessary and desirable to the business of MERALCO, it is not directly related to its
principal business and may even be considered unnecessary in the conduct of MERALCO's principal
business, which is the distribution of electricity.

Furthermore, the fact that the individual respondents filed their claim for unpaid monetary benefits
against ASDAI is a clear indication that the individual respondents acknowledge that ASDAI is their
employer.

We cannot give credence to individual respondents' insistence that they were absorbed by AFSISI when
MERALCO's security service agreement with ASDAI was terminated. The individual respondents failed to
present any evidence to confirm that AFSISI absorbed them into its workforce. Thus, respondent Benamira
was not retained in his post at MERALCO since July 25, 1992 due to the termination of the security service
45

agreement of MERALCO with ASDAI. As for the rest of the individual respondents, they retained their post
only as "hold-over" guards until the security guards of AFSISI took over their post on August 6, 1992.30

In the present case, respondent Benamira has been "off-detail" for seventeen days while the rest of the
individual respondents have only been "off - detail" for five days when they amended their complaint on
August 11, 1992 to include the charge of illegal dismissal. The inclusion of the charge of illegal dismissal
then was premature. Nonetheless, bearing in mind that ASDAI simply stopped giving the individual
respondents any assignment and their inactivity clearly persisted beyond the six-month period allowed by
Article 28631 of the Labor Code, the individual respondents were, in effect, constructively dismissed by
ASDAI from employment, hence, they should be reinstated.

The fact that there is no actual and direct employer-employee relationship between MERALCO and the
individual respondents does not exonerate MERALCO from liability as to the monetary claims of the
individual respondents. When MERALCO contracted for security services with ASDAI as the security
agency that hired individual respondents to work as guards for it, MERALCO became an indirect employer
of individual respondents pursuant to Article 107 of the Labor Code, which reads:

ART. 107. Indirect employer - The provisions of the immediately preceding Article shall likewise apply to
any person, partnership, association or corporation which, not being an employer, contracts with an
independent contractor for the performance of any work, task, job or project.

When ASDAI as contractor failed to pay the individual respondents, MERALCO as principal becomes
jointly and severally liable for the individual respondents' wages, under Articles 106 and 109 of the Labor
Code, which provide:

ART. 106. Contractor or subcontractor. - Whenever an employer enters into a contract with another
person for the performance of the former['s] work, the employees of the contractor and of the latter['s]
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. xxx

ART. 109. Solidary liability - The provisions of existing laws to the contrary notwithstanding, every
employer or indirect employer shall be held responsible with his contractor or subcontractor for any
violation of any provision of this Code. For purpose of determining the extent of their civil liability under
this Chapter, they shall be considered as direct employers.

ASDAI is held liable by virtue of its status as direct employer, while MERALCO is deemed the indirect
employer of the individual respondents for the purpose of paying their wages in the event of failure of
ASDAI to pay them. This statutory scheme gives the workers the ample protection consonant with labor
and social justice provisions of the 1987 Constitution.32

However, as held in Mariveles Shipyard Corp. v. Court of Appeals,33 the solidary liability of MERALCO with
that of ASDAI does not preclude the application of Article 1217 of the Civil Code on the right of
reimbursement from his co-debtor by the one who paid,34 which provides:
46

ART. 1217. Payment made by one of the solidary debtors extinguishes the obligation. If two or more
solidary debtors offer to pay, the creditor may choose which offer to accept.

He who made the payment may claim from his co-debtors only the share which corresponds to each, with
the interest for the payment already made. If the payment is made before the debt is due, no interest for
the intervening period may be demanded.

When one of the solidary debtors cannot, because of his insolvency, reimburse his share to the debtor
paying the obligation, such share shall be borne by all his co-debtors, in proportion to the debt of each.

ASDAI may not seek exculpation by claiming that MERALCO's payments to it were inadequate for the
individual respondents' lawful compensation. As an employer, ASDAI is charged with knowledge of labor
laws and the adequacy of the compensation that it demands for contractual services is its principal
concern and not any other's.35

WHEREFORE, the present petition is GRANTED. The assailed Decision, dated September 27, 2000, of the
CA is REVERSED and SET ASIDE. The Decision of the Labor Arbiter dated January 3, 1994 and the
Resolution of the NLRC dated April 10, 1995 are AFFIRMED with the MODIFICATION that the joint and
solidary liability of ASDAI and MERALCO to pay individual respondents' monetary claims for
underpayment of actual regular hours and overtime hours rendered, and premium pay for holiday and
rest day, as well as attorney's fees, shall be without prejudice to MERALCO's right of reimbursement from
ASDAI.

SO ORDERED.
47

[G.R. NO. 161115 : November 30, 2006]

DOLE PHILIPPINES, INC., Petitioner, v. MEDEL ESTEVA
CHICO-NAZARIO, J.:

Before this Court is a Petition for Review on Certiorari under Rule 45 of the revised Rules of Civil
Procedure seeking the reversal of the Decision,1 dated 20 May 2002, and the Amended Decision,2 dated
27 November 2003, both rendered by the Court of Appeals in CA-G.R. SP No. 63405, which declared
herein petitioner Dole Philippines, Inc. as the employer of herein respondents, Medel Esteva and 86
others; found petitioner guilty of illegal dismissal; and ordered petitioner to reinstate respondents to their
former positions and to pay the latter backwages.

The antecedent facts of the case are recounted as follows:

Petitioner is a corporation duly organized and existing in accordance with Philippine laws, engaged
principally in the production and processing of pineapple for the export market.3 Its plantation is located
in Polomolok, South Cotabato.4

Respondents are members of the Cannery Multi-Purpose Cooperative (CAMPCO). CAMPCO was
organized in accordance with Republic Act No. 6938, otherwise known as the Cooperative Code of the
Philippines, and duly-registered with the Cooperative Development Authority (CDA) on 6 January 1993.5
Members of CAMPCO live in communities surrounding petitioner's plantation and are relatives of
petitioner's employees.

On 17 August 1993, petitioner and CAMPCO entered into a Service Contract.6 The Service Contract
referred to petitioner as "the Company," while CAMPCO was "the Contractor." Relevant portions thereof
read as follows '

1. That the amount of this contract shall be or shall not exceed TWO HUNDRED TWENTY THOUSAND
ONLY (P220,000.00) PESOS, terms and conditions of payment shall be on a per job basis as specified in
the attached schedule of rates; the CONTRACTOR shall perform the following services for the COMPANY;

1.1 Assist the COMPANY in its daily operations;

1.2 Perform odd jobs as may be assigned.

2. That both parties shall observe the following terms and conditions as stipulated, to wit:

2.1 CONTRACTOR must carry on an independent legitimate business, and must comply with all the
pertinent laws of the government both local and national;

2.2 CONTRACTOR must provide all hand tools and equipment necessary in the performance of their work.

However, the COMPANY may allow the use of its fixed equipment as a casual facility in the performance
of the contract;

2.3 CONTRACTOR must comply with the attached scope of work, specifications, and GMP and safety
practices of the company;

2.4 CONTRACTOR must undertake the contract work under the following manner:
48

A. on his own account;

b. under his own responsibility;

c. according to his manner and method, free from the control and direction of the company in all matters
connected with the performance of the work except as to the result thereof;

3. CONTRACTOR must pay the prescribed minimum wage, remit SSS/MEDICARE premiums to proper
government agencies, and submit copies of payroll and proof of SSS/MEDICARE remittances to the
COMPANY;

4. This contract shall be for a specific period of Six (6) months from July 1 to December 31, 1993; x x x.

Pursuant to the foregoing Service Contract, CAMPCO members rendered services to petitioner. The
number of CAMPCO members that report for work and the type of service they performed depended on
the needs of petitioner at any given time. Although the Service Contract specifically stated that it shall
only be for a period of six months, i.e., from 1 July to 31 December 1993, the parties had apparently
extended or renewed the same for the succeeding years without executing another written contract. It
was under these circumstances that respondents came to work for petitioner.

Investigation by DOLE

Concomitantly, the Sangguniang Bayan of Polomolok, South Cotabato, passed Resolution No. 64, on 5
May 1993, addressed to then Secretary Ma. Nieves R. Confessor of the Department of Labor and
Employment (DOLE), calling her attention to the worsening working conditions of the petitioner's workers
and the organization of contractual workers into several cooperatives to replace the individual labor-only
contractors that used to supply workers to the petitioner. Acting on the said Resolution, the DOLE
Regional Office No. XI in Davao City organized a Task Force that conducted an investigation into the
alleged labor-only contracting activities of the cooperatives in Polomolok.7

On 24 May 1993, the Senior Legal Officer of petitioner wrote a letter addressed to Director Henry M. Parel
of DOLE Regional Office No. XI, supposedly to correct the misinformation that petitioner was involved in
labor-only contracting, whether with a cooperative or any private contractor. He further stated in the
letter that petitioner was not hiring cooperative members to replace the regular workers who were
separated from service due to redundancy; that the cooperatives were formed by the immediate
dependents and relatives of the permanent workers of petitioner; that these cooperatives were registered
with the CDA; and that these cooperatives were authorized by their respective constitutions and by-laws
to engage in the job contracting business.8

The Task Force submitted a report on 3 June 1993 identifying six cooperatives that were engaged in
labor-only contracting, one of which was CAMPCO. The DOLE Regional Office No. XI held a conference on
18 August 1993 wherein the representatives of the cooperatives named by the Task Force were given the
opportunity to explain the nature of their activities in relation to petitioner. Subsequently, the
cooperatives were required to submit their position papers and other supporting documents, which they
did on 30 August 1993. Petitioner likewise submitted its position paper on 15 September 1993.9

On 19 October 1993, Director Parel of DOLE Regional Office No. XI issued an Order10 in which he made
the following findings'
49

Records submitted to this Office show that the six (6) aforementioned cooperatives are all duly registered
with the Cooperative Development Authority (CDA). These cooperatives were also found engaging in
different activities with DOLE PHILIPPINES, INC. a company engaged in the production of pineapple and
export of pineapple products. Incidentally, some of these cooperatives were also found engaging in
activities which are directly related to the principal business or operations of the company. This is true in
the case of the THREE (3) Cooperatives, namely; Adventurer's Multi Purpose Cooperative, Human
Resource Multi Purpose Cooperative and Cannery Multi Purpose Cooperative.

From the foregoing findings and evaluation of the activities of Adventurer's Multi Purpose Cooperative,
Human Resource Multi Purpose Cooperative and Cannery Multi Purpose Cooperative, this Office finds and
so holds that they are engaging in Labor Only Contracting Activities as defined under Section 9, Rule VIII,
Book III of the rules implementing the Labor Code of the Philippines, as amended which we quote:

"Section 9 Labor Only Contracting - a) Any person who undertakes to supply workers to an employer shall
be deemed to be engaged in labor-only contracting where such person:

1) Does not have substantial capital or investment in the form of tools, equipment, machineries, work
premises and other materials; andcralawlibrary

2) The workers recruited and placed by such person are performing activities which are directly related to
the principal business or operation of the employer to which workers are habitually employed.

b) Labor-only contracting as defined herein is hereby prohibited and the person acting as contractor shall
be considered merely as an agent or intermediary 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."

WHEREFORE, premises considered, ADVENTURER'S MULTI PURPOSE COOPERATIVE, HUMAN RESOURCE

MULTI PURPOSE COOPERATIVE and CANNERY MULTI PURPOSE COOPERATIVE are hereby declared to be
engaged in labor only contracting which is a prohibited activity. The same cooperatives are therefore
ordered to cease and desist from further engaging in such activities.

The three (3) other cooperatives, namely Polomolok Skilled Workers Multi Purpose Cooperative, Unified
Engineering and Manpower Service Multi Purpose Cooperative and Tibud sa Katibawasan Multi Purpose
Cooperative whose activities may not be directly related to the principal business of DOLE Philippines, Inc.
are also advised not to engage in labor only contracting with the company.

All the six cooperatives involved appealed the afore-quoted Order to the Office of the DOLE Secretary,
raising the sole issue that DOLE Regional Director Director Parel committed serious error of law in
directing the cooperatives to cease and desist from engaging in labor-only contracting. On 15 September
1994, DOLE Undersecretary Cresencio B. Trajano, by the authority of the DOLE Secretary, issued an
Order11 dismissing the appeal on the basis of the following ratiocination'

The appeal is devoid of merit.

The Regional Director has jurisdiction to issue a cease and desist order as provided by Art. 106 of the
Labor Code, as amended, to wit:

"Art. 106. Contractor or subcontractor. x x x

50

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 restricting, 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 (Emphasis supplied)cralawlibrary

There is "labor-only" contracting where the person supplying workers to an employer does not have
substantial capital or investment in the forms of tools, equipment, machineries, work premises, among
others, and the workers recruited and placed by such person are performing activities which are directly
related to the principal business of the employer. In such cases, the person or the 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." in relation to Article 128(b) of the
Labor Code, as amended by Republic Act No. 7730, which reads:

"Art. 128. Visitorial and Enforcement Power.

b) Notwithstanding the provisions of Articles 129 and 217 of this Code to the contrary, and in cases where
the relationship of employer-employee still exists, the Secretary of Labor and Employment or his duly
authorized representatives shall have the power to issue compliance orders to give effect to the labor
standards provisions of this Code and other labor legislation based on the findings of labor employment
and enforcement officers or industrial safety engineers made in the course of inspection. The Secretary or
his duly authorized representatives shall issue writs of execution to the appropriate authority for the
enforcement of their orders, except in cases where the employer contests the findings of the labor
employment and enforcement officer and raises issues supported by documentary proof which were not
considered in the course of inspection.

An order issued by the duly authorized representative of the Secretary of Labor and Employment under
this article may be appealed to the latter. In case said order involves a monetary award, an appeal by the
employer may be perfected only upon the posting of a cash bond issued by a reputable bonding
company duly accredited by the Secretary of Labor and Employment in the amount equivalent to the
monetary award in the order appealed from."

The records reveal that in the course of the inspection of the premises of Dolefil, it was found out that the
activities of the members of the [cooperatives] are necessary and desirable in the principal business of the
former; and that they do not have the necessary investment in the form of tools and equipments. It is
worthy to note that the cooperatives did not deny that they do not have enough capital in the form of
tools and equipment. Under the circumstances, it could not be denied that the [cooperatives] are
considered as labor-only contractors in relation to the business operation of DOLEFIL, INC.

Thus, Section 9, Rule VIII, Book III of the Omnibus Rules Implementing the Labor Code, provides that:

"Sec. 9. Labor-only contracting. - (a) Any person who undertakes to supply workers to an employer shall
be deemed to be engaged in labor-only contracting where such person:
51

(1) Does not have substantial capital or investment in the form of tools, equipment, machineries, work
premises and other materials; andcralawlibrary

(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.

(b) Labor-only contracting as defined herein is hereby prohibited and the person acting as a contractor
shall be considered merely as an agent or intermediary 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.

Violation of the afore-quoted provision is considered a labor standards violation and thus, within the
visitorial and enforcement powers of the Secretary of Labor and Employment (Art. 128).

The Regional Director's authority to issue a cease and desist order emanates from Rule I, Section 3 of the
Rules on Disposition of Labor Standard Cases in the Regional Offices, to wit:

"Section 3. Authorized representative of the Secretary of Labor and Employment. - The Regional Directors
shall be the duly authorized representatives of the Secretary of Labor and Employment in the
administration and enforcement of the labor standards within their respective territorial jurisdiction."

The power granted under Article 106 of the Labor Code to the Secretary of Labor and Employment to
restrict or prohibit the contracting out of labor to protect the rights of workers established under the
Code is delegated to the Regional Directors by virtue of the above-quoted provision.

The reason why "labor-only" contracting is prohibited under the Labor Code is that it encourages
circumvention of the provisions of the Labor Code on the workers' right to security of tenure and to self-
organization.

WHEREFORE, the respondents' Appeal is hereby DISMISSED for lack of merit. The Order of the Regional
Director, Regional Office No. XI, Davao City, is AFFIRMED.

After the motion for reconsideration of the foregoing Order was denied, no further motion was filed by
the parties, and the Order, dated 15 September 1994, of DOLE Undersecretary Trajano became final and
executory. A Writ of Execution12 was issued by DOLE Regional Office No. XI only on 27 July 1999, years
after the issuance of the order subject of the writ. The DOLE Regional Office No. XI was informed that
CAMPCO and two other cooperatives "continued to operate at DOLE Philippines, Inc. despite the cease
and desist Order" it had issued. It therefore commanded the Sheriff to proceed to the premises of
CAMPCO and the two other cooperatives and implement its Order dated 19 October 1993.

Respondent's Complaint before the NLRC

Respondents started working for petitioner at various times in the years 1993 and 1994, by virtue of the
Service Contract executed between CAMPCO and petitioner. All of the respondents had already rendered
more than one year of service to petitioner. While some of the respondents were still working for
petitioner, others were put on "stay home status" on varying dates in the years 1994, 1995, and 1996 and
were no longer furnished with work thereafter. Together, respondents filed a Complaint,13 on 19
December 1996, with the National Labor Relations Commission (NLRC), for illegal dismissal, regularization,
wage differentials, damages and attorney's fees.
52

In their Position Paper,14 respondents reiterated and expounded on the allegations they previously made
in their Complaint'

Sometime in 1993 and 1994, [herein petitioner] Dolefil engaged the services of the [herein respondents]
through Cannery Multi-purpose Cooperative. A cooperative which was organized through the initiative of
Dolefil in order to fill in the vacuum created as a result of the dismissal of the regular employees of Dolefil
sometime in 1990 to 1993.

The [respondents] were assigned at the Industrial Department of respondent Dolefil. All tools, implements
and machineries used in performing their task such as: can processing attendant, feeder of canned
pineapple at pineapple processing, nata de coco processing attendant, fruit cocktail processing attendant,
and etc. were provided by Dolefil. The cooperative does not have substantial capital and does not provide
the [respondents] with the necessary tools to effectively perform their assigned task as the same are being
provided by Dolefil.

The training and instructions received by the [respondents] were provided by Dolefil. Before any of the
[respondents] will be allowed to work, he has to undergo and pass the training prescribed by Dolefil. As a
matter of fact, the trainers are employees of Dolefil.

The [respondents] perform their assigned task inside the premises of Dolefil. At the job site, they were
given specific task and assignment by Dolefil's supervisors assigned to supervise the works and efficiency
of the complainants. Just like the regular employees of Dolefil, [respondents] were subjected to the same
rules and regulations observe [sic] inside company premises and to some extent the rules applied to the
[respondents] by the company through its officers are even stricter.

The functions performed by the [respondents] are the same functions discharged by the regular
employees of Dolefil. In fact, at the job site, the [respondents] were mixed with the regular workers of
Dolefil. There is no difference in so far as the job performed by the regular workers of Dolefil and that of
the [respondents].

Some of the [respondents] were deprived of their employment under the scheme of "stay home status"
where they were advised to literally stay home and wait for further instruction to report anew for work.
However, they remained in this condition for more than six months. Hence, they were constructively or
illegally dismissed.

Respondents thus argued that they should be considered regular employees of petitioner given that: (1)
they were performing jobs that were usually necessary and desirable in the usual business of petitioner;
(2) petitioner exercised control over respondents, not only as to the results, but also as to the manner by
which they performed their assigned tasks; and (3) CAMPCO, a labor-only contractor, was merely a
conduit of petitioner. As regular employees of petitioner, respondents asserted that they were entitled to
security of tenure and those placed on "stay home status" for more than six months had been
constructively and illegally dismissed. Respondents further claimed entitlement to wage differential, moral
damages, and attorney's fees.

In their Supplemental Position Paper,15 respondents presented, in support of their Complaint, the Orders
of DOLE Regional Director Parel, dated 19 October 1993, and DOLE Undersecretary Trajano, dated 15
September 1994, finding that CAMPCO was a labor-only contractor and directing CAMPCO to cease and
desist from any further labor-only contracting activities.
53

Petitioner, in its Position Paper16 filed before the NLRC, denied that respondents were its employees.

Petitioner explained that it found the need to engage external services to augment its regular workforce,
which was affected by peaks in operation, work backlogs, absenteeism, and excessive leaves. It used to
engage the services of individual workers for definite periods specified in their employment contracts and
never exceeding one year. However, such an arrangement became the subject of a labor case,17 in which
petitioner was accused of preventing the regularization of such workers. The Labor Arbiter who heard the
case, rendered his Decision18 on 24 June 1994 declaring that these workers fell squarely within the
concept of seasonal workers as envisaged by Article 280 of the Labor Code, as amended, who were hired
by petitioner in good faith and in consonance with sound business practice; and consequently, dismissing
the complaint against petitioner. The NLRC, in its Resolution,19 dated 14 March 1995, affirmed in toto the
Labor Arbiter's Decision and further found that the workers were validly and legally engaged by petitioner
for "term employment," wherein the parties agreed to a fixed period of employment, knowingly and
voluntarily, without any force, duress or improper pressure being brought to bear upon the employees
and absent any other circumstance vitiating their consent. The said NLRC Resolution became final and
executory on 18 June 1996. Despite the favorable ruling of both the Labor Arbiter and the NLRC,
petitioner decided to discontinue such employment arrangement. Yet, the problem of petitioner as to
shortage of workforce due to the peaks in operation, work backlogs, absenteeism, and excessive leaves,
persisted. Petitioner then found a solution in the engagement of cooperatives such as CAMPCO to
provide the necessary additional services.

Petitioner contended that respondents were owners-members of CAMPCO; that CAMPCO was a duly-
organized and registered cooperative which had already grown into a multi-million enterprise; that
CAMPCO was engaged in legitimate job-contracting with its own owners-members rendering the contract
work; that under the express terms and conditions of the Service Contract executed between petitioner
(the principal) and CAMPCO (the contractor), the latter shall undertake the contract work on its own
account, under its own responsibility, and according to its own manner and method free from the control
and direction of the petitioner in all matters connected with the performance of the work, except as to the
result thereof; and since CAMPCO held itself out to petitioner as a legitimate job contractor, respondents,
as owners-members of CAMPCO, were estopped from denying or refuting the same.

Petitioner further averred that Department Order No. 10, amending the rules implementing Books III and
VI of the Labor Code, as amended, promulgated by the DOLE on 30 May 1997, explicitly recognized the
arrangement between petitioner and CAMPCO as permissible contracting and subcontracting, to wit'

Section 6. Permissible contracting and subcontracting. - Subject to the conditions set forth in Section 3(d)
and (e) and Section 5 hereof, the principal may engage the services of a contractor or subcontractor for
the performance of any of the following;

(a) Works or services temporarily or occasionally needed to meet abnormal increase in the demand of
products or services, provided that the normal production capacity or regular workforce of the principal
cannot reasonably cope with such demands;
54

(b) Works or services temporarily or occasionally needed by the principal for undertakings requiring
expert or highly technical personnel to improve the management or operations of an enterprise;

(c) Services temporarily needed for the introduction or promotion of new products, only for the duration
of the introductory or promotional period;

(d) Works or services not directly related or not integral to the main business or operation of the principal,
including casual work, janitorial, security, landscaping, and messengerial services, and work not related to
manufacturing processes in manufacturing establishments;

(e) Services involving the public display of manufacturer's products which does not involve the act of
selling or issuance of receipts or invoices;

(f) Specialized works involving the use of some particular, unusual, or peculiar skills, expertise, tools or
equipment the performance of which is beyond the competence of the regular workforce or production
capacity of the principal; andcralawlibrary

(g) Unless a reliever system is in place among the regular workforce, substitute services for absent regular
employees, provided that the period of service shall be coextensive with the period of absence and the
same is made clear to the substitute employee at the time of engagement. The phrase "absent regular
employees" includes those who are serving suspensions or other disciplinary measures not amounting to
termination of employment meted out by the principal, but excludes those on strike where all the formal
requisites for the legality of the strike have been prima facie complied with based on the records filed
with the National Conciliation and Mediation Board.

According to petitioner, the services rendered by CAMPCO constituted permissible job contracting under
the afore-quoted paragraphs (a), (c), and (g), Section 6 of DOLE Department Order No. 10, series of 1997.

After the parties had submitted their respective Position Papers, the Labor Arbiter promulgated its
Decision20 on 11 June 1999, ruling entirely in favor of petitioner, ratiocinating thus'

After judicious review of the facts, narrated and supporting documents adduced by both parties, the
undersigned finds [and] holds that CAMPCO is not engaged in labor-only contracting.

Had it not been for the issuance of Department Order No. 10 that took effect on June 22, 1997 which in
the contemplation of Law is much later compared to the Order promulgated by the Undersecretary
Cresencio Trajano of Department of [L]abor and Employment, the undersigned could safely declared [sic]
otherwise. However, owing to the principle observed and followed in legal practice that the later law or
jurisprudence controls, the reliance to Secretary Trajano's order is overturned.

Labor-only contracting as amended by Department [O]rder No. 10 is defined in this wise:

"Labor-only contracting is prohibited under this Rule is an arrangement where the contractor or
subcontractor merely recruits, supplied [sic] or places workers to perform a job, work or service for a
principal, and the following elements are present:

i) The contractor or sub-contractor does not have substantial capital or investment to actually perform the
job, work, or service under its own account & responsibility, and
55

ii) 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."

Verification of the records reveals that per Annexes "J" and "K" of [herein petitioner DolePhil's] position
paper, which are the yearly audited Financial Statement and Balance Sheet of CAMPCO shows [sic] that it
has more than substantial capital or investment in order to qualify as a legitimate job contractor.

We likewise recognize the validity of the contract entered into and between CAMPCO and [petitioner] for
the former to assists [sic] the latter in its operations and in the performance of odd jobs - such as the
augmentation of regular manning particularly during peaks in operation, work back logs, absenteeism and
excessive leave availment of respondent's regular employees. The rule is well-settled that labor laws
discourage interference with an employer's judgment in the conduct of his business. Even as the law is
solicitors [sic] of the welfare of the employees, it must also protect the right of an employer to exercise
what are clearly management prerogatives. The free will of management to conduct its own business
affairs to achieve its purpose cannot be denied (Yuco Chemical Industries v. Ministry of [L]abor, GR No.
75656, May 28, 1990).

CAMPCO being engaged in legitimate contracting, cannot therefore declared [sic] as guilty of labor-only
contracting which [herein respondents] want us to believe.

The second issue is likewise answered in the negative. The reason is plain and simple[,] section 12 of
Department [O]rder No. 10 states:

"Section 12. Employee-employer relationship. Except in cases provided for in Section 13, 14, 15 & 17, the
contractor or subcontractor shall be considered the employer of the contractual employee for purposes of
enforcing the provisions of the Code."

The Resolution of NLRC 5th division, promulgated on March 14, 1 1995 [sic] categorically declares:

"Judging from the very nature of the terms and conditions of their hiring, the Commission finds the
complainants to have been engaged to perform work, although necessary or desirable to the business of
respondent company, for a definite period or what is community called TERM EMPLOYMENT. It is clear
from the evidence and record that the nature of the business and operation of respondent company has
its peaks and valleys and therefore, it is not difficult to discern, inclement weather, or high availment by
regular workers of earned leave credits, additional workers categorized as casuals, or temporary, are
needed to meet the exigencies." (Underlining in the original)

The validity of fixed-period employment has been consistently upheld by the Supreme [C]ourt in a long
line of cases, the leading case of which is Brent School, Inc. v. Zamora & Alegre, GR No. 48494, February 5,
1990. Thus at the end of the contract the employer-employee relationship is terminated. It behooves
upon us to rule that herein complainants cannot be declared regular rank and file employees of the
[petitioner] company.

Anent the third issue, [respondents] dismally failed to provide us the exact figures needed for the
computation of their wage differentials. To simply alleged [sic] that one is underpaid of his wages is not
enough. No bill of particulars was submitted. Moreover, the Order of RTWPB Region XI, Davao City dated
February 21, 1996 exempts [petitioner] company from complying Wage Order No. 04 [sic] in so far as such
exemption applies only to workers who are not covered by the Collective Bargaining Agreement, for the
period January 1 to December 31, 1995,. [sic] In so far as [respondents] were not privies to the CBA, they
56

were the workers referred to by RTWPB's Order. [H]ence, [respondents'] claims for wage differentials are
hereby dismissed for lack of factual basis.

We find no further necessity in delving into the issues raised by [respondents] regarding moral damages
and attorney's fees for being moot and academic because of the findings that CAMPCO does not
engaged [sic] in labor-only contracting and that [respondents] cannot be declared as regular employees
of [petitioner].

WHEREFORE, premises considered, judgment is hereby rendered in the above-entitled case, dismissing
the complaint for lack of merit.

Respondents appealed the Labor Arbiter's Decision to the NLRC, reiterating their position that they should
be recognized as regular employees of the petitioner since CAMPCO was a mere labor-only contractor, as
already declared in the previous Orders of DOLE Regional Director Parel, dated 19 October 1993, and
DOLE Undersecretary Trajano, dated 15 September 1994, which already became final and executory. The
NLRC, in its Resolution,21 dated 29 February 2000, dismissed the appeal and affirmed the Labor Arbiter's
Decision, reasoning as follows'

We find no merit in the appeal.

The concept of conclusiveness of judgment under the principle of "res judicata" means that where
between the first case wherein judgment is rendered and the second case wherein such judgment is
invoked, there is identity of parties, but there is no identity of cause of action, the judgment is conclusive
in the second case, only as to those matters actually and directly controverted and determined and not as
to matters merely involved therein (Viray, etc. v. Marinas, et al., 49 SCRA 44). There is no denying that the
order of the Department of Labor and Employment, Regional Office No. XI in case No. RI100-9310-RI-355,
which the complainants perceive to have sealed the status of CAMPCO as labor-only contractor,
proceeded from the visitorial and enforcement power of the Department Secretary under Article 128 of
the Labor Code. Acting on reports that the cooperatives, including CAMPCO, that operated and offered
services at [herein petitioner] company were engaging in labor-only contracting activities, that Office
conducted a routinary inspection over the records of said cooperatives and consequently, found the latter
to be engaging in labor-only contracting activities. This being so, [petitioner] company was not a real
party-in-interest in said case, but the cooperatives concerned. Therefore, there is no identity of parties
between said case and the present case which means that the afore-said ruling of the DOLE is not binding
and conclusive upon [petitioner] company.

It is not correct, however, to say, as the Labor Arbiter did, that the afore-said ruling of the Department of
Labor and Employment has been overturned by Department Order No. 10. It is a basic principle that
"once a judgment becomes final it cannot be disturbed, except for clerical errors or when supervening
events render its execution impossible or unjust" (Sampaguita Garmens [sic] Corp. v. NLRC, G. R. No.
102406, June 7, 1994). Verily, the subsequent issuance of Department Order No. 10 cannot be construed
as supervening event that would render the execution of said judgment impossible or unjust. Department
Order No. 10 refers to the ramification of some provisions of the Rules Implementing Articles 106 and 109
of the Labor Code, without substantially changing the definition of "labor-only" or "job' contracting.
57

Well-settled is the rule that to qualify as an independent job contractor, one has either substantial capital
"or" investment in the form of tools, equipment and machineries necessary to carry out his business (see
Virginia Neri, et al. v. NLRC, et al., G.R. NOS. 97008-89, July 23, 1993). CAMPCO has admittedly a paid-up
capital of P4,562,470.25 and this is more than enough to qualify it as an independent job contractor, as
aptly held by the Labor Arbiter.

WHEREFORE, the appeal is DISMISSED for lack of merit and the appealed decision is AFFIRMED.

Petition for Certiorari with the Court of Appeals

Refusing to concede defeat, respondents filed with the Court of Appeals a Petition for Certiorari under
Rule 65 of the revised Rules of Civil Procedure, asserting that the NLRC acted without or in excess of its
jurisdiction and with grave abuse of discretion amounting to lack of jurisdiction when, in its Resolution,
dated 29 February 2000, it (1) ruled that CAMPCO was a bona fide independent job contractor with
substantial capital, notwithstanding the fact that at the time of its organization and registration with CDA,
it only had a paid-up capital of P6,600.00; and (2) refused to apply the doctrine of res judicata against
petitioner. The Court of Appeals, in its Decision,22 dated 20 May 2002, granted due course to
respondents' Petition, and set aside the assailed NLRC Decision. Pertinent portions of the Court of
Appeals Decision are reproduced below'

In the case at bench, it was established during the proceedings before the [NLRC] that CAMPCO has a
substantial capital. However, having a substantial capital does not per se qualify CAMPCO as a job
contractor. In order to be considered an independent contractor it is not enough to show substantial
capitalization or investment in the form of tools, equipment, machinery and work premises. The
conjunction "and," in defining what a job contractor is, means that aside from having a substantial capital
or investment in the form of tools, equipment, machineries, work premise, and other materials which are
necessary in the conduct of his business, the contractor must be able to prove that it also 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. [Herein
petitioner DolePhil] has failed to prove, except for the substantial capital requirement, that CAMPCO has
met the other requirements. It was not established that CAMPCO is engaged or carries on an independent
business. In the performance of the respective tasks of workers deployed by CAMPCO with [petitioner], it
was not established that CAMPCO undertook the contract of work it entered with [petitioner] under its
own account and its own responsibility. It is [petitioner] who provides the procedures to be followed by
the workers in the performance of their assigned work. The workers deployed by CAMPCO to [petitioner]
performed activities which are directly related to the principal business or operations of the employer in
which workers are habitually employed since [petitioner] admitted that these workers were engaged to
perform the job of other regular employees who cannot report for work.

Moreover, [NLRC] likewise gravely erred in not giving weight to the Order dated 19 October 1993 issued
by the Office of the Secretary of the Department of Labor and Employment, through Undersecretary
Cresencio Trajano, which affirmed the findings of the Department of Labor and Employment Regional
Office, Region XI, Davao City that Cannery Multi-Purpose Cooperative is one of the cooperatives engaged
in labor-only contracting activities.
58

In the exercise of the visitorial and enforcement power of the Department of Labor and Employment, an
investigation was conducted among the cooperatives organized and existing in Polomolok, South
Cotabato, relative to labor-only contracting activities. One of the cooperatives investigated was Cannery
Multi-Purpose Cooperative. After the investigation, the Department of Labor and Employment, Regional
Office No. XI, Davao City, through its Regional Director, issued the Order dated 19 October 1993, stating:

"WHEREFORE, premises considered, ADVENTURER'S MULTI PURPOSE COOPERATIVE, HUMAN RESOURCE

MULTI PURPOSE SKILLED COOPERATIVE and CANNERY MULTI PURPOSE COOPERATIVE are hereby
declared to be engaged in labor only contracting which is a prohibited activity. The same cooperatives are
therefore ordered to cease and desist from further engaging in such activities

SO ORDERED."

Cannery Multi Purpose Cooperative, together with the other cooperatives declared as engaged in labor-
only contracting activity, appeal the above-findings to the Secretary of the Department of Labor and
Employment. Their appeal was dismissed for lack of merit as follows:: [sic]

[NLRC] held that CAMPCO, being not a real party-in interest in the above-case, the said ruling is not
binding and conclusive upon [petitioner]. This Court, however, finds the contrary.

CAMPCO was one of the cooperatives investigated by the Department of Labor and Employment,
Regional Office No. XI, Davao City, pursuant to Article 128 of the Labor Code. It was one of the appellants
before the Secretary of the Department of Labor questioning the decision of the Regional Director of
DOLE, Regional Office No. XI, Davao City. This Court noted that in the proceedings therein, and as
mentioned in the decision rendered by Undersecretary Cresencio B. Trajano of the Department of Labor
and Employment, Manila, regarding the cooperatives' appeal thereto, the parties therein, including
Cannery Multi-Purpose Cooperative, submitted to the said office their position papers and Articles of
Cooperatives and Certification of Registrations [sic] on 30 August 1993. This is a clear indicia that
CAMPCO participated in the proceedings therein. [NLRC], therefore, committed grave abuse of discretion
amounting to lack or excess of jurisdiction when it held that CAMPCO was never a party to the said case.

[Petitioner] invokes Section 6 of Department Order No. 10, series of 1997, issued by the Department of
Labor and Employment which took effect on 22 June 1997. The said section identified the circumstances
which are permissible job contracting, to wit:

[Petitioner's] main contention is based on the decisions rendered by the labor arbiter and [NLRC] which
are both anchored on Department Order No. 10 issued by the Department of Labor and Employment. The
said department order provided for several flexible working relations between a principal, a contractor or
subcontractor and the workers recruited by the latter and deployed to the former. In the case at bench,
[petitioner] posits that the engagement of [petitioner] of the workers deployed by CAMPCO was pursuant
to D.O. No. 10, Series of 1997.

However, on 8 May 2001, the Department of Labor and Employment issued Department Order No. 3,
series of 2001, revoking Department Order No. 10, series of 1997. The said department order took effect
on 29 May 2001.
59

Under Department Order No. 3, series of 2001, some contracting and outsourcing arrangements are no
longer legitimate modes of employment relation. Having revoked Department Order No. 10, series of
1997, [petitioner] can no longer support its argument by relying on the revoked department order.

Considering that [CAMPCO] is not a job contractor, but one engaged in labor-only contracting, CAMPCO
serves only as an agent of [petitioner] pursuant to par. (b) of Sec. 9, Rule VIII, Book III of the Implementing
Rules and Regulations of the Labor Code, stating,

However, the Court cannot declare that [herein respondents] are regular employees of [petitioner]. x x x

In the case at bench, although [respondents] were engaged to perform activities which are usually
necessary or desirable in the usual business or trade of private respondent, it is apparent, however, that
their services were engaged by [petitioner] only for a definite period. [Petitioner's] nature of business and
operation has its peaks. In order to meet the demands during peak seasons they necessarily have to
engage the services of workers to work only for a particular season. In the case of [respondents], when
they were deployed by CAMPCO with [petitioner] and were assigned by the latter at its cannery
department, they were aware that they will be working only for a certain duration, and this was made
known to them at the time they were employed, and they agreed to the same.

The non-rehiring of some of the petitioners who were allegedly put on a "floating status' is an indication
that their services were no longer needed. They attained their "floating status" only after they have
finished their contract of employment, or after the duration of the season that they were employed. The
decision of [petitioner] in not rehiring them means that their services were no longer needed due to the
end of the season for which they were hired. And this Court reiterates that at the time they were deployed
to [petitioner's] cannery division, they knew that the services they have to render or the work they will
perform are seasonal in nature and consequently their employment is only for the duration of the season.

ACCORDINGLY, in view of the foregoing, the instant petition for certiorari is hereby GRANTED DUE
COURSE. The decision dated 29 February 2000 and Resolution dated 19 December 2000 rendered by
[NLRC] are hereby SET ASIDE. In place thereof, it is hereby rendered that:

1. Cannery Multi-Purpose Cooperative is a labor-only contractor as defined under the Labor Code of the
Philippines and its implementing rules and regulations; and that

2. DOLE Philippines Incorporated is merely an agent or intermediary of Cannery Multi-Purpose

Cooperative.

All other claims of [respondents] are hereby DENIED for lack of basis.

Both petitioner and respondents filed their respective Motions for Reconsideration of the foregoing
Decision, dated 20 May 2002, prompting the Court of Appeals to promulgate an Amended Decision on 27
November 2003, in which it ruled in this wise:

This court examined again the documentary evidence submitted by the [herein petitioner] and we rule not
to disturb our findings in our Decision dated May 20, 2002. It is our opinion that there was no competent
evidence submitted that would show that CAMPCO is 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 articles of
cooperation and by-laws of CAMPCO do not show that it is engaged in performing a specific and special
60

job or service. What is clear is that it is a multi-purpose cooperative organized under RA No. 6938,
nothing more, nothing less.

As can be gleaned from the contract that CAMPCO entered into with the [petitioner], the undertaking of
CAMPCO is to provide [petitioner] with workforce by assisting the company in its daily operations and
perform odd jobs as may be assigned. It is our opinion that CAMPCO merely acted as recruitment agency
for [petitioner]. CAMPCO by supplying manpower only, clearly conducted itself as 'labor-only" contractor.
As can be gleaned from the service contract, the work performed by the [herein respondents] are directly
related to the main business of the [petitioner]. Clearly, the requisites of "labor-only" contracting are
present in the case at bench.

In view of the above ruling, we find it unnecessary to discuss whether the Order of Undersecretary Trajano
finding that CAMPCO is a "labor-only" contractor is a determining factor or constitutes res judicata in the
case at bench. Our findings that CAMPCO is a "labor-only" contractor is based on the evidence presented
vis - à-vis the rulings of the Supreme Court on the matter.

Since, the argument that the [petitioner] is the real employer of the [respondents], the next question that
must be answered is - what is the nature of the employment of the petitioners?

The afore-quoted [Article 280 of the Labor Code, as amended] provides for two kinds of employment,
namely: (1) regular (2) casual. In our Decision, we ruled that the [respondents] while performing work
necessary and desirable to the business of the [petitioner] are seasonal employees as their services were
engaged by the [petitioner] for a definite period or only during peak season.

In the most recent case of Hacienda Fatima v. National Federation of Sugarcane Workers Food and
General Trade, the Supreme Court ruled that for employees to be excluded from those classified as
regular employees, it is not enough that they perform work or services that are seasonal in nature. They
must have also been employed only for the duration of one season. It is undisputed that the
[respondents'] services were engaged by the [petitioner] since 1993 and 1994. The instant complaint was
filed in 1996 when the [respondents] were placed on floating status. Evidently, [petitioner] employed the
[respondents] for more than one season. Therefore, the general rule on regular employment is applicable.
The herein petitioners who performed their jobs in the workplace of the [petitioner] every season for
several years, are considered the latter's regular employees for having performed works necessary and
desirable to the business of the [petitioner]. The [petitioner's] eventual refusal to use their services'even if
they were ready, able and willing to perform their usual duties whenever these were available and hiring
other workers to perform the tasks originally assigned to [respondents] amounted to illegal dismissal of
the latter. We thus, correct our earlier ruling that the herein petitioners are seasonal workers. They are
regular employees within the contemplation of Article 280 of the Labor Code and thus cannot be
dismissed except for just or authorized cause. The Labor Code provides that when there is a finding of
illegal dismissal, the effect is that the employee dismissed shall be reinstated to his former position
without loss of seniority rights with backwages from the date of his dismissal up to his actual
reinstatement.

This court however, finds no basis for the award of damages and attorney's fees in favor of the petitioners.

WHEREFORE, the Decision dated May 20, 2002 rendered by this Court is hereby AMENDED as follows:
61

1) [Petitioner] DOLE PHILIPPINES is hereby declared the employer of the [respondents].

2) [Petitioner] DOLE PHILIPPINES is hereby declared guilty of illegal dismissal and ordered to immediately
reinstate the [respondents] to their former position without loss of seniority rights and other benefits, and
to pay each of the [respondents] backwages from the date of the filing of illegal dismissal on December
19, 1996 up to actual reinstatement, the same to be computed by the labor arbiter.

3) The claims for damages and attorney's fees are hereby denied for lack of merit.

No costs.23

The Petition at Bar

Aggrieved by the Decision, dated 20 May 2002, and the Amended Decision, dated 27 November 2003, of
the Court of Appeals, petitioner filed the instant Petition for Review on Certiorari under Rule 45 of the
revised Rules of Civil Procedure, in which it made the following assignment of errors '

I.

THE COURT OF APPEALS HAS DEPARTED FROM THE USUAL COURSE OF JUDCIAL PROCEEDINGS WHEN
IT MADE ITS OWN FACTUAL FINDINGS AND DISREGARDED THE UNIFORM AND CONSISTENT FACTUAL
FINDINGS OF THE LABOR ARBITER AND THE NLRC, WHICH MUST BE ACCORDED GREAT WEIGHT,
RESPECT AND EVEN FINALITY. IN SO DOING, THE COURT OF APPEALS EXCEEDED ITS AUTHORITY ON
CERTIORARI UNDER RULE 65 OF THE RULES OF COURT.

II.

THE COURT OF APPEALS HAS DECIDED A QUESTION OF SUBSTANCE IN A WAY NOT IN ACCORD WITH
THE CONSTITUTION, LAW, APPLICABLE RULES AND REGULATIONS AND DECISIONS OF THE SUPREME
COURT IN NOT HOLDING THAT DEPARTMENT ORDER NO. 10, SERIES OF 1997 IS THE APPLICABLE
REGULATION IN THIS CASE. IN GIVING RETROACTIVE APPLICATION TO DEPARTMENT ORDER NO. 3,
SERIES OF 2001, THE COURT OF APPEALS VIOLATED THE CONSTITUTIONAL PROVISION AGAINST
IMPAIRMENT OF CONTRACTS AND DEPRIVED PETITIONER OF THE DUE PROCESS OF THE LAW.

III.

THE COURT OF APPEALS HAS DETERMINED A QUESTION OF SUBSTANCE NOT IN ACCORD WITH LAW
AND JURISPRUDENCE IN GIVING WEIGHT TO THE ORDER DATED 19 OCTOBER 1993 ISSUED BY THE
OFFICE OF SECRETARY OF LABOR, WHICH AFFIRMED THE FINDINGS OF THE DOLE REGIONAL OFFICE
(REGION XI, DAVAO CITY) THAT CAMPCO IS ONE OF THE COOPERATIVES ENGAGED IN LABOR-ONLY
CONTRACTING ACTIVITIES.

IV.

THE COURT OF APPEALS HAS DETERMINED A QUESTION OF SUBSTANCE NOT IN ACCORD WITH LAW
AND JURISPRUDENCE IN NOT RULING THAT RESPONDENTS, BY ACTIVELY REPRESENTING THEMSELVES
AND WARRANTING THAT THEY ARE ENGAGED IN LEGITIMATE JOB CONTRACTING, ARE BARRED BY THE
EQUITABLE PRINCIPLE OF ESTOPPEL FROM ASSERTING THAT THEY ARE REGULAR EMPLOYEES OF
PETITIONER.
62

V.

THE COURT OF APPEALS HAS DETERMINED A QUESTION OF SUBSTANCE NOT IN ACCORD WITH LAW
AND JURISPRUDENCE IN RULING THAT CAMPCO IS ENGAGED IN THE PROHIBITED ACT OF "LABOR-
ONLY CONTRACTING" DESPITE THERE BEING SUBSTANTIAL EVIDENCE TO THE CONTRARY.

VI.

THE COURT OF APPEALS HAS DETERMINED A QUESTION OF SUBSTANCE NOT IN ACCORD WITH LAW
AND JURISPRUDENCE IN RULING THAT PETITIONER IS THE EMPLOYER OF RESPONDENTS AND THAT
PETITIONER IS GUILTY OF ILLEGAL DISMISSAL.24

This Court's Ruling

Anent the first assignment of error, petitioner argues that judicial review under Rule 65 of the revised
Rules of Civil Procedure is limited only to issues concerning want or excess or jurisdiction or grave abuse
of discretion. The special civil action for certiorari is a remedy designed to correct errors of jurisdiction and
not mere errors of judgment. It is the contention of petitioner that the NLRC properly assumed
jurisdiction over the parties and subject matter of the instant case. The errors assigned by the respondents
in their Petition for Certiorari before the Court of Appeals do not pertain to the jurisdiction of the NLRC;
they are rather errors of judgment supposedly committed by the the NLRC, in its Resolution, dated 29
February 2000, and are thus not the proper subject of a Petition for Certiorari. Petitioner also posits that
the Petition for Certiorari filed by respondents with the Court of Appeals raised questions of fact that
would necessitate a review by the appellate court of the evidence presented by the parties before the
Labor Arbiter and the NLRC, and that questions of fact are not a fit subject for a special civil action for
certiorari.

It has long been settled in the landmark case of St. Martin Funeral Home v. NLRC,25 that the mode for
judicial review over decisions of the NLRC is by a Petition for Certiorari under Rule 65 of the revised Rules
of Civil Procedure. The different modes of appeal, namely, writ of error (Rule 41), Petition for Review
(Rules 42 and 43), and Petition for Review on Certiorari (Rule 45), cannot be availed of because there is no
provision on appellate review of NLRC decisions in the Labor Code, as amended.26 Although the same
case recognizes that both the Court of Appeals and the Supreme Court have original jurisdiction over
such petitions, it has chosen to impose the strict observance of the hierarchy of courts. Hence, a Petition
for Certiorari of a decision or resolution of the NLRC should first be filed with the Court of Appeals; direct
resort to the Supreme Court shall not be allowed unless the redress desired cannot be obtained in the
appropriate courts or where exceptional and compelling circumstances justify an availment of a remedy
within and calling for the exercise by the Supreme Court of its primary jurisdiction.

The extent of judicial review by certiorari of decisions or resolutions of the NLRC, as exercised previously
by the Supreme Court and, now, by the Court of Appeals, is described in Zarate v. Olegario,27 thus'

The rule is settled that the original and exclusive jurisdiction of this Court to review a decision of
respondent NLRC (or Executive Labor Arbiter as in this case) in a Petition for Certiorari under Rule 65 does
not normally include an inquiry into the correctness of its evaluation of the evidence. Errors of judgment,
as distinguished from errors of jurisdiction, are not within the province of a special civil action for
certiorari, which is merely confined to issues of jurisdiction or grave abuse of discretion. It is thus
63

incumbent upon petitioner to satisfactorily establish that respondent Commission or executive labor
arbiter acted capriciously and whimsically in total disregard of evidence material to or even decisive of the
controversy, in order that the extraordinary writ of certiorari will lie. By grave abuse of discretion is meant
such capricious and whimsical exercise of judgment as is equivalent to lack of jurisdiction, and it must be
shown that the discretion was exercised arbitrarily or despotically. For certiorari to lie, there must be
capricious, arbitrary and whimsical exercise of power, the very antithesis of the judicial prerogative in
accordance with centuries of both civil law and common law traditions.

The Court of Appeals, therefore, can grant the Petition for Certiorari if it finds that the NLRC, in its assailed
decision or resolution, committed grave abuse of discretion by capriciously, whimsically, or arbitrarily
disregarding evidence which is material or decisive of the controversy; and the Court of Appeals can not
make this determination without looking into the evidence presented by the parties. Necessarily, the
appellate court can only evaluate the materiality or significance of the evidence, which is alleged to have
been capriciously, whimsically, or arbitrarily disregarded by the NLRC, in relation to all other evidence on
record.

As this Court elucidated in Garcia v. National Labor Relations Commission28 - -

[I]n Ong v. People, we ruled that certiorari can be properly resorted to where the factual findings
complained of are not supported by the evidence on record. Earlier, in Gutib v. Court of Appeals, we
emphasized thus:

[I]t has been said that a wide breadth of discretion is granted a court of justice in certiorari proceedings.
The cases in which certiorari will issue cannot be defined, because to do so would be to destroy its
comprehensiveness and usefulness. So wide is the discretion of the court that authority is not wanting to
show that certiorari is more discretionary than either prohibition or mandamus . In the exercise of our
superintending control over inferior courts, we are to be guided by all the circumstances of each particular
case "as the ends of justice may require." So it is that the writ will be granted where necessary to prevent a
substantial wrong or to do substantial justice.

And in another case of recent vintage, we further held:

In the review of an NLRC decision through a special civil action for certiorari, resolution is confined only to
issues of jurisdiction and grave abuse of discretion on the part of the labor tribunal. Hence, the Court
refrains from reviewing factual assessments of lower courts and agencies exercising adjudicative functions,
such as the NLRC. Occasionally, however, the Court is constrained to delve into factual matters where, as
in the instant case, the findings of the NLRC contradict those of the Labor Arbiter.

In this instance, the Court in the exercise of its equity jurisdiction may look into the records of the case
and re-examine the questioned findings. As a corollary, this Court is clothed with ample authority to
review matters, even if they are not assigned as errors in their appeal, if it finds that their consideration is
necessary to arrive at a just decision of the case. The same principles are now necessarily adhered to and
are applied by the Court of Appeals in its expanded jurisdiction over labor cases elevated through a
petition for certiorari; thus, we see no error on its part when it made anew a factual determination of the
matters and on that basis reversed the ruling of the NLRC.

II
64

The second assignment of error delves into the significance and application to the case at bar of the two
department orders issued by DOLE. Department Order No. 10, series of 1997, amended the implementing
rules of Books III and VI of the Labor Code, as amended. Under this particular DOLE department order, the
arrangement between petitioner and CAMPCO would qualify as permissible contracting. Department
Order No. 3, series of 2001, revoked Department Order No. 10, series of 1997, and reiterated the
prohibition on labor-only contracting.

Attention is called to the fact that the acts complained of by the respondents occurred well before the
issuance of the two DOLE department orders in 1997 and 2001. The Service Contract between DOLE and
CAMPCO was executed on 17 August 1993. Respondents started working for petitioner sometime in 1993
and 1994. While some of them continued to work for petitioner, at least until the filing of the Complaint,
others were put on "stay home status" at various times in 1994, 1995, and 1996. Respondents filed their
Complaint with the NLRC on 19 December 1996.

A basic rule observed in this jurisdiction is that no statute, decree, ordinance, rule or regulation shall be
given retrospective effect unless explicitly stated.29 Since there is no provision at all in the DOLE
department orders that expressly allowed their retroactive application, then the general rule should be
followed, and the said orders should be applied only prospectively.

Which now brings this Court to the question as to what was the prevailing rule on labor-only contracting
from 1993 to 1996, the period when the occurrences subject of the Complaint before the NLRC took
place.

Article 106 of the Labor Code, as amended, permits legitimate job contracting, but prohibits labor-only
contracting. The said provision reads'

ART. 106. Contractor or subcontractor. - Whenever an employer enters into a contract with another
person for the performance of the former's work, the employees of the contractor and of the latter's
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 restricting, 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 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 person or intermediary shall be
65

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.

To implement the foregoing provision of the Labor Code, as amended, Sections 8 and 9, Rule VIII, Book III
of the implementing rules, in force since 1976 and prior to their amendment by DOLE Department Order
No. 10, series of 1997, provided as follows'

Sec. 8. Job contracting. - There is job contracting permissible under the Code if the following conditions
are met;

(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; andcralawlibrary

(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.

Sec. 9. Labor-only contracting. - (a) Any person who undertakes to supply workers to an employer shall be
deemed to be engaged in labor-only contracting where such person:

(1) Does not have substantial capital or investment in the form of tools, equipment, machineries, work
premises and other materials; andcralawlibrary

(2) The workers recruited and placed by such persons are performing activities which are directly related
to the principal business or operations of the employer in which workers are habitually employed.

(b) Labor-only contracting as defined herein is hereby prohibited and the person acting as contractor shall
be considered merely as an agent or intermediary 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.

(c) For cases not falling under this Article, the Secretary of Labor shall determine through appropriate
orders whether or not the contracting out of labor is permissible in the light of the circumstances of each
case and after considering the operating needs of the employer and the rights of the workers involved. In
such case, he may prescribe conditions and restrictions to insure the protection and welfare of the
workers.

Since these statutory and regulatory provisions were the ones in force during the years in question, then it
was in consideration of the same that DOLE Regional Director Parel and DOLE Undesrsecretary Trajano
issued their Orders on 19 September 1993 and 15 September 1994, respectively, both finding that
CAMPCO was engaged in labor-only contracting. Petitioner, in its third assignment of error, questions the
weight that the Court of Appeals gave these orders in its Decision, dated 20 May 2002, and Amended
Decision, dated 27 November 2003.

III

The Orders of DOLE Regional Director Parel, dated 19 September 1993, and of DOLE Undersecretary
Trajano, dated 15 September 1994, were issued pursuant to the visitorial and enforcement power
conferred by the Labor Code, as amended, on the DOLE Secretary and his duly authorized representatives,
to wit'
66

ART. 128. Visitorial and enforcement power. - (a) The Secretary of Labor or his duly authorized
representatives, including labor regulation officers, shall have access to employer's records and premises
at any time of the day or night whenever work is being undertaken therein, and the right to copy
therefrom, to question any employee and investigate any fact, condition or matter which may be
necessary to determine violations or which may aid in the enforcement of this Code and of any labor law,
wage order or rules and regulations pursuant thereto.

(b) Notwithstanding the provisions of Articles 129 and 217 of this Code to the contrary, and in cases
where the relationship of employer-employee still exists, the Secretary of Labor and Employment or his
duly authorized representatives shall have the power to issue compliance orders to give effect to the labor
standards provisions of this Code and other labor legislation based on the findings of labor employment
and enforcement officers or industrial safety engineers made in the course of inspection. The Secretary or
his duly authorized representatives shall issue writs of execution to the appropriate authority for the
enforcement of their orders, except in cases where the employer contests the findings of the labor
employment and enforcement officer and raises issues supported by documentary proofs which were not
considered in the course of inspection.

An order issued by the duly authorized representative of the Secretary of Labor and Employment under
this article may be appealed to the latter. In case said order involves a monetary award, an appeal by the
employer may be perfected only upon the posting of a cash or surety bond issued by a reputable
bonding company duly accredited by the Secretary of Labor and Employment in the amount equivalent to
the monetary award in the order appealed from. (Emphasis supplied.)

Before Regional Director Parel issued his Order, dated 19 September 1993, a Task Force investigated the
operations of cooperatives in Polomolok, South Cotabato, and submitted a report identifying six
cooperatives that were engaged in labor-only contracting, one of which was CAMPCO. In a conference
before the DOLE Regional Office, the cooperatives named by the Task Force were given the opportunity
to explain the nature of their activities in relation to petitioner; and, the cooperatives, as well as petitioner,
submitted to the DOLE Regional Office their position papers and other supporting documents to refute
the findings of the Task Force. It was only after these procedural steps did Regional Director Parel issued
his Order finding that three cooperatives, including CAMPCO, were indeed engaged in labor-only
contracting and were directed to cease and desist from further engaging in such activities. On appeal,
DOLE Undersecretary Trajano, by authority of the DOLE Secretary, affirmed Regional Director Parel's
Order. Upon denial of the Motion for Reconsideration filed by the cooperatives, and no further appeal
taken therefrom, the Order of DOLE Undersecretary Trajano, dated 15 September 1994, became final and
executory.

Petitioner avers that the foregoing Orders of the authorized representatives of the DOLE Secretary do not
constitute res judicata in the case filed before the NLRC. This Court, however, believes otherwise and finds
that the final and executory Orders of the DOLE Secretary or his authorized representatives should bind
the NLRC.

It is obvious that the visitorial and enforcement power granted to the DOLE Secretary is in the nature of a
quasi-judicial power. Quasi-judicial power has been described by this Court in the following manner'
67

Quasi-judicial or administrative adjudicatory power on the other hand is the power of the administrative
agency to adjudicate the rights of persons before it. It is the power to hear and determine questions of
fact to which the legislative policy is to apply and to decide in accordance with the standards laid down by
the law itself in enforcing and administering the same law. The administrative body exercises its quasi-
judicial power when it performs in a judicial manner an act which is essentially of an executive or
administrative nature, where the power to act in such manner is incidental to or reasonably necessary for
the performance of the executive or administrative duty entrusted to it. In carrying out their quasi-judicial
functions the administrative officers or bodies are required to investigate facts or ascertain the existence
of facts, hold hearings, weigh evidence, and draw conclusions from them as basis for their official action
and exercise of discretion in a judicial nature. Since rights of specific persons are affected it is elementary
that in the proper exercise of quasi-judicial power due process must be observed in the conduct of the
proceedings.30 (Emphasis supplied.)

The DOLE Secretary, under Article 106 of the Labor Code, as amended, exercise quasi-judicial power, at
least, to the extent necessary to determine violations of labor standards provisions of the Code and other
labor legislation. He can issue compliance orders and writs of execution for the enforcement of his orders.
As evidence of the importance and binding effect of the compliance orders of the DOLE Secretary, Article
128 of the Labor Code, as amended, further provides'

ART. 128. Visitorial and enforcement power.'

(d) It shall be unlawful for any person or entity to obstruct, impede, delay or otherwise render ineffective
the orders of the Secretary of Labor or his duly authorized representatives issued pursuant to the
authority granted under this article, and no inferior court or entity shall issue temporary or permanent
injunction or restraining order or otherwise assume jurisdiction over any case involving the enforcement
orders issued in accordance with this article.

The Orders of DOLE Regional Director Parel, dated 19 September 1993, and of DOLE Undersecretary
Trajano, dated 15 September 1994, consistently found that CAMPCO was engaging in labor-only
contracting. Such finding constitutes res judicata in the case filed by the respondents with the NLRC.

It is well-established in this jurisdiction that the decisions and orders of administrative agencies, rendered
pursuant to their quasi-judicial authority, have upon their finality, the force and binding effect of a final
judgment within the purview of the doctrine of res judicata. The rule of res judicata, which forbids the
reopening of a matter once judicially determined by competent authority, applies as well to the judicial
and quasi-judicial acts of public, executive or administrative officers and boards acting within their
jurisdiction as to the judgments of courts having general judicial powers. The orderly administration of
justice requires that the judgments or resolutions of a court or quasi-judicial body must reach a point of
finality set by the law, rules and regulations, so as to write finis to disputes once and for all. This is a
fundamental principle in the Philippine justice system, without which there would be no end to
litigations.31

Res judicata has dual aspects, "bar by prior judgment" and "conclusiveness of judgment." This Court has
previously clarified the difference between the two'
68

Section 49, Rule 39 of the Revised Rules of Court lays down the dual aspects of res judicata in actions in
personam. to wit:

"Effect of judgment. - The effect of a judgment or final order rendered by a court or judge of the
Philippines, having jurisdiction to pronounce the judgment or order, may be as follows:

(b) In other cases the judgment or order is, with respect to the matter directly adjudged or as to any other
matter that could have been raised in relation thereto, conclusive between the parties and their successors
in interest by title subsequent to the commencement of the action or special proceeding, litigating for the
same thing and under the same title and in the same capacity;

(c) In any other litigation between the same parties or their successors in interest, that only is deemed to
have been adjudged in a former judgment which appears upon its face to have been so adjudged, or
which was actually and necessarily included therein or necessary thereto."

Section 49(b) enunciates the first concept of res judicata known as "bar by prior judgment," whereas,
Section 49(c) is referred to as "conclusiveness of judgment."

There is "bar by former judgment" when, between the first case where the judgment was rendered, and
the second case where such judgment is invoked, there is identity of parties, subject matter and cause of
action. When the three identities are present, the judgment on the merits rendered in the first constitutes
an absolute bar to the subsequent action. But where between the first case wherein Judgment is rendered
and the second case wherein such judgment is invoked, there is only identity of parties but there is no
identity of cause of action, the judgment is conclusive in the second case, only as to those matters actually
and directly controverted and determined, and not as to matters merely involved therein. This is what is
termed "conclusiveness of judgment."

The second concept of res judicata, conclusiveness of judgment, is the one applicable to the case at bar.

The same parties who participated in the proceedings before the DOLE Regional Office are the same
parties involved in the case filed before the NLRC. CAMPCO, on behalf of its members, attended the
conference before the DOLE Regional Office; submitted its position paper; filed an appeal with the DOLE
Secretary of the Order of DOLE Regional Director Parel; and moved for reconsideration of the subsequent
Order of DOLE Undersecretary Trajano. Petitioner, although not expressly named as a respondent in the
DOLE investigation, was a necessary party thereto, considering that CAMPCO was rendering services to
petitioner solely. Moreover, petitioner participated in the proceedings before the DOLE Regional Office,
intervening in the matter through a letter sent by its Senior Legal Officer, dated 24 May 1993, and
submitting its own position paper.

While the causes of action in the proceedings before the DOLE and the NLRC differ, they are, in fact, very
closely related. The DOLE Regional Office conducted an investigation to determine whether CAMPCO was
violating labor laws, particularly, those on labor-only contracting. Subsequently, it ruled that CAMPCO was
indeed engaging in labor-only contracting activities, and thereafter ordered to cease and desist from
doing so. Respondents came before the NLRC alleging illegal dismissal by the petitioner of those
respondents who were put on "stay home status," and seeking regularization of respondents who were
still working for petitioner. The basis of their claims against petitioner rests on the argument that
CAMPCO was a labor-only contractor and, thus, merely an agent or intermediary of petitioner, who
should be considered as respondents' real employer. The matter of whether CAMPCO was a labor-only
69

contractor was already settled and determined in the DOLE proceedings, which should be conclusive and
binding upon the NLRC. What were left for the determination of the NLRC were the issues on whether
there was illegal dismissal and whether respondents should be regularized.

This Court also notes that CAMPCO and DOLE still continued with their Service Contract despite the
explicit cease and desist orders rendered by authorized DOLE officials. There is no other way to look at it
except that CAMPCO and DOLE acted in complete defiance and disregard of the visitorial and
enforcement power of the DOLE Secretary and his authorized representatives under Article 128 of the
Labor Code, as amended. For the NLRC to ignore the findings of DOLE Regional Director Parel and DOLE
Undersecretary Trajano is an unmistakable and serious undermining of the DOLE officials' authority.

IV

In petitioner's fourth assignment of error, it points out that the Court of Appeals erred in not holding
respondents estopped from asserting that they were regular employees of petitioner since respondents,
as owners-members of CAMPCO, actively represented themselves and warranted that they were engaged
in legitimate job contracting.

This Court cannot sustain petitioner's argument.

It is true that CAMPCO is a cooperative composed of its members, including respondents. Nonetheless, it
cannot be denied that a cooperative, as soon as it is registered with the CDA, attains a juridical personality
of its own,32 separate and distinct from its members; much in the same way that a corporation has a
juridical personality separate and distinct from its stockholders, known as the doctrine of corporate fiction.
The protection afforded by this doctrine is not absolute, but the exception thereto which necessitates the
piercing of the corporate veil can only be made under specified circumstances. In Traders Royal Bank v.
Court of Appeals,33 this Court ruled that -

Petitioner cannot put up the excuse of piercing the veil of corporate entity, as this is merely an equitable
remedy, and maybe awarded only in cases when the corporate fiction is used to defeat public
convenience, justify wrong, protect fraud or defend crime or where a corporation is a mere alter ego or
business conduit of a person.

Piercing the veil of corporate entity requires the court to see through the protective shroud which
exempts its stockholders from liabilities that ordinarily, they could be subject to, or distinguishes one
corporation from a seemingly separate one, were it not for the existing corporate fiction. But to do this,
the court must be sure that the corporate fiction was misused, to such an extent that injustice, fraud, or
crime was committed upon another, disregarding, thus, his, her, or its rights. It is the corporate entity
which the law aims to protect by this doctrine.

Using the above-mentioned guidelines, is petitioner entitled to a piercing of the "cooperative identity" of
CAMPCO? This Court thinks not.

It bears to emphasize that the piercing of the corporate veil is an equitable remedy, and among the
maxims of equity are: (1) he who seeks equity must do equity, and (2) he who comes into equity must
come with clean hands. Hence, a litigant may be denied relief by a court of equity on the ground that his
conduct has been inequitable, unfair, dishonest, fraudulent, or deceitful as to the controversy in issue.34
70

Petitioner does not come before this Court with clean hands. It is not an innocent party in this
controversy.

Petitioner itself admitted that it encouraged and even helped the establishment of CAMPCO and the
other cooperatives in Polomolok, South Cotabato. These cooperatives were established precisely to
render services to petitioner. It is highly implausible that the petitioner was lured into entering into the
Service Contract with CAMPCO in 1993 on the latter's misrepresentation and false warranty that it was an
independent job contractor. Even if it is conceded that petitioner was indeed defrauded into believing
that CAMPCO was an independent contractor, then the DOLE proceedings should have placed it on
guard. Remember that petitioner participated in the proceedings before the DOLE Regional Office, it
cannot now claim ignorance thereof. Furthermore, even after the issuance of the cease and desist order
on CAMPCO, petitioner still continued with its prohibited service arrangement with the said cooperative. If
petitioner was truly defrauded by CAMPCO and its members into believing that the cooperative was an
independent job contractor, the more logical recourse of petitioner was to have the Service Contract
voided in the light of the explicit findings of the DOLE officials that CAMPCO was engaging in labor-only
contracting. Instead, petitioner still carried on its Service Contract with CAMPCO for several more years
thereafter.

As previously discussed, the finding of the duly authorized representatives of the DOLE Secretary that
CAMPCO was a labor-only contractor is already conclusive. This Court cannot deviate from said finding.

This Court, though, still notes that even an independent review of the evidence on record, in consideration
of the proper labor statutes and regulations, would result in the same conclusion: that CAMPCO was
engaged in prohibited activities of labor-only contracting.

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.35

While there is present in the relationship of petitioner and CAMPCO some factors suggestive of an
independent contractor relationship (i.e., CAMPCO chose who among its members should be sent to work
for petitioner; petitioner paid CAMPCO the wages of the members, plus a percentage thereof as
administrative charge; CAMPCO paid the wages of the members who rendered service to petitioner),
many other factors are present which would indicate a labor-only contracting arrangement between
petitioner and CAMPCO.36

First, although petitioner touts the multi-million pesos assets of CAMPCO, it does well to remember that
such were amassed in the years following its establishment. In 1993, when CAMPCO was established and
the Service Contract between petitioner and CAMPCO was entered into, CAMPCO only had P6,600.00
paid-up capital, which could hardly be considered substantial.37 It only managed to increase its
capitalization and assets in the succeeding years by continually and defiantly engaging in what had been
declared by authorized DOLE officials as labor-only contracting.
71

Second, CAMPCO did not carry out an independent business from petitioner. It was precisely established
to render services to petitioner to augment its workforce during peak seasons. Petitioner was its only
client. Even as CAMPCO had its own office and office equipment, these were mainly used for
administrative purposes; the tools, machineries, and equipment actually used by CAMPCO members when
rendering services to the petitioner belonged to the latter.

Third, petitioner exercised control over the CAMPCO members, including respondents. Petitioner attempts
to refute control by alleging the presence of a CAMPCO supervisor in the work premises. Yet, the mere
presence within the premises of a supervisor from the cooperative did not necessarily mean that CAMPCO
had control over its members. Section 8(1), Rule VIII, Book III of the implementing rules of the Labor Code,
as amended, required for permissible job contracting that the contractor undertakes the contract work on
his 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. As alleged by the respondents, and unrebutted by petitioner, CAMPCO
members, before working for the petitioner, had to undergo instructions and pass the training provided
by petitioner's personnel. It was petitioner who determined and prepared the work assignments of the
CAMPCO members. CAMPCO members worked within petitioner's plantation and processing plants
alongside regular employees performing identical jobs, a circumstance recognized as an indicium of a
labor-only contractorship.38

Fourth, CAMPCO was not engaged to perform a specific and special job or service. In the Service Contract
of 1993, CAMPCO agreed to assist petitioner in its daily operations, and perform odd jobs as may be
assigned. CAMPCO complied with this venture by assigning members to petitioner. Apart from that, no
other particular job, work or service was required from CAMPCO, and it is apparent, with such an
arrangement, that CAMPCO merely acted as a recruitment agency for petitioner. Since the undertaking of
CAMPCO did not involve the performance of a specific job, but rather the supply of manpower only,
CAMPCO clearly conducted itself as a labor-only contractor.39

Lastly, CAMPCO members, including respondents, performed activities directly related to the principal
business of petitioner. They worked as can processing attendant, feeder of canned pineapple and
pineapple processing, nata de coco processing attendant, fruit cocktail processing attendant, and etc.,
functions which were, not only directly related, but were very vital to petitioner's business of production
and processing of pineapple products for export.

The findings enumerated in the preceding paragraphs only support what DOLE Regional Director Parel
and DOLE Undersecretary Trajano had long before conclusively established, that CAMPCO was a mere
labor-only contractor.

VI

The declaration that CAMPCO is indeed engaged in the prohibited activities of labor-only contracting,
then consequently, an employer-employee relationship is deemed to exist between petitioner and
respondents, since CAMPCO shall be considered as a mere agent or intermediary of petitioner.
72

Since respondents are now recognized as employees of petitioner, this Court is tasked to determine the
nature of their employment. In consideration of all the attendant circumstances in this case, this Court
concludes that respondents are regular employees of petitioner.

Article 280 of the Labor Code, as amended, reads'

ART. 280. Regular and Casual Employment. - The provisions of written agreement to the contrary
notwithstanding and regardless of the oral agreement of the parties, an employment shall be deemed to
be regular where the employee has been engaged to perform activities which are usually necessary and
desirable in the usual business or trade of the employer, except where the employment has been fixed for
a specific project or undertaking the completion or termination of which has been determined at the time
of engagement of the employee or where the work or services to be performed is seasonal in nature and
the employment is for the duration of the season.

An employment shall be deemed to be casual if its is not covered by the preceding paragraph: Provided,
That, any employee who has rendered at least one year of service, whether such service is continuous or
broken, shall be considered a regular employee with respect to the activity in which he is employed and
his employment shall continue while such activity exists.

This Court expounded on the afore-quoted provision, thus'

The primary standard, therefore, of determining a regular employment is the reasonable connection
between the particular activity performed by the employee in relation to the usual business or trade of the
employer. The test is whether the former is usually necessary or desirable in the usual business or trade of
the employer. The connection can be determined by considering the nature of the work performed and its
relation to the scheme of the particular business or trade in its entirety. Also, if the employee has been
performing the job for at least one year, even if her performance is not continuous or merely intermittent,
the law deems the repeated and continuing need for its performance as sufficient evidence of the
necessity if not indispensability of the activity to the business. Hence, the employment is also considered
regular, but only with respect to such activity and while such activity exists.40

In the instant Petition, petitioner is engaged in the manufacture and production of pineapple products for
export.ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

Respondents rendered services as processing attendant, feeder of canned pineapple and pineapple
processing, nata de coco processing attendant, fruit cocktail processing attendant, and etc., functions they
performed alongside regular employees of the petitioner. There is no doubt that the activities performed
by respondents are necessary or desirable to the usual business of petitioner.

Petitioner likewise want this Court to believe that respondents' employment was dependent on the peaks
in operation, work backlogs, absenteeism, and excessive leaves. However, bearing in mind that
respondents all claimed to have worked for petitioner for over a year, a claim which petitioner failed to
rebut, then respondent's continued employment clearly demonstrates the continuing necessity and
indispensability of respondents' employment to the business of petitioner.

Neither can this Court apply herein the ruling of the NLRC in the previous case involving petitioner and
the individual workers they used to hire before the advent of the cooperatives, to the effect that the
employment of these individual workers were not regular, but rather, were valid "term employments,"
wherein the employer and employee knowingly and voluntarily agreed to employment for only a limited
73

or specified period of time. The difference between that case and the one presently before this Court is
that the members of CAMPCO, including respondents, were not informed, at the time of their
engagement, that their employment shall only be for a limited or specified period of time. There is
absence of proof that the respondents were aware and had knowingly and voluntarily agreed to such
term employment. Petitioner did not enter into individual contracts with the CAMPCO members, but
executed a Service Contract with CAMPCO alone. Although the Service Contract of 1993 stated that it
shall be for a specific period, from 1 July to 31 December 1993, petitioner and CAMPCO continued the
service arrangement beyond 1993. Since there was no written renewal of the Service Contract,41 there
was no further indication that the engagement by petitioner of the services of CAMPCO members was for
another definite or specified period only.

Respondents, as regular employees of petitioner, are entitled to security of tenure. They could only be
removed based on just and authorized causes as provided for in the Labor Code, as amended, and after
they are accorded procedural due process. Therefore, petitioner's acts of placing some of the respondents
on "stay home status" and not giving them work assignments for more than six months were already
tantamount to constructive and illegal dismissal.42

In summary, this Court finds that CAMPCO was a labor-only contractor and, thus, petitioner is the real
employer of the respondents, with CAMPCO acting only as the agent or intermediary of petitioner. Due to
the nature of their work and length of their service, respondents should be considered as regular
employees of petitioner. Petitioner constructively dismissed a number of the respondents by placing them
on "stay home status" for over six months, and was therefore guilty of illegal dismissal. Petitioner must
accord respondents the status of regular employees, and reinstate the respondents who it constructively
and illegally dismissed, to their previous positions, without loss of seniority rights and other benefits, and
pay these respondents' backwages from the date of filing of the Complaint with the NLRC on 19
December 1996 up to actual reinstatement.

WHEREFORE, in view of the foregoing, the instant Petition is DENIED and the Amended Decision, dated 27
November 2003, rendered by the Court of Appeals in CA-G.R. SP No. 63405 is AFFIRMED.

Costs against the petitioner.

SO ORDERED.
74

G.R. No. 160506 : March 9, 2010

JOEB M. ALIVIADO, Petitioners, v. PROCTER & GAMBLE PHILS., INC., and PROMM-GEM INC.,
Respondents.
DECISION
DEL CASTILLO, J.:

Labor laws expressly prohibit "labor-only" contracting. To prevent its circumvention, the Labor Code
establishes an employer-employee relationship between the employer and the employees of the labor-
only contractor.chanroblesvirtua|awlibary

The instant petition for review assails the March 21, 2003 Decision1cЃa of the Court of Appeals (CA) in CA-
G.R. SP No. 52082 and its October 20, 2003 Resolution2cЃa denying the motions for reconsideration
separately filed by petitioners and respondent Procter & Gamble Phils. Inc. (P&G). The appellate court
affirmed the July 27, 1998 Decision of the National Labor Relations Commission (NLRC), which in turn
affirmed the November 29, 1996 Decision3cЃa of the Labor Arbiter. All these decisions found Promm-
Gem, Inc. (Promm-Gem) and Sales and Promotions Services (SAPS) to be legitimate independent
contractors and the employers of the petitioners.

Factual Antecedents

Petitioners worked as merchandisers of P&G from various dates, allegedly starting as early as 1982 or as
late as June 1991, to either May 5, 1992 or March 11, 1993, more specifically as follows:

Name Date Employed Date Dismissed

1. Joeb M. Aliviado November, 1985 May 5, 1992

2. Arthur Corpuz 1988 March 11, 1993

3. Eric Aliviado 1985 March 11, 1993

4. Monchito Ampeloquio September, 1988 March 11, 1993

5. Abraham Basmayor[, Jr.] 1987 March 11, 1993

6. Jonathan Mateo May, 1988 March 11, 1993

7. Lorenzo Platon 1985 March 11, 1993

8. Jose Fernando Gutierrez 1988 May 5, 1992

9. Estanislao Buenaventura June, 1988 March 11, 1993

10. Lope Salonga 1982 March 11, 1993

11. Franz David 1989 March 11, 1993

12. Nestor Ignacio 1982 March 11, 1993

13. Julio Rey 1989 May 5, 1992

14. Ruben [Vasquez], Jr. 1985 May 5, 1992

75

15. Maximino Pascual 1990 May 5, 1992

16. Ernesto Calanao[, Jr.] 1987 May 5, 1992

17. Rolando Romasanta 1983 March 11, 1993

18. [Roehl] Agoo 1988 March 11, 1993

19. Bonifacio Ortega 1988 March 11, 1993

20. Arsenio Soriano, Jr. 1985 March 11, 1993

21. Arnel Endaya 1983 March 11, 1993

22. Roberto Enriquez December, 1988 March 11, 1993

23. Nestor [Es]quila 1983 May 5, 1992

24. Ed[g]ardo Quiambao 1989 March 11, 1993

25. Santos Bacalso 1990 March 11, 1993

26. Samson Basco 1984 March 11, 1993

27. Aladino Gregor[e], Jr. 1980 May 5, 1992

28. Edwin Garcia 1987 May 5, 1992

29. Armando Villar 1990 May 5, 1992

30. Emil Tawat 1988 March 11, 1993

31. Mario P. Liongson 1991 May 5, 1992

32. Cresente J. Garcia 1984 March 11, 1993

33. Fernando Macabent[a] 1990 May 5, 1992

34. Melecio Casapao 1987 March 11, 1993

35. Reynaldo Jacaban 1990 May 5, 1992

36. Ferdinand Salvo 1985 May 5, 1992

37. Alstando Montos 1984 March 11, 1993

38. Rainer N. Salvador 1984 May 5, 1992

39. Ramil Reyes 1984 March 11, 1993

40. Pedro G. Roy 1987

41. Leonardo [F]. Talledo 1985 March 11, 1993

42. Enrique [F]. Talledo 1988 March 11, 1993

43. Willie Ortiz 1987 May 5, 1992

76

44. Ernesto Soyosa 1988 May 5, 1992

45. Romeo Vasquez 1985 March 11, 1993

46. Joel Billones 1987 March 11, 1993

47. Allan Baltazar 1989 March 11, 1993

48. Noli Gabuyo 1991 March 11, 1993

49. Emmanuel E. Laban 1987 May 5, 1992

50. Ramir[o] E. [Pita] 1990 May 5, 1992

51. Raul Dulay 1988 May 5, 1992

52. Tadeo Duran[o] 1988 May 5, 1992

53. Joseph Banico 1988 March 11, 1993

54. Albert Leynes 1990 May 5, 1992

55. Antonio Dacu[m]a 1990 May 5, 1992

56. Renato dela Cruz 1982

57. Romeo Viernes, Jr. 1986

58. El[ia]s Bas[c]o 1989

59. Wilfredo Torres 1986 May 5, 1992

60. Melchor Carda[ñ]o 1991 May 5, 1992

61. [Marino] [Maranion] 1989 May 5, 1992

62. John Sumergido 1987 May 5, 1992

63. Roberto Rosales May, 1987 May 5, 1992

64. Gerry [G]. Gatpo November, 1990 March 11, 1993

65. German N. Guevara May, 1990 March 11, 1993

66. Gilbert Y. Miranda June, 1991 March 11, 1993

67. Rodolfo C. Toledo[, Jr.] May 14, 1991 March 11, 1993

68. Arnold D. [Laspoña] June 1991 March 11, 1993

69. Philip M. Loza March 5, 1992 March 11, 1993

70. Mario N. C[o]ldayon May 14, 1991 March 11, 1993

71. Orlando P. Jimenez November 6, 1992 March 11, 1993

72. Fred P. Jimenez September, 1991 March 11, 1993

77

73. Restituto C. Pamintuan, Jr. March 5, 1992 March 11, 1993

74. Rolando J. de Andres June, 1991 March 11, 1993

75. Artuz Bustenera[, Jr.] December, 1989 March 11, 1993

76. Roberto B. Cruz May 4, 1990 March 11, 1993

77. Rosedy O. Yordan June, 1991 May 5, 1992

78. Dennis Dacasin May. 1990 May 5, 1992

79. Alejandrino Abaton 1988 May 5, 1992

80. Orlando S. Balangue March, 1989 March 11, 19934cЃa

Cralaw. They all individually signed employment contracts with either Promm-Gem or SAPS for periods of
more or less five months at a time.5cЃa 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.6cЃa

SAPS and Promm-Gem imposed disciplinary measures on erring merchandisers for reasons such as
habitual absenteeism, dishonesty or changing day-off without prior notice.7cЃa

P&G is principally engaged in the manufacture and production of different consumer and health products,
which it sells on a wholesale basis to various supermarkets and distributors.8cЃa 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.9cЃa

In December 1991, petitioners filed a complaint10cЃa against P&G for regularization, service incentive
leave pay and other benefits with damages. The complaint was later amended11cЃa to include the matter
of their subsequent dismissal.

Ruling of the Labor Arbiter

On November 29, 1996, the Labor Arbiter dismissed the complaint for lack of merit and ruled that there
was no employer-employee relationship between petitioners and P&G. He found that the selection and
engagement of the petitioners, the payment of their wages, the power of dismissal and control with
respect to the means and methods by which their work was accomplished, were all done and exercised by
Promm-Gem/SAPS. He further found that Promm-Gem and SAPS were legitimate independent job
contractors. The dispositive portion of his Decision reads:

WHEREFORE, premises considered, judgment is hereby rendered Dismissing the above-entitled cases
against respondent Procter & Gamble (Phils.), Inc. for lack of merit.

SO ORDERED.12cЃa

Ruling of the NLRC

Appealing to the NLRC, petitioners disputed the Labor Arbiters findings. On July 27, 1998, the NLRC
rendered a Decision13cЃa disposing as follows:
78

WHEREFORE, premises considered, the appeal of complainants is hereby DISMISSED and the decision
appealed from AFFIRMED.

SO ORDERED.14cЃa

Petitioners filed a motion for reconsideration but the motion was denied in the November 19, 1998
Resolution.15cЃa

Ruling of the Court of Appeals

Petitioners then filed a petition for certiorari with the CA, alleging grave abuse of discretion amounting to
lack or excess of jurisdiction on the part of the Labor Arbiter and the NLRC. However, said petition was
also denied by the CA which disposed as follows:

WHEREFORE, the decision of the National Labor Relations Commission dated July 27, 1998 is AFFIRMED
with the MODIFICATION that respondent Procter & Gamble Phils., Inc. is ordered to pay service incentive
leave pay to petitioners.chanroblesvirtua|awlibary

SO ORDERED.16cЃa

Petitioners filed a motion for reconsideration but the motion was also denied. Hence, this petition.

Issues

Petitioners now come before us raising the following issues:

I. WHETHER X X X THE HONORABLE COURT OF APPEALS HAS COMMITTED [A] REVERSIBLE

ERROR WHEN IT DID NOT FIND THE PUBLIC RESPONDENTS TO HAVE ACTED WITH GRAVE
ABUSE OF DISCRETION AMOUNTING TO LACK OF OR IN EXCESS OF JURISDICTION IN
RENDERING THE QUESTIONED JUDGMENT WHEN, OBVIOUSLY, THE PETITIONERS WERE
ABLE TO PROVE AND ESTABLISH THAT RESPONDENT PROCTER & GAMBLE PHILS., INC. IS
THEIR EMPLOYER AND THAT THEY WERE ILLEGALLY DISMISSED BY THE FORMER.

II.

WHETHER X X X THE HONORABLE COURT OF APPEALS HAS COMMITTED [A] REVERSIBLE ERROR WHEN
IT DID NOT DECLARE THAT THE PUBLIC RESPONDENTS HAD ACTED WITH GRAVE ABUSE OF DISCRETION
WHEN THE LATTER DID NOT FIND THE PRIVATE RESPONDENTS LIABLE TO THE PETITIONERS FOR
PAYMENT OF ACTUAL, MORAL AND EXEMPLARY DAMAGES AS WELL AS LITIGATION COSTS AND
ATTORNEYS FEES.17cЃa

Simply stated, the issues are: (1) whether P&G is the employer of petitioners; (2) whether petitioners were
illegally dismissed; and (3) whether petitioners are entitled for payment of actual, moral and exemplary
damages as well as litigation costs and attorneys fees.

Petitioners Arguments

Petitioners insist that they are employees of P&G. They claim that they were recruited by the salesmen of
P&G and were engaged to undertake merchandising chores for P&G long before the existence of Promm-
Gem and/or SAPS. They further claim that when the latter had its so-called re-alignment program,
79

petitioners were instructed to fill up application forms and report to the agencies which P&G
created.18cЃa

Petitioners further claim that P&G instigated their dismissal from work as can be gleaned from its
letter19cЃa to SAPS dated February 24, 1993, informing the latter that their Merchandising Services
Contract will no longer be renewed.chanroblesvirtua|awlibary

Petitioners further assert that Promm-Gem and SAPS are labor-only contractors providing services of
manpower to their client. They claim that the contractors have neither substantial capital nor tools and
equipment to undertake independent labor contracting. Petitioners insist that since they had been
engaged to perform activities which are necessary or desirable in the usual business or trade of P&G, then
they are its regular employees.20cЃa

Respondents Arguments

On the other hand, P&G points out that the instant petition raises only questions of fact and should thus
be thrown out as the Court is not a trier of facts. It argues that findings of facts of the NLRC, particularly
where the NLRC and the Labor Arbiter are in agreement, are deemed binding and conclusive on the
Supreme Court.chanroblesvirtua|awlibary

P&G further 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.chanroblesvirtua|awlibary

P&G also contends that the Labor Code neither defines nor limits which services or activities may be
validly outsourced. Thus, an employer can farm out any of its activities to an independent contractor,
regardless of whether such activity is peripheral or core in nature. It insists that the determination of
whether to engage the services of a job contractor or to engage in direct hiring is within the ambit of
management prerogative.chanroblesvirtua|awlibary

At this juncture, it is worth mentioning that on January 29, 2007, we deemed as waived the filing of the
Comment of Promm-Gem on the petition.21cЃa Also, although SAPS was impleaded as a party in the
proceedings before the Labor Arbiter and the NLRC, it was no longer impleaded as a party in the
proceedings before the CA.22cЃa Hence, our pronouncements with regard to SAPS are only for the
purpose of determining the obligations of P&G, if any.

Our Ruling

The petition has merit.chanroblesvirtua|awlibary

As a rule, the Court refrains from reviewing factual assessments of lower courts and agencies exercising
adjudicative functions, such as the NLRC. Occasionally, however, the Court is constrained to wade into
factual matters when there is insufficient or insubstantial evidence on record to support those factual
findings; or when too much is concluded, inferred or deduced from the bare or incomplete facts
appearing on record.23cЃa In the present case, we find the need to review the records to ascertain the
facts.
80

Labor-only contracting and job contracting

In order to resolve the issue of whether P&G is the employer of petitioners, it is necessary to first
determine whether Promm-Gem and SAPS are labor-only contractors or legitimate job contractors.

The pertinent Labor Code provision on the matter states:

ART. 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.chanroblesvirtua|awlibary

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 restricting, 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 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 person 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. (Emphasis and underscoring supplied.)

Rule VIII-A, Book III of the Omnibus Rules Implementing the Labor Code, as amended by Department
Order No. 18-02,24cЃa distinguishes between legitimate and labor-only contracting:

Section 3. Trilateral Relationship in Contracting Arrangements. In legitimate contracting, there exists a

trilateral relationship under which there is a contract for a specific job, work or service between the
principal and the contractor or subcontractor, and a contract of employment between the contractor or
subcontractor and its workers. Hence, there are three parties involved in these arrangements, the principal
which decides to farm out a job or service to a contractor or subcontractor, the contractor or
subcontractor which has the capacity to independently undertake the performance of the job, work or
service, and the contractual workers engaged by the contractor or subcontractor to accomplish the job[,]
work or service.chanroblesvirtua|awlibary

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 present:
81

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) [T]he contractor does not exercise the right to control over the performance of the work of the
contractual employee.chanroblesvirtua|awlibary

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

"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.chanroblesvirtua|awlibary

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 in reaching that end.

x x x x (Underscoring supplied.)

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.chanroblesvirtua|awlibary

To emphasize, there is labor-only contracting when the contractor or sub-contractor merely recruits,
supplies or places workers to perform a job, work or service for a principal25cЃa 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. (Underscoring supplied)

In the instant case, the financial statements26cЃa of Promm-Gem show that it

has authorized capital stock of P1 million and a paid-in capital, or capital available for operations, of
P500,000.00 as of 1990.27cЃa It also has long term assets worth P432,895.28 and current assets of
P719,042.32. Promm-Gem has also proven that it maintained its own warehouse and office space with a
floor area of 870 square meters.28cЃa It also had under its name three registered vehicles which were
used for its promotional/merchandising business.29cЃa Promm-Gem also has other clients30cЃa aside
from P&G.31cЃa Under the circumstances, we find that Promm-Gem has substantial investment which
relates to the work to be performed. These factors negate the existence of the element specified in
Section 5(i) of DOLE Department Order No. 18-02.chanroblesvirtua|awlibary
82

The records also show that Promm-Gem supplied its complainant-workers with the relevant materials,
such as markers, tapes, liners and cutters, necessary for them to perform their work. Promm-Gem also
issued uniforms to them. It is also relevant to mention that Promm-Gem already considered the
complainants working under it as its regular, not merely contractual or project, employees.32cЃa This
circumstance negates the existence of element (ii) as stated in Section 5 of DOLE Department Order No.
18-02, which speaks of contractual employees. This, furthermore, negates on the part of Promm-Gem bad
faith and intent to circumvent labor laws which factors have often been tipping points that lead the Court
to strike down the employment practice or agreement concerned as contrary to public policy, morals,
good customs or public order.33cЃa

Under the circumstances, Promm-Gem cannot be considered as a labor-only contractor. We find that it is
a legitimate independent contractor.chanroblesvirtua|awlibary

On the other hand, the Articles of Incorporation of SAPS shows that it has a paid-in capital of only
P31,250.00. 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.chanroblesvirtua|awlibary

In Vinoya v. National Labor Relations Commission,34cЃa the Court held that "[w]ith the current economic
atmosphere in the country, the paid-in capitalization of PMCI amounting to P75,000.00 cannot be
considered as substantial capital and, as such, PMCI cannot qualify as an independent contractor."35cЃa
Applying the same rationale to the present case, it is clear that SAPS having a paid-in capital of only
P31,250 - has no substantial capital. SAPS lack of substantial capital is underlined by the records36cЃa
which show that its payroll for its merchandisers alone for one month would already total P44,561.00. It
had 6-month contracts with P&G.37cЃa Yet SAPS failed to show that it could complete the 6-month
contracts using its own capital and investment. Its capital is not even sufficient for one months payroll.
SAPS failed to show that its paid-in capital of P31,250.00 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 or completion of the job, work or service contracted out. In the
present case, SAPS has failed to show substantial capital.chanroblesvirtua|awlibary

Furthermore, the petitioners have been charged with the merchandising and promotion of the products
of P&G, an activity that has already been considered by the Court as doubtlessly directly related to the
manufacturing business,38cЃa which is 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".chanroblesvirtua|awlibary

"Where labor-only contracting exists, the Labor Code itself establishes an employer-employee relationship
between the employer and the employees of the labor-only contractor."39cЃa The statute establishes this
relationship for a comprehensive purpose: to prevent a circumvention of labor laws. The contractor is
considered merely an agent of the principal employer and the latter is responsible to the employees of
the labor-only contractor as if such employees had been directly employed by the principal
employer.40cЃa
83

Consequently, the following petitioners, having been recruited and supplied by SAPS41cЃa -- which
engaged in labor-only contracting -- are considered as the employees of P&G: Arthur Corpuz, Eric
Aliviado, Monchito Ampeloquio, Abraham Basmayor, Jr., Jonathan Mateo, Lorenzo Platon, Estanislao
Buenaventura, Lope Salonga, Franz David, Nestor Ignacio, Jr., Rolando Romasanta, Roehl Agoo, Bonifacio
Ortega, Arsenio Soriano, Jr., Arnel Endaya, Roberto Enriquez, Edgardo Quiambao, Santos Bacalso, Samson
Basco, Alstando Montos, Rainer N. Salvador, Pedro G. Roy, Leonardo F. Talledo, Enrique F. Talledo, Joel
Billones, Allan Baltazar, Noli Gabuyo, Gerry Gatpo, German Guevara, Gilbert V. Miranda, Rodolfo C. Toledo,
Jr., Arnold D. Laspoña, Philip M. Loza, Mario N. Coldayon, Orlando P. Jimenez, Fred P. Jimenez, Restituto C.
Pamintuan, Jr., Rolando J. De Andres, Artuz Bustenera, Jr., Roberto B. Cruz, Rosedy O. Yordan, Orlando S.
Balangue, Emil Tawat, Cresente J. Garcia, Melencio Casapao, Romeo Vasquez, Renato dela Cruz, Romeo
Viernes, Jr., Elias Basco and Dennis Dacasin.chanroblesvirtua|awlibary

The following petitioners, having worked under, and been dismissed by Promm-Gem, are considered the
employees of Promm-Gem, not of P&G: Wilfredo Torres, John Sumergido, Edwin Garcia, Mario P.
Liongson, Jr., Ferdinand Salvo, Alejandrino Abaton, Emmanuel A. Laban, Ernesto Soyosa, Aladino Gregore,
Jr., Ramil Reyes, Ruben Vasquez, Jr., Maximino Pascual, Willie Ortiz, Armando Villar, Jose Fernando
Gutierrez, Ramiro Pita, Fernando Macabenta, Nestor Esquila, Julio Rey, Albert Leynes, Ernesto Calanao,
Roberto Rosales, Antonio Dacuma, Tadeo Durano, Raul Dulay, Marino Maranion, Joseph Banico, Melchor
Cardano, Reynaldo Jacaban, and Joeb Aliviado.42cЃa

Termination of services

We now discuss the issue of whether petitioners were illegally dismissed. In cases of regular employment,
the employer shall not terminate the services of an employee except for a just43cЃa or authorized44cЃa
cause.chanroblesvirtua|awlibary

In the instant case, the termination letters given by Promm-Gem to its employees uniformly specified the
cause of dismissal as grave misconduct and breach of trust, as follows:

This informs you that effective May 5, 1992, your employment with our company, Promm-Gem, Inc. has
been terminated. We find your expressed admission, that you considered yourself as an employee of
Procter & Gamble Phils., Inc. and assailing the integrity of the Company as legitimate and independent
promotion firm, is deemed as an act of disloyalty prejudicial to the interests of our Company: serious
misconduct and breach of trust reposed upon you as employee of our Company which [co]nstitute just
cause for the termination of your employment.chanroblesvirtua|awlibary

Misconduct has been defined as improper or wrong conduct; the transgression of some established and
definite rule of action, a forbidden act, a dereliction of duty, unlawful in character implying wrongful intent
and not mere error of judgment. The misconduct to be serious must be of such grave and aggravated
character and not merely trivial and unimportant.46cЃa To be a just cause for dismissal, such misconduct
(a) must be serious; (b) must relate to the performance of the employees duties; and (c) must show that
the employee has become unfit to continue working for the employer.47cЃa

In other words, in order to constitute serious misconduct which will warrant the dismissal of an employee
under paragraph (a) of Article 282 of the Labor Code, it is not sufficient that the act or conduct
complained of has violated some established rules or policies. It is equally important and required that the
act or conduct must have been performed with wrongful intent.48cЃa In the instant case, petitioners-
employees of Promm-Gem may have committed an error of judgment in claiming to be employees of
84

P&G, but it cannot be said that they were motivated by any wrongful intent in doing so. As such, we find
them guilty of only simple misconduct for assailing the integrity of Promm-Gem as a legitimate and
independent promotion firm. A misconduct which is not serious or grave, as that existing in the instant
case, cannot be a valid basis for dismissing an employee.chanroblesvirtua|awlibary

Meanwhile, loss of trust and confidence, as a ground for dismissal, must be based on the willful breach of
the trust reposed in the employee by his employer. Ordinary breach will not suffice. A breach of trust is
willful if it is done intentionally, knowingly and purposely, without justifiable excuse, as distinguished from
an act done carelessly, thoughtlessly, heedlessly or inadvertently.49cЃa

Loss of trust and confidence, as a cause for termination of employment, is premised on the fact that the
employee concerned holds a position of responsibility or of trust and confidence. As such, he must be
invested with confidence on delicate matters, such as custody, handling or care and protection of the
property and assets of the employer. And, in order to constitute a just cause for dismissal, the act
complained of must be work-related and must show that the employee is unfit to continue to work for
the employer.50cЃa In the instant case, the petitioners-employees of Promm-Gem have not been shown
to be occupying positions of responsibility or of trust and confidence. Neither is there any evidence to
show that they are unfit to continue to work as merchandisers for Promm-Gem.chanroblesvirtua|awlibary

All told, we find no valid cause for the dismissal of petitioners-employees of Promm-
Gem.chanroblesvirtua|awlibary

While Promm-Gem had complied with the procedural aspect of due process in terminating the
employment of petitioners-employees, i.e., giving two notices and in between such notices, an
opportunity for the employees to answer and rebut the charges against them, it failed to comply with the
substantive aspect of due process as the acts complained of neither constitute serious misconduct nor
breach of trust. Hence, the dismissal is illegal.chanroblesvirtua|awlibary

With regard to the petitioners placed with P&G by SAPS, they were given no written notice of dismissal.
The records show that upon receipt by SAPS of P&Gs letter terminating their "Merchandising Services
Contact" effective March 11, 1993, they in turn verbally informed the concerned petitioners not to report
for work anymore. The concerned petitioners related their dismissal as follows:

5. On March 11, 1993, we were called to a meeting at SAPS office. We were told by Mr. Saturnino A. Ponce
that we should already stop working immediately because that was the order of Procter and Gamble.
According to him he could not do otherwise because Procter and Gamble was the one paying us. To
prove that Procter and Gamble was the one responsible in our dismissal, he showed to us the letter51cЃa
dated February 24, 1993, x x x

February 24, 1993

Sales and Promotions Services

Armons Bldg., 142 Kamias Road,

Quezon City

Attention: Mr. Saturnino A. Ponce

85

President & General Manager

Gentlemen:

Based on our discussions last 5 and 19 February 1993, this formally informs you that we will not be
renewing our Merchandising Services Contract with your agency.chanroblesvirtua|awlibary

Please immediately undertake efforts to ensure that your services to the Company will terminate effective
close of business hours of 11 March 1993.

This is without prejudice to whatever obligations you may have to the company under the
abovementioned contract.

Very truly yours,

(Sgd.)

EMMANUEL M. NON

Sales Merchandising III

cralaw6. On March 12, 1993, we reported to our respective outlet assignments. But, we were no longer
allowed to work and we were refused entrance by the security guards posted. According to the security
guards, all merchandisers of Procter and Gamble under S[APS] who filed a case in the Dept. of Labor are
already dismissed as per letter of Procter and Gamble dated February 25, 1993. x x x52cЃa

Neither SAPS nor P&G dispute the existence of these circumstances. Parenthetically, unlike Promm-Gem
which dismissed its employees for grave misconduct and breach of trust due to disloyalty, SAPS dismissed
its employees upon the initiation of P&G. It is evident that SAPS does not carry on its own business
because the termination of its contract with P&G automatically meant for it also the termination of its
employees services. It is obvious from its act that SAPS had no other clients and had no intention of
seeking other clients in order to further its merchandising business. From all indications SAPS, existed to
cater solely to the need of P&G for the supply of employees in the latters merchandising concerns only.
Under the circumstances prevailing in the instant case, we cannot consider SAPS as an independent
contractor.chanroblesvirtua|awlibary

Going back to the matter of dismissal, it must be emphasized that the onus probandi to prove the
lawfulness of the dismissal rests with the employer.53cЃa In termination cases, the burden of proof rests
upon the employer to show that the dismissal is for just and valid cause.54cЃa In the instant case, P&G
failed to discharge the burden of proving the legality and validity of the dismissals of those petitioners
who are considered its employees. Hence, the dismissals necessarily were not justified and are therefore
illegal.

Damages

We now go to the issue of whether petitioners are entitled to damages. Moral

86

and exemplary damages are recoverable where the dismissal of an employee was attended by bad faith or
fraud or constituted an act oppressive to labor or was done in a manner contrary to morals, good customs
or public policy.55cЃa

With regard to the employees of Promm-Gem, there being no evidence of bad faith, fraud or any
oppressive act on the part of the latter, we find no support for the award of
damages.chanroblesvirtua|awlibary

As for P&G, the records show that it dismissed its employees through SAPS in a manner oppressive to
labor. The sudden and peremptory barring of the concerned petitioners from work, and from admission to
the work place, after just a one-day verbal notice, and for no valid cause bellows oppression and utter
disregard of the right to due process of the concerned petitioners. Hence, an award of moral damages is
called for.chanroblesvirtua|awlibary

Attorneys fees may likewise be awarded to the concerned petitioners who were illegally dismissed in bad
faith and were compelled to litigate or incur expenses to protect their rights by reason of the oppressive
acts56cЃa of P&G.chanroblesvirtua|awlibary

Lastly, under Article 279 of the Labor Code, an employee who is unjustly dismissed from work shall be
entitled to reinstatement without loss of seniority rights and other privileges, inclusive of allowances, and
other benefits or their monetary equivalent from the time the compensation was withheld up to the time
of actual reinstatement.57cЃa Hence, all the petitioners, having been illegally dismissed are entitled to
reinstatement without loss of seniority rights and with full back wages and other benefits from the time of
their illegal dismissal up to the time of their actual reinstatement.

WHEREFORE, the petition is GRANTED. The Decision dated March 21, 2003 of the Court of Appeals in CA-
G.R. SP No. 52082 and the Resolution dated October 20, 2003 are REVERSED and SET ASIDE. Procter &
Gamble Phils., Inc. and Promm-Gem, Inc. are ORDERED to reinstate their respective employees
immediately without loss of seniority rights and with full backwages and other benefits from the time of
their illegal dismissal up to the time of their actual reinstatement. Procter & Gamble Phils., Inc. is further
ORDERED to pay each of those petitioners considered as its employees, namely Arthur Corpuz, Eric
Aliviado, Monchito Ampeloquio, Abraham Basmayor, Jr., Jonathan Mateo, Lorenzo Platon, Estanislao
Buenaventura, Lope Salonga, Franz David, Nestor Ignacio, Rolando Romasanta, Roehl Agoo, Bonifacio
Ortega, Arsenio Soriano, Jr., Arnel Endaya, Roberto Enriquez, Edgardo Quiambao, Santos Bacalso, Samson
Basco, Alstando Montos, Rainer N. Salvador, Pedro G. Roy, Leonardo F. Talledo, Enrique F. Talledo, Joel
Billones, Allan Baltazar, Noli Gabuyo, Gerry Gatpo, German Guevara, Gilbert Y. Miranda, Rodolfo C. Toledo,
Jr., Arnold D. Laspoña, Philip M. Loza, Mario N. Coldayon, Orlando P. Jimenez, Fred P. Jimenez, Restituto C.
Pamintuan, Jr., Rolando J. De Andres, Artuz Bustenera, Jr., Roberto B. Cruz, Rosedy O. Yordan, Orlando S.
Balangue, Emil Tawat, Cresente J. Garcia, Melencio Casapao, Romeo Vasquez, Renato dela Cruz, Romeo
Viernes, Jr., Elias Basco and Dennis Dacasin, P25,000.00 as moral damages plus ten percent of the total
sum as and for attorneys fees.chanroblesvirtua|awlibary

Let this case be REMANDED to the Labor Arbiter for the computation, within 30 days from receipt of this
Decision, of petitioners backwages and other benefits; and ten percent of the total sum as and for
attorneys fees as stated above; and for immediate execution.

SO ORDERED.
87

[G.R. NO. 186965 : December 23, 2009]

TEMIC AUTOMOTIVE PHILIPPINES, INC., Petitioner, v. TEMIC AUTOMOTIVE PHILIPPINES, INC.
EMPLOYEES UNION-FFW, Respondent.
DECISION
BRION, J.:

We resolve the present Petition for Review on Certiorari [1] filed by Temic Automotive Philippines Inc.
(petitioner) to challenge the decision2 and resolution3 of the Court of Appeals (CA) in CA-G.R. SP No.
99029.4

The Antecedents

The petitioner is a corporation engaged in the manufacture of electronic brake systems and comfort body
electronics for automotive vehicles. Respondent Temic Automotive Philippines, Inc. Employees Union-FFW
(union) is the exclusive bargaining agent of the petitioner's rank-and-file employees. On May 6, 2005, the
petitioner and the union executed a collective bargaining agreement (CBA) for the period January 1, 2005
to December 31, 2009.

The 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. Their functions
are interrelated and include: receiving and recording of incoming deliveries, raw materials and spare parts;
checking and booking-in deliveries, raw materials and spare parts with the use of the petitioner's system
application processing; generating bar codes and sticking these on boxes and automotive parts; and
issuing or releasing spare parts and materials as may be needed at the production area, and piling them
up by means of the company's equipment (forklift or jacklift).

By practice established since 1998, the petitioner contracts out some of the work in the warehouse
department, specifically those in the receiving and finished goods sections, to three independent service
providers or forwarders (forwarders), namely: Diversified Cargo Services, Inc. (Diversified), Airfreight 2100
(Airfreight) and Kuehne & Nagel, Inc. (KNI). These forwarders also have their own employees who hold the
positions of clerk, material handler, system encoder and general clerk. The regular employees of the
petitioner and those of the forwarders share the same work area and use the same equipment, tools and
computers all belonging to the petitioner.

This outsourcing arrangement gave rise to a union grievance on the issue of the scope and coverage of
the collective bargaining unit, specifically to the question of "whether or not the functions of the
forwarders' employees are functions being performed by the regular rank-and-file employees covered by
the bargaining unit."5 The union thus demanded that the forwarders' employees be absorbed into the
petitioner's regular employee force and be given positions within the bargaining unit. The petitioner, on
the other hand, on the premise that the contracting arrangement with the forwarders is a valid exercise of
its management prerogative, posited that the union's position is a violation of its management
prerogative to determine who to hire and what to contract out, and that the regular rank-and-file
88

employees and their forwarders' employees serving as its clerks, material handlers, system encoders and
general clerks do not have the same functions as regular company employees.

The union and the petitioner failed to resolve the dispute at the grievance machinery level, thus
necessitating recourse to voluntary arbitration. The parties chose Atty. Roberto A. Padilla as their voluntary
arbitrator. Their voluntary arbitration submission agreement delineated the issues to be resolved as
follows:

1. Whether or not the company validly contracted out or outsourced the services involving forwarding,
packing, loading and clerical activities related thereto; andcralawlibrary

2. Whether or not the functions of the forwarders' employees are functions being performed by regular
rank-and-file employees covered by the bargaining unit.6

To support its position, the union submitted in evidence a copy of the complete manpower complement
of the petitioner's warehouse department as of January 3, 20077 showing that there were at the time 19
regular company employees and 26 forwarder employees. It also presented the affidavits8 of Edgardo P.
Usog, Antonio A. Muzones, Endrico B. Dumolong, Salvador R. Vargas and Harley J. Noval, regular
employees of the petitioner, who deposed that they and the forwarders' employees assigned at the
warehouse department were performing the same functions. The union also presented the affidavits of
Ramil V. Barit9 (Barit), Jonathan G. Prevendido10 (Prevendido) and Eduardo H. Enano11 (Enano),
employees of forwarder KNI, who described their work at the warehouse department.

In its submission,12 the petitioner invoked the exercise of its management prerogative and its authority
under this prerogative to contract out to independent service providers the forwarding, packing, loading
of raw materials and/or finished goods and all support and ancillary services (such as clerical activities) for
greater economy and efficiency in its operations. It argued that in Meralco v. Quisumbing13 this Court
explicitly recognized that the contracting out of work is an employer proprietary right in the exercise of its
inherent management prerogative.

The forwarders, the petitioners alleged, are all highly reputable freight forwarding companies providing
total logistics services such as customs brokerage that includes the preparation and processing of import
and export documentation, cargo handling, transport (air, land or sea), delivery and trucking; and they
have substantial capital and are fully equipped with the technical knowledge, facilities, equipment,
materials, tools and manpower to service the company's forwarding, packing and loading requirements.
Additionally, the petitioner argued that the union is not in a position to question its business judgment,
for even their CBA expressly recognizes its prerogative to have exclusive control of the management of all
functions and facilities in the company, including the exclusive right to plan or control operations and
introduce new or improved systems, procedures and methods.

The petitioner maintained that the services rendered by the forwarders' employees are not the same as
the functions undertaken by regular rank-and-file employees covered by the bargaining unit; therefore,
the union's demand that the forwarders' employees be assimilated as regular company employees and
absorbed by the collective bargaining unit has no basis; what the union asks constitutes an unlawful
interference in the company's prerogative to choose who to hire as employees. It pointed out that the
union could not, and never did, assert that the contracting-out of work to the service providers was in
violation of the CBA or prohibited by law.
89

The petitioner explained that its regular employees' clerical and material handling tasks are not identical
with those done by the service providers; the clerical work rendered by the contractors are recording and
documentation tasks ancillary to or supportive of the contracted services of forwarding, packing and
loading; on the other hand, the company employees assigned as general clerks prepare inventory reports
relating to its shipments in general to ensure that the recording of inventory is consistent with the
company's general system; company employees assigned as material handlers essentially assist in
counter-checking and reporting activities to ensure that the contractors' services comply with company
standards.

The petitioner submitted in evidence the affidavits of Antonio Gregorio14 (Gregorio), its warehouse
manager, and Ma. Maja Bawar15 (Bawar), its section head.

The Voluntary Arbitration Decision

In his decision of May 1, 2007,16 the voluntary arbitrator defined forwarding as a universally accepted and
normal business practice or activity, and ruled that the company validly contracted out its forwarding
services. The voluntary arbitrator observed that exporters, in utilizing forwarders as travel agents of cargo,
mitigate the confusion and delays associated with international trade logistics; the company need not
deal with many of the details involved in the export of goods; and given the years of experience and
constant attention to detail provided by the forwarders, it may be a good investment for the company. He
found that the outsourcing of forwarding work is expressly allowed by the rules implementing the Labor
Code.17

At the same time, however, the voluntary arbitrator found that the petitioner went beyond the limits of
the legally allowable contracting out because the forwarders' employees encroached upon the functions
of the petitioner's regular rank-and-file workers. He opined that the forwarders' personnel serving as
clerks, material handlers, system encoders and general clerks perform "functions [that] are being
performed by regular rank-and-file employees covered by the bargaining unit." He also noted that the
forwarders' employees perform their jobs in the company warehouse together with the petitioner's
employees, use the same company tools and equipment and work under the same company supervisors -
indicators that the petitioner exercises supervision and control over all the employees in the warehouse
department. For these reasons, he declared the forwarders' employees serving as clerks, material handlers,
system encoders and general clerks to be "employees of the company who are entitled to all the rights
and privileges of regular employees of the company including security of tenure."18

The petitioner sought relief from the CA through a Petition for Review under Rule 43 of the Rules of Court
invoking questions of facts and law.19 It specifically questioned the ruling that the company did not
validly contract out the services performed by the forwarders' clerks, material handlers, system encoders
and general clerks, and claimed that the voluntary arbitrator acted in excess of his authority when he ruled
that they should be considered regular employees of the company.

The CA Decision

In its decision of October 28, 2008,20 the CA fully affirmed the voluntary arbitrator's decision and
dismissed the petition for lack of merit. The discussion essentially focused on three points. First, that
decisions of voluntary arbitrators on matters of fact and law, acting within the scope of their authority, are
90

conclusive and constitute res adjudicata on the theory that the parties agreed that the voluntary
arbitrator's decision shall be final. Second, that the petitioner has the right to enter into the forwarding
agreements, but these agreements should be limited to forwarding services; the petitioner failed to
present clear and convincing proof of the delineation of functions and duties between company and
forwarder employees engaged as clerks, material handlers, system encoders and general clerks; thus, they
should be considered regular company employees. Third, on the extent of the voluntary arbitrator's
authority, the CA acknowledged that the arbitrator can only decide questions agreed upon and submitted
by the parties, but maintained that the arbitrator also has the power to rule on consequential issues that
would finally settle the dispute. On this basis, the CA justified the ruling on the employment status of the
forwarders' clerks, material handlers, system encoders and general clerks as a necessary consequence that
ties up the loose ends of the submitted issues for a final settlement of the dispute.

The CA denied the petitioner's motion for reconsideration, giving way to the present petition.

The Petition

The petition questions as a preliminary issue the CA ruling that decisions of voluntary arbitrators are
conclusive and constitute res adjudicata on the facts and law ruled upon.

Expectedly, it cites as error the voluntary arbitrator's and the CA's rulings that: (a) the forwarders'
employees undertaking the functions of clerks, material handlers, system encoders and general clerks
exercise the functions of regular company employees and are subject to the company's control; and (b)
the functions of the forwarders' employees are beyond the limits of what the law allows for a forwarding
agreement.

The petitioner reiterates that there are distinctions between the work of the forwarders' employees and
that of the regular company employees. The receiving, unloading, recording or documenting of materials
the forwarders' employees undertake form part of the contracted forwarding services. The similarity of
these activities to those performed by the company's regular employees does not necessarily lead to the
conclusion that the forwarders' employees should be absorbed by the company as its regular employees.
No proof was ever presented by the union that the company exercised supervision and control over the
forwarders' employees. The contracted services and even the work performed by the regular employees in
the warehouse department are also not usually necessary and desirable in the manufacture of automotive
electronics which is the company's main business. It adds that as held in Philippine Global
Communications, Inc. v. De Vera,[21] management can contract out even services that are usually
necessary or desirable in the employer's business.

On the issue of jurisdiction, the petitioner argues that the voluntary arbitrator neither had jurisdiction nor
basis to declare the forwarders' personnel as regular employees of the company because the matter was
not among the issues submitted by the parties for arbitration; in voluntary arbitration, it is the parties'
submission of the issues that confers jurisdiction on the voluntary arbitrator. The petitioner finally argues
that the forwarders and their employees were not parties to the voluntary arbitration case and thus
cannot be bound by the voluntary arbitrator's decision.

The Case for the Union

91

In its comment,22 the union takes exception to the petitioner's position that the contracting out of
services involving forwarding and ancillary activities is a valid exercise of management prerogative. It
posits that the exercise of management prerogative is not an absolute right, but is subject to the
limitation provided for by law, contract, existing practice, as well as the general principles of justice and
fair play. It submits that both the law and the parties' CBA prohibit the petitioner from contracting out to
forwarders the functions of regular employees, especially when the contracting out will amount to a
violation of the employees' security of tenure, of the CBA provision on the coverage of the bargaining
unit, or of the law on regular employment.

The union disputes the petitioner's claim that there is a distinction between the work being performed by
the regular employees and that of the forwarders' employees. It insists that the functions being assigned,
delegated to and performed by employees of the forwarders are also those assigned, delegated to and
being performed by the regular rank-and-file employees covered by the bargaining unit.

On the jurisdictional issue, the union submits that while the submitted issue is "whether or not the
functions of the forwarders' employees are functions being performed by the regular rank-and-file
employees covered by the bargaining unit," the ruling of the voluntary arbitrator was a necessary
consequence of his finding that the forwarders' employees were performing functions similar to those
being performed by the regular employees of the petitioner. It maintains that it is within the power of the
voluntary arbitrator to rule on the issue since it is inherently connected to, or a consequence of, the main
issues resolved in the case.

The Court's Ruling

We find the petition meritorious.

Underlying Jurisdictional Issues

As submitted by the parties, the first issue is "whether or not the company validly contracted out or
outsourced the services involving forwarding, packing, loading and clerical activities related thereto."
However, the forwarders, with whom the petitioner had written contracts for these services, were never
made parties (and could not have been parties to the voluntary arbitration except with their consent) so
that the various forwarders' agreements could not have been validly impugned through voluntary
arbitration and declared invalid as against the forwarders.

The second submitted issue is "whether or not the functions of the forwarders' employees are functions
being performed by regular rank-and-file employees covered by the bargaining unit." While this
submission is couched in general terms, the issue as discussed by the parties is limited to the forwarders'
employees undertaking services as clerks, material handlers, system encoders and general clerks, which
functions are allegedly the same functions undertaken by regular rank-and-file company employees
covered by the bargaining unit. Either way, however, the issue poses jurisdictional problems as the
forwarders' employees are not parties to the case and the union has no authority to speak for them.

From this perspective, the voluntary arbitration submission covers matters affecting third parties who are
not parties to the voluntary arbitration and over whom the voluntary arbitrator has no jurisdiction; thus,
the voluntary arbitration ruling cannot bind them.23 While they may voluntarily join the voluntary
arbitration process as parties, no such voluntary submission appears in the record and we cannot presume
that one exists. Thus, the voluntary arbitration process and ruling can only be recognized as valid between
92

its immediate parties as a case arising from their collective bargaining agreement. This limited scope, of
course, poses no problem as the forwarders and their employees are not indispensable parties and the
case is not mooted by their absence. Our ruling will fully bind the immediate parties and shall fully apply
to, and clarify the terms of, their relationship, particularly the interpretation and enforcement of the CBA
provisions pertinent to the arbitrated issues.

Validity of the Contracting Out

The voluntary arbitration decision itself established, without objection from the parties, the description of
the work of forwarding as a basic premise for its ruling. We similarly find the description acceptable and
thus adopt it as our own starting point in considering the nature of the service contracted out when the
petitioner entered into its forwarding agreements with Diversified, Airfreight and KNI. To quote the
voluntary arbitration decision:

As forwarders they act as travel agents for cargo. They specialize in arranging transport and completing
required shipping documentation of respondent's company's finished products. They provide custom
crating and packing designed for specific needs of respondent company. These freight forwarders are
actually acting as agents for the company in moving cargo to an overseas destination. These agents are
familiar with the import rules and regulations, the methods of shipping, and the documents related to
foreign trade. They recommend the packing methods that will protect the merchandise during transit.
Freight forwarders can also reserve for the company the necessary space on a vessel, aircraft, train or
truck.

They also prepare the bill of lading and any special required documentation. Freight forwarders can also
make arrangement with customs brokers overseas that the goods comply with customs export
documentation regulations. They have the expertise that allows them to prepare and process the
documentation and perform related activities pertaining to international shipments. As an analogy, freight
forwarders have been called travel agents for freight.24

Significantly, both the voluntary arbitrator and the CA recognized that the petitioner was within its right in
entering the forwarding agreements with the forwarders as an exercise of its management prerogative.
The petitioner's declared objective for the arrangement is to achieve greater economy and efficiency in its
operations - a universally accepted business objective and standard that the union has never questioned.
In Meralco v. Quisumbing,25 we joined this universal recognition of outsourcing as a legitimate activity
when we held that a company can determine in its best judgment whether it should contract out a part of
its work for as long as the employer is motivated by good faith; the contracting is not for purposes of
circumventing the law; and does not involve or be the result of malicious or arbitrary action.

While the voluntary arbitrator and the CA saw nothing irregular in the contracting out as a whole, they
held otherwise for the ancillary or support services involving clerical work, materials handling and
documentation. They held these to be the same as the workplace activities undertaken by regular
company rank-and-file employees covered by the bargaining unit who work under company control;
hence, they concluded that the forwarders' employees should be considered as regular company
employees.
93

Our own examination of the agreement shows that the forwarding arrangement complies with the
requirements of Article 10626 of the Labor Code and its implementing rules.27 To reiterate, no evidence
or argument questions the company's basic objective of achieving "greater economy and efficiency of
operations." This, to our mind, goes a long way to negate the presence of bad faith. The forwarding
arrangement has been in place since 1998 and no evidence has been presented showing that any regular
employee has been dismissed or displaced by the forwarders' employees since then. No evidence likewise
stands before us showing that the outsourcing has resulted in a reduction of work hours or the splitting of
the bargaining unit - effects that under the implementing rules of Article 106 of the Labor Code can make
a contracting arrangement illegal. The other requirements of Article 106, on the other hand, are simply
not material to the present petition. Thus, on the whole, we see no evidence or argument effectively
showing that the outsourcing of the forwarding activities violate our labor laws, regulations, and the
parties' CBA, specifically that it interfered with, restrained or coerced employees in the exercise of their
rights to self-organization as provided in Section 6, par. (f) of the implementing rules. The only exception,
of course, is what the union now submits as a voluntary arbitration issue - i.e., the failure to recognize
certain forwarder employees as regular company employees and the effect of this failure on the CBA's
scope of coverage - which issue we fully discuss below.

The job of forwarding, as we earlier described, consists not only of a single activity but 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 as one whole package of inter-related services that we
discern a basic misunderstanding that results in the error of equating the functions of the forwarders'
employees with those of regular rank-and-file employees of the company. A clerical job, for example, may
similarly involve typing and paper pushing activities and 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, to be
sure, work for the company under its supervision and control, but forwarder employees work for the
forwarder in the forwarder's own operation that is itself a 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. This
interaction is best exemplified by the adduced evidence, particularly the affidavits of petitioner's
warehouse manager Gregorio28 and Section Head Bawar29 discussed below.

From the perspective of the union in the present case, we note that the forwarding agreements were
already in place when the current CBA was signed.30 In this sense, the union accepted the forwarding
arrangement, albeit implicitly, when it signed the CBA with the company. Thereby, the union agreed, again
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 and separate forwarder and company employees from one another. A clerical job, therefore, if
94

undertaken by a forwarders' employee in support of forwarding activities, is not a CBA-covered

undertaking or a regular company activity.

The best evidence supporting this conclusion can be found in the CBA itself, Article 1, Sections 1, 2, 3 and
4 (VII) of which provide:

Section 1. Recognition and Bargaining Unit. - Upon the union's representation and showing of continued
majority status among the employees covered by the bargaining unit as already appropriately constituted,
the company recognizes the union as the sole and exclusive collective bargaining representative of all its
regular rank-and-file employees, except those excluded from the bargaining unit as hereinafter
enumerated in Sections 2 and 3 of this Article, for purposes of collective bargaining in respect to their
rates of pay and other terms and condition of employment for the duration of this Agreement.

Section 2. Exclusions. The following employment categories are expressly excluded from the bargaining
unit and from the scope of this Agreement: executives, managers, supervisors and those employees
exercising any of the attributes of a managerial employee; Accounting Department, Controlling
Department, Human Resources Department and IT Department employees, department secretaries, the
drivers and personnel assigned to the Office of the General Manager and the Office of the Commercial
Affairs and Treasury, probationary, temporary and casual employees, security guards, and other categories
of employees declared by law to be eligible for union membership.

Section 3. Additional Exclusions. Employees within the bargaining unit heretofore defined, who are
promoted or transferred to an excluded employment category as herein before enumerated, shall
automatically be considered as resigned and/or disqualified from membership in the UNION and
automatically removed from the bargaining unit.

Section 4. Definitions - x x x

VII. A regular employee is one who having satisfactorily undergone the probationary period of
employment and passed the company's full requirement for regular employees, such as, but not limited to
physical fitness, proficiency, acceptable conduct and good moral character, received an appointment as a
regular employee duly signed by the authorized official of the COMPANY.

[Emphasis supplied.]

When these CBA provisions were put in place, the forwarding agreements had been in place so that the
forwarders' employees were never considered as company employees who would be part of the
bargaining unit. To be precise, the forwarders' employees and their positions were not part of the
appropriate bargaining unit "as already constituted." In fact, even now, the union implicitly recognizes
forwarding as a whole as a legitimate non-company activity by simply claiming as part of their unit the
forwarders' employees undertaking allied support activities.

At this point, the union cannot simply turn around and claim through voluntary arbitration 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. What the union wants is a function of
negotiations, or perhaps an appropriate action before the National Labor Relations Commission
impleading the proper parties, but not a voluntary arbitration that does not implead the affected parties.
The union must not forget, too, that 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. As
95

already mentioned, the union does not even have the personality to make this claim for these forwarders'
employees. This is the impenetrable wall that the union cannot, for now, pass through using the voluntary
arbitration proceedings now before us on appeal.

Significantly, the evidence presented does not also prove the union's point that forwarder employees
undertake company rather than the forwarders' activities. We say this mindful that 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 KNI employees Barit, Prevendido, and Enano, submitted in evidence by the union,
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, particularly to Germany and the
United States of America (USA).???ñr?bl?š ??r
96

G.R. No. 148132 January 28, 2008

SMART COMMUNICATIONS, INC., petitioner,
vs.
REGINA M. ASTORGA, respondent.
x---------------------------------------------------x
G.R. No. 151079 January 28, 2008
SMART COMMUNICATIONS, INC., petitioner,
vs.
REGINA M. ASTORGA, respondent.
x---------------------------------------------------x
G.R. No. 151372 January 28, 2008
REGINA M. ASTORGA, petitioner,
vs.
SMART COMMUNICATIONS, INC. and ANN MARGARET V. SANTIAGO, respondents.
DECISION
NACHURA, J.:

For the resolution of the Court are three consolidated petitions for review on certiorari under Rule 45 of
the Rules of Court. G.R. No. 148132 assails the February 28, 2000 Decision1 and the May 7, 2001
Resolution2 of the Court of Appeals (CA) in CA-G.R. SP. No. 53831. G.R. Nos. 151079 and 151372 question
the June 11, 2001 Decision3 and the December 18, 2001 Resolution4 in CA-G.R. SP. No. 57065.

Regina M. Astorga (Astorga) was employed by respondent Smart Communications, Incorporated (SMART)
on May 8, 1997 as District Sales Manager of the Corporate Sales Marketing Group/ Fixed Services Division
(CSMG/FSD). She was receiving a monthly salary of P33,650.00. As District Sales Manager, Astorga
enjoyed additional benefits, namely, annual performance incentive equivalent to 30% of her annual gross
salary, a group life and hospitalization insurance coverage, and a car plan in the amount of P455,000.00.5

In February 1998, SMART launched an organizational realignment to achieve more efficient operations.
This was made known to the employees on February 27, 1998.6 Part of the reorganization was the
outsourcing of the marketing and sales force. Thus, SMART entered into a joint venture agreement with
NTT of Japan, and formed SMART-NTT Multimedia, Incorporated (SNMI). Since SNMI was formed to do
the sales and marketing work, SMART abolished the CSMG/FSD, Astorga’s division.

To soften the blow of the realignment, SNMI agreed to absorb the CSMG personnel who would be
recommended by SMART. SMART then conducted a performance evaluation of CSMG personnel and
those who garnered the highest ratings were favorably recommended to SNMI. Astorga landed last in the
performance evaluation, thus, she was not recommended by SMART. SMART, nonetheless, offered her a
supervisory position in the Customer Care Department, but she refused the offer because the position
carried lower salary rank and rate.

Despite the abolition of the CSMG/FSD, Astorga continued reporting for work. But on March 3, 1998,
SMART issued a memorandum advising Astorga of the termination of her employment on ground of
redundancy, effective April 3, 1998. Astorga received it on March 16, 1998.7
97

The termination of her employment prompted Astorga to file a Complaint8 for illegal dismissal, non-
payment of salaries and other benefits with prayer for moral and exemplary damages against SMART and
Ann Margaret V. Santiago (Santiago). She claimed that abolishing CSMG and, consequently, terminating
her employment was illegal for it violated her right to security of tenure. She also posited that it was
illegal for an employer, like SMART, to contract out services which will displace the employees, especially
if the contractor is an in-house agency.9

SMART responded that there was valid termination. It argued that Astorga was dismissed by reason of
redundancy, which is an authorized cause for termination of employment, and the dismissal was effected
in accordance with the requirements of the Labor Code. The redundancy of Astorga’s position was the
result of the abolition of CSMG and the creation of a specialized and more technically equipped SNMI,
which is a valid and legitimate exercise of management prerogative.10

In the meantime, on May 18, 1998, SMART sent a letter to Astorga demanding that she pay the current
market value of the Honda Civic Sedan which was given to her under the company’s car plan program, or
to surrender the same to the company for proper disposition.11 Astorga, however, failed and refused to
do either, thus prompting SMART to file a suit for replevin with the Regional Trial Court of Makati (RTC)
on August 10, 1998. The case was docketed as Civil Case No. 98-1936 and was raffled to Branch 57.12

Astorga moved to dismiss the complaint on grounds of (i) lack of jurisdiction; (ii) failure to state a cause of
action; (iii) litis pendentia; and (iv) forum-shopping. Astorga posited that the regular courts have no
jurisdiction over the complaint because the subject thereof pertains to a benefit arising from an
employment contract; hence, jurisdiction over the same is vested in the labor tribunal and not in regular
courts.13

Pending resolution of Astorga’s motion to dismiss the replevin case, the Labor Arbiter rendered a
Decision14 dated August 20, 1998, declaring Astorga’s dismissal from employment illegal. While
recognizing SMART’s right to abolish any of its departments, the Labor Arbiter held that such right should
be exercised in good faith and for causes beyond its control. The Arbiter found the abolition of CSMG
done neither in good faith nor for causes beyond the control of SMART, but a ploy to terminate Astorga’s
employment. The Arbiter also ruled that contracting out the functions performed by Astorga to an in-
house agency like SNMI was illegal, citing Section 7(e), Rule VIII-A of the Rules Implementing the Labor
Code.

Accordingly, the Labor Arbiter ordered:

WHEREFORE, judgment is hereby rendered declaring the dismissal of [Astorga] to be illegal and unjust.
[SMART and Santiago] are hereby ordered to:

1. Reinstate [Astorga] to [her] former position or to a substantially equivalent position, without loss of
seniority rights and other privileges, with full backwages, inclusive of allowances and other benefits from
the time of [her] dismissal to the date of reinstatement, which computed as of this date, are as follows:

(a)

Astorga

BACKWAGES; (P33,650.00 x 4 months) = P134,600.00

UNPAID SALARIES (February 15, 1998-April 3, 1998

98

February 15-28, 1998 = P 16,823.00

March 1-31, [1998] = P 33,650.00

April 1-3, 1998 = P 3,882.69

CAR MAINTENANCE ALLOWANCE

(P2,000.00 x 4) = P 8,000.00

FUEL ALLOWANCE (300 liters/mo. x 4 mos. at P12.04/liter) = P 14,457.83

TOTAL = P211,415.52

3. Jointly and severally pay moral damages in the amount of P500,000.00 x x x and exemplary damages in
the amount of P300,000.00. x x x

4. Jointly and severally pay 10% of the amount due as attorney’s fees.

SO ORDERED.15

Subsequently, on March 29, 1999, the RTC issued an Order16 denying Astorga’s motion to dismiss the
replevin case. In so ruling, the RTC ratiocinated that:

Assessing the [submission] of the parties, the Court finds no merit in the motion to dismiss.

As correctly pointed out, this case is to enforce a right of possession over a company car assigned to the
defendant under a car plan privilege arrangement. The car is registered in the name of the plaintiff.
Recovery thereof via replevin suit is allowed by Rule 60 of the 1997 Rules of Civil Procedure, which is
undoubtedly within the jurisdiction of the Regional Trial Court.

In the Complaint, plaintiff claims to be the owner of the company car and despite demand, defendant
refused to return said car. This is clearly sufficient statement of plaintiff’s cause of action.

Neither is there forum shopping. The element of litis penden[t]ia does not appear to exist because the
judgment in the labor dispute will not constitute res judicata to bar the filing of this case.

WHEREFORE, the Motion to Dismiss is hereby denied for lack of merit.

SO ORDERED.17

Astorga filed a motion for reconsideration, but the RTC denied it on June 18, 1999.18

Astorga elevated the denial of her motion via certiorari to the CA, which, in its February 28, 2000
Decision,19 reversed the RTC ruling. Granting the petition and, consequently, dismissing the replevin case,
the CA held that the case is intertwined with Astorga’s complaint for illegal dismissal; thus, it is the labor
tribunal that has rightful jurisdiction over the complaint. SMART’s motion for reconsideration having been
denied,20 it elevated the case to this Court, now docketed as G.R. No. 148132.
99

Meanwhile, SMART also appealed the unfavorable ruling of the Labor Arbiter in the illegal dismissal case
to the National Labor Relations Commission (NLRC). In its September 27, 1999 Decision,21 the NLRC
sustained Astorga’s dismissal. Reversing the Labor Arbiter, the NLRC declared the abolition of CSMG and
the creation of SNMI to do the sales and marketing services for SMART a valid organizational action. It
overruled the Labor Arbiter’s ruling that SNMI is an in-house agency, holding that it lacked legal basis. It
also declared that contracting, subcontracting and streamlining of operations for the purpose of
increasing efficiency are allowed under the law. The NLRC further found erroneous the Labor Arbiter’s
disquisition that redundancy to be valid must be impelled by economic reasons, and upheld the
redundancy measures undertaken by SMART.

The NLRC disposed, thus:

WHEREFORE, the Decision of the Labor Arbiter is hereby reversed and set aside. [Astorga] is further
ordered to immediately return the company vehicle assigned to her. [Smart and Santiago] are hereby
ordered to pay the final wages of [Astorga] after [she] had submitted the required supporting papers
therefor.

SO ORDERED.22

Astorga filed a motion for reconsideration, but the NLRC denied it on December 21, 1999.23

Astorga then went to the CA via certiorari. On June 11, 2001, the CA rendered a Decision24 affirming with
modification the resolutions of the NLRC. In gist, the CA agreed with the NLRC that the reorganization
undertaken by SMART resulting in the abolition of CSMG was a legitimate exercise of management
prerogative. It rejected Astorga’s posturing that her non-absorption into SNMI was tainted with bad faith.
However, the CA found that SMART failed to comply with the mandatory one-month notice prior to the
intended termination. Accordingly, the CA imposed a penalty equivalent to Astorga’s one-month salary
for this non-compliance. The CA also set aside the NLRC’s order for the return of the company vehicle
holding that this issue is not essentially a labor concern, but is civil in nature, and thus, within the
competence of the regular court to decide. It added that the matter had not been fully ventilated before
the NLRC, but in the regular court.

Astorga filed a motion for reconsideration, while SMART sought partial reconsideration, of the Decision.
On December 18, 2001, the CA resolved the motions, viz.:

WHEREFORE, [Astorga’s] motion for reconsideration is hereby PARTIALLY GRANTED. [Smart] is hereby
ordered to pay [Astorga] her backwages from 15 February 1998 to 06 November 1998. [Smart’s] motion
for reconsideration is outrightly DENIED.

SO ORDERED.25

Astorga and SMART came to us with their respective petitions for review assailing the CA ruling, docketed
as G.R Nos. 151079 and 151372. On February 27, 2002, this Court ordered the consolidation of these
petitions with G.R. No. 148132.26

In her Memorandum, Astorga argues:

100

THE COURT OF APPEALS ERRED IN UPHOLDING THE VALIDITY OF ASTORGA’S DISMISSAL DESPITE THE
FACT THAT HER DISMISSAL WAS EFFECTED IN CLEAR VIOLATION OF THE CONSTITUTIONAL RIGHT TO
SECURITY OF TENURE, CONSIDERING THAT THERE WAS NO GENUINE GROUND FOR HER DISMISSAL.

II

SMART’S REFUSAL TO REINSTATE ASTORGA DURING THE PENDENCY OF THE APPEAL AS REQUIRED BY
ARTICLE 223 OF THE LABOR CODE, ENTITLES ASTORGA TO HER SALARIES DURING THE PENDENCY OF
THE APPEAL.

III

THE COURT OF APPEALS WAS CORRECT IN HOLDING THAT THE REGIONAL TRIAL COURT HAS NO
JURISDICTION OVER THE COMPLAINT FOR RECOVERY OF A CAR WHICH ASTORGA ACQUIRED AS PART
OF HER EMPLOYEE (sic) BENEFIT.27

On the other hand, Smart in its Memoranda raises the following issues:

WHETHER THE HONORABLE COURT OF APPEALS HAS DECIDED A QUESTION OF SUBSTANCE IN A WAY
PROBABLY NOT IN ACCORD WITH LAW OR WITH APPLICABLE DECISION OF THE HONORABLE SUPREME
COURT AND HAS SO FAR DEPARTED FROM THE ACCEPTED AND USUAL COURSE OF JUDICIAL
PROCEEDINGS AS TO CALL FOR AN EXERCISE OF THE POWER OF SUPERVISION WHEN IT RULED THAT
SMART DID NOT COMPLY WITH THE NOTICE REQUIREMENTS PRIOR TO TERMINATING ASTORGA ON
THE GROUND OF REDUNDANCY.

II

WHETHER THE NOTICES GIVEN BY SMART TO ASTORGA AND THE DEPARTMENT OF LABOR AND
EMPLOYMENT ARE SUBSTANTIAL COMPLIANCE WITH THE NOTICE REQUIREMENTS BEFORE
TERMINATION.

III

WHETHER THE RULE ENUNCIATED IN SERRANO VS. NATIONAL LABOR RELATIONS COMMISSION FINDS
APPLICATION IN THE CASE AT BAR CONSIDERING THAT IN THE SERRANO CASE THERE WAS
ABSOLUTELY NO NOTICE AT ALL.28

IV

WHETHER THE HONORABLE COURT OF APPEALS HAS DECIDED A QUESTION OF SUBSTANCE IN A WAY
PROBABLY NOT IN ACCORD WITH LAW OR WITH APPLICABLE DECISION[S] OF THE HONORABLE
SUPREME COURT AND HAS SO FAR DEPARTED FROM THE ACCEPTED AND USUAL COURSE OF JUDICIAL
PROCEEDINGS AS TO CALL FOR AN EXERCISE OF THE POWER OF SUPERVISION WHEN IT RULED THAT
THE REGIONAL TRIAL COURT DOES NOT HAVE JURISDICTION OVER THE COMPLAINT FOR REPLEVIN
FILED BY SMART TO RECOVER ITS OWN COMPANY VEHICLE FROM A FORMER EMPLOYEE WHO WAS
LEGALLY DISMISSED.
101

WHETHER THE HONORABLE COURT OF APPEALS HAS FAILED TO APPRECIATE THAT THE SUBJECT OF THE
REPLEVIN CASE IS NOT THE ENFORCEMENT OF A CAR PLAN PRIVILEGE BUT SIMPLY THE RECOVERY OF A
COMPANY CAR.

VI

WHETHER THE HONORABLE COURT OF APPEALS HAS FAILED TO APPRECIATE THAT ASTORGA CAN NO
LONGER BE CONSIDERED AS AN EMPLOYEE OF SMART UNDER THE LABOR CODE.29

The Court shall first deal with the propriety of dismissing the replevin case filed with the RTC of Makati
City allegedly for lack of jurisdiction, which is the issue raised in G.R. No. 148132.

Replevin is an action whereby the owner or person entitled to repossession of goods or chattels may
recover those goods or chattels from one who has wrongfully distrained or taken, or who wrongfully
detains such goods or chattels. It is designed to permit one having right to possession to recover property
in specie from one who has wrongfully taken or detained the property.30 The term may refer either to the
action itself, for the recovery of personalty, or to the provisional remedy traditionally associated with it, by
which possession of the property may be obtained by the plaintiff and retained during the pendency of
the action.31

That the action commenced by SMART against Astorga in the RTC of Makati City was one for replevin
hardly admits of doubt.

In reversing the RTC ruling and consequently dismissing the case for lack of jurisdiction, the CA made the
following disquisition, viz.:

[I]t is plain to see that the vehicle was issued to [Astorga] by [Smart] as part of the employment package.
We doubt that [SMART] would extend [to Astorga] the same car plan privilege were it not for her
employment as district sales manager of the company. Furthermore, there is no civil contract for a loan
between [Astorga] and [Smart]. Consequently, We find that the car plan privilege is a benefit arising out of
employer-employee relationship. Thus, the claim for such falls squarely within the original and exclusive
jurisdiction of the labor arbiters and the NLRC.32

We do not agree. Contrary to the CA’s ratiocination, the RTC rightfully assumed jurisdiction over the suit
and acted well within its discretion in denying Astorga’s motion to dismiss. SMART’s demand for payment
of the market value of the car or, in the alternative, the surrender of the car, is not a labor, but a civil,
dispute. It involves the relationship of debtor and creditor rather than employee-employer relations.33 As
such, the dispute falls within the jurisdiction of the regular courts.

In Basaya, Jr. v. Militante,34 this Court, in upholding the jurisdiction of the RTC over the replevin suit,
explained:

Replevin is a possessory action, the gist of which is the right of possession in the plaintiff. The primary
relief sought therein is the return of the property in specie wrongfully detained by another person. It is an
ordinary statutory proceeding to adjudicate rights to the title or possession of personal property. The
question of whether or not a party has the right of possession over the property involved and if so,
102

whether or not the adverse party has wrongfully taken and detained said property as to require its return
to plaintiff, is outside the pale of competence of a labor tribunal and beyond the field of specialization of
Labor Arbiters.

The labor dispute involved is not intertwined with the issue in the Replevin Case. The respective issues
raised in each forum can be resolved independently on the other. In fact in 18 November 1986, the NLRC
in the case before it had issued an Injunctive Writ enjoining the petitioners from blocking the free ingress
and egress to the Vessel and ordering the petitioners to disembark and vacate. That aspect of the
controversy is properly settled under the Labor Code. So also with petitioners’ right to picket. But the
determination of the question of who has the better right to take possession of the Vessel and whether
petitioners can deprive the Charterer, as the legal possessor of the Vessel, of that right to possess in
addressed to the competence of Civil Courts.

In thus ruling, this Court is not sanctioning split jurisdiction but defining avenues of jurisdiction as laid
down by pertinent laws.

The CA, therefore, committed reversible error when it overturned the RTC ruling and ordered the dismissal
of the replevin case for lack of jurisdiction.

Having resolved that issue, we proceed to rule on the validity of Astorga’s dismissal.

Astorga was terminated due to redundancy, which is one of the authorized causes for the dismissal of an
employee. The nature of redundancy as an authorized cause for dismissal is explained in the leading case
of Wiltshire File Co., Inc. v. National Labor Relations Commission,35 viz:

x x x redundancy in an employer’s personnel force necessarily or even ordinarily refers to duplication of

work. That no other person was holding the same position that private respondent held prior to
termination of his services does not show that his position had not become redundant. Indeed, in any well
organized business enterprise, it would be surprising to find duplication of work and two (2) or more
people doing the work of one person. We believe that redundancy, for purposes of the Labor Code, exists
where the services of an employee are in excess of what is reasonably demanded by the actual
requirements of the enterprise. Succinctly put, a position is redundant where it is superfluous, and
superfluity of a position or positions may be the outcome of a number of factors, such as overhiring of
workers, decreased volume of business, or dropping of a particular product line or service activity
previously manufactured or undertaken by the enterprise.

The characterization of an employee’s services as superfluous or no longer necessary and, therefore,

properly terminable, is an exercise of business judgment on the part of the employer. The wisdom and
soundness of such characterization or decision is not subject to discretionary review provided, of course,
that a violation of law or arbitrary or malicious action is not shown.36

Astorga claims that the termination of her employment was illegal and tainted with bad faith. She asserts
that the reorganization was done in order to get rid of her. But except for her barefaced allegation, no
convincing evidence was offered to prove it. This Court finds it extremely difficult to believe that SMART
would enter into a joint venture agreement with NTT, form SNMI and abolish CSMG/FSD simply for the
sole purpose of easing out a particular employee, such as Astorga. Moreover, Astorga never denied that
SMART offered her a supervisory position in the Customer Care Department, but she refused the offer
103

because the position carried a lower salary rank and rate. If indeed SMART simply wanted to get rid of her,
it would not have offered her a position in any department in the enterprise.

Astorga also states that the justification advanced by SMART is not true because there was no compelling
economic reason for redundancy. But contrary to her claim, an employer is not precluded from adopting a
new policy conducive to a more economical and effective management even if it is not experiencing
economic reverses. Neither does the law require that the employer should suffer financial losses before he
can terminate the services of the employee on the ground of redundancy. 37

We agree with the CA that the organizational realignment introduced by SMART, which culminated in the
abolition of CSMG/FSD and termination of Astorga’s employment was an honest effort to make SMART’s
sales and marketing departments more efficient and competitive. As the CA had taken pains to elucidate:

x x x a careful and assiduous review of the records will yield no other conclusion than that the
reorganization undertaken by SMART is for no purpose other than its declared objective – as a labor and
cost savings device. Indeed, this Court finds no fault in SMART’s decision to outsource the corporate sales
market to SNMI in order to attain greater productivity. [Astorga] belonged to the Sales Marketing Group
under the Fixed Services Division (CSMG/FSD), a distinct sales force of SMART in charge of selling
SMART’s telecommunications services to the corporate market. SMART, to ensure it can respond quickly,
efficiently and flexibly to its customer’s requirement, abolished CSMG/FSD and shortly thereafter assigned
its functions to newly-created SNMI Multimedia Incorporated, a joint venture company of SMART and
NTT of Japan, for the reason that CSMG/FSD does not have the necessary technical expertise required for
the value added services. By transferring the duties of CSMG/FSD to SNMI, SMART has created a more
competent and specialized organization to perform the work required for corporate accounts. It is also
relieved SMART of all administrative costs – management, time and money-needed in maintaining the
CSMG/FSD. The determination to outsource the duties of the CSMG/FSD to SNMI was, to Our mind, a
sound business judgment based on relevant criteria and is therefore a legitimate exercise of management
prerogative.

Indeed, out of our concern for those lesser circumstanced in life, this Court has inclined towards the
worker and upheld his cause in most of his conflicts with his employer. This favored treatment is
consonant with the social justice policy of the Constitution. But while tilting the scales of justice in favor of
workers, the fundamental law also guarantees the right of the employer to reasonable returns for his
investment.38 In this light, we must acknowledge the prerogative of the employer to adopt such
measures as will promote greater efficiency, reduce overhead costs and enhance prospects of economic
gains, albeit always within the framework of existing laws. Accordingly, we sustain the reorganization and
redundancy program undertaken by SMART.

However, as aptly found by the CA, SMART failed to comply with the mandated one (1) month notice
prior to termination. The record is clear that Astorga received the notice of termination only on March 16,
199839 or less than a month prior to its effectivity on April 3, 1998. Likewise, the Department of Labor and
Employment was notified of the redundancy program only on March 6, 1998.40

Article 283 of the Labor Code clearly provides:

104

Art. 283. Closure of establishment and reduction of personnel. — The employer may also terminate the
employment of any employee due to the installation of labor saving devices, redundancy, retrenchment to
prevent losses or the closing or cessation of operation of the establishment or undertaking unless the
closing is for the purpose of circumventing the provisions of this Title, by serving a written notice on the
workers and the Ministry of Labor and Employment at least one (1) month before the intended date
thereof x x x.

SMART’s assertion that Astorga cannot complain of lack of notice because the organizational realignment
was made known to all the employees as early as February 1998 fails to persuade. Astorga’s actual
knowledge of the reorganization cannot replace the formal and written notice required by the law. In the
written notice, the employees are informed of the specific date of the termination, at least a month prior
to the effectivity of such termination, to give them sufficient time to find other suitable employment or to
make whatever arrangements are needed to cushion the impact of termination. In this case,
notwithstanding Astorga’s knowledge of the reorganization, she remained uncertain about the status of
her employment until SMART gave her formal notice of termination. But such notice was received by
Astorga barely two (2) weeks before the effective date of termination, a period very much shorter than
that required by law.

Be that as it may, this procedural infirmity would not render the termination of Astorga’s employment
illegal. The validity of termination can exist independently of the procedural infirmity of the dismissal.41 In
DAP Corporation v. CA,42 we found the dismissal of the employees therein valid and for authorized cause
even if the employer failed to comply with the notice requirement under Article 283 of the Labor Code.
This Court upheld the dismissal, but held the employer liable for non-compliance with the procedural
requirements.

The CA, therefore, committed no reversible error in sustaining Astorga’s dismissal and at the same time,
awarding indemnity for violation of Astorga's statutory rights.

However, we find the need to modify, by increasing, the indemnity awarded by the CA to Astorga, as a
sanction on SMART for non-compliance with the one-month mandatory notice requirement, in light of
our ruling in Jaka Food Processing Corporation v. Pacot,43 viz.:

[I]f the dismissal is based on a just cause under Article 282 but the employer failed to comply with the
notice requirement, the sanction to be imposed upon him should be tempered because the dismissal
process was, in effect, initiated by an act imputable to the employee, and (2) if the dismissal is based on
an authorized cause under Article 283 but the employer failed to comply with the notice requirement, the
sanction should be stiffer because the dismissal process was initiated by the employer’s exercise of his
management prerogative.

We deem it proper to increase the amount of the penalty on SMART to P50,000.00.

As provided in Article 283 of the Labor Code, Astorga is, likewise, entitled to separation pay equivalent to
at least one (1) month salary or to at least one (1) month’s pay for every year of service, whichever is
higher. The records show that Astorga’s length of service is less than a year. She is, therefore, also entitled
to separation pay equivalent to one (1) month pay.
105

Finally, we note that Astorga claimed non-payment of wages from February 15, 1998. This assertion was
never rebutted by SMART in the proceedings a quo. No proof of payment was presented by SMART to
disprove the allegation. It is settled that in labor cases, the burden of proving payment of monetary claims
rests on the employer.44 SMART failed to discharge the onus probandi. Accordingly, it must be held liable
for Astorga’s salary from February 15, 1998 until the effective date of her termination, on April 3, 1998.

However, the award of backwages to Astorga by the CA should be deleted for lack of basis. Backwages is
a relief given to an illegally dismissed employee. Thus, before backwages may be granted, there must be a
finding of unjust or illegal dismissal from work.45 The Labor Arbiter ruled that Astorga was illegally
dismissed. But on appeal, the NLRC reversed the Labor Arbiter’s ruling and categorically declared
Astorga’s dismissal valid. This ruling was affirmed by the CA in its assailed Decision. Since Astorga’s
dismissal is for an authorized cause, she is not entitled to backwages. The CA’s award of backwages is
totally inconsistent with its finding of valid dismissal.

WHEREFORE, the petition of SMART docketed as G.R. No. 148132 is GRANTED. The February 28, 2000
Decision and the May 7, 2001 Resolution of the Court of Appeals in CA-G.R. SP. No. 53831 are SET ASIDE.
The Regional Trial Court of Makati City, Branch 57 is DIRECTED to proceed with the trial of Civil Case No.
98-1936 and render its Decision with reasonable dispatch.

On the other hand, the petitions of SMART and Astorga docketed as G.R. Nos. 151079 and 151372 are
DENIED. The June 11, 2001 Decision and the December 18, 2001 Resolution in CA-G.R. SP. No. 57065, are
AFFIRMED with MODIFICATION. Astorga is declared validly dismissed. However, SMART is ordered to pay
Astorga P50,000.00 as indemnity for its non-compliance with procedural due process, her separation pay
equivalent to one (1) month pay, and her salary from February 15, 1998 until the effective date of her
termination on April 3, 1998. The award of backwages is DELETED for lack of basis.

SO ORDERED.
106

[G.R. NO. 179546 : July 23, 2009]

COCA-COLA BOTTLERS PHILS., INC., Petitioner, v. ALAN M. AGITO, REGOLO S. OCA III, ERNESTO G.
ALARIAO, JR., ALFONSO PAA, JR., DEMPSTER P. ONG, URRIQUIA T. ARVIN, GIL H. FRANCISCO and
EDWIN M. GOLEZ, Respondents.

CHICO-NAZARIO, J.:

In a Decision dated 13 February 2009, the Court denied the petition filed in this case and partially affirmed
the Decision dated 19 February 2007 and the Resolution dated 31 August 2007 of the Court of Appeals in
CA-G.R. SP No. 85320, insofar as it found that an employer-employee relationship existed between
petitioner Coca-cola Bottlers Philippines, Inc. and herein respondents. However, instead of remanding the
case to the National Labor Relations Commission (NLRC) for further proceedings as the appellate court
had ordered, this Court ordered the petitioner to reinstate respondents without loss of seniority rights
and to pay them full back wages from the time their compensation was withheld up to their actual
reinstatement.

On 13 April 2009, respondents filed a Motion for Clarification and/or Partial Motion for Reconsideration
wherein it quoted the decretal part of the Decision dated 13 February 2009 and the decisive paragraph
that precedes it:

Given that respondents were illegally dismissed by petitioner, they are entitled to reinstatement, full
backwages, inclusive of allowance, and to their other benefits or the monetary equivalent thereof
computed from the time their compensations were withheld from them up to the time of their actual
reinstatement, as mandated under Article 279 of the Labor Code.

IN VIEW OF THE FOREGOING, the instant Petition is DENIED. The Court AFFIRMS WITH MODIFICATION
the Decision dated 19 February 2007 of the Court of Appeals in CA-GR SP NO. 85320. The Court
DECLARES that respondents were illegally dismissed and, accordingly, ORDERS petitioner to reinstate
them without loss of seniority rights, and to pay them full backwages computed from the time their
compensation was withheld up to the time of their actual reinstatement. (Underscored by respondents.)

Respondents seek to include in the fallo of the afore-quoted Decision the words "inclusive of allowance
and x x x other benefits or the monetary equivalent thereof," found in the discussion.

This Court finds merit in the respondents' motion for partial reconsideration, since the words "inclusive of
allowance and x x x other benefits or the monetary equivalent thereof" are merely descriptive of "full
backwages," which this Court had already categorically awarded to respondents after a thorough
discussion of the merits of the case. They do not constitute a new or additional award to respondents. The
inclusion of these words in the dispositive part of the Decision serves only to clarify the same so that in
the implementation thereof, none of the rights legally due to the respondents shall be overlooked.

WHEREFORE, the respondents' Motion for Clarification and/or Partial Motion for Reconsideration is
GRANTED. The dispositive part of the Decision dated 13 February 2009 is MODIFIED to read as follows:

IN VIEW OF THE FOREGOING, the instant Petition is DENIED. The Court AFFIRMS WITH MODIFICATION
the Decision dated 19 February 2007 of the Court of Appeals in CA-G.R. SP No. 85320. The Court
DECLARES that respondents were illegally dismissed and, accordingly, ORDERS petitioner to reinstate
them without loss of seniority rights, and to pay them full backwages, inclusive of allowances, and their
107

other benefits or the monetary equivalent thereof computed from the time their compensation was
withheld up to the time of their actual reinstatement. Costs against the petitioner.

SO ORDERED.
108

G.R. No. 175501 October 4, 2010

MANILA WATER COMPANY, INC., Petitioner,

vs.

JOSE J. DALUMPINES, EMMANUEL CAPIT, ROMEO B. CASTOLONE, MELITANTE CASTRO, NONITO

FERNANDEZ, ARNULFO JAMISON, ARTHUR LAVISTE, ESTEBAN LEGARTO, SUSANO MIRANDA,
RAMON C. REYES, JOSE SIERRA, BENJAMIN TALAVERA, MOISES ZAPATERO, EDGAR PAMORAGA,
BERNARDO S. MEDINA, MELENCIO M. BAONGUIS, JR., JOSE AGUILAR, ANGEL C. GARCIA, JOSE
TEODY P. VELASCO, AUGUSTUS J. TANDOC, ROBERTO DAGDAG, MIGUEL LOPEZ, GEORGE
CABRERA, ARMAN BORROMEO, RONITO R. FRIAS, ANTONIO VERGARA, RANDY CORTIGUERRA,
and FIRST CLASSIC COURIER SERVICES, INC., Respondents.

NACHURA, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court, assailing the
Decision1 dated September 12, 2006 and the Resolution2 dated November 17, 2006 of the Court of
Appeals (CA) in CA-G.R. SP No. 94909.

The facts of the case are as follows:

By virtue of Republic Act No. 8041, otherwise known as the "National Water Crisis Act of 1995," the
Metropolitan Waterworks and Sewerage System (MWSS) was given the authority to enter into concession
agreements allowing the private sector in its operations. Petitioner Manila Water Company, Inc. (Manila
Water) was one of two private concessionaires contracted by the MWSS to manage the water distribution
system in the east zone of Metro Manila. The east service area included the following towns and cities:
Mandaluyong, Marikina, Pasig, Pateros, San Juan, Taguig, Makati, parts of Quezon City and Manila,
Angono, Antipolo, Baras, Binangonan, Cainta, Cardona, Jala-Jala, Morong, Pililla, Rodriguez, Tanay, Taytay,
Teresa, and San Mateo.3

Under the concession agreement, Manila Water undertook to absorb the regular employees of MWSS
listed by the latter effective August 1, 1997. Individual respondents, with the exception of Moises Zapatero
(Zapatero) and Edgar Pamoraga (Pamoraga), were among the one hundred twenty-one (121) employees
not included in the list of employees to be absorbed by Manila Water. Nevertheless, Manila Water
engaged their services without written contract from August 1, 1997 to August 31, 1997.4

On September 1, 1997, individual respondents signed a three (3)-month contract to perform collection
services on commission basis for Manila Water’s branches in the east zone.5

On November 21, 1997, before the expiration of the contract of services, the 121 bill collectors formed a
corporation duly registered with the Securities and Exchange Commission (SEC) as the "Association
Collector’s Group, Inc." (ACGI). ACGI was one of the entities engaged by Manila Water for its courier
service. However, Manila Water contracted ACGI for collection services only in its Balara Branch.6
109

In December 1997, Manila Water entered into a service agreement with respondent First Classic Courier
Services, Inc. (FCCSI) also for its courier needs. The service agreements between Manila Water and FCCSI
covered the periods 1997 to 1999 and 2000 to 2002.7 Earlier, in a memorandum dated November 28,
1997, FCCSI gave a deadline for the bill collectors who were members of ACGI to submit applications and
letters of intent to transfer to FCCSI. The individual respondents in this case were among the bill collectors
who joined FCCSI and were hired effective December 1, 1997.8

On various dates between May and October 2002, individual respondents were terminated from
employment. Manila Water no longer renewed its contract with FCCSI because it decided to implement a
"collectorless" scheme whereby Manila Water customers would instead remit payments through "Bayad
Centers."9 The aggrieved bill collectors individually filed complaints for illegal dismissal, unfair labor
practice, damages, and attorney’s fees, with prayer for reinstatement and backwages against petitioner
Manila Water and respondent FCCSI. The complaints were consolidated and jointly heard.10

Respondent bill collectors alleged that their employment under Manila Water had four (4) stages: (a) from
August 1, 1997 to August 31, 1997; (b) from September 1, 1997 to November 30, 1997; (c) in November
1997 when FCCSI was incorporated; and (d) after November 1977 when FCCSI came in. While in MWSS,
and thereafter in Manila Water and FCCSI, respondent bill collectors were made to perform the following
functions: (1) delivery of bills to customers; (2) collection of payments from customers; and (3) delivery of
disconnection notice to customers. They were also allowed to effect disconnection and were given tools
for this purpose.11

Respondent bill collectors averred that when Manila Water issued their individual contracts of service for
three months in September 1997, there was already an attempt to make it appear that respondent bill
collectors were not its employees but independent contractors. Respondent bill collectors stressed that
they could not qualify as independent contractors because they did not have an independent business of
their own, tools, equipment, and capitalization, but were purely dependent on the wages they earned
from Manila Water, which was termed as "commission."12

Respondent bill collectors alleged that Manila Water had complete supervision over their work and their
collections, which they had to remit daily to the former. They also maintained that the incorporation of
ACGI did not mean that they were not employees of Manila Water. Furthermore, they alleged that they
suffered injustice when Manila Water imposed upon them the work set-up that caused them to be
emotionally depressed because those who were not assigned to the Balara Branch under Manila Water’s
contract with ACGI were forced to join FCCSI to retain their employment. They argued that the entry of
FCCSI did not change the employer-employee relationship of respondent bill collectors with Manila
Water.13

Respondent bill collectors insisted that they remained employees of Manila Water even after the entry of
FCCSI. The latter did not qualify as a legitimate labor contractor since it had no substantial capital. FCCSI
only had a paid-up capital of one hundred thousand pesos (₱100,000.00), out of the four hundred
thousand pesos (₱400,000.00) authorized capital. FCCSI relied mainly on what Manila Water would pay,
from which it deducted an agency fee, and it had no other clients on collection. They were forced to
transfer to FCCSI when their service contracts with Manila Water was about to expire on November 30,
1997. FCCSI was engaged in labor-only contracting which is prohibited by law.14
110

Respondent bill collectors averred that even under the four-fold test of employer-employee relationship,
it appeared that Manila Water was their true employer based on the following circumstances: (1) it was
Manila Water who engaged their services as bill collectors when it took over the operations of the east
zone from MWSS on August 1, 1997; (2) it was Manila Water which paid their wages in the form of
commissions every fifteenth (15th) and thirtieth (30th) day of each month; (3) Manila Water exercised the
power of dismissal over them as bill collectors as evidenced by the instances surrounding their
termination as set forth in their respective affidavits, and by the individual clearances issued to them not
by FCCSI but by Manila Water, stating that the same was "issued in connection with his termination of
contract as Contract Collector of Manila Water Company"; and (4) their work as bill collectors was clearly
related to the principal business of Manila Water.15

Respondent FCCSI, on the other hand, claimed that it is an independent contractor engaged in the
business of providing messengerial or courier services, and it fulfills the criteria set forth under
Department Order No. 10, Series of 1997.16 It was issued a certificate of registration by the Department of
Labor and Employment (DOLE) as an independent contractor. It was incorporated and registered with the
SEC in November 1995. It was duly registered with the Department of Transportation and Communication
(DOTC) and the Office of the Mayor of Makati City for authority to operate. It has sufficient capital in the
form of tools, equipment, and machinery as attested to by the Postal Regulation Committee of the DOTC
after conducting an ocular inspection. It provides similar services to Philippine Long Distance Telephone
Company, Smart Telecommunications, Inc., and Home Cable, Inc. Under the terms and conditions of its
service agreement with Manila Water, FCCSI has the power to hire, assign, discipline, or dismiss its own
employees, as well as control the means and methods of accomplishing the assigned tasks, and it pays
the wages of the employees.17

The termination of employment of respondent bill collectors upon the expiration of FCCSI’s contract with
Manila Water did not mean the automatic termination or suspension of the employer-employee
relationship between FCCSI and respondent bill collectors. Their termination after their six (6) month
floating status, which was allowed by law, was due to the non-renewal of FCCSI’s agreement with Manila
Water and its inability to enter into a similar contract requiring the skills of respondent bill collectors.18

Petitioner Manila Water, for its part, denied that there was an employer-employee relationship between
its company and respondent bill collectors. Based on the agreement between FCCSI and Manila Water,
respondent bill collectors are the employees of the former, as it is the former that has the right to
select/hire, discipline, supervise, and control. FCCSI has a separate and distinct legal personality from
Manila Water, and it was duly registered as an independent contractor before the DOLE.19

Petitioner further claimed that individual service contracts signed by respondent bill collectors for a 3-
month period with Manila Water were valid and legal. The fact that the duration of the engagement was
stated on the face of the contract dispels any bad faith on the part of the company. Fixed term contracts
are allowed by law. Furthermore, respondent bill collectors’ allegation that the incorporation of ACGI was
made as a condition of their continued employment was unfounded. They transferred to FCCSI on their
own volition.20

Petitioner Manila Water also averred that, under its organizational structure, there was no regular plantilla
position of bill collector, which was the main reason why respondent bill collectors were not included in
the list of MWSS employees absorbed by the company. The company’s out-sourcing of courier needs to
an independent contractor was valid and legal.
111

On September 27, 2004, the Labor Arbiter (LA) rendered a decision,21 the dispositive portion of which
reads:

WHEREFORE, premises considered, the complaints against respondent Manila Water Company, Inc. is
dismissed for lack of jurisdiction due to want of employer-employee relationship. Respondent First Classic
Courier Services is hereby ordered to pay complainants separation pay equivalent to one (1) month pay
for every year of service, to wit:

1. JOSE P. DALUMPINES - - - - - - - - ₱36,400.00

2. SUSANO MIRANDA - - - - - - - - - ₱36,400.00

3. EDGAR PAMORAGA - - - - - - - - - ₱29,120.00

4. ARTHUR G. LAVISTI - - - - - - - - - ₱36,400.00

5. BENJAMIN TALAVERA, JR. - - - - ₱36,400.00

6. JOSE S.A. SIERRA - - - - - - - - - - - ₱36,400.00

7. MELITANTE D. CASTRO - - - - - - ₱36,400.00

8. BERNARDO S. MEDINA - - - - - - - ₱36,400.00

9. MELENCIO BAONGUIS - - - - - - - ₱36,400.00

10. NONITO V. FERNANDEZ - - - - - - ₱36,400.00

11. LEGARTO ESTEBAN - - - - - - - - - ₱36,400.00

12. ROMEO B. CASTALONE - - - - - - ₱36,400.00

13. RAMON C. REYES - - - - - - - - - - - ₱36,400.00

14. MOISES L. ZAPATERO - - - - - - - - ₱29,120.00

15. JOSE T. AGUILAR - - - - - - - - - - - ₱36,400.00

16. ARNULFO T. JAMISON - - - - - - - ₱36,400.00

17. ANGEL C. GARCIA - - - - - - - - - - - ₱36,400.00

18. JOSE TEODY P. VELASCO - - - - - ₱36,400.00

19. AUGUSTUS J. TANDOC - - - - - - - ₱36,400.00

20. EMMANUEL L. CAPIT - - - - - - - - ₱36,400.00

21. WILLIAM AGANON - - - - - - - - - - ₱87,360.00

22. ROBERTO S. DAGDAG - - - - - - - - ₱36,400.00

23 MIGUEL J. LOPEZ - - - - - - - - - - - - ₱36,400.00

112

24. GEORGE CABRERA - - - - - - - - - - ₱36,400.00

25. BORROMEO ARMAN - - - - - - - - - ₱36,400.00

26. RONITO R. FRIAS - - - - - - - - - - - - ₱36,400.00

27. ANTONIO A. VERGARA - - - - - - - ₱36,400.00

28. RANDY T. CORTIGUERRA - - - - - ₱36,400.00

TOTAL - - - - - - - ₱1,055,600.00

SO ORDERED.22

Respondent bill collectors and FCCSI filed their separate appeals with the National Labor Relations
Commission (NLRC). On March 15, 2006, the NLRC rendered a decision23 affirming in toto the decision of
the LA. Respondent bill collectors filed a motion for reconsideration, but the same was denied in a
resolution24 dated April 28, 2006.

Disgruntled, respondent bill collectors filed a petition for certiorari under Rule 65 of the Rules of Court
before the CA. On September 12, 2006, the CA rendered a Decision, the dispositive portion of which
reads:

WHEREFORE, premises considered, the present petition is hereby GIVEN DUE COURSE and the writ prayed
for accordingly GRANTED. Consequently, the assailed Decision dated March 15, 2006 and Resolution
dated April 28, 2006 of the National Labor Relations Commission are hereby ANNULED and SET ASIDE. A
new judgment is hereby entered (a) declaring the petitioners as employees of private respondent Manila
Water Company, Inc., and their termination as bill collectors as illegal; and (b) ordering private respondent
Manila Water Company, Inc. to pay the petitioners separation pay equivalent to one (1) month for every
year of service. In addition, private respondent Manila Water Company, Inc. is liable to pay ten percent
(10%) of the total amount awarded as attorney’s fees.

No pronouncement as to costs.

SO ORDERED.25

Petitioner Manila Water and respondent bill collectors filed a motion for reconsideration. However, the CA
denied their respective motions for reconsideration in a Resolution dated November 17, 2006.

Hence, this petition.

Petitioner Manila Water presented the following issues for resolution, whether the CA erred (1) in ruling
that an employment relationship exists between respondent bill collectors and petitioner Manila Water;
(2) in its application of Manila Water Company, Inc. v. Peña26 to the instant case; and (3) in ruling that
respondent FCCSI is not a bona fide independent contractor.27

The petition is bereft of merit.

In this case, the LA, the NLRC, and the CA reached different conclusions of law albeit agreeing on the
same set of facts. It was in their interpretation and appreciation of the evidence that they differed. The CA
ruled that respondent FCCSI was a labor-only contractor and that respondent bill collectors are
employees of petitioner Manila Water, while the LA and the NLRC ruled otherwise.
113

"Contracting" or "subcontracting" refers to an arrangement whereby a principal agrees to put out or farm
out with a contractor or subcontractor the performance or completion of a specific job, work, or service
within a definite or predetermined period, regardless of whether such job, work, or service is to be
performed or completed within or outside the premises of the principal.28

Contracting and subcontracting arrangements are expressly allowed by law but are subject to regulation
for the promotion of employment and the observance of the rights of workers to just and humane
conditions of work, security of tenure, self-organization, and collective bargaining.29 In legitimate
contracting, the trilateral relationship between the parties in these arrangements involves the principal
which decides to farm out a job or service to a contractor or subcontractor, which has the capacity to
independently undertake the performance of the job, work, or service, and the contractual workers
engaged by the contractor or subcontractor to accomplish the job, work, or service.30

Job contracting is permissible only if the following conditions are met: 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 the business.31

On the other hand, the Labor Code expressly prohibits "labor-only" contracting. Article 106 of the Code
provides that 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 person are performing activities which are
directly related to the principal business of the 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 to the same extent as if the latter were directly employed by him.32

Department Order No. 18-02, Series of 2002, enunciates that labor-only contracting refers 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 the performance of the work of the contractual
employee.33

"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" refers 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 in reaching that end.34
114

In the instant case, the CA found that FCCSI is a labor-only contractor. Based on the factual findings of the
CA, FCCSI does not have substantial capital or investment to qualify as an independent contractor, viz.:

FCCSI was incorporated on November 14, 1995, with an authorized capital stock of ₱400,000.00, of which
only ₱100,000.00 is actually paid-in. Going by the pronouncement in Peña, such capitalization can hardly
be considered substantial. FCCSI and Manila Water make much of the 17 April 1997 letter of Postal
Regulation Committee Chairman Francisco V. Ontalan, Jr. to DOTC Secretary Arturo T. Enrile
recommending the renewal and/or extension of authority to FCCSI to operate private messengerial
delivery services, which states in part:

"Ocular inspection conducted on its office premises and evaluation of the documents submitted, the firm
during the six (6) months operation has generated employment to thirty six (36) messengers, and four (4)
office personnel.

"The office equipt [sic] with modern facilities such as computers, printers, electric typewriter, working
table, telephone lines, airconditioning unit, pigeon holes, working tables and delivery vehicles such as a
Suzuki van and three (3) motorcycles. The firm’s audited financial statement for the period ending 31
December 1996 [shows] that it earned a net income of ₱253,000.00. x x x."

The above document only proves that FCCSI has no sufficient investment in the form of tools, equipment
and machinery to undertake contract services for Manila Water involving a fleet of around 100 collectors
assigned to several branches and covering the service area of Manila Water customers spread out in
several cities/towns of the East Zone. The only rational conclusion is that it is Manila Water that provides
most if not all the logistics and equipment including service vehicles in the performance of the contracted
service, notwithstanding that the contract between FCCSI and Manila Water states that it is the Contractor
which shall furnish at its own expense all materials, tools and equipment needed to perform the tasks of
collectors. Moreover, it must be emphasized that petitioners who are "trained collectors" performed tasks
that cannot be simply categorized as "messengerial." In fact, these are the very functions they were
already discharging even before they joined FCCSI which "invited" or "solicited" their placement just about
the expiration of their three (3)-month contract with Manila Water on November 28, 1997. The Agreement
between FCCSI and Manila Water provides that FCCSI shall "field the required number of trained
collectors to the following Customer Relations Branch Office": Cubao, España, San Juan-Mandaluyong,
Marikina, Pasig, Taguig-Pateros and Makati.351avvphi1

As correctly ruled by the CA, FCCSI’s capitalization may not be considered substantial considering that it
had close to a hundred collectors covering the east zone service area of Manila Water customers. The
allegation in the position paper of FCCSI that it serves other companies’ courier needs does not "cure" the
fact that it has insufficient capitalization to qualify as independent contractor. Neither did FCCSI prove its
allegation by substantial evidence other than by their self-serving declarations. What is evident is that it
was Manila Water that provided the equipment and service vehicles needed in the performance of the
contracted service, even if the contract between FCCSI and Manila Water stated that it was the Contractor
which shall furnish at its own expense all materials, tools, and equipment needed to perform the tasks of
collectors.

Based on the four-fold test of employer-employee relationship, Manila Water emerges as the employer of
respondent collectors. The elements to determine the existence 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)
115

the employer's power to control the employee's conduct. The most important of these elements is the
employer's control of the employee's conduct, not only as to the result of the work to be done, but also as
to the means and methods to accomplish it.36

The factual circumstances in the instant case are essentially the same as those cited in Manila Water
Company, Inc. v. Hermiño Peña.37 In that case, 121 bill collectors, headed by Peña, filed a complaint for
illegal dismissal against Manila Water. The bill collectors formed ACGI which was registered with the SEC.
Manila Water, in opposing the claim of the bill collectors, claimed that there was no employer-employee
relationship with the latter. It averred that the bill collectors were employees of ACGI, a separate entity
engaged in collection services, an independent contractor which entered into a service contract for the
collection of Manila Water’s accounts. The Court ruled that ACGI was not an independent contractor but
was engaged in labor-only contracting, and as such, is considered merely an agent of Manila Water.38

The Court ratiocinated that: First, ACGI does not have substantial capitalization or investment in the form
of tools, equipment, machineries, work premises, and other materials to qualify as an independent
contractor. Second, the work of the bill collectors was directly related to the principal business or
operation of Manila Water. Being in the business of providing water to the consumers in the east zone,
the collection of the charges by the bill collectors for the company can only be categorized as related to,
and in the pursuit of, the latter's business. Lastly, ACGI did not carry on an independent business or
undertake the performance of its service contract in its own manner and using its own methods, free from
the control and supervision of its principal, Manila Water. Since ACGI is obviously a labor-only contractor,
the workers it supplied are considered employees of the principal. Furthermore, the activities performed
by the bill collectors were necessary or desirable to Manila Water's principal trade or business; thus, they
are regular employees of the latter. Since Manila Water failed to comply with the requirements of
termination under the Labor Code, the dismissal of the bill collectors was tainted with illegality.39

The similarity between the instant case and Peña is very evident. First, the work set-up between the
respondent contractor FCCSI and respondent bill collectors is the same as in Peña. Respondent bill
collectors were individually hired by the contractor, but were under the direct control and supervision of
the concessionaire. Second, they performed the same function of courier and bill collection services. Third,
the element of control exercised by Manila Water over respondent bill collectors is essentially the same as
in Peña, manifested in the following circumstances, viz.: (a) respondent bill collectors reported daily to the
branch offices of Manila Water to remit their collections with the specified monthly targets and comply
with the collection reporting procedures prescribed by the latter; (b) respondent bill collectors, except for
Pamoraga and Zapatero, were among the 121 collectors who incorporated ACGI; (c) Manila Water
continued to pay their wages in the form of commissions even after the employees alleged transfer to
FCCSI. Manila Water paid the respondent bill collectors their individual commissions, and the lump sum
paid by Manila Water to FCCSI merely represented the agency fee; and (d) the certification or individual
clearances issued by Manila Water to respondent bill collectors upon the termination of the service
contract with FCCSI. The certification stated that respondents were contract collectors of Manila Water
and not of FCCSI. Thus, this Court agrees with the findings of the CA that if, indeed, FCCSI was the true
employer of the bill collectors, it should have been the one to issue the certification or individual
clearances.
116

It should be remembered that the control test merely calls for the existence of the right to control, and
not necessarily the exercise thereof. It is not essential that the employer actually supervises the
performance of duties of the employee. It is enough that the former has a right to wield the power.40

Respondent bill collectors are, therefore, employees of petitioner Manila Water. It cannot be denied that
the tasks performed by respondent bill collectors are directly related to the principal business or trade of
Manila Water. Payments made by the subscribers are the lifeblood of the company, and the respondent
bill collectors are the ones who collect these payments.

The primary standard of determining regular employment is the reasonable connection between the
particular activity performed by the employee in relation to the usual business or trade of the employer. In
this case, the connection is obvious when we consider the nature of the work performed and its relation
to the scheme of the particular business or trade in its entirety. Finally, the repeated and continuing need
for the performance of the job is sufficient evidence of the necessity, if not indispensability of the activity
to the business.41

WHEREFORE, in view of the foregoing, the Decision dated September 12, 2006 and the Resolution dated
November 17, 2006 of the Court of Appeals in CA-G.R. SP No. 94909 are hereby AFFIRMED.

Costs against petitioner.

SO ORDERED.
117

G.R. No. 186091 December 15, 2010

EMMANUEL BABAS, DANILO T. BANAG, ARTURO V. VILLARIN, SR., EDWIN JAVIER, SANDI
BERMEO, REX ALLESA, MAXIMO SORIANO, JR., ARSENIO ESTORQUE, and FELIXBERTO ANAJAO,
Petitioners,

vs.

LORENZO SHIPPING CORPORATION, Respondent.

NACHURA, J.:

Petitioners Emmanuel Babas, Danilo T. Banag, Arturo V. Villarin, Sr., Edwin Javier, Sandi Bermeo, Rex Allesa,
Maximo Soriano, Jr., Arsenio Estorque, and Felixberto Anajao appeal by certiorari under Rule 45 of the
Rules of Court the October 10, 2008 Decision1 of the Court of Appeals (CA) in CA-G.R. SP. No. 103804,
and the January 21, 2009 Resolution,2 denying its reconsideration.

Respondent Lorenzo Shipping Corporation (LSC) is a duly organized domestic corporation engaged in the
shipping industry; it owns several equipment necessary for its business. On September 29, 1997, LSC
entered into a General Equipment Maintenance Repair and Management Services Agreement3
(Agreement) with Best Manpower Services, Inc. (BMSI). Under the Agreement, BMSI undertook to provide
maintenance and repair services to LSC’s container vans, heavy equipment, trailer chassis, and generator
sets. BMSI further undertook to provide checkers to inspect all containers received for loading to and/or
unloading from its vessels.

Simultaneous with the execution of the Agreement, LSC leased its equipment, tools, and tractors to
BMSI.4 The period of lease was coterminous with the Agreement.

BMSI then hired petitioners on various dates to work at LSC as checkers, welders, utility men, clerks,
forklift operators, motor pool and machine shop workers, technicians, trailer drivers, and mechanics. Six
years later, or on May 1, 2003, LSC entered into another contract with BMSI, this time, a service contract.5

In September 2003, petitioners filed with the Labor Arbiter (LA) a complaint for regularization against LSC
and BMSI. On October 1, 2003, LSC terminated the Agreement, effective October 31, 2003. Consequently,
petitioners lost their employment.

BMSI asserted that it is an independent contractor. It averred that it was willing to regularize petitioners;
however, some of them lacked the requisite qualifications for the job. BMSI was willing to reassign
petitioners who were willing to accept reassignment. BMSI denied petitioners’ claim for underpayment of
wages and non-payment of 13th month pay and other benefits.

LSC, on the other hand, averred that petitioners were employees of BMSI and were assigned to LSC by
virtue of the Agreement. BMSI is an independent job contractor with substantial capital or investment in
the form of tools, equipment, and machinery necessary in the conduct of its business. The Agreement
between LSC and BMSI constituted legitimate job contracting. Thus, petitioners were employees of BMSI
and not of LSC.
118

After due proceedings, the LA rendered a decision6 dismissing petitioners’ complaint. The LA found that
petitioners were employees of BMSI. It was BMSI which hired petitioners, paid their wages, and exercised
control over them.

Petitioners appealed to the National Labor Relations Commission (NLRC), arguing that BMSI was engaged
in labor-only contracting. They insisted that their employer was LSC.

On January 16, 2008, the NLRC promulgated its decision.7 Reversing the LA, the NLRC held:

We find from the records of this case that respondent BMSI is not engaged in legitimate job contracting.

First, respondent BMSI has no equipment, no office premises, no capital and no investments as shown in
the Agreement itself which states:

VI. RENTAL OF EQUIPMENT

[6.01.] That the CLIENT has several forklifts and truck tractor, and has offered to the CONTRACTOR the use
of the same by way of lease, the monthly rental of which shall be deducted from the total monthly billings
of the CONTRACTOR for the services covered by this Agreement.

6.02. That the CONTRACTOR has agreed to rent the CLIENT’s forklifts and truck tractor.

6.03. The parties herein have agreed to execute a Contract of Lease for the forklifts and truck tractor that
will be rented by the CONTRACTOR. (p. 389, Records)

True enough, parties signed a Lease Contract (p. 392, Records) wherein respondent BMSI leased several
excess equipment of LSC to enable it to discharge its obligation under the Agreement. So without the
equipment which respondent BMSI leased from respondent LSC, the former would not be able to perform
its commitments in the Agreement.

In Phil. Fuji Xerox Corp. v. NLRC (254 SCRA 294) the Supreme Court held:

x x x. The phrase "substantial capital and investment in the form of tools, equipment, machineries, work
premises, and other materials which are necessary in the conduct of his business," in the Implementing
Rules clearly contemplates tools, equipment, etc., which are directly related to the service it is being
contracted to render. One who does not have an independent business for undertaking the job
contracted for is just an agent of the employer. (underscoring ours)

Second, respondent BMSI has no independent business or activity or job to perform in respondent LSC
free from the control of respondent LSC except as to the results thereof. In view of the absence of such
independent business or activity or job to be performed by respondent BMSI in respondent LSC
[petitioners] performed work that was necessary and desirable to the main business of respondent LSC.
Respondents were not able to refute the allegations of [petitioners] that they performed the same work
that the regular workers of LSC performed and they stood side by side with regular employees of
respondent LSC performing the same work. Necessarily, the control on the manner and method of doing
the work was exercised by respondent LSC and not by respondent BMSI since the latter had no business
of its own to perform in respondent LSC.
119

Lastly, respondent BMSI has no other client but respondent LSC. If respondent BMSI were a going
concern, it would have other clients to which to assign [petitioners] after its Agreement with LSC expired.
Since there is only one client, respondent LSC, it is easy to conclude that respondent BMSI is a mere
supplier of labor.

After concluding that respondent BMSI is engaged in prohibited labor-only contracting, respondent LSC
became the employer of [petitioners] pursuant to DO 18-02.

[Petitioners] therefore should be reinstated to their former positions or equivalent positions in respondent
LSC as regular employees with full backwages and other benefits without loss of seniority rights from
October 31, 2003, when they lost their jobs, until actual reinstatement (Vinoya v. NLRC, 324 SCRA 469). If
reinstatement is not feasible, [petitioners] then should be paid separation pay of one month pay for every
year of service or a fraction of six months to be considered as one year, in addition to full backwages.

Concerning [petitioners’] prayer to be paid wage differentials and benefits under the CBA, We have no
doubt that [petitioners] would be entitled to them if they are covered by the said CBA. For this purpose,
[petitioners] should first enlist themselves as union members if they so desire, or pay agency fee.
Furthermore, only [petitioners] who signed the appeal memorandum are covered by this Decision. As
regards the other complainants who did not sign the appeal, the Decision of the Labor Arbiter dismissing
this case became final and executory.8

The NLRC disposed thus:

WHEREFORE, the appeal of [petitioners] is GRANTED. The Decision of the Labor Arbiter is hereby
REVERSED, and a NEW ONE rendered finding respondent Best Manpower Services, Inc. is engaged in
prohibited labor-only-contracting and finding respondent Lorenzo Shipping Corp. as the employer of the
following [petitioners]:

1. Emmanuel B. Babas

2. Danilo Banag

3. Edwin L. Javier

4. Rex Allesa

5. Arturo Villarin, [Sr.]

6. Felixberto C. Anajao

7. Arsenio Estorque

8. Maximo N. Soriano, Jr.

9. Sandi G. Bermeo

Consequently, respondent Lorenzo Shipping Corp. is ordered to reinstate [petitioners] to their former
positions as regular employees and pay their wage differentials and benefits under the CBA.
120

If reinstatement is not feasible, both respondents Lorenzo Shipping Corp. and Best Manpower Services are
adjudged jointly and solidarily to pay [petitioners] separation pay of one month for every year of service, a
fraction of six months to be considered as one year.

In addition, respondent LSC and BMSI are solidarily liable to pay [petitioners’] full backwages from
October 31, 2003 until actual reinstatement or, if reinstatement is not feasible, until finality of this
Decision.

Respondent LSC and respondent BMSI are likewise adjudged to be solidarily liable for attorney’s fees
equivalent to ten (10%) of the total monetary award.

SO ORDERED.9

LSC went to the CA via certiorari. On October 10, 2008, the CA rendered the now challenged Decision,10
reversing the NLRC. In holding that BMSI was an independent contractor, the CA relied on the provisions
of the Agreement, wherein BMSI warranted that it is an independent contractor, with adequate capital,
expertise, knowledge, equipment, and personnel necessary for the services rendered to LSC. According to
the CA, the fact that BMSI entered into a contract of lease with LSC did not ipso facto make BMSI a labor-
only contractor; on the contrary, it proved that BMSI had substantial capital. The CA was of the view that
the law only required substantial capital or investment. Since BMSI had substantial capital, as shown by its
ability to pay rents to LSC, then it qualified as an independent contractor. It added that even under the
control test, BMSI would be the real employer of petitioners, since it had assumed the entire charge and
control of petitioners’ services. The CA further held that BMSI’s Certificate of Registration as an
independent contractor was sufficient proof that it was an independent contractor. Hence, the CA
absolved LSC from liability and instead held BMSI as employer of petitioners.

The fallo of the CA Decision reads:

WHEREFORE, premises considered, the instant petition is GRANTED and the assailed decision and
resolution of public respondent NLRC are REVERSED and SET ASIDE. Consequently, the decision of the
Labor Arbiter dated September 29, 2004 is REINSTATED.

SO ORDERED.11

Petitioners filed a motion for reconsideration, but the CA denied it on January 21, 2009.12

Hence, this appeal by petitioners, positing that:

THE HONORABLE COURT OF APPEALS ERRED IN IGNORING THE CLEAR EVIDENCE OF RECORD THAT
RESPONDENT WAS ENGAGED IN LABOR-ONLY CONTRACTING TO DEFEAT PETITIONERS’ RIGHT TO
SECURITY OF TENURE.13

Before resolving the petition, we note that only seven (7) of the nine petitioners signed the Verification
and Certification.14 Petitioners Maximo Soriano, Jr. (Soriano) and Felixberto Anajao (Anajao) did not sign
the Verification and Certification, because they could no longer be located by their co-petitioners.15

In Toyota Motor Phils. Corp. Workers Association (TMPCWA), et al. v. National Labor Relations
Commission,16 citing Loquias v. Office of the Ombudsman,17 we stated that the petition satisfies the
formal requirements only with regard to the petitioner who signed the petition, but not his co-petitioner
who did not sign nor authorize the other petitioner to sign it on his behalf. Thus, the petition can be given
121

due course only as to the parties who signed it. The other petitioners who did not sign the verification and
certificate against forum shopping cannot be recognized as petitioners and have no legal standing before
the Court. The petition should be dismissed outright with respect to the non-conforming petitioners.

Thus, we dismiss the petition insofar as petitioners Soriano and Anajao are concerned.

Petitioners vigorously insist that they were employees of LSC; and that BMSI is not an independent
contractor, but a labor-only contractor. LSC, on the other hand, maintains that BMSI is an independent
contractor, with adequate capital and investment. LSC capitalizes on the ratiocination made by the CA.

In declaring BMSI as an independent contractor, the CA, in the challenged Decision, heavily relied on the
provisions of the Agreement, wherein BMSI declared that it was an independent contractor, with
substantial capital and investment.

De Los Santos v. NLRC18 instructed us that the character of the business, i.e., whether as labor-only
contractor or as job contractor, should

be measured in terms of, and determined by, the criteria set by statute. The parties cannot dictate by the
mere expedience of a unilateral declaration in a contract the character of their business.

In San Miguel Corporation v. Vicente B. Semillano, Nelson Mondejas, Jovito Remada, Alilgilan Multi-
Purpose Coop (AMPCO), and Merlyn N. Policarpio,19 this Court explained:

Despite the fact that the service contracts contain stipulations which are earmarks of independent
contractorship, they do not make it legally so. The language of a contract is neither determinative nor
conclusive of the relationship between the parties. Petitioner SMC and AMPCO cannot dictate, by a
declaration in a contract, the character of AMPCO's business, that is, whether as labor-only contractor, or
job contractor. AMPCO's character should be measured in terms of, and determined by, the criteria set by
statute.

Thus, in distinguishing between prohibited labor-only contracting and permissible job contracting, the
totality of the facts and the surrounding circumstances of the case are to be considered.

Labor-only contracting, a prohibited act, is an arrangement where the contractor or subcontractor merely
recruits, supplies, or places workers to perform a job, work, or service for a principal. In labor-only
contracting, the following elements are present: (a) the contractor or subcontractor does not have
substantial capital or investment to actually perform the job, work, or service under its own account and
responsibility; and (b) the employees recruited, supplied, or placed by such contractor or subcontractor
perform activities which are directly related to the main business of the principal.20

On the other hand, permissible job contracting or subcontracting refers to an arrangement whereby a
principal agrees to put out or farm out with the contractor or subcontractor the performance or
completion of a specific job, work, or service within a definite or predetermined period, regardless of
whether such job, work, or service is to be performed or completed within or outside the premises of the
principal. 21

A person is considered engaged in legitimate job contracting or subcontracting if the following conditions
concur:
122

(a) The contractor carries on a distinct and independent business and undertakes the contract work on his
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 his work except as
to the results thereof;

(b) The contractor has substantial capital or investment; and

(c) The agreement between the principal and the contractor or subcontractor assures 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.22

Given the above standards, we sustain the petitioners’ contention that BMSI is engaged in labor-only
contracting.

First, petitioners worked at LSC’s premises, and nowhere else. Other than the provisions of the Agreement,
there was no showing that it was BMSI which established petitioners’ working procedure and methods,
which supervised petitioners in their work, or which evaluated the same. There was absolute lack of
evidence that BMSI exercised control over them or their work, except for the fact that petitioners were
hired by BMSI.

Second, LSC was unable to present proof that BMSI had substantial capital. The record before us is bereft
of any proof pertaining to the contractor’s capitalization, nor to its investment in tools, equipment, or
implements actually used in the performance or completion of the job, work, or service that it was
contracted to render. What is clear was that the equipment used by BMSI were owned by, and merely
rented from, LSC.

In Mandaue Galleon Trade, Inc. v. Andales,23 we held:

The law casts the burden on the contractor to prove that it has substantial capital, investment, tools, etc.
Employees, on the other hand, need not prove that the contractor does not have substantial capital,
investment, and tools to engage in job-contracting.

Third, petitioners performed activities which were directly related to the main business of LSC. The work of
petitioners as checkers, welders, utility men, drivers, and mechanics could only be characterized as part of,
or at least clearly related to, and in the pursuit of, LSC’s business. Logically, when petitioners were
assigned by BMSI to LSC, BMSI acted merely as a labor-only contractor.

Lastly, as found by the NLRC, BMSI had no other client except for LSC, and neither BMSI nor LSC refuted
this finding, thereby bolstering the NLRC finding that BMSI is a labor-only contractor.

The CA erred in considering BMSI’s Certificate of Registration as sufficient proof that it is an independent
contractor. In San Miguel Corporation v. Vicente B. Semillano, Nelson Mondejas, Jovito Remada, Alilgilan
Multi-Purpose Coop (AMPCO), and Merlyn N. Policarpio,24 we held that a Certificate of Registration
issued by the Department of Labor and Employment 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.251avvphi1
123

Indubitably, BMSI can only be classified as a labor-only contractor. The CA, therefore, erred when it ruled
otherwise. Consequently, the workers that BMSI supplied to LSC became regular employees of the
latter.26 Having gained regular status, petitioners were entitled to security of tenure and could only be
dismissed for just or authorized causes and after they had been accorded due process.

Petitioners lost their employment when LSC terminated its Agreement with BMSI. However, the
termination of LSC’s Agreement with BMSI cannot be considered a just or an authorized cause for
petitioners’ dismissal. In Almeda v. Asahi Glass Philippines. Inc. v. Asahi Glass Philippines, Inc.,27 this Court
declared:

The sole reason given for the dismissal of petitioners by SSASI was the termination of its service contract
with respondent. But since SSASI was a labor-only contractor, and petitioners were to be deemed the
employees of respondent, then the said reason would not constitute a just or authorized cause for
petitioners’ dismissal. It would then appear that petitioners were summarily dismissed based on the
aforecited reason, without compliance with the procedural due process for notice and hearing.

Herein petitioners, having been unjustly dismissed from work, are entitled to reinstatement without loss of
seniority rights and other privileges and to full back wages, inclusive of allowances, and to other benefits
or their monetary equivalents computed from the time compensation was withheld up to the time of
actual reinstatement. Their earnings elsewhere during the periods of their illegal dismissal shall not be
deducted therefrom.

Accordingly, we hold that the NLRC committed no grave abuse of discretion in its decision. Conversely,
the CA committed a reversible error when it set aside the NLRC ruling.

WHEREFORE, the petition is GRANTED. The Decision and the Resolution of the Court of Appeals in CA-
G.R. SP. No. 103804 are REVERSED and SET ASIDE. Petitioners Emmanuel Babas, Danilo T. Banag, Arturo V.
Villarin, Sr., Edwin Javier, Sandi Bermeo, Rex Allesa, and Arsenio Estorque are declared regular employees
of Lorenzo Shipping Corporation. Further, LSC is ordered to reinstate the seven petitioners to their former
position without loss of seniority rights and other privileges, and to pay full backwages, inclusive of
allowances, and other benefits or their monetary equivalent, computed from the time compensation was
withheld up to the time of actual reinstatement.

No pronouncement as to costs.

SO ORDERED.
124

G.R. No. 169704 November 17, 2010

ALBERT TENG, doing business under the firm name ALBERT TENG FISH TRADING, and EMILIA
TENG-CHUA, Petitioners,
vs.
ALFREDO S. PAHAGAC, EDDIE D. NIPA, ORLANDO P. LAYESE, HERNAN Y. BADILLES and ROGER S.
PAHAGAC, Respondents.
BRION, J.:

Before this Court is a Petition for Review on Certiorari1 filed by petitioners Albert Teng Fish Trading, its
owner Albert Teng, and its manager Emilia Teng-Chua, to reverse and set aside the September 21, 2004
decision2 and the September 1, 2005 resolution3 of the Court of Appeals (CA) in CA-G.R. SP No. 78783.
The CA reversed the decision of the Voluntary Arbitrator (VA), National Conciliation and Mediation Board
(NCMB), Region IX, Zamboanga City, and declared that there exists an employer-employee relationship
between Teng and respondents Hernan Badilles, Orlando Layese, Eddie Nipa, Alfredo Pahagac, and Roger
Pahagac (collectively, respondent workers). It also found that Teng illegally dismissed the respondent
workers from their employment.

BACKGROUND FACTS

Albert Teng Fish Trading is engaged in deep sea fishing and, for this purpose, owns boats (basnig),
equipment, and other fishing paraphernalia. As owner of the business, Teng claims that he customarily
enters into joint venture agreements with master fishermen (maestros) who are skilled and are experts in
deep sea fishing; they take charge of the management of each fishing venture, including the hiring of the
members of its complement. He avers that the maestros hired the respondent workers as checkers to
determine the volume of the fish caught in every fishing voyage.4

On February 20, 2003, the respondent workers filed a complaint for illegal dismissal against Albert Teng
Fish Trading, Teng, and Chua before the NCMB, Region Branch No. IX, Zamboanga City.

The respondent workers alleged that Teng hired them, without any written employment contract, to serve
as his "eyes and ears" aboard the fishing boats; to classify the fish caught by bañera; to report to Teng via
radio communication the classes and volume of each catch; to receive instructions from him as to where
and when to unload the catch; to prepare the list of the provisions requested by the maestro and the
mechanic for his approval; and, to procure the items as approved by him.5 They also claimed that they
received regular monthly salaries, 13th month pay, Christmas bonus, and incentives in the form of shares
in the total volume of fish caught.

They asserted that sometime in September 2002, Teng expressed his doubts on the correct volume of fish
caught in every fishing voyage.6 In December 2002, Teng informed them that their services had been
terminated.7

In his defense, Teng maintained that he did not have any hand in hiring the respondent workers; the
maestros, rather than he, invited them to join the venture. According to him, his role was clearly limited to
the provision of the necessary capital, tools and equipment, consisting of basnig, gears, fuel, food, and
other supplies.8
125

The VA rendered a decision9 in Teng’s favor and declared that no employer-employee relationship
existed between Teng and the respondent workers. The dispositive portion of the VA’s May 30, 2003
decision reads:

WHEREFORE, premises considered, judgment is hereby rendered dismissing the instant complaint for lack
of merit.

It follows also, that all other claims are likewise dismissed for lack of merit.10

The respondent workers received the VA’s decision on June 12, 2003.11 They filed a motion for
reconsideration, which was denied in an order dated June 27, 2003 and which they received on July 8,
2003.12 The VA reasoned out that Section 6, Rule VII of the 1989 Procedural Guidelines in the Conduct of
Voluntary Arbitration Proceedings (1989 Procedural Guidelines) does not provide the remedy of a motion
for reconsideration to the party adversely affected by the VA’s order or decision.13 The order states:

Under Executive Order No. 126, as amended by Executive Order No. 251, and in order to implement
Article 260-262 (b) of the Labor Code, as amended by R.A. No. 6715, otherwise known as the Procedural
Guidelines in the Conduct of Voluntary Arbitration Proceedings, inter alia:

An award or the Decision of the Voluntary Arbitrators becomes final and executory after ten (10) calendar
days from receipt of copies of the award or decision by the parties (Sec. 6, Rule VII).

Moreover, the above-mentioned guidelines do not provide the remedy of a motion for reconsideration to
the party adversely affected by the order or decision of voluntary arbitrators.14

On July 21, 2003, the respondent-workers elevated the case to the CA. In its decision of September 21,
2004, the CA reversed the VA’s decision after finding sufficient evidence showing the existence of
employer-employee relationship:

WHEREFORE, premises considered, the petition is granted. The questioned decision of the Voluntary
Arbitrator dated May 30, 2003 is hereby REVERSED and SET ASIDE by ordering private respondent to pay
separation pay with backwages and other monetary benefits. For this purpose, the case is REMANDED to
the Voluntary Arbitrator for the computation of petitioner’s backwages and other monetary benefits. No
pronouncement as to costs.

SO ORDERED.15

Teng moved to reconsider the CA’s decision, but the CA denied the motion in its resolution of September
1, 2005.16 He, thereafter, filed the present Petition for Review on Certiorari under Rule 45 of the Rules of
Court, claiming that:

a. the VA’s decision is not subject to a motion for reconsideration; and

b. no employer-employee relationship existed between Teng and the respondent workers.

Teng contends that the VA’s decision is not subject to a motion for reconsideration in the absence of any
specific provision allowing this recourse under Article 262-A of the Labor Code.17 He cites the 1989
Procedural Guidelines, which, as the VA declared, does not provide the remedy of a motion for
reconsideration.18 He claims that after the lapse of 10 days from its receipt, the VA’s decision becomes
final and executory unless an appeal is taken.19 He argues that when the respondent workers received the
126

VA’s decision on June 12, 2003,20 they had 10 days, or until June 22, 2003, to file an appeal. As the
respondent workers opted instead to move for reconsideration, the 10-day period to appeal continued to
run; thus, the VA’s decision had already become final and executory by the time they assailed it before the
CA on July 21, 2003.21

Teng further insists that the VA was correct in ruling that there was no employer-employee relationship
between him and the respondent workers. What he entered into was a joint venture agreement with the
maestros, where Teng’s role was only to provide basnig, gears, nets, and other tools and equipment for
every fishing voyage.22

THE COURT’S RULING

We resolve to deny the petition for lack of merit.

Article 262-A of the Labor Code does not prohibit the filing of a motion for reconsideration.

On March 21, 1989, Republic Act No. 671523 took effect, amending, among others, Article 263 of the
Labor Code which was originally worded as:

Art. 263 x x x Voluntary arbitration awards or decisions shall be final, unappealable, and executory.

As amended, Article 263 is now Article 262-A, which states:

Art. 262-A. x x x [T]he award or decision x x x shall contain the facts and the law on which it is based. It
shall be final and executory after ten (10) calendar days from receipt of the copy of the award or decision
by the parties.

Notably, Article 262-A deleted the word "unappealable" from Article 263. The deliberate selection of the
language in the amendatory act differing from that of the original act indicates that the legislature
intended a change in the law, and the court should endeavor to give effect to such intent.24 We
recognized the intent of the change of phraseology in Imperial Textile Mills, Inc. v. Sampang,25 where we
ruled that:

It is true that the present rule [Art. 262-A] makes the voluntary arbitration award final and executory after
ten calendar days from receipt of the copy of the award or decision by the parties. Presumably, the
decision may still be reconsidered by the Voluntary Arbitrator on the basis of a motion for reconsideration
duly filed during that period.26

In Coca-Cola Bottlers Phil., Inc., Sales Force Union-PTGWO-Balais v. Coca-Cola Bottlers Philippines, Inc.,27
we likewise ruled that the VA’s decision may still be reconsidered on the basis of a motion for
reconsideration seasonably filed within 10 days from receipt thereof.28 The seasonable filing of a motion
for reconsideration is a mandatory requirement to forestall the finality of such decision.29 We further
cited the 1989 Procedural Guidelines which implemented Article 262-A, viz:30

[U]nder Section 6, Rule VII of the same guidelines implementing Article 262-A of the Labor Code, this
Decision, as a matter of course, would become final and executory after ten (10) calendar days from
receipt of copies of the decision by the parties x x x unless, in the meantime, a motion for reconsideration
or a petition for review to the Court of Appeals under Rule 43 of the Rules of Court is filed within the
same 10-day period. 31
127

These rulings fully establish that the absence of a categorical language in Article 262-A does not preclude
the filing of a motion for reconsideration of the VA’s decision within the 10-day period. Teng’s allegation
that the VA’s decision had become final and executory by the time the respondent workers filed an appeal
with the CA thus fails. We consequently rule that the respondent workers seasonably filed a motion for
reconsideration of the VA’s judgment, and the VA erred in denying the motion because no motion for
reconsideration is allowed.

The Court notes that despite our interpretation that Article 262-A does not preclude the filing of a motion
for reconsideration of the VA’s decision, a contrary provision can be found in Section 7, Rule XIX of the
Department of Labor’s Department Order (DO) No. 40, series of 2003:32

Rule XIX

Section 7. Finality of Award/Decision. – The decision, order, resolution or award of the voluntary arbitrator
or panel of voluntary arbitrators shall be final and executory after ten (10) calendar days from receipt of
the copy of the award or decision by the parties and it shall not be subject of a motion for
reconsideration.

Presumably on the basis of DO 40-03, the 1989 Procedural Guidelines was revised in 2005 (2005
Procedural Guidelines),33 whose pertinent provisions provide that:

Rule VII – DECISIONS

Section 6. Finality of Decisions. – The decision of the Voluntary Arbitrator shall be final and executory after
ten (10) calendar days from receipt of the copy of the decision by the parties.

Section 7. Motions for Reconsideration. – The decision of the Voluntary Arbitrator is not subject of a
Motion for Reconsideration.

We are surprised that neither the VA nor Teng cited DO 40-03 and the 2005 Procedural Guidelines as
authorities for their cause, considering that these were the governing rules while the case was pending
and these directly and fully supported their theory. Had they done so, their reliance on the provisions
would have nevertheless been unavailing for reasons we shall now discuss.

In the exercise of its power to promulgate implementing rules and regulations, an implementing agency,
such as the Department of Labor,34 is restricted from going beyond the terms of the law it seeks to
implement; it should neither modify nor improve the law. The agency formulating the rules and guidelines
cannot exceed the statutory authority granted to it by the legislature.35

By allowing a 10-day period, the obvious intent of Congress in amending Article 263 to Article 262-A is to
provide an opportunity for the party adversely affected by the VA’s decision to seek recourse via a motion
for reconsideration or a petition for review under Rule 43 of the Rules of Court filed with the CA. Indeed, a
motion for reconsideration is the more appropriate remedy in line with the doctrine of exhaustion of
administrative remedies. For this reason, an appeal from administrative agencies to the CA via Rule 43 of
the Rules of Court requires exhaustion of available remedies36 as a condition precedent to a petition
under that Rule.
128

The requirement that administrative remedies be exhausted is based on the doctrine that in providing for
a remedy before an administrative agency, every opportunity must be given to the agency to resolve the
matter and to exhaust all opportunities for a resolution under the given remedy before bringing an action
in, or resorting to, the courts of justice.37 Where Congress has not clearly required exhaustion, sound
judicial discretion governs,38 guided by congressional intent.39

By disallowing reconsideration of the VA’s decision, Section 7, Rule XIX of DO 40-03 and Section 7 of the
2005 Procedural Guidelines went directly against the legislative intent behind Article 262-A of the Labor
Code. These rules deny the VA the chance to correct himself40 and compel the courts of justice to
prematurely intervene with the action of an administrative agency entrusted with the adjudication of
controversies coming under its special knowledge, training and specific field of expertise. In this era of
clogged court dockets, the need for specialized administrative agencies with the special knowledge,
experience and capability to hear and determine promptly disputes on technical matters or intricate
questions of facts, subject to judicial review, is indispensable.41 In Industrial Enterprises, Inc. v. Court of
Appeals,42 we ruled that relief must first be obtained in an administrative proceeding before a remedy
will be supplied by the courts even though the matter is within the proper jurisdiction of a court.43

There exists an employer-employee relationship between Teng and the respondent workers.

We agree with the CA’s finding that sufficient evidence exists indicating the existence of an employer-
employee relationship between Teng and the respondent workers.

While Teng alleged that it was the maestros who hired the respondent workers, it was his company that
issued to the respondent workers identification cards (IDs) bearing their names as employees and Teng’s
signature as the employer. Generally, in a business establishment, IDs are issued to identify the holder as a
bona fide employee of the issuing entity.

For the 13 years that the respondent workers worked for Teng, they received wages on a regular basis, in
addition to their shares in the fish caught.44 The worksheet showed that the respondent workers received
uniform amounts within a given year, which amounts annually increased until the termination of their
employment in 2002.45 Teng’s claim that the amounts received by the respondent workers are mere
commissions is incredulous, as it would mean that the fish caught throughout the year is uniform and
increases in number each year.

More importantly, the element of control – which we have ruled in a number of cases to be a strong
indicator of the existence of an employer-employee relationship – is present in this case. Teng not only
owned the tools and equipment, he directed how the respondent workers were to perform their job as
checkers; they, in fact, acted as Teng’s eyes and ears in every fishing expedition.

Teng cannot hide behind his argument that the respondent workers were hired by the maestros. To
consider the respondent workers as employees of the maestros would mean that Teng committed
impermissible labor-only contracting. As a policy, the Labor Code prohibits labor-only contracting:

ART. 106. Contractor or Subcontractor – x x x The Secretary of Labor and Employment may, by
appropriate regulations, restrict or prohibit the contracting-out of labor.
129

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 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.

Section 5 of the DO No. 18-02,46 which implements Article 106 of the Labor Code, provides:

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 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.

In the present case, the maestros did not have any substantial capital or investment.1avvphi1 Teng
admitted that he solely provided the capital and equipment, while the maestros supplied the workers. The
power of control over the respondent workers was lodged not with the maestros but with Teng. As
checkers, the respondent workers’ main tasks were to count and classify the fish caught and report them
to Teng. They performed tasks that were necessary and desirable in Teng’s fishing business. Taken
together, these incidents confirm the existence of a labor-only contracting which is prohibited in our
jurisdiction, as it is considered to be the employer’s attempt to evade obligations afforded by law to
employees.

Accordingly, we hold that employer-employee ties exist between Teng and the respondent workers. A
finding that the maestros are labor-only contractors is equivalent to a finding that an employer-employee
relationship exists between Teng and the respondent workers. As regular employees, the respondent
workers are entitled to all the benefits and rights appurtenant to regular employment.

The dismissal of an employee, which the employer must validate, has a twofold requirement: one is
substantive, the other is procedural.47 Not only must the dismissal be for a just or an authorized cause, as
provided by law; the rudimentary requirements of due process – the opportunity to be heard and to
defend oneself – must be observed as well.48 The employer has the burden of proving that the dismissal
was for a just cause; failure to show this, as in the present case, would necessarily mean that the dismissal
was unjustified and, therefore, illegal.49

The respondent worker’s allegation that Teng summarily dismissed them on suspicion that they were not
reporting to him the correct volume of the fish caught in each fishing voyage was never denied by Teng.
Unsubstantiated suspicion is not a just cause to terminate one’s employment under Article 28250 of the
Labor Code. To allow an employer to dismiss an employee based on mere allegations and generalities
would place the employee at the mercy of his employer, and would emasculate the right to security of
130

tenure.51 For his failure to comply with the Labor Code’s substantive requirement on termination of
employment, we declare that Teng illegally dismissed the respondent workers.

WHEREFORE, we DENY the petition and AFFIRM the September 21, 2004 decision and the September 1,
2005 resolution of the Court of Appeals in CA-G.R. SP No. 78783. Costs against the petitioners.

SO ORDERED.