CONTRACTING OUT

ALIVIADO VS PROCTER AND GAMBLE

Under Section 3, Rule VIII-A, Book III of the Omnibus Rules Implementing the Labor Code, as amended
by Department Order No. 18-02, it discussed legitimate contracting as having “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.”

On the other hand, Section 5 of the same Omnibus Rules discussed the prohibition on labor-only
contracting wherein “the contractor or subcontractor merely recruits, supplies or places workers to
perform a job, work or service for a principal, and any of the following elements are present:

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

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

The Supreme Court found that Promm-Gem has substantial investment which relates to the work to be
performed due to the latter’s financial statements. And also, records also showed 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, as well as the uniforms of workers. Under the circumstances,
Promm-Gem cannot be considered as a labor-only contractor, and was found as legitimate independent
contractor.

On the part of SAPS, the Supreme Court found that it lacked substantial capital as underlined by the
records. It failed to show that it could complete the 6-month contracts using its own capital and
investment. Its capital was not even sufficient for one month’s payroll. 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, it was found that the former was engaged in labor-only
contracting.

Contracting out (also known in business jargon as outsourcing) is a business solution whereby certain
company functions are assigned to outside service providers rather than performed in-house. 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.

PAL VS LIGAN

The Court ruled that the employees herein, having performed tasks which are usually necessary and
desirable in the air transportation business of PAL, should be deemed as its regular employees and
Synergy as a labor-only contractor.

To determine whether labor-contracting exists, the Court applied Sec. 5 of D.O. No. 18-02 which requires
any of the two elements to be 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. Even if only one of the two
elements is present then, there is labor-only contracting.

In this case, it was gathered that the work performed by almost all of the employees is directly related to
the main business of PAL. And the equipment used by the employees as station loaders, such as trailers
and conveyors, are owned by PAL.

How do we define the terms "main business" and "directly related"? How are we to interpret DO No. 174
(S. 2017) in the light of certain jurisprudence?

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.

FILIPINAS SYNTHETIC FIBER VS NLRC

The Court held that there is sufficient evidence to show that private respondent DE LIMA is an
independent job contractor, not a mere labor-only contractor.

Under the Labor Code, two (2) elements must exist for a finding of labor-only contracting: (a) the person
supplying workers to an employer does not have substantial capital or investment in the form of tools,
equipment, machineries, work premises, among others, and (b) the workers recruited and placed by such
persons are performing activities directly related to the principal business of such employer. These two
(2) elements do not exist in the instant case. As pointed out by petitioner, private respondent DE LIMA is
a going concern duly registered with the Securities and Exchange Commission with substantial
capitalization of P1,600,000.00, P400,000.00 of which is actually subscribed. Hence, it cannot be considered
as engaged in labor-only contracting being a highly capitalized venture.

While the janitorial services performed by Felipe Loterte pursuant to the agreement between FILSYN
and DE LIMA may be considered directly related to the principal business of FILSYN which is the
manufacture of polyester fiber, nevertheless, they are not necessary in its operation. On the contrary,
they are merely incidental thereto, as opposed to being integral, without which production and
company sales will not suffer.

Consequently, DE LIMA being an independent job contractor, no direct employer-employee relationship

exists between petitioner FILSYN and private respondent Felipe Loterte.

SAN MIGUEL CORP. VS SEMILLANO

The test to determine the existence of independent contractor is whether the 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.

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.

Even though the service contracts contain stipulations which are earmarks of independent contractor,
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 AMPCOs business, that is, whether as labor-only contractor, or job contractor.
AMPCOs character should be measured in terms of, and determined by, the criteria set by statute. At a
closer look, AMPCOs actual status and participation regarding respondent’s employment clearly belie
the contents of the written service contract.

Petitioner cannot rely either on AMPCOs Certificate of Registration as an Independent Contractor issued
by the proper Regional Office of the DOLE to prove its claim. It is not conclusive evidence of such status.
The fact of registration simply prevents the legal presumption of being a mere labor-only contractor from
arising. In distinguishing between permissible job contracting and prohibited labor-only contracting, the
totality of the facts and the surrounding circumstances of the case are to be considered.

ALLIED BANK VS CALUMPANG

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

overcomes the burden of proving that it has the substantial capital, investment, tools and the like. In the
case, ABC failed to establish the RCI is a legitimate labor contactor as contemplated under the Labor
Code. Except for the bare allegation of ABC that RCI has substantial capitalization, it presented no
supporting evidence to show the same. Aside from this, petitioner's claim that RCI exercised control and
supervision over respondent is belied by the fact that petitioner admitted that its own Branch Manager
had informed respondent that his services would no longer be required at the Branch.

A finding that a contractor is a labor-only contractor, as opposed to permissible job contracting, is

equivalent to declaring that there is an employer-employee relationship between the principal and the
employees of the supposed contractor, and the labor-only contractor is considered as a mere agent of the
principal, the real employer. In this case, petitioner bank is the principal employer and RCI is the labor-
only contractor. Accordingly, petitioner and RCI are solidarily liable for the rightful claims of respondent.

As a rule, the dismissal of an employee is justified where there was a just cause and that employee was
afforded due process prior to dismissal. The burden of proof to establish is on the employer, who must
present clear, accurate, consistent, and convincing evidence. In the case at bar, ABC’s reason for
termination Mr. Calumpang rests on valid legal grounds. Because of the acts done by Mr. Calumpang
and the absent of any denial on his part, the SC is constrained to believed that Mr. Calumpang’s silence is
an admission of these accusations against him, hereby causing a serious and detrimental part of ABC’s
operation.

COCA COLA VS AGITO

The Supreme Court finds that the argument of petitioner is untenable. Upon the finding that Interserve is
engaged in labor-only contracting, it establishes an employer-employee relationship between petitioner,
who is the principal employer and herein respondents, the contractor’s employees. According to Article 6
of the Labor Code, the indicators of a labor-only contracting are where the person supplying workers to
an employee does not have substantial capital or investment in the form of tools, equipment, machineries,
work premises, among others, AND the workers recruited and placed by such persons are performing
activities which are directly related to the principal business of such employer. The Court finds that both
indicators exist in the present case. The work of respondents which constitutes distribution and sale of
Coca-Cola products is clearly indispensable to the principal business of respondents. The repeated re-
hiring of some them supports the said finding.

With regard to the alleged capital stock maintained by Interserve, the Court does not set an absolute
figure for what it considers substantial capital for an independent job contractor but it measures the same
against the type of work which the contractor is obligated to perform for the principal. Contrarily, the
contract between petitioner and Interserve does not even specify the work or the project that need to be
performed or completed by the contractor’s employees. The contractor has the burden of proof that it has
the substantial capital, investment and tool to engage in job contracting and not the employee. In the
instant case, the burden of proof lies within the petitioner who is invoking the supposed status of
Interserve as independent job contractor. However, petitioner failed to submit evidence to establish its
allegations. In addition, the lack of control of Interserve over respondents can be gleaned from the
Contract of Service between the former and the petitioner. With the foregoing, it is evident that Interserve
falls under the definition of labor-only contractor. Petitioner shall then deem to be the employer of the
respondents. As regular employees, respondents cannot be dismissed except for just or authorized causes
which are all lacking in the instant case. Wherefore, the petition is DENIED.

DOLE PHIL VS NLRC

The mere presence within the premises of a supervisor from the contractor does not necessarily mean that
it has control over its members, and that it is an independent contractor. Oftentimes, these 'supervisors "
or "coordinators" do nothing more than relay to the employees the work schedule or assignments given
by the principal or else check the attendance of the personnel. These are hardly indicators of "control".
Other circumstances indicate LOC: the deployed personnel had to undergo instructions and pass the
training provided by the principal's officer; it was the principal which determined and prepared the work
assignments of the deployed personnel; the deployed personnel worked alongside regular employees
performing identical jobs

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.

PHILIPPINE PIZZA VS CAYETANO

the Court finds that the NLRC did not in fact gravely abuse its discretion in holding that CBMI is a
legitimate job contractor, and consequently, the employer of respondents. As the NLRC aptly pointed
out, CBMI is presumed to have complied with all the requirements of a legitimate job contractor,
considering the Certificates of Registration issued to it by the DOLE. Although not a conclusive proof of
legitimacy, the certification nonetheless prevents the presumption of labor-only contracting from arising.
It gives rise to a disputable presumption that the contractor's operations are legitimate. The NLRC was
also correct in holding that CBMI has substantial capital and investment. Based on CBMI's 2012 General
Information Sheet, it has an authorized capital stock in the amount of P10,000,000.00 and subscribed
capital stock in the amount of P5,000,000.00, P3,500,000.00 of which had already been paid-up.
Additionally, its audited financial statements show that it has considerable current and non-current assets
amounting to P85,518,832.00. Taken together, CBMI has substantial capital to properly carry out its
obligations with PPI, as well as to sufficiently cover its own operational expenses.

the Court agrees with the finding of the NLRC that respondents were not illegally dismissed from work.
Records show that while PPI denied the existence of an employer-employee relationship with
respondents, CBMI actually acknowledged that respondents were its employees. CBMI likewise
presented proof that it duly informed respondents of their impending lay-off, yet they immediately filed
the complaints before it had the chance to re-deploy them. On the other hand, respondents did not even
refute CBMI's claim that they were informed of its decision to place them in floating status pending their
re-deployment. As such, respondents could not have been illegally terminated from work, for they were
placed in a temporary lay-off status when they prematurely filed the complaints. There being no
dismissal to speak of, respondents were thus not illegally dismissed by CBMI, their actual employer.

LINGNAM RESTAURANT VS SKILLS TALENT EMPLOYMENT POOL

STEP is engaged in labor-only contracting, thus petitioner Lingnam Restaurant (principal), shall be
deemed the employer of respondent Jessie Colaste, and he should be considered a regular employee of
petitioner. The ascertainment of the liability of petitioner Lingnam Restaurant and/or respondent STEP
toward complainant-respondent Jessie Colaste requires the determination of the nature of the contracts
between them, specifically whether respondent STEP is engaged in job-contracting or labor-only
contracting.

It is Lingnam Restaurant who has control over the means, manner, method and results to be performed
by Jessie Colaste and not STEP. STEP merely provides manpower for the restaurant which means that
their arrangement is a labor-only contracting. In this case, it is therefore Lingnam Restaurant, the
principal, who is considered as the direct employer of the Jessie Colaste and is the one liable for his illegal
dismissal case or any other labor standards violated thereof.

VALENCIA VS CLASSIQUE VINYL PRODUCTS

The Court finds untenable Valencia's argument that neither Classique Vinyl nor CMS was able to present
proof that the latter is a legitimate independent contractor and therefore, unable to rebut the presumption
that a contractor is presumed to be a labor-only contractor. "Generally, the presumption is that the
contractor is a labor-only [contractor] unless such contractor overcomes the burden of proving that it has
the substantial capital, investment, tools and the like." Here, to prove that CMS was a legitimate
contractor, Classique Vinyl presented the former's Certificate of Registration with the Department of
Trade and Industry and, License as private recruitment and placement agency from the Department of
Labor and Employment. Indeed, these documents are not conclusive evidence of the status of CMS as a
contractor. However, such fact of registration of CMS prevented the legal presumption of it being a mere
labor-only contractor from arising. In any event, it must be stressed that "in labor-only contracting, the
statute creates an employer-employee relationship for a comprehensive purpose: to prevent a
circumvention of labor laws. The contractor is considered merely an agent of the principal employer and
the latter is responsible to the employees of the labor-only contractor as if such employees had been
directly employed by the principal employer. The principal employer therefore becomes solidarily liable
with the labor-only contractor for all the rightful claims of the employees." The facts of this case, however,
failed to establish that there is any circumvention of labor laws as to call for the creation by the statute of
an employer-employee relationship between Classique Vinyl and Valencia. In fact, even as against CMS,
Valencia's money claims has been debunked by the labor tribunals and the CA. Again, the Court is not
inclined to disturb the same.