COCA-COLA BOTTLERS PHILS., INC., v. ALAN M. AGITO, ET AL.

GR. No. 179546, 13 February 2018, THIRD DIVISION (Chico-Nazario, J.)

DOCTRINE OF THE CASE:

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

FACTS:

Petitioner is a domestic corporation duly registered with the Securities and Exchange
Commission (SEC) and engaged in manufacturing, bottling and distributing soft drink beverages and
other allied products.

Respondents filed before the NLRC two complaints against petitioner, Interserve, Peerless
Integrated Services, Inc., Better Builders, Inc., and Excellent Partners, Inc. for reinstatement with
backwages, regularization, nonpayment of 13th month pay, and damages. Respondents alleged in
their Position Paper that they were salesmen assigned at the Lagro Sales Office of petitioner. They
had been in the employ of petitioner for years, but were not regularized. Their employment was
terminated without just cause and due process. However, they failed to state the reason/s for filing a
complaint against Interserve; Peerless Integrated Services, Inc.; Better Builders, Inc.; and Excellent
Partners, Inc.

Petitioner filed its Position Paper (with Motion to Dismiss), where it averred that
respondents were employees of Interserve who were tasked to perform contracted services in
accordance with the provisions of the Contract of Services executed between petitioner and
Interserve. Said Contract between petitioner and Interserve, covering the period of 1 April 2002 to
30 September 2002, constituted legitimate job contracting, given that the latter was a bona fide
independent contractor with substantial capital or investment in the form of tools, equipment, and
machinery necessary in the conduct of its business.

To prove the status of Interserve as an independent contractor, petitioner presented the

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

As a result, petitioner asserted that respondents were employees of Interserve, since it was
the latter which hired them, paid their wages, and supervised their work, as proven by: (1)
respondents’ Personal Data Files in the records of Interserve; (2) respondents’ Contract of
Temporary Employment with Interserve; and (3) the payroll records of Interserve.

Petitioner, thus, sought the dismissal of respondents’ complaint against it on the ground that
the Labor Arbiter did not acquire jurisdiction over the same in the absence of an employer-
employee relationship between petitioner and the respondents. Petitioner argues that there could not
have been labor-only contracting, since respondents did not perform activities that were
indispensable to petitioner’s principal business. And, even assuming that they did, such fact alone
does not establish an employer-employee relationship between petitioner and the respondents, since
respondents were unable to show that petitioner exercised the power to select and hire them, pay
their wages, dismiss them, and control their conduct.

ISSUE:

Is Interserve a legitimate job contractor?

RULING:

NO. Article 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
restriction, he may make appropriate distinctions between labor-only contracting and job contracting
as well as differentiations within these types of contracting and determine who among the parties
involved shall be considered the employer for purposes of this Code, to prevent any violation or
circumvention of any provision of this Code.

There is "labor-only" contracting where the person supplying workers to an employee does
not have substantial capital or investment in the form of tools, equipment, machineries, work
premises, among others, and the workers recruited and placed by such persons are performing
activities which are directly related to the principal business of such employer. In such cases, the
person or intermediary shall be considered merely as an agent of the employer who shall be
responsible to the workers in the same manner and extent as if the latter were directly employed by
him.
The afore-quoted provision recognizes two possible relations among the parties: (1) the
permitted legitimate job contract, or (2) the prohibited labor-only contracting.

A legitimate job contract, wherein an employer enters into a contract with a job contractor
for the performance of the former’s work, is permitted by law. Thus, the employer-employee
relationship between the job contractor and his employees is maintained. In legitimate job
contracting, the law creates an employer-employee relationship between the employer and the
contractor’s employees only for a limited purpose, i.e., to ensure that the employees are paid their
wages. The employer becomes jointly and severally liable with the job contractor only for the
payment of the employees’ wages whenever the contractor fails to pay the same. Other than that, the
employer is not responsible for any claim made by the contractor’s employees.
 On the other hand, labor-only contracting is an arrangement wherein the contractor merely
acts as an agent in recruiting and supplying the principal employer with workers for the purpose of
circumventing labor law provisions setting down the rights of employees. It is not condoned by law.
A finding by the appropriate authorities that a contractor is a "labor-only" contractor establishes an
employer-employee relationship between the principal employer and the contractor’s employees and
the former becomes solidarily liable for all the rightful claims of the employees.

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

Section 5. Prohibition against labor-only contracting. Labor-only contracting is hereby

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

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

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

"Substantial capital or investment" refers to capital stocks and subscribed capitalization in

the case of corporations, tools, equipment, implements, machineries and work premises, actually and
directly used by the contractor or subcontractor in the performance or completion of the job, work,
or service contracted out.

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

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

Section 7. Existence of an employer-employee relationship.— The contractor or

subcontractor shall be considered the employer of the contractual employee for purposes of
enforcing the provisions of the Labor Code and other social legislation. The principal, however,
shall be solidarily liable with the contractor in the event of any violation of any provision of the
Labor Code, including the failure to pay wages.
The principal shall be deemed the employer of the contractual employee in any of the
following case, as declared by a competent authority:
a. where there is labor-only contracting; or
b. where the contracting arrangement falls within the prohibitions provided in Section 6
(Prohibitions) hereof.
 Labor-only contracting would give rise to: (1) the creation of an employer-employee
relationship between the principal and the employees of the contractor or sub-contractor; and (2)
the solidary liability of the principal and the contractor to the employees in the event of any violation
of the Labor Code.

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

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

Interserve did not have substantial capital or investment in the form of tools, equipment,
machineries, and work premises; and respondents, its supposed employees performed work which
was directly related to the principal business of petitioner. Interserve falls under the definition of a
"labor-only" contractor, under Article 106 of the Labor Code; as well as Section 5(i) of the Rules
Implementing Articles 106-109 of the Labor Code, as amended.

Interserve is a labor-only contractor under Section 5(ii) of the Rules Implementing Articles
106-109 of the Labor Code, as amended, since it did not exercise the right to control the
performance of the work of respondents.

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

Also significant was the right of petitioner under paragraph 2 of the Contract to "request the
replacement of the CONTRACTOR’S personnel." True, this right was conveniently qualified by the
phrase "if from its judgment, the jobs or the projects being done could not be completed within the
time specified or that the quality of the desired result is not being achieved," but such qualification
was rendered meaningless by the fact that the Contract did not stipulate what work or job the
personnel needed to complete, the time for its completion, or the results desired. The said provision
left a gap which could enable petitioner to demand the removal or replacement of any employee in
the guise of his or her inability to complete a project in time or to deliver the desired result. The
power to recommend penalties or dismiss workers is the strongest indication of a company’s right of
control as direct employer.
 Paragraph 4 of the same Contract, in which Interserve warranted to petitioner that the
former would provide relievers and replacements in case of absences of its personnel, raises another
red flag. An independent job contractor, who is answerable to the principal only for the results of a
certain work, job, or service need not guarantee to said principal the daily attendance of the workers
assigned to the latter. An independent job contractor would surely have the discretion over the pace
at which the work is performed, the number of employees required to complete the same, and the
work schedule which its employees need to follow.

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

Interserve was engaged in prohibited labor-only contracting, petitioner shall be deemed the
true employer of respondents. As regular employees of petitioner, respondents cannot be dismissed
except for just or authorized causes, none of which were alleged or proven to exist in this case, the
only defense of petitioner against the charge of illegal dismissal being that respondents were not its
employees.