Art. 100 111

Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. Nos. 97008-09 July 23, 1993
VIRGINIA G. NERI and JOSE CABELIN, petitioners,

vs.
NATIONAL LABOR RELATIONS COMMISSION FAR EAST BANK & TRUST COMPANY
(FEBTC) and BUILDING CARE CORPORATION, respondents.
R.L. Salcedo & Improso Law Office for petitioners.
Bengzon, Zarnaga, Narciso, Cudala, Pecson, Bengzon & Jimenez for Bldg. Care Corp.
Bautista, Picaso, Buyco, Tan & Fider for respondent FEBTC.
BELLOSILLO, J.:
Respondents are sued by two employees of Building Care Corporation, which provides janitorial and
other specific services to various firms, to compel Far Bast Bank and Trust Company to recognize
them as its regular employees and be paid the same wages which its employees receive.
Building Care Corporation (BCC, for brevity), in the proceedings below, established that it had
substantial capitalization of P1 Million or a stockholders equity of P1.5 Million. Thus the Labor Arbiter
ruled that BCC was only job contracting and that consequently its employees were not employees of
Far East Bank and Trust Company (FEBTC, for brevity). on appeal, this factual finding was affirmed
by respondent National Labor Relations Commission (NLRC, for brevity). Nevertheless, petitioners
insist before us that BCC is engaged in "labor-only" contracting hence, they conclude, they are
employees of respondent FEBTC.
Petitioners Virginia G. Neri and Jose Cabelin applied for positions with, and were hired by,
respondent BCC, a corporation engaged in providing technical, maintenance, engineering,
housekeeping, security and other specific services to its clientele. They were assigned to work in the
Cagayan de Oro City Branch of respondent FEBTC on 1 May 1979 and 1 August 1980, respectively,
Neri an radio/telex operator and Cabelin as janitor, before being promoted to messenger on 1 April
1989.
On 28 June 1989, petitioners instituted complaints against FEBTC and BCC before Regional
Arbitration Branch No. 10 of the Department of Labor and Employment to compel the bank to accept
them as regular employees and for it to pay the differential between the wages being paid them by
BCC and those received by FEBTC employees with similar length of service.
On 16 November 1989, the Labor Arbiter dismissed the complaint for lack of merit.1 Respondent
BCC was considered an independent contractor because it proved it had substantial capital. Thus,
petitioners were held to be regular employees of BCC, not FEBTC. The dismissal was appealed to
NLRC which on 28 September 1990 affirmed the decision on appeal.2 On 22 October 1990, NLRC
denied reconsideration of its affirmance,3 prompting petitioners to seek redress from this Court.
Petitioners vehemently contend that BCC in engaged in "labor-only" contracting because it failed to
adduce evidence purporting to show that it invested in the form of tools, equipment, machineries,
work premises and other materials which are necessary in the conduct of its business. Moreover,
petitioners argue that they perform duties which are directly related to the principal business or
operation of FEBTC. If the definition of "labor-only" contracting4is to be read in conjunction with job
contracting,5 then the only logical conclusion is that BCC is a "labor only" contractor. Consequently,
they must be deemed employees of respondent bank by operation of law since BCC is merely an
agent of FEBTC following the doctrine laid down in Philippine Bank of Communications v. National
Labor Relations Commission6 where we ruled that 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; hence, FEBTC should be considered the employer of
petitioners who are deemed its employees through its agent, "labor-only" contractor BCC.
We cannot sustain the petition.
Respondent BCC need not prove that it made investments in the form of tools, equipment,
machineries, work premises, among others, because it has established that it has sufficient
capitalization. The Labor Arbiter and the NLRC both determined that BCC had a capital stock of P1
million fully subscribed and paid for.7 BCC is therefore a highly capitalized venture and cannot be
deemed engaged in "labor-only" contracting.
It is well-settled that there is "labor-only" contracting where: (a) the person supplying workers to an
employer does not have substantial capital or investment in the form of tools, equipment,
machineries, work premises, among others; and, (b) the workers recruited and placed by such
person are performing activities which are directly related to the principal business of the employer.8
Article 106 of the Labor Code defines "labor-only" contracting thus —
Art. 106. Contractor or subcontractor. — . . . . 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 by such persons are performing activities which are
directly related to the principal business of such employer . . . . (emphasis supplied).
Based on the foregoing, BCC cannot be considered a "labor-only" contractor because it has
substantial capital. While there may be no evidence that it has investment in the form of tools,
equipment, machineries, work premises, among others, it is enough that it has substantial capital, as
was established before the Labor Arbiter as well as the NLRC. In other words, the law does not
require both substantial capital and investment in the form of tools, equipment, machineries, etc.
This is clear from the use of the conjunction "or". If the intention was to require the contractor to
prove that he has both capital and the requisite investment, then the conjunction "and" should have
been used. But, having established that it has substantial capital, it was no longer necessary for
BCC to further adduce evidence to prove that it does not fall within the purview of "labor-only"
contracting. There is even no need for it to refute petitioners' contention that the activities they
perform are directly related to the principal business of respondent bank.
Be that as it may, the Court has already taken judicial notice of the general practice adopted in
several government and private institutions and industries of hiring independent contractors to
perform special services.9 These services range from janitorial, 10 security 11 and even technical or
other specific services such as those performed by petitioners Neri and Cabelin. While these
services may be considered directly related to the principal business of the
employer, 12 nevertheless, they are not necessary in the conduct of the principal business of the
employer.
In fact, the status of BCC as an independent contractor was previously confirmed by this Court
in Associated Labor Unions-TUCP v. National Labor Relations Commission, 13 where we held thus —
The public respondent ruled that the complainants are not employees of the bank but
of the company contracted to serve the bank. Building Care Corporation is a big firm
which services, among others, a university, an international bank, a big local bank, a
hospital center, government agencies, etc. It is a qualified independent contractor.
The public respondent correctly ruled against petitioner's contentions . . . . (Emphasis
supplied).
Even assuming ex argumenti that petitioners were performing activities directly related to the
principal business of the bank, under the "right of control" test they must still be considered
employees of BCC. In the case of petitioner Neri, it is admitted that FEBTC issued a job description
which detailed her functions as a radio/telex operator. However, a cursory reading of the job
description shows that what was sought to be controlled by FEBTC was actually the end-result of the
task, e.g., that the daily incoming and outgoing telegraphic transfer of funds received and relayed by
her, respectively, tallies with that of the register. The guidelines were laid down merely to ensure that
the desired end-result was achieved. It did not, however, tell Neri how the radio/telex machine
should be operated. In the Shipside case, 14 we ruled —
. . . . If in the course of private respondents' work (referring to the workers),

SHIPSIDE occasionally issued instructions to them, that alone does not in the least
detract from the fact that only STEVEDORES is the employer of the private
respondents, for in legal contemplation, such instructions carry no more weight than
mere requests, the privity of contract being between SHIPSIDE and STEVEDORES .
...
Besides, petitioners do not deny that they were selected and hired by BCC before being assigned to
work in the Cagayan de Oro Branch of FFBTC. BCC likewise acknowledges that petitioners are its
employees. The record is replete with evidence disclosing that BCC maintained supervision and
control over petitioners through its Housekeeping and Special Services Division: petitioners reported
for work wearing the prescribed uniform of BCC; leaves
of absence were filed directly with BCC; and, salaries were drawn only from BCC. 15
As a matter of fact, Neri even secured a certification from BCC on 16 May 1986 that she was
employed by the latter. On the other hand, on 24 May 1988, Cabelin filed a complaint for
underpayment of wages, non-integration of salary adjustments mandated by Wage Orders Nos. 5 &
6 and R.A. 6640 as well as for illegal deduction 16 against BCC alone which was provisionally
dismissed on 19 August 1988 upon Cabelin's manifestation that his money claim was negligible. 17
More importantly, under the terms and conditions of the contract, it was BCC alone which had the
power to reassign petitioners. Their deployment to FEBTC was not subject to the bank's acceptance.
Cabelin was promoted to messenger because the FEBTC branch manager promised BCC that two
(2) additional janitors would be hired from the company if the promotion was to be
effected. 18 Furthermore, BCC was to be paid in lump sum unlike in the situation in Philippine Bank of
Communications 19 where the contractor, CESI, was to be paid at a daily rate on a per person basis.
And, the contract therein stipulated that the CESI was merely to provide manpower that would
render temporary services. In the case at bar, Neri and Cabelin were to perform specific special
services. Consequently, petitioners cannot be held to be employees of FEBTC as BCC "carries an
independent business" and undertaken the performance of its contract with various clients according
to its "own manner and method, free from the control and supervision" of its principals in all matters
"except as to the results thereof." 20
Indeed, the facts in Philippine Bank of Communications do not square with those of the instant case.
Therein, the Court ruled that CESI was a "labor-only" contractor because upholding the contract
between the contractor and the bank would in effect permit employers to avoid the necessity of
hiring regular or permanent employees and would enable them to keep their employees indefinitely
on a temporary or casual basis, thus denying them security of tenure in their jobs. This of course
violates the Labor Code. BCC has not committed any violation. Also, the former case was for illegal
dismissal; this case, on the other hand, is for conversion of employment status so that petitioners
can receive the same salary being given to regular employees of FEBTC. But, as herein determined,
petitioners are not regular employees of FEBTC but of BCC. At any rate, the finding that BCC in a
qualified independent contractor precludes us from applying the Philippine Bank of
Communications doctrine to the instant petition.
The determination of employer-employee relationship involves factual findings. 21 Absent any grave
abuse of discretion, and we find none in the case before us, we are bound by the findings of the
Labor Arbiter as affirmed by respondent NLRC.
IN VIEW OF THE FOREGOING, the Petition for Certiorari is DISMISSED.
SO ORDERED.
Cruz, Griño-Aquino, Davide, Jr. and Quiason, JJ., concur.
G.R. No. 104658. April 7, 1993.
PILIPINAS SHELL PETROLEUM CORPORATION, petitioner,

vs.
THE HONORABLE COURT OF APPEALS and CLARITA T. CAMACHO,
respondents.
Angara, Abello, Concepcion, Regala & Cruz for petitioner.
Yolanda Quisumbing-Javellana & Associates for private respondent.
SYLLABUS
1. LABOR LAWS AND SOCIAL LEGISLATION; EMPLOYER-EMPLOYEE

RELATIONSHIP; FACTORS CONSIDERED IN DETERMINING EXISTENCE
THEREOF; CASE AT BAR. — It is firmly settled that the existence or non-
existence of the employer-employee relationship is commonly to be determined
by examination of certain factors or aspects of that relationship. These include:
(a) the manner of selection and engagement of the putative employee; (b) the
mode of payment of wages; (c) the presence or absence of a power to control the
putative employee's conduct, although the latter is the most important element
. . . As aptly held by the trial court, petitioner did not exercise control and
supervision over Feliciano with regard to the manner in which he conducted
the hydro-pressure test. All that petitioner did, through its Field Engineer,
Roberto Mitra, was relay to Feliciano the request of private respondent for a
hydro-pressure test, to determine any possible leakages in the storage tanks in
her gasoline station. The mere hiring of Feliciano by petitioner for that
particular task is not the form of control and supervision contemplated by law
which may be the basis for establishing an employer-employee relationship
between petitioner and Feliciano. The fact that there was no such control is
further amplified by the absence of any shell representative in the job site at
the time when the test was conducted. Roberto Mitra was never there. Only
Feliciano and his men were. True, it was petitioner who sent Feliciano to
private respondent's gasoline station to conduct the hydro-pressure test as per
the request of private respondent herself. But this single act did not
automatically make Feliciano an employee of petitioner. As discussed earlier,
more than mere hiring is required. It must further be established that
petitioner is the one who is paying Feliciano's salary on a regular basis; that it
has the power to dismiss said employee, and more importantly, that petitioner
has control and supervision over the work of Feliciano. The last requisite was
sorely missing in the instant case.
2. ID.; JOB CONTRACTING; REQUISITES; HALLMARKS OF INDEPENDENT

CONTRACTOR. — Section 8 of Rule VIII, Book III of the Omnibus Rules
Implementing the Labor Code provides: "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; and (2) The contractor has substantial
capital or investment in the form of tools, equipment, machineries, work
premises, and other materials which are necessary in the conduct of his
business." Feliciano is independently maintaining a business under a duly
registered business name, "JFS Repair and Maintenance Service," and is duly
registered with the Bureau of Domestic Trade. He does not enjoy a fixed salary
but instead charges a lump sum consideration for every piece of work he
accomplishes. If he is not able to finish his work, he does not get paid, as what
happened in this case. Further, Feliciano utilizes his own tools and equipment
and has a complement of workers. Neither is he required to work on a regular
basis. Instead, he merely awaits calls from clients such as petitioner whenever
repairs and maintenance services are requested. Moreover, Feliciano does not
exclusively service petitioner because he can accept other business but not
from other oil companies. All these are the hallmarks of an independent
contractor.
3. CIVIL LAW; QUASI-DELICTS; INDEPENDENT CONTRACTOR

RESPONSIBLE FOR HIS OWN ACTS AND OMISSIONS. — Being an
independent contractor, Feliciano is responsible for his own acts and
omissions. As he alone was in control over the manner of how he was to
undertake the hydro-pressure test, he alone must bear the consequences of his
negligence, if any, in the conduct of the same.
DECISION
CAMPOS, JR., J p:
Was the hydro-pressure test of the underground storage tank in private

respondent Clarita T. Camacho's gasoline station conducted by an independent
contractor or not? A negative answer will make petitioner Pilipinas Shell
Petroleum Corporation (Shell, for brevity) liable for the said independent
contractor's acts or omissions; otherwise, no. This is the issue that this Court
is called upon to resolve in this case.
The facts are as follows:
Private respondent Clarita T. Camacho (private respondent for short) was the
operator of a gasoline station in Naguilian Road, Baguio City, wherein she sells
petitioner Shell's petroleum products. Sometime in April 1983, private
respondent requested petitioner to conduct a hydro-pressure test on the
underground storage tanks of the said station in order to determine whether or
not the sales losses she was incurring for the past several months were due to
leakages therein. Petitioner acceded to the said request and on April 27, 1983,
one Jesus "Jessie" Feliciano together with other workers, came to private
respondent's station with a Job Order from petitioner to perform the hydro-
pressure test.
On the same day, Feliciano and his men drained the underground storage tank
which was to be tested of its remaining gasoline. After which, they filled the
tank with water through a water hose from the deposit tank of private
respondent. Then, after requesting one of private respondent's gasoline boys to
shut off the water when the tank was filled, Feliciano and his men left. At
around 2:00 a.m. the following day, private respondent saw that the water had
reached the lip of the pipe of the underground storage tank and so, she shut off
the water faucet.
At around 5:30 a.m., private respondent's husband opened the station and
started selling gasoline. But at about 6:00 a.m., the customers who had bought
gasoline returned to the station complaining that their vehicles stalled because
there was water in the gasoline that they bought. On account of this, private
respondent was constrained to replace the gasoline sold to the said customers.
However, a certain Eduardo Villanueva, one of the customers, filed a complaint
with the police against private respondent for selling the adulterated gasoline.
In addition, he caused the incident to be published in two local newspapers.
Feliciano, who arrived later that morning, did not know what caused the water
pollution of the gasoline in the adjacent storage tank. So he called up Nick
Manalo, Superintendent of Shell's Poro Point Installation at San Fernando, La
Union, and referred the matter to the latter. Manalo went up to Baguio in the
afternoon to investigate. Thereafter, he and Feliciano again filled with water the
underground storage tank undergoing hydro-pressure test whereat they
noticed that the water was transferring to the other tanks from whence came
the gasoline being sold. Manalo asked permission from Shell's Manila Office to
excavate the underground pipes of the station. Upon being granted permission
to do so, Feliciano and his men began excavating the driveway of private
respondent's station in order to expose the underground pipeline. The task was
continued by one Daniel "Danny" Pascua who replaced Feliciano, Pascua
removed the corroded pipeline and installed new independent vent pipe for
each storage tank.
Meanwhile, petitioner undertook to settle the criminal complaint filed by

Villanueva. Subsequently, Villanueva filed an Affidavit of Desistance, 1
declaring, inter alia —
"THAT, after careful evaluation of the surrounding circumstances, especially

the explanation of the representatives of SHELL Phils., that the gasoline tanks
of Mrs. Camacho were subject to Hydro test, in such a way that water was
used for the said test, I believe that she may not have had anything to do with
the filling of water in the tank of my car;
xxx xxx xxx
THAT, said representatives of SHELL Phils. have interceded for and in behalf of
Mrs. Camacho and have fully satisfied my claim against her.
THAT, in view of all the foregoing I do not intend to prosecute the case and I am
therefore asking for the dismissal of the case against Mrs. Camacho."
Thereafter, private respondent demanded from petitioner the payment of

damages in the amount of P10,000.00. Petitioner, instead, offered private
respondent additional credit line and other beneficial terms, which offer was,
however, rejected. cdrep
Subsequently, or on October 12, 1983, private respondent filed before the trial
court a complaint for damages against petitioner due to the latter's alleged
negligence in the conduct of the hydro-pressure test in her gasoline station. For
its part, petitioner denied liability because, according to it, the hydro-pressure
test on the underground storage tanks was conducted by an independent
contractor.
The trial court dismissed private respondent's complaint for damages for the
reason that:
"The hydro-pressure test which brought about the incident was conducted by
Jesus Feliciano, who was neither an employee nor agent nor representative of
the defendant. Jesus Feliciano is responsible for his own acts and omissions.
He alone was in control of the manner of how he is to undertake the hydro-
pressure test.
Considering that the conduct of said hydro-pressure test was under the sole
and exclusive control and supervision of Jesus Feliciano, the overflow with
water causing the same to sip into the adjoining tank cannot be attributed to
the fault or negligence of defendant. 2
From the adverse decision of the trial court, private respondent appealed to the
Court of Appeals which court reversed the decision of the trial court. Thus,
"PREMISES CONSIDERED, the decision being appealed from is hereby SET

ASIDE and, in lieu thereof, another rendered ordering defendant to pay
plaintiff:
1. P100,000.00 as moral damages;
2. P2,639.25 and P15,000.00 representing the actual losses suffered by

plaintiff as a result of the water pollution of the gasoline.
No costs.
SO ORDERED." 3
Petitioner moved to have the above decision reconsidered but the same was
denied in a Resolution dated March 9, 1992. Hence, this recourse.
As stated at the very outset, the pivotal issue in this case is whether or not
petitioner should be held accountable for the damage to private respondent due
to the hydro-pressure test conducted by Jesus Feliciano.
It is a well-entrenched rule that an employer-employee relationship must exist

before an employer may be held liable for the negligence of his employee. It is
likewise firmly settled that the existence or non-existence of the employer-
employee relationship is commonly to be determined by examination of certain
factors or aspects of that relationship. These include: (a) the manner of
selection and engagement of the putative employee; (b) the mode of payment of
wages; (c) the presence or absence of a power to control the putative employee's
conduct, 4 although the latter is the most important element. 5
In this case, respondent Court of Appeals held petitioner liable for the damage
caused to private respondent as a result of the hydro-pressure test conducted
by Jesus Feliciano due to the following circumstances: 6
1. Feliciano was hired by petitioner;
2. He received his instructions from the Field Engineer of petitioner, Mr.

Roberto Mitra;
3. While he was at private respondent's service station, he also received

instructions from Nick Manalo, petitioner's Poro Point Depot Superintendent;
4. Instructions from petitioner's Manila Office were also relayed to him

while he was at .the job site at Baguio City;
5. His work was under the constant supervision of petitioner's engineer;
6. Before he could complete the work, he was instructed by Mr. Manalo,

petitioner's Superintendent, to discontinue the same and it was turned over to
Daniel Pascua, who was likewise hired by petitioner.
Based on the foregoing, respondent Court of Appeals concluded that Feliciano

was not an independent contractor but was under the control and supervision
of petitioner in the performance of the hydro-pressure test, hence, it held
petitioner liable for the former's acts and omissions.
We are not in accord with the above finding of respondent Court of Appeals. As
aptly held by the trial court, petitioner did not exercise control and supervision
over Feliciano with regard to the manner in which he conducted the hydro-
pressure test. All that petitioner did, through its Field Engineer, Roberto Mitra,
was relay to Feliciano the request of private respondent for a hydro-pressure
test, to determine any possible leakages in the storage tanks in her gasoline
station. The mere hiring of Feliciano by petitioner for that particular task is not
the form of control and supervision contemplated by may be the basis for
establishing an employer-employee relationship between petitioner and
Feliciano. The fact that there was no such control is further amplified by the
absence of any Shell representative in the job site time when the test was
conducted. Roberto Mitra was never there. Only Feliciano and his men were.
True, it was petitioner who sent Feliciano to private respondent's gasoline

station in conduct the hydro-pressure test as per the request of private
respondent herself. But this single act did not automatically make Feliciano an
employee of petitioner. As discussed earlier, more than mere hiring is required.
It must further be established that petitioner is the one who is paying Felicia's
salary on a regular basis; that it has the power to dismiss said employee, and
more importantly, that petitioner has control and supervision over the work of
Feliciano. The last requisite was sorely missing in the instant case.
A careful perusal of the records will lead to the conclusion that Feliciano is an
independent contractor. Section 8 of Rule VIII, Book III of the Omnibus Rules
Implementing the Labor Code provides:
"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; and
(2) The contractor has substantial capital or investment in the form of tools,
equipment, machineries, work premises, and other materials which are
necessary in the conduct of his business."
Feliciano is independently maintaining a business under a duly registered

business name, "JFS Repair and Maintenance Service," and is duly registered
with the Bureau of Domestic Trade. 7 He does not enjoy a fixed salary but
instead charges a lump sum consideration for every piece of work he
accomplishes. 8 If he is not able to finish his work, he does not get paid, as
what happened in this case. 9 Further, Feliciano utilizes his own tools and
equipment and has a complement of workers. Neither is he required to work on
a regular basis. Instead, he merely awaits calls from clients such as petitioner
whenever repairs and maintenance services are requested. Moreover, Feliciano
does not exclusively service petitioner because he can accept other business
but not from other oil companies. 10 All these are the hallmarks of an
independent contractor.
Being an independent contractor, Feliciano is responsible for his own acts and
omissions. As he alone was in control over the manner of how he was to
undertake the hydro-pressure test, he alone must bear the consequences of his
negligence, if any, in the conduct of the same.
Anent the issue of damages, the same has been rendered moot by the failure of
private respondent to establish an employer-employee relationship between
petitioner and Feliciano. Absent said relationship, petitioner cannot be held
liable for the acts and omissions of the independent contractor, Feliciano.
WHEREFORE, premises considered, the appealed decision of respondent Court
of Appeals is hereby SET ASIDE and the decision of the trial court
REINSTATED. Without pronouncement as to costs.
SO ORDERED.
G.R. Nos. 100264-81 January 29, 1993
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,

vs.
THE NATIONAL LABOR RELATIONS COMMISSION, ONG PENG, ET. AL.,
respondents.
The Chief Legal Counsel for Development Bank of the Philippines.
Muñoz Law Office for private respondents.
GUTIERREZ, JR., J.:
In this petition for certiorari, petitioner Development Bank of the Philippines

(DBP) asserts its preferential right as a foreclosing creditor over private
respondents' claims for separation pay against Republic Hardwood, Inc. (RHI).
On November 14, 1986, the private respondents filed with the Provincial
Extension Office of the Department of Labor and Employment (DOLE) in Daet,
Camarines Norte seventeen individual complaints against RHI for unpaid
wages and separation pay. These complaints were thereafter endorsed to the
Regional Arbitration Branch (Branch V of Legaspi City) of the National Labor
Relations Commission (NLRC) since the petitioners had already been
terminated from employment.
In its position paper dated March 1987, RHI alleged that it had ceased to
operate in 1983 due to the government ban against tree-cutting. It further
alleged that in May 24, 1981, its sawmill was totally burned resulting in
enormous losses and that due to its financial setbacks, RHI failed to pay its
loan with the DBP. RHI contended that since DBP foreclosed its mortgaged
assets on September 24, l985, then any adjudication of monetary claims in
favor of its former employees must be satisfied against DBP.
On April 29, 1987, the private respondents filed a motion to implead DBP. On
July 13, 1987, DBP filed its opposition to said motion.
On October 28, 1988, Executive Labor Arbiter Gelacio Rivera rendered a joint
decision on the complaints, the relevant and dispositive portions of which read:
To say that workers of bankrupt or insolvent employers must first file an

insolvency or bankruptcy proceeding against the latter before their unpaid
workers may be satisfied will cause additional burden, unnecessary expenses,
unwanted hardship which are conditions not so intended under the Social
Justice policy of the State. . . . .
. . . To require petitioners to file insolvency proceedings against RHI and later
file against DBP their claims is to prolong the agony of petitioners. To give a
technical and legal meaning to the words of Art. 110 is to subvert the rights of
the petitioners. We hold therefore that as against the contention of respondent
DBP, Art. 4 of the Labor Code is the answer. The social justice clause of the
Constitution is our guide.
xxx xxx xxx
WHEREFORE, premises considered, judgment is hereby rendered in favor of

petitioners and adversely against respondent Republic Hardwood, Inc. and
Development Bank of the Philippines, ordering the latter to jointly and severally
pay petitioners the amount of P59,610.00 as separation pay within ten (10)
days upon receipt of this Decision through this Regional Arbitration Branch.
Further, respondents are ordered to pay the amount of P308.00 as deposit fee
pursuant to PD 1177 under Budget Circular No. 304 and Secs. 4 and 8 of
Batas Pambansa Blg. 230. (Rollo, pp. 38, 40-41)
DBP appealed to the NLRC which rendered a decision on April 15, 1991
affirming the labor arbiter's judgment. DBP filed a motion for reconsideration
which was likewise dismissed by the NLRC on May 17, 1991.
Hence, this petition for certiorari.
The petitioner alleges that the NLRC committed grave abuse of discretion in
issuing the assailed decision dated April 15, 1991 and its resolution of May 17,
1991 and raises the following issues:
1. Whether or not the Joint Decision of Executive Labor Arbiter Gelacio L.

Rivera is violative of procedural due process on the part of DBP;
2. Whether or not the complainant-private respondents are entitled to

separation pay;
3. Whether or not there was retroactive application of Executive Order No.

81 in this case;
4. Whether or not Executive Labor Arbiter Gelacio L. Rivera and the NLRC
correctly applied Article 110 of the Labor Code in this case; and
5. Whether or not there is a basis for the NLRC (Labor Arbiter Rivera) to
order the payment of deposit fee. (Rollo, pp. 17-18)
DBP asserts that it was deprived of due process since there was no formal
order impleading it in the complaints against RHI. Moreover, DBP points out,
the cases were never set for hearing thus depriving it of the opportunity to
peruse the documentary evidence of the complainants and to confront the
complainants' witnesses. Additionally, DBP was not given an opportunity to
present its own evidence.
There is no merit to this contention of DBP. Denial of due process means the
total lack of opportunity to be heard. There is no denial of due process where a
party is given an opportunity to be heard and to present his case. The
petitioner in this case filed an opposition to the motion to implead it as a party
defendant. It likewise filed a motion for reconsideration of the labor arbiter's
decision. Thereafter, DBP filed an appeal with the NLRC and, later on, a motion
for reconsideration of the NLRC decision. The petitioner, thus, was given ample
opportunity to present its case. It was not denied due process.
There is no merit to DBP's contention that the workers are not entitled to
separation pay. Despite the enormous losses incurred by RHI due to the fire
that gutted the sawmill in 1981 and despite the logging ban in 1983, the
uncontroverted claims for separation pay show that most of the private
respondents still worked up to the end of 1985 (See Rollo, p. 39). RHI would
still have continued its business had not the petitioner foreclosed all of its
assets and properties on September 24, 1985. Thus, the closure of RHI's
business was not primarily brought about by serious business losses. Such
closure was a consequence of DBP's foreclosure of RHI's assets. We therefore
apply Article 283 which provides:
. . . 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 or at least one-half
(1/2) month pay for every year of service, whichever is higher. . . .
However, because of the petitioner's assertion that the labor arbiter and
respondent NLRC incorrectly applied the provisions of Article 110 of the Labor
Code, we are constrained to grant the petition for certiorari.
Article 110, prior to its amendment by Republic Act No. 6715, reads:
Art. 110. Worker preference in case of bankruptcy. — In the event of

bankruptcy or liquidation of an employer's business, his workers shall enjoy
first preference as regards wages due them for services rendered during the
period prior to the bankruptcy or liquidation, any provision of law to the
contrary notwithstanding. Unpaid wages shall be paid in full before other
creditors may establish any claim to a share in the assets of the employer.
Section 10, Rule VIII, Book III of the Implementing Rules and Regulations of
the Labor Code states:
Sec. 10. Payment of wages in case of bankruptcy. — Unpaid wages earned
by the employees before the declaration of bankruptcy or judicial liquidation of
the employer's business shall be given first preference and shall be paid in full
before other creditors may establish any claim to a share in the assets of the
employer.
In Republic v. Peralta, 150 SCRA 37 (1987), the Court held that the term
"wages" includes separation pay. But the Court declared:
Article 110 of the Labor Code, in determining the reach of its terms, cannot be
viewed in isolation. Rather, Article 110 must be read in relation to the
provisions of the Civil Code concerning the classification, concurrence and
preference of credits, which provisions find particular application in insolvency
proceedings where the claims of all creditors, preferred or non-preferred, may
be adjudicated in a binding manner.
We have repeatedly stressed that before the workers' preference provided by

Article 110 may be invoked, there must first be a declaration of bankruptcy or
a judicial liquidation of the employer's business. (See DBP v. Minister of Labor,
195 SCRA 463 [1991]; DBP v. NLRC, 186 SCRA 841 [1990]; DBP v. NLRC, 183
SCRA 328 [1990]; DBP v. Secretary of Labor, 179 SCRA 630 [1989]; DBP v.
Santos, 171 SCRA 138 [1989]; Republic v. Peralta, supra).
In DBP v. Santos, supra, the Court discussed the import of Article 110 and
Section 10 of Rule VIII, Book III and stated:
It is quite clear from the provisions that a declaration of bankruptcy or a

judicial liquidation must be present before the worker's preference may be
enforced. Thus, Article 110 of the Labor Code and its implementing rule cannot
be invoked by the respondents in this case absent a formal declaration of
bankruptcy or a liquidation order.
xxx xxx xxx
Moreover, the reason behind the necessity for a judicial proceeding or a

proceeding in rem before the concurrence and preference of credits may be
applied was explained by this Court in the case of Philippines Savings Bank v.
Lantin (124 SCRA 476 [1983]). We said:
The proceedings in the court below do not partake of the nature of the
insolvency proceedings or settlement of a decedent's estate. The action filed by
Ramos was only to collect the unpaid cost of the construction of the duplex
apartment. It is far from being a general liquidation of the estate of the
Tabligan spouses.
Insolvency proceedings and settlement of a decedent's estate are both
proceedings in rem which are binding against the whole world. All persons
having interest in the subject matter involved, whether they were notified or
not, are equally bound. Consequently, a liquidation of similar import or other
equivalent general liquidation must also necessarily be a proceeding in rem so
that all interested persons whether known to the parties or not may be bound
by such proceeding.
In the case at bar, although the lower court found that "there were no known
creditors other than the plaintiff and the defendant herein", this can not be
conclusive. It will not bar other creditors in the event they show up and present
their claims against the petitioner bank, claiming that they also have preferred
liens against the property involved. Consequently, Transfer Certificate of Title
No. 101864 issued in favor of the bank which is supposed to be indefeasible
would remain constantly unstable and questionable. Such could not have been
the intention of Article 2243 of the Civil Code although it considers claims and
credits under Article 2242 as statutory liens. Neither does the De Barreto case .
...
The claims of all creditors whether preferred or non-preferred, the identification

of the preferred ones and the totality of the employer's asset should be brought
into the picture. There can then be an authoritative, fair, and binding
adjudication instead of the piece meal settlement which would result from the
questioned decision in this case. (At pp. 144-145).
The NLRC, therefore, committed grave abuse of discretion when it affirmed the
labor arbiter's ruling that the workers' preference espoused in Article 110 may
be applied even in the absence of a declaration of bankruptcy or a liquidation
order.
We must also emphasize that DBP's lien on RHI's mortgaged assets, being a
mortgage credit, is a special preferred credit under Article 2242 of the Civil
Code while the workers' preference is an ordinary preferred credit under Article
2244.
Thus, in DBP v. NLRC, (supra) it was held:
4. A distinction should be made between a preference of credit and a lien. A

preference applies only to claims which do not attach to specific properties. A
lien creates a charge on a particular property. The right of first preference as
regards unpaid wages recognized by Article 110 does not constitute a lien on
the property of the insolvent debtor in favor of workers. It is but a preference of
credit in their favor, a preference in application. It is a method adopted to
determine and specify the order in which credits should be paid in the final
distribution of the proceeds of the insolvent's assets. It is a right to a first
preference in the discharge of the funds of the judgment debtor.
In the words of Republic v. Peralta, supra.
Article 110 of the Labor Code does not purport to create a lien in favor of
workers or employees for unpaid wages either upon all of the properties or
upon any particular property owned by their employer. Claims for unpaid
wages do not therefore fall at all within the category of specially preferred
claims established under Articles 2241 and 2242 of the Civil Code, except to
the extent that such claims for unpaid wages are already covered Article 2241,
number 6: "claims for laborers" wages, on the goods manufactured or the work
done; or by Article 2242, number 3: "claims of laborers and other workers
engaged in the construction, reconstruction or repair of buildings, canals and
other works, upon said buildings, canals and other works. To the extent that
claims for unpaid wages fall outside the scope of Article 2241, number 6 and
2242, number 3, they would come within the ambit of the category of ordinary
preferred credits under Article 2244.
5. The DBP anchors its claim on a mortgage credit. A mortgage directly and
immediately subjects the property upon which it is imposed, whoever the
possessor may be, to the fulfillment of the obligation for whose security it was
constituted (Article 2176, Civil Code). It creates a real right which is
enforceable against the whole world. It is a lien on an identified immovable
property, which a preference is not. A recorded mortgage credit is a special
preferred credit under Article 2242 (5) of the Civil Code on classification of
credits. The preference given by Article 110, when not falling within Article
2241 (6) and Article 2242 (3) of the Civil Code and not attached to any specific
property, is an ordinary preferred credit although its impact is to move it from
second priority to first priority in the order of preference established by Article
2244 of the Civil Code (Republic v. Peralta, supra).
Clearly, even if DBP and the private respondents assert their preferred credits
in a judicial proceeding, the former's claim must first be satisfied.
Article 110 of the Labor Code has been amended by R.A. No. 6715 and now
reads:

first preference as regards their unpaid wages and other monetary claims, any
provision of law to the contrary notwithstanding. Such unpaid wages, and
monetary claims shall be paid in full before the claims of the Government and
other creditors may be paid. (Emphasis ours.)
We ruled in DBP v. NLRC, supra, that the amendment "expands worker

preference to cover not only unpaid wages but also other monetary claims to
which even claims of the Government must be deemed subordinate." Hence,
under the new law, even mortgage credits are subordinate to workers' claims.
In this connection, respondent NLRC ruled:
Lastly, while we are cognizant of the pronouncement of the Supreme Court

with respect to Art. 110 and while we hold in respect said pronouncements, we
are of the earnest view that considering that Art. 110 has been amended by RA
6715, complainants' preference over government claims and other creditors be
adhered to. (Rollo, p. 65)
R.A. No. 6715, however, took effect only on March 21, 1989. The amendment
cannot therefore be retroactively applied to, nor can it affect, the mortgage
credit which was secured by the petitioner several years prior to its effectivity.
This was our pronouncement in DBP v. NLRC, supra:
6. Even if Article 110 and its Implementing Rule, as amended, should be

interpreted to mean "absolute preference," the same should be given only
prospective effect in line with the cardinal rule that laws shall have no
retroactive effect, unless the contrary is provided (Article 4, Civil Code).
Thereby, any infringement on the constitutional guarantee on
non-impairment of the obligation of contracts (Section 10, Article III, 1987
Constitution) is also avoided. In point of fact, DBP's mortgage credit antedated
by several years the amendatory law, RA No. 6715. To give Article 110
retroactive effect would be to wipe out the mortgage in DBP's favor and expose
it to a risk which it sought to protect itself against by requiring a collateral in
the form of real property.
The public respondent, therefore, committed grave abuse of discretion when it

retroactively applied the amendment introduced by R.A. No. 6715 to the case at
bar.
With the foregoing discussion, we no longer find it necessary to discuss the two
other issues raised by the petitioner.
WHEREFORE, the petition is hereby GRANTED. The assailed decision of public

respondent National Labor Relations Commission dated April 15, 1991 and its
resolution dated May 17, 1991 are SET ASIDE. The temporary restraining
order issued by the Court on July 29, 1991 is made PERMANENT.
G.R. No. 97175 May 18, 1993
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,

vs.
NLRC and NATIONAL MINES AND ALLIED WORKERS UNION, respondents.
Chief Legal Counsel, Development Bank of the Philippines for petitioner.
Padilla & Associates Law Office for respondent.
MELO, J.:
Before us is a petition to set aside the NLRC Decision dated November 28, 1990
(Annex "C", p. 41, Rollo), disposing as follows:
WHEREFORE, PREMISES CONSIDERED, the appealed decision is hereby set

aside and a new judgment is entered, holding the Development Bank of the
Philippines liable to the complainants for their separation pay to the extent of
the proceed of the foreclosure sale, subject to the liquidation or bankruptcy
proceeding that may be instituted against Midland Cement Corporation. (pp.
47-48, Rollo).
Herein private respondent labor union filed on January 10, 1986, a complaint,
the allegations of which were paraphrased by the NLRC in this wise:
. . . that the individual complainants were all employees of respondent Midland

Cement Corporation who were terminated from employment on or about July
30, 1981 by reason of the termination of the business operations of the
Construction and Development Corporation of the Philippines (CDCP) now
PNCC, which was brought about by the expiration of the lease contract
between Midland Cement Corporation and CDCP; that at the time of the
separation from the service [of] the individual complainants, the complainant
union was the certified sole and exclusive bargaining agent; that as a
consequence of said termination, the complainant union filed with the then
Ministry of Labor and Employment an opposition to the application for
clearance to terminate their services filed by CDCP, the lessee of the cement
plant owned by Midland Cement Corporation; that on April 27, 1983, the
Ministry of Labor and Employment thru then Deputy Minister Vicente
Leogardo, Jr., ordered applicant CDCP to pay the 175 affected employees
separation pay equivalent to one-half (1/2) month salary for every year of
service; that the employees were paid only based on their length of service with
CDCP from August 1, 1975 up to July 30, 1981; the said employees were not
paid (with) their separation pay when they were employees of respondent
Midland Cement Corporation; that later, respondent DBP foreclosed and
assumed ownership over the cement plant, including land, buildings,
machinery, etc., of Midland Cement Corporation; that the individual
complainants are claiming separation benefits covering the period from date of
hiring up to July 31, 1975 when CDCP took over the operations of Midland
Cement Corporation by virtue of lease contract. (pp. 43-44, Rollo).
After hearing, the Labor Arbiter rendered a decision on January 5, 1990 (Annex
"A", p. 26, Rollo), finding DBP jointly and severally liable with Midland Cement
for the payment of the separation pay, as follows:
WHEREFORE, judgment is hereby rendered giving due course to the complaint

thereby ordering the respondents DBP and Midland Cement Corporation jointly
and severally liable for the separation pay of the affected members of the
complainant union.
It appearing that as published in the morning dailies lately that the assets of
Midland Cement Corporation are now being offered for sale through public
bidding by the Asset Privatization Trust, (APT) let copies of this decision be
served upon said APT to protect the interest of the herein complainants. (pp.
30-31, Rollo)
DBP appealed, contending that its acquisition of the mortgaged assets of

Midland through foreclosure sale did not make it the owner of the defunct
Midland Cement, and that the doctrine of successor-employee is not applicable
in this case, since DBP did not continue the business operations of Midland.
The NLRC, while finding merit in DBP's contention, nonetheless held DBP
liable since respondent's claim "constitutes a first preference with respect to
the proceeds of the foreclosure sale" as provided in Article 110 of the Labor
Code:

first preference as regards their wages and other monetary claims, any
provisions of law to the contrary notwithstanding. Such unpaid wages and
monetary claims shall be paid in full before claims of the government and other
creditors may be paid. (p. 46, Rollo)
Following the denial of its motion for reconsideration, DBP filed the instant
petition.
DBP correctly points out that its mortgage lien should not be classified as a
preferred credit. The issue raised was settled in Republic v. Peralta (150 SCRA
37 [1987]) and reinforced in DBP v. NLRC (183 SCRA 328 [1990]) wherein we
held because of its impact on the entire system of credit, Article 110 of the
Labor Code cannot be viewed in isolation but must be read in relation to the
Civil Code scheme on classification and preference of credits. Thus,
4. A distinction should be made between a preference of credit or a lien. A
preference applies only to claims which do not attach to specific properties, A
lien creates a charge on a particular property. The right of first preference as
regards unpaid wages recognized by Article 110 does not constitute a lien on
the property of the insolvent debtor in favor of workers. It is but a preference of
credit in their favor, a preference in application. It is a method adopted to
determine and specify the order in which credits should be paid in the final
distribution of the proceeds of the insolvent's assets. It is a right to a first
preference in the discharge of the funds of the judgment debtor.
In the words of Republic vs. Peralta, supra:
the extent that such claims for unpaid wages are already covered by Article
2241, number 6: claims for laborer wages, on the goods manufactured or the
work done, or by Article 2242, number 3: "claims of laborers and other workers
engaged in construction, reconstruction or repair of buildings, canals and other
works, upon said buildings, canals and other works." To the extent that claims
for unpaid wages fall outside the scope of Article 2241, number 6 and Article
2242, number 3, they would come within the ambit of the category of ordinary
preferred credits under Article 2244.
6. The DBP anchors its claim on a mortgage credit. A mortgage directly and
immediately subjects the property upon which it is imposed, whoever the
possessor may be, to the fulfillment of the obligation for whose security it was
constituted (Article 2176, Civil Code). It creates a real right which is
enforceable against the whole world. It is a lien on an identified immovable
property, which a preference is not. A recorded mortgage credit is a special
preferred credit under Article 2242 (5) of the Civil Code on classification of
credits. The preference given by Article 110, when not falling within Article
2241 (6) and Article 2242 (3) of the Civil Code and not attached to any specific
property, is an ordinary preferred credit although its impact is to move it from
second priority to first priority in the order of preference established by Article
2244 of the Civil Code. (Republic vs. Peralta, supra.)
xxx xxx xxx
In fine, the right to preference given to workers under Article 110 of the Labor
Code cannot exist in any effective way prior to the time of its presentation in
distribution proceedings. It will find application when, in proceedings such as
insolvency, such unpaid wages shall be paid in full before the "claims of the
Government and other creditors" may be paid. . . . (DBP vs, NLRC, supra; pp.
337-339.)
The NLRC, therefore, erred in holding DBP liable "to the extent of the proceeds
of the foreclosure sale." And making such liability dependent on a bankruptcy
or liquidation proceedings is really beside the point, for these proceedings are
relevant only to preferred credits, which is not the situation in the case at bar.
To equate DBP's mortgage lien with a preferred credit would be to render
inutile the protective mantle of the mortgage in DBP's favor and thus in the
process wreak havoc to commercial transactions.
WHEREFORE, the petition is GRANTED. The decision of the NLRC dated

November 28, 1990 and the Resolution of February 1, 1991 are hereby SET
ASIDE, and a new judgment is entered absolving Development Bank of the
Philippines of any and all liabilities to private respondent and its members.
No special pronouncement is made as to costs.
SO ORDERED.
G.R. No. L-56568 May 20, 1987
REPUBLIC OF THE PHILIPPINES, represented by the Bureau of Customs

and the Bureau of Internal Revenue, petitioner,
vs.
HONORABLE E.L. PERALTA, PRESIDING JUDGE OF THE COURT OF FIRST
INSTANCE OF MANILA, BRANCH XVII, QUALITY TABACCO
CORPORATION, FRANCISCO, FEDERACION OBRERO DE LA INDUSTRIA
TABAQUERA Y OTROS TRABAJADORES DE FILIPINAS (FOITAF) USTC
EMPLOYEES ASSOCIATION WORKERS UNION-PTGWO, respondents.
Oscar A. Pascua for assignee F. Candelaria.
Teofilo C. Villarico for respondent Federation.
Pedro A. Lopez for respondent USTC.
FELICIANO, J.:
The Republic of the Philippines seeks the review on certiorari of the Order
dated 17 November 1980 of the Court of First Instance of Manila in its Civil
Case No. 108395 entitled "In the Matter of Voluntary Insolvency of Quality
Tobacco Corporation, Quality Tobacco Corporation, Petitioner," and of the
Order dated 19 January 1981 of the same court denying the motion for
reconsideration of the earlier Order filed by the Bureau of Internal Revenue and
the Bureau of Customs for the Republic.
In the voluntary insolvency proceedings commenced in May 1977 by private

respondent Quality Tobacco Corporation (the "Insolvent"), the following claims
of creditors were filed:
(i) P2,806,729.92, by the USTC Association of Employees and workers

Union-PTGWO USTC as separation pay for their members. This amount plus
an additional sum of P280,672.99 as attorney's fees had been awarded by the
National Labor Relations Commission in NLRC Case No. RB-IV-9775-77. 1
(ii) P53,805.05 by the Federacion de la Industria Tabaquera y Otros

Trabajadores de Filipinas ("FOITAF), as separation pay for their members, an
amount similarly awarded by the NLRC in the same NLRC Case.
(iii) P1,085,188.22 by the Bureau of Internal Revenue for tobacco inspection

fees covering the period 1 October 1967 to 28 February 1973;
(iv) P276,161.00 by the Bureau of Customs for customs duties and taxes
payable on various importations by the Insolvent. These obligations appear to
be secured by surety bonds. 2 Some of these imported items are apparently
still in customs custody so far as the record before this Court goes.
In its questioned Order of 17 November 1980, the trial court held that the
above-enumerated claims of USTC and FOITAF (hereafter collectively referred
to as the "Unions") for separation pay of their respective members embodied in
final awards of the National Labor Relations Commission were to be preferred
over the claims of the Bureau of Customs and the Bureau of Internal Revenue.
The trial court, in so ruling, relied primarily upon Article 110 of the Labor Code
which reads thus:
Article 110. Worker preference in case of bankruptcy — In the event of

first preference as regards wages due them for services rendered during the
period prior to the bankruptcy or liquidation, any provision of law to the
contrary notwithstanding. Union paid wages shall be paid in full before other
creditors may establish any claim to a share in the assets of the employer.
The Solicitor General, in seeking the reversal of the questioned Orders, argues
that Article 110 of the Labor Code is not applicable as it speaks of "wages," a
term which he asserts does not include the separation pay claimed by the
Unions. "Separation pay," the Solicitor General contends,
is given to a laborer for a separation from employment computed on the basis

of the number of years the laborer was employed by the employer; it is a form
of penalty or damage against the employer in favor of the employee for the
latter's dismissal or separation from service. 3
Article 97 (f) of the Labor Code defines "wages" in the following terms:
Wage' paid to any employee shall mean the remuneration or 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 same, which is payable by an employer to an employee under a
written or 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. 'Fair and
reasonable value' shall not include any profit to the employer or to any person
affiliated with the employer.(emphasis supplied)
We are unable to subscribe to the view urged by the Solicitor General. We note,
in this connection, that in Philippine Commercial and Industrial Bank (PCIB)
us. National Mines and Allied Workers Union, 4 the Solicitor General took a
different view and there urged that the term "wages" under Article 110 of the
Labor Code may be regarded as embracing within its scope severance pay or
termination or separation pay. In PCIB, this Court agreed with the position
advanced by the Solicitor General.5 We see no reason for overturning this
particular position. We continue to believe that, for the specific purposes of
Article 110 and in the context of insolvency termination or separation pay is
reasonably regarded as forming part of the remuneration or other money
benefits accruing to employees or workers by reason of their having previously
rendered services to their employer; as such, they fall within the scope of
"remuneration or earnings — for services rendered or to be rendered — ."
Liability for separation pay might indeed have the effect of a penalty, so far as
the employer is concerned. So far as concerns the employees, however,
separation pay is additional remuneration to which they become entitled
because, having previously rendered services, they are separated from the
employer's service. The relationship between separation pay and services
rendered is underscored by the fact that separation pay is measured by the
amount (i.e., length) of the services rendered. This construction is sustained
both by the specific terms of Article 110 and by the major purposes and basic
policy embodied in the Labor Code. 6 It is also the construction that is
suggested by Article 4 of the Labor Code which directs that doubts — assuming
that any substantial rather than merely frivolous doubts remain-in the
interpretation of the provisions of the labor Code and its implementing rules
and regulations shall be "resolved in favor of labor."
The resolution of the issue of priority among the several claims filed in the
insolvency proceedings instituted by the Insolvent cannot, however, rest on a
reading of Article 110 of the labor Code alone.
Article 110 of the Labor Code, in determining the reach of its terms, cannot be
viewed in isolation. Rather, Article 110 must be read in relation to the
provisions of the Civil Code concerning the classification, concurrence and
preference of credits, which provisions find particular application in insolvency
proceedings where the claims of all creditors, preferred or non-preferred, may
be adjudicated in a binding manner. 7 It is thus important to begin by
outlining the scheme constituted by the provisions of the Civil Code on this
subject.
Those provisions may be seen to classify credits against a particular insolvent

into three general categories, namely:
(a) special preferred credits listed in Articles 2241 and 2242,
(b) ordinary preferred credits listed in Article 2244; and
(c) common credits under Article 2245.
Turning first to special preferred credits under Articles 2241 and 2242, it
should be noted at once that these credits constitute liens or encumbrances on
the specific movable or immovable property to which they relate. Article 2243
makes clear that these credits "shall be considered as mortgages or pledges of
real or personal property, or liens within the purview of legal provisions
governing insolvency." It should be emphasized in this connection that "duties,
taxes and fees due [on specific movable property of the insolvent] to the State
or any subdivision thereof" (Article 2241 [1]) and "taxes due upon the
[insolvent's] land or building (2242 [1])"stand first in preference in respect of
the particular movable or immovable property to which the tax liens have
attached. Article 2243 is quite explicit: "[T]axes mentioned in number 1, Article
2241 and number 1, Article 2242 shall first be satisfied. " The claims listed in
numbers 2 to 13 in Article 2241 and in numbers 2 to 10 in Articles 2242, all
come after taxes in order of precedence; such claims enjoy their privileged
character as liens and may be paid only to the extent that taxes have been paid
from the proceeds of the specific property involved (or from any other sources)
and only in respect of the remaining balance of such proceeds. What is more,
these other (non-tax) credits, although constituting liens attaching to particular
property, are not preferred one over another inter se. Provided tax liens shall
have been satisfied, non-tax liens or special preferred credits which subsist in
respect of specific movable or immovable property are to be treated on an equal
basis and to be satisfied concurrently and proportionately. 8 Put succintly,
Articles 2241 and 2242 jointly with Articles 2246 to 2249 establish a two-tier
order of preference. The first tier includes only taxes, duties and fees due on
specific movable or immovable property. All other special preferred credits
stand on the same second tier to be satisfied, pari passu and pro rata, out of
any residual value of the specific property to which such other credits relate.
Credits which are specially preferred because they constitute liens (tax or non-
tax) in turn, take precedence over ordinary preferred credits so far as concerns
the property to which the liens have attached. The specially preferred credits
must be discharged first out of the proceeds of the property to which they
relate, before ordinary preferred creditors may lay claim to any part of such
proceeds. 9
If the value of the specific property involved is greater than the sum total of the
tax liens and other specially preferred credits, the residual value will form part
of the "free property" of the insolvent — i.e., property not impressed with liens
by operation of Articles 2241 and 2242. If, on the other hand, the value of the
specific movable or immovable is less than the aggregate of the tax liens and
other specially preferred credits, the unsatisfied balance of the tax liens and
other such credits are to the treated as ordinary credits under Article 2244 and
to be paid in the order of preference there set up. 10
In contrast with Articles 2241 and 2242, Article 2244 creates no liens on
determinate property which follow such property. What Article 2244 creates are
simply rights in favor of certain creditors to have the cash and other assets of
the insolvent applied in a certain sequence or order of priority. 11
Only in respect of the insolvent's "free property" is an order of priority
established by Article 2244. In this sequence, certain taxes and assessments
also figure but these do not have the same kind of overriding preference that
Articles 2241 No. 1 and 2242 No. I create for taxes which constituted liens on
the taxpayer's property. Under Article 2244,
(a) taxes and assessments due to the national government, excluding those
which result in tax liens under Articles 2241 No. 1 and 2242 No. 1 but
including the balance thereof not satisfied out of the movable or immovable
property to which such liens attached, are ninth in priority;
(b) taxes and assessments due any province, excluding those impressed as
tax liens under Articles 2241 No. 1 and 2242 No. 1, but including the balance
thereof not satisfied out of the movable or immovable property to which such
liens attached, are tenth in priority; and
(c) taxes and assessments due any city or municipality, excluding those
impressed as tax liens under Articles 2241 No. I and 2242 No. 2 but including
the balance thereof not satisfied out of the movable or immovable property to
which such liens attached, are eleventh in priority.
It is within the framework of the foregoing rules of the Civil Code that the
question of the relative priority of the claims of the Bureau of Customs and the
Bureau of Internal Revenue, on the one hand, and of the claims of the Unions
for separation pay of their members, on the other hand, is to be resolved. A
related vital issue is what impact Article 110 of the labor Code has had on
those provisions of the Civil Code.
A. Claim of the Bureau of Customs for Unpaid Customs Duties and Taxes-
Under Section 1204 of the Tariff and Customs Code, 12 the liability of an
importer
for duties, taxes and fees and other charges attaching on importation
constitute a personal debt due from the importer to the government which can
be discharged only by payment in full of all duties, taxes, fees and other
charges legally accruing It also constitutes a lien upon the articles imported
which may be enforced while such articles are in the custody or subject to the
control of the government. (emphasis supplied)
Clearly, the claim of the Bureau of Customs for unpaid customs duties and
taxes enjoys the status of a specially preferred credit under Article 2241, No. 1,
of the Civil Code. only in respect of the articles importation of which by the
Insolvent resulted in the assessment of the unpaid taxes and duties, and which
are still in the custody or subject to the control of the Bureau of Customs. The
goods imported on one occasion are not subject to a lien for customs duties
and taxes assessed upon other importations though also effected by the
Insolvent. Customs duties and taxes which remain unsatisfied after levy upon
the imported articles on which such duties and taxes are due, would have to be
paid out of the Insolvent's "free property" in accordance with the order of
preference embodied in Article 2244 of the Civil Code. Such unsatisfied
customs duties and taxes would fall within Article 2244, No. 9, of the Civil
Code and hence would be ninth in priority.
B. Claims of the Bureau of Internal Revenue for Tabacco Inspection Fees —
Under Section 315 of the National Internal Revenue Code ("old Tax Code"), 13
later reenacted in Identical terms as Section 301 of the Tax Code of 1977, 14
an unpaid "internal revenue tax," together with related interest, penalties and
costs, constitutes a lien in favor of the Government from the time an
assessment therefor is made and until paid, "upon all property and rights to
property belonging to the taxpayer."
Tobacco inspection fees are specifically mentioned as one of the miscellaneous

taxes imposed under the National Internal Revenue Code, specifically Title VIII,
Chapter IX of the old Tax Code and little VIII, Chapter VII of the Tax Code of
1977. 15 Tobacco inspection fees are collected both for purposes of regulation
and control and for purposes of revenue generation: half of the said fees
accrues to the Tobacco Inspection Fund created by Section 12 of Act No. 2613,
as amended by Act No. 3179, while the other half accrues to the Cultural
Center of the Philippines. Tobacco inspection fees, in other words, are imposed
both as a regulatory measure and as a revenue-raising measure. In
Commissioner of Internal Revenue us. Guerrero, et al 16 this Court held,
through Mr. Chief Justice Concepcion, that the term "tax" is used in Section
315 of the old Tax Code:
not in the limited sense [of burdens imposed upon persons and/or properties,
by way of contributions to the support of the Government, in consideration of
general benefits derived from its operation], but, in a broad sense,
encompassing all government revenues collectible by the Commissioner of
Internal Revenue under said Code, whether involving taxes, in the strict
technical sense thereof, or not. x x x As used in Title IX of said Code, the term
'tax' includes 'any national internal revenue tax, fee or charge imposed by the
Code. 17
It follows that the claim of the Bureau of Internal Revenue for unpaid tobacco
inspection fees constitutes a claim for unpaid internal revenue taxes 18 which
gives rise to a tax lien upon all the properties and assets, movable and
immovable, of the Insolvent as taxpayer. Clearly, under Articles 2241 No. 1,
2242 No. 1, and 2246-2249 of the Civil Code, this tax claim must be given
preference over any other claim of any other creditor, in respect of any and all
properties of the Insolvent. 19
C. Claims of the Unions for Separation Pay of Their Members —
the extent that such claims for unpaid wages are already covered by Article
2241, number 6. "claims for laborers' wages, on the goods manufactured or the
work done;" or by Article 2242, number 3: "claims of laborers and other
workers engaged in the construction, reconstruction or repair of buildings,
canals and other works, upon said buildings, canals or other works." To the
extent that claims for unpaid wages fall outside the scope of Article 2241,
number 6 and 2242, number 3, they would come within the ambit of the
category of ordinary preferred credits under Article 2244.
Applying Article 2241, number 6 to the instant case, the claims of the Unions
for separation pay of their members constitute liens attaching to the processed
leaf tobacco, cigars and cigarettes and other products produced or
manufactured by the Insolvent, but not to other assets owned by the Insolvent.
And even in respect of such tobacco and tobacco products produced by the
Insolvent, the claims of the Unions may be given effect only after the Bureau of
Internal Revenue's claim for unpaid tobacco inspection fees shall have been
satisfied out of the products so manufactured by the Insolvent.
Article 2242, number 3, also creates a lien or encumbrance upon a building or

other real property of the Insolvent in favor of workmen who constructed or
repaired such building or other real property. Article 2242, number 3, does not
however appear relevant in the instant case, since the members of the Unions
to whom separation pay is due rendered services to the Insolvent not (so far as
the record of this case would show) in the construction or repair of buildings or
other real property, but rather, in the regular course of the manufacturing
operations of the Insolvent. The Unions' claims do not therefore constitute a
lien or encumbrance upon any immovable property owned by the Insolvent, but
rather, as already indicated, upon the Insolvent's existing inventory (if any of
processed tobacco and tobacco products.
We come to the question of what impact Article 110 of the Labor Code has had
upon the complete scheme of classification, concurrence and preference of
credits in insolvency set out in the Civil Code. We believe and so hold that
Article 110 of the Labor Code did not sweep away the overriding preference
accorded under the scheme of the Civil Code to tax claims of the government or
any subdivision thereof which constitute a lien upon properties of the
Insolvent. It is frequently said that taxes are the very lifeblood of government.
The effective collection of taxes is a task of highest importance for the
sovereign. It is critical indeed for its own survival. It follows that language of a
much higher degree of specificity than that exhibited in Article 110 of the Labor
Code is necessary to set aside the intent and purpose of the legislator that
shines through the precisely crafted provisions of the Civil Code. It cannot be
assumed simpliciter that the legislative authority, by using in Article 110 the
words "first preference" and "any provision of law to the contrary
notwithstanding" intended to disrupt the elaborate and symmetrical structure
set up in the Civil Code. Neither can it be assumed casually that Article 110
intended to subsume the sovereign itself within the term "other creditors" in
stating that "unpaid wages shall be paid in full before other creditors may
establish any claim to a share in the assets of employer." Insistent
considerations of public policy prevent us from giving to "other creditors" a
linguistically unlimited scope that would embrace the universe of creditors save
only unpaid employees.
We, however, do not believe that Article 110 has had no impact at all upon the
provisions of the Civil Code. Bearing in mind the overriding precedence given to
taxes, duties and fees by the Civil Code and the fact that the Labor Code does
not impress any lien on the property of an employer, the use of the phrase "first
preference" in Article 110 indicates that what Article 110 intended to modify is
the order of preference found in Article 2244, which order relates, as we have
seen, to property of the Insolvent that is not burdened with the liens or
encumbrances created or recognized by Articles 2241 and 2242. We have noted
that Article 2244, number 2, establishes second priority for claims for wages
for services rendered by employees or laborers of the Insolvent "for one year
preceding the commencement of the proceedings in insolvency." Article 110 of
the Labor Code establishes "first preference" for services rendered "during the
period prior to the bankruptcy or liquidation, " a period not limited to the year
immediately prior to the bankruptcy or liquidation. Thus, very substantial
effect may be given to the provisions of Article 110 without grievously distorting
the framework established in the Civil Code by holding, as we so hold, that
Article 110 of the Labor Code has modified Article 2244 of the Civil Code in two
respects: (a) firstly, by removing the one year limitation found in Article 2244,
number 2; and (b) secondly, by moving up claims for unpaid wages of laborers
or workers of the Insolvent from second priority to first priority in the order of
preference established I by Article 2244.
Accordingly, and by way of recapitulating the application of Civil Code and

Labor Code provisions to the facts herein, the trial court should inventory the
properties of the Insolvent so as to determine specifically: (a) whether the
assets of the Insolvent before the trial court includes stocks of processed or
manufactured tobacco products; and (b) whether the Bureau of Customs still
has in its custody or control articles imported by the Insolvent and subject to
the lien of the government for unpaid customs duties and taxes.
In respect of (a), if the Insolvent has inventories of processed or manufactured
tobacco products, such inventories must be subjected firstly to the claim of the
Bureau of Internal Revenue for unpaid tobacco inspection fees. The remaining
value of such inventories after satisfaction of such fees (or should such
inspection fees be satisfied out of other properties of the Insolvent) will be
subject to a lien in favor of the Unions by virtue of Article 2241, number 6. In
case, upon the other hand, the Insolvent no longer has any inventory of
processed or manufactured product, then the claim of the Unions for
separation pay would have to be satisfied out of the "free property" of the
Insolvent under Article 2244 of the Civil Code. as modified by Article 110 of the
Labor Code.
Turning to (b), should the Bureau of Customs no longer have any importations
by the Insolvent still within customs custody or control, or should the
importations still held by the Bureau of Customs be or have become
insufficient in value for the purpose, customs duties and taxes remaining
unpaid would have only ninth priority by virtue of Article 2244, number 9. In
respect therefore of the Insolvent's "free property, " the claims of the Unions will
enjoy first priority under Article 2244 as modified and will be paid ahead of the
claims of the Bureau of Customs for any customs duties and taxes still
remaining unsatisfied.
It is understood that the claims of the Unions referred to above do not include
the 10% claim for attorney's fees. Attorney's fees incurred by the Unions do not
stand on the same footing as the Unions' claims for separation pay of their
members.
WHEREFORE, the petition for review is granted and the Orders dated 17
November 1980 and 19 January 1981 of the trial court are modified
accordingly. This case is hereby remanded to the trial court for further
proceedings in insolvency compatible with the rulings set forth above. No
pronouncement as to costs.
SO ORDERED.
G.R. No. 118746 September 7, 1995
ATTY. WILFREDO TAGANAS, petitioner,

vs.
NATIONAL LABOR RELATIONS COMMISSION, MELCHOR ESCULTURA, ET
AL., respondents.
RESOLUTION
FRANCISCO, J.:
Petitioner Atty. Wilfredo E. Taganas represented herein private respondents in

a labor suit for illegal dismissal, underpayment and non-payment of wages,
thirteenth-month pay, attorney's fees and damages conditioned upon a
contingent fee arrangement granting the equivalent of fifty percent of the
judgment award plus three hundred pesos appearance fee per hearing.1 The
Labor Arbiter ruled in favor of private respondents and ordered Ultra Clean
Services (Ultra) and the Philippine Tuberculosis Society, Inc., (PTSI)
respondents therein, jointly and severally to reinstate herein private
respondents with full backwages, to pay wage differentials, emergency cost of
living allowance, thirteenth-month pay and attorney's fee, but disallowed the
claim for damages for lack of basis.2 This decision was appealed by Ultra and
PTSI to the National Labor Relations Commission (NLRC), and subsequently by
PTSI to the Court but to no avail. During the execution stage of the decision,
petitioner moved to enforce his attorney's charging lien.3 Private respondents,
aggrieved for receiving a reduced award due to the attorney's charging lien,
contested the validity of the contingent fee arrangement they have with
petitioner, albeit four of the fourteen private respondents have expressed their
conformity thereto.4
Finding the arrangement excessive, the Labor Arbiter ordered the reduction of
petitioner's contingent fee from fifty percent of the judgment award to ten
percent, except for the four private respondents who earlier expressed their
conformity.5 Petitioner appealed to NLRC which affirmed with modification the
Labor Arbiter's order by ruling that the ten percent contingent fee should apply
also to the four respondents even if they earlier agreed to pay a higher
percentage.6 Petitioner's motion for reconsideration was denied, hence this
petition for certiorari.
The sole issue in this petition is whether or not the reduction of petitioner's
contingent fee is warranted. Petitioner argues that respondent NLRC failed to
apply the pertinent laws and jurisprudence on the factors to be considered in
determining whether or not the stipulated amount of petitioner's contingent fee
is fair and reasonable. Moreover, he contends that the invalidation of the
contingent fee agreement between petitioner and his clients was without any
legal justification especially with respect to the four clients who manifested
their conformity thereto. We are not persuaded.
A contingent fee arrangement is an agreement laid down in an express contract

between a lawyer and a client in which the lawyer's professional fee, usually a
fixed percentage of what may be recovered in the action is made to depend
upon the success of the litigation.7 This arrangement is valid in this
jurisdiction.8 It is, however, under the supervision and scrutiny of the court to
protect clients from unjust charges.9 Section 13 of the Canons of Professional
Ethics states that "[a] contract for a contingent fee, where sanctioned by law,
should be reasonable under all the circumstances of the case including the risk
and uncertainty of the compensation, but should always be subject to the
supervision of a court, as to its reasonableness". Likewise, Rule 138, Section
24 of the Rules of Court provides:
Sec. 24. Compensation of attorneys; agreement as to fees. — An attorney

shall be entitled to have and recover from his client no more than a reasonable
compensation for his services, with a view to the importance of the subject-
matter of the controversy, the extent of the services rendered, and the
professional standing of the attorney. No court shall be bound by the opinion of
attorneys as expert witnesses as to the proper compensation but may disregard
such testimony and base its conclusion on its own professional knowledge. A
written contract for services shall control the amount to be paid therefor unless
found by the court to be unconscionable or unreasonable.
When it comes, therefore, to the validity of contingent fees, in large measure it

depends on the reasonableness of the stipulated fees under the circumstances
of each case. The reduction of unreasonable attorney's fees is within the
regulatory powers of the courts.10
We agree with the NLRC's assessment that fifty percent of the judgment award
as attorney's fees is excessive and unreasonable. The financial capacity and
economic status of the client have to be taken into account in fixing the
reasonableness of the fee.11 Noting that petitioner's clients were lowly janitors
who receive miniscule salaries and that they were precisely represented by
petitioner in the labor dispute for reinstatement and claim for backwages, wage
differentials, emergency cost of living allowance, thirteenth-month pay and
attorney's fees to acquire what they have not been receiving under the law and
to alleviate their living condition, the reduction of petitioner's contingent fee is
proper. Labor cases, it should be stressed, call for compassionate justice.
Furthermore, petitioner's contingent fee falls within the purview of Article 111
of the Labor Code. This article fixes the limit on the amount of attorney's fees
which a lawyer, like petitioner, may recover in any judicial or administrative
proceedings since the labor suit where he represented private respondents
asked for the claim and recovery of wages. In fact, We are not even precluded
from fixing a lower amount than the ten percent ceiling prescribed by the
article when circumstances warrant it.12 Nonetheless, considering the
circumstances and the able handling of the case, petitioner's fee need not be
further reduced.
The manifestation of petitioner's four clients indicating their conformity with

the contingent fee contract did not make the agreement valid. The contingent
fee contract being unreasonable and unconscionable the same was correctly
disallowed by public respondent NLRC even with respect to the four private
respondents who agreed to pay higher percentage. Petitioner is reminded that
as a lawyer he is primarily an officer of the court charged with the duty of
assisting the court in administering impartial justice between the parties.
When he takes his oath, he submits himself to the authority of the court and
subjects his professional fees to judicial control.13
WHEREFORE, finding no grave abuse of discretion the assailed NLRC decision

is hereby affirmed in toto.

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Republic of the Philippines

G.R. Nos. 97008-09 July 23, 1993

VIRGINIA G. NERI and JOSE CABELIN, petitioners,

R.L. Salcedo & Improso Law Office for petitioners.

Bautista, Picaso, Buyco, Tan & Fider for respondent FEBTC.

We cannot sustain the petition.

Article 106 of the Labor Code defines "labor-only" contracting thus —

Art. 106. Contractor or subcontractor. — . . . . There is "labor-only" contracting where

. . . . If in the course of private respondents' work (referring to the workers),

IN VIEW OF THE FOREGOING, the Petition for Certiorari is DISMISSED.

Cruz, Griño-Aquino, Davide, Jr. and Quiason, JJ., concur.

G.R. No. 104658. April 7, 1993.

PILIPINAS SHELL PETROLEUM CORPORATION, petitioner,

Angara, Abello, Concepcion, Regala & Cruz for petitioner.

Yolanda Quisumbing-Javellana & Associates for private respondent.

1. LABOR LAWS AND SOCIAL LEGISLATION; EMPLOYER-EMPLOYEE

2. ID.; JOB CONTRACTING; REQUISITES; HALLMARKS OF INDEPENDENT

3. CIVIL LAW; QUASI-DELICTS; INDEPENDENT CONTRACTOR

Was the hydro-pressure test of the underground storage tank in private

The facts are as follows:

Meanwhile, petitioner undertook to settle the criminal complaint filed by

"THAT, after careful evaluation of the surrounding circumstances, especially

xxx xxx xxx

Thereafter, private respondent demanded from petitioner the payment of

"PREMISES CONSIDERED, the decision being appealed from is hereby SET

1. P100,000.00 as moral damages;

2. P2,639.25 and P15,000.00 representing the actual losses suffered by

It is a well-entrenched rule that an employer-employee relationship must exist

1. Feliciano was hired by petitioner;

2. He received his instructions from the Field Engineer of petitioner, Mr.

3. While he was at private respondent's service station, he also received

4. Instructions from petitioner's Manila Office were also relayed to him

5. His work was under the constant supervision of petitioner's engineer;

6. Before he could complete the work, he was instructed by Mr. Manalo,

Based on the foregoing, respondent Court of Appeals concluded that Feliciano

True, it was petitioner who sent Feliciano to private respondent's gasoline

(1) The contractor carries on an independent business and undertakes the

Feliciano is independently maintaining a business under a duly registered

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,

The Chief Legal Counsel for Development Bank of the Philippines.

Muñoz Law Office for private respondents.

GUTIERREZ, JR., J.:

In this petition for certiorari, petitioner Development Bank of the Philippines

To say that workers of bankrupt or insolvent employers must first file an

xxx xxx xxx

WHEREFORE, premises considered, judgment is hereby rendered in favor of

Hence, this petition for certiorari.

1. Whether or not the Joint Decision of Executive Labor Arbiter Gelacio L.

2. Whether or not the complainant-private respondents are entitled to

3. Whether or not there was retroactive application of Executive Order No.

. . . in cases of closures or cessation of operations of establishment or

Art. 110. Worker preference in case of bankruptcy. — In the event of

We have repeatedly stressed that before the workers' preference provided by

It is quite clear from the provisions that a declaration of bankruptcy or a

xxx xxx xxx

Moreover, the reason behind the necessity for a judicial proceeding or a

The claims of all creditors whether preferred or non-preferred, the identification

Thus, in DBP v. NLRC, (supra) it was held:

4. A distinction should be made between a preference of credit and a lien. A

Art. 110. Worker preference in case of bankruptcy. — In the event of

We ruled in DBP v. NLRC, supra, that the amendment "expands worker

In this connection, respondent NLRC ruled: