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MABEZA VS NLRC

Norma Mabeza was an employee hired by Hotel Supreme in Baguio City. In 1991, an inspection was
made by the Department of Labor and Employment (DOLE) at Hotel Supreme and the DOLE inspectors
discovered several violations by the hotel management. Immediately, the owner of the hotel, Peter Ng,
directed his employees to execute an affidavit which would purport that they have no complaints
whatsoever against Hotel Supreme. But Mabeza refused to certify said affidavit with the fiscals office so
this led to her dismissal. She sued Peter Ng and one of her complaints against him is underpayment
because her wage was less than the minimum wage. Peter Ng argued that the reason for such low
payment was because she was being given free lodging, water, electricity, and water consumption by the
hotel.

ISSUE: Whether or not such amenities provided by the hotel be considered as facilities which are
deductible from Mabezas wage.

HELD:
No. There are requisites before such can be done and they are:
1. Proof must be shown that such facilities are customarily furnished by the trade.
2. The provision of deductible facilities must be voluntarily accepted in writing by the employee.
3. Facilities must be charged at fair and reasonable value.
None of these were complied with in the case at bar. More significantly, the food and lodging, or the
electricity and water consumed by Mabeza were not facilities but supplements. A benefit or privilege
granted to an employee for the convenience of the employer is not a facility. The criterion in making a
distinction between the two not so much lies in the kind (food, lodging) but the purpose. Considering,
therefore, that hotel workers are required to work different shifts and are expected to be available at
various odd hours, their ready availability is a necessary matter in the operations of a small hotel, such as
Hotel Supreme.


ATOK-BIG WEDGE MUTUAL BENEFIT ASSOCIATION, petitioner ,vs. ATOK-BIG WEDGE MINING
COMPANY, INCORPORATED, respondents

Facts:

Labor union, Atok-Big Wedge Mutual Benefit Association, submitted to the Atok-Big Wedge Mining Co.,
Inc.(respondent herein) several demands, among which was an increase of P0.50 in daily wage. The
matter was referred by the mining company to the Court of Industrial Relations for arbitration and
settlement. On July 14, 1951, the Court rendered a decision fixing the minimum wage at P2.65 a day with
the rice ration, or P3.20 without rice ration; denying the deduction from such minimum wage, of the
value of housing facilities furnished by the company to the laborers, as well as the efficiency bonus given
to them by the company; and ordered that the award be made effective retroactively from the date of
the demand, September 4, 1950, as agreed by the parties. From this decision, the mining company
appealed to SC. Atok-Big Wedge Mining Company for authority to stop operations and lay off employees
and laborers, for the reason that due to the heavy losses, increased taxes, high cost of materials,
negligible quantity of ore deposits, and the enforcement of the Minimum Wage Law, the continued
operation of the company would lead to its immediate bankruptcy and collapse(Rec. pp. 100-109). To
avert the closure of the company and the consequent lay-off of hundreds of laborers and employees, the
Court, instead of hearing the petition on the merits, convened the parties for voluntary conciliation and
mediation.


G.R. No. L-58870 December 18, 1987CEBU INSTITUTE OF TECHNOLOGY (CIT), petitioner ,vs. HON. BLAS
OPLE

FACTS:
A case was filed against CIT by, Panfilo Canete, et al., teachers of CIT, for non-payment of: a) cost
of living allowances(COLA) under Pres. Dec. Nos. 525, 1123, 1614, 1678 and 1713, b) thirteenth (13th)
month pay differentials and c) service incentive leave. CIT maintained that it had paid the allowances
mandated by various decrees but the same had been integrated in the teacher's hourly rate. It alleged
that the payment of COLA by way of salary increases is in line with Pres.Dec. No. 451. It also claimed in
its position paper that it had paid thirteenth month pay to its employees and that it was exempt from
the payment of service incentive leave to its teachers who were employed on contract basis. Minister of
Labor and Employment issued the assailed Order and held that the basic hourly rate designated in the
Teachers' Program is regarded as the basic hourly rate of teachers exclusive
of the COLA, and that COLA should not be taken from the 60%incremental proceeds of the approved
increase in tuition fee. In a nutshell, the present controversy was precipitated by the claims of some
school personnel for allowances and other benefits and the refusal of the private schools concerned to
pay said allowances and benefits on the ground that said items should be deemed included in the salary
increases they had paid out of the 60% portion of the proceeds from tuition fee increases provided for in
section 3 (a) of Pres. Decree No. 451.Petitioner assails the aforesaid Order in this Special Civil Action of
certiorari with Preliminary Injunction and/or Restraining Order. The Court issued a Temporary
Restraining Order on December 7, 1981 against the enforcement of the questioned Order of the Minister
of Labor and Employment.

ISSUE:
Whether or not allowances and other fringe benefits of employees may be charged against the 60%
portion of the incremental proceeds provided for in sec. 3(a) of Pres. Dec. No. 451.

RESOLUTION:
This Court has consistently held, beginning with the
University of the East
case, that if the schools have no resources other than those derived from tuition fee increases,
allowances and benefits should be charged against the proceeds of tuition fee increases which the law
allows for return on investments under section 3(a) of Pres. Dec. No. 451, therefore,not against the 60%
portion allocated for increases in salaries and wages. InUniversity of Pangasinan Faculty Union v.
University of Pangasinan, supra:
... The sixty (60%) percent incremental proceeds from the tuition increase are
to be devoted entirely to wage or salary increases which means increases in basic salary
. The law cannot be construed to include allowances which are benefits over and above the basic salaries
of the employees. To charge such benefits to the 60% incremental proceeds would be to reduce the
increase in basic salary provided by law, an increase intended also to help the teachers and other
workers tide themselves and their families over these difficult economic times. While coming to the aid
of the private school system by simplifying the procedure for increasing tuition fees, the Decree imposes
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as a condition for the approval of any such increase in fees, the allocation of 60% of the incremental
proceeds thereof, to increases in salaries or wages of school personnel. This condition makes for a
quid pro quo
of the approval of any tuition fee hike by a school, thereby assuring the school personnel concerned, of
a share in its proceeds. The condition having been imposed to attain one of the main objectives of the
Decree, which is to help the school personnel cope with the increasing costs of living, the same cannot
be interpreted in a sense that would diminish the benefit granted said personnel.


Traders Royal Bank vs NLRC, 189 SCRA 274; G. R. No. 88168, August 30, 1990
(Labor Standards bonus, diminution of benefits)
Facts: Respondent union filed a letter-complaint against petitioner TRB for the diminution of benefits
being enjoyed by the employees since time immemorial, e.g. mid-year bonus, from 2 months gross pay
to 2 months basic and year-end bonus from 3 months gross to only 2 months.
Petitioner insisted that it had paid the employees holiday pay. The practice of giving them bonuses at
years end, would depend on how profitable the operation of the bank had been.
NLRC found TRB guilty of diminution of benefits due to the private respondents and ordered it to pay the
said employees claims for differentials in their holiday, mid-year, and year-end bonuses.
Issue: Whether or not bonuses are part of labor standards.
Held: No. A bonus is a gratuity or act of liberality of the giver which the recipient has no right to
demand as a matter of right. It is something given in addition to what is ordinarily received by or strictly
due the recipient. The granting of a bonus is basically a management prerogative which cannot be forced
upon the employer who may not be obliged to assume the onerous burden of granting bonuses or
other benefits aside from the employees basic salaries or wages.
Honda Philippines vs. Samahan ng Malayang Manggagawa sa Honda

Facts: Honda Phils, Inc (company) and Samahan ng Malayang Manggagawa sa Honda (union) started
renegotiations of their CBA. When there was a bargaining deadlock, the union filed a notice of strike. The
company likewise filed a notice of lockout. SOLE assumed jurisdiction and ordered both parties to desist
from their strike and lockout.

However, the union subsequently filed a second notice of strike on the ground of unfair labor practice,
alleging that the company illegally contracted out work to the detriment of the workers. The union went
on strike. SOLE assumed jurisdiction and certified the case to NLRC for compulsory arbitration. The
striking employees were ordered to return to work and management accepted them back.

Honda then issued a memorandum announcing its new computation of the 13th and 14th month pay
whereby the 31-day strike shall be considered unworked days for the purpose of computing said
benefits. The amount equivalent to 1/12 of the employees basic salary shall be deducted from the
bonuses (because they did not work for 1 month). Furthermore, Honda wanted a pro-rata payment of
the 13th month pay.

The union opposed said computation because it was contrary to the Sections 3 and 6 in their current CBA
which mandates that the company shall maintain the present practice in the implementation of the
13th month pay and that the 14th month pay shall be computed in the same way as the former.

The Bureau of Working Conditions (BWC) sided with the company. But the issue was unresolved by the
grievance machinery, so it was submitted for voluntary arbitration. The Voluntary Arbiter invalidated
Hondas computation and ordered the computation of the benefits based on the full month basic pay.

CA affirmed, hence this petition.

Issues:
(1) Whether or not there is ambiguity in the CBA provisions concerning the 13th and 14th month pay

(2) Whether or not the proposed computation of Honda deducting 1/12 of the employees basic salary
from the 13th and 14th month pay and its pro-rata payment are valid

Held:
(1) YES. A collective bargaining agreement refers to the negotiated contract between a legitimate labor
organization and the employer concerning wages, hours of work and all other terms and conditions of
employment in a bargaining unit. The parties in a CBA may establish such stipulations, clauses, terms and
conditions as they may deem convenient as long as they are not contrary to law, morals, good customs,
public order or public policy. Where the CBA is clear and unambiguous, it becomes the law between the
parties.

However, there are times when the CBA provisions may become contentious. In this case, Honda wanted
to implement a pro-rated computation based on the no work, no pay rule. Honda argues that the
phrase present practice in the CBA refers to the manner of payment of the bonuses (50% in May and
50% in December). The union, on the other hand, insists that the CBA provisions necessarily relate to the
computation of the benefits.

As the voluntary arbitrator has correctly observed, there is ambiguity in the assailed CBA provisions
because they did not categorically state whether the computation of the 13th and 14th month pay
would be based on a one full months basic salary of the employees, or pro-rated based on the
compensation actually received.

(2) NO. The ambiguity in the CBA provisions was correctly resolved by the arbitrator by relying on Article
1702 of the Civil Code, which provides that in case of doubt, all labor legislation and all labor contracts
shall be construed in favor of the safety and decent living of the laborer. CA is also correct in ruling that
the computation of the 13th month pay should be based on the length of service and not on the actual
wage earned by the worker.

PD 851 or the 13th Month Pay Law was issued to protect the level of wages of workers from worldwide
inflation. Under the IRR of said law, the minimum 13th month pay shall not be less than 1/12 of the total
basic salary earned by an employee within a calendar year. The Court has interpreted basic salary to
mean, NOT the amount actually received by an employee, but 1/12 of their standard monthly wage
multiplied by their length of service within a given calendar year.

The IRR also provide for a pro-ration of this benefit ONLY in cases of resignation or separation from work.
In the present case, there being no resignation/separation, the computation of the 13th month pay
should not be pro-rated but should be given in full.

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Moreover, it has not been proven that Honda has been implementing pro-rating of the 13th month pay
before the present case. It is not a company practice. In fact, there was an implicit acceptance that prior
to the strike, a full month basic pay computation was the present practice intended in the CBA. It was
the second strike that prompted the company to adopt the pro-rata computation.

Davao Fruits Corporation vs Associated Labor Unions, G.R. No. 85073, August 24, 1993; 225 SCRA 562
(Labor Standards Fringe benefits not included in 13
th
month pay)
Facts: Respondent ALU for and in behalf of all the rank-and-file workers and employees of petitioner
sought to recover from the latter the 13
th
month pay differential for 1982 of said employees, equivalent
to their sick, vacation and maternity leaves, premium for work done on rest days and special holidays,
and pay for regular holidays which petitioner, allegedly in disregard of company practice since 1975,
excluded from the computation of the 13
th
month pay for 1982.
Issue: WON in the computation of the 13
th
month pay under PD No. 851, payments for sick,
vacation and maternity leaves, premiums for work done on rest days and special holidays, and pay for
regular holidays may be excluded in the computation and payment thereof.
Held: Yes. Basic salary does not merely exclude the benefits expressly mentioned but all payments which
may be in the form of fringe benefits or allowances.
Sec. 4 of the Supplementary Rules and Regulations Implementing PD No. 851 provides that overtime
pay, earnings and other remunerations which are not part of the basic salary shall not be included in the
computation of the 13
th
month pay.
Whatever compensation an employee receives for an 8 hour work daily or the daily wage rate is the
basic salary. Any compensation or remuneration other than the daily wage rate is excluded. It follows
therefore, that payments for sick, vacation and maternity leaves, premiums for work done on rest days
and special holidays, as well as pay for regular holidays, are likewise excluded in computing the basic
salary for the purpose of determining the 13
th
month pay.

EMPLOYERS CONFEDERATION OF THE PHILIPPINES, petitioner,
vs.
NATIONAL WAGES AND PRODUCTIVITY COMMISSION AND REGIONAL TRIPARTITE WAGES AND
PRODUCTIVITY BOARD-NCR, TRADE UNION CONGRESS OF THE PHILIPPINES, respondents.
J. SARMIENTO; September 24, 1991

FACTS
On October 15, 1990, the Regional Board of NCR issued Wage Order No. NCR-01, increasing the
minimum wage by P17 daily.
The Trade Union Congress of the Philippines (TUCP) and Personnel Management Association of the
Philippines (PMAP) moved for reconsideration. Petitioner Employers Confederation of the
Philippines (ECOP) opposed.
Board then issued Wage Order No. NCR-01-A, amending the wage order by stating that all workers
and employees in the private sector already receiving wages above the statutory minimum wage
rates up to P125 per day shall also receive the P17 daily increase.
Petitioner ECOP appealed to respondent National Wages and Productivity Commission (NWPC).
NWPC: Appeal dismissed for lack of merit.
Motion for reconsideration denied. Hence, this petition.

ISSUE:
Whether or not respondent NWPC committed grave abuse of discretion. NO.
REASONING:
Petitioner says
Wage Order No. NCR-01-A is an excess of authority as under RA 6727, the boards may only
prescribe minimum wages, not determine salary ceilings.
RA 6727 is meant to promote collective bargaining as the primary mode of settling wages, so
boards cannot preempt CBAs by establishing ceilings
Boards may only adjust floor wages

Solicitor-General (for NWPC) comments
The across-the-board hike did not grant additional or other benefits to workers and
employees, but rather fixed minimum wages according to the salary-ceiling method
RA 6727 is to correct wage distortions and the salary-ceiling method does just that

Court rules
The Court is inclined to agree with the Government.
The NWPC noted that the determination of wages involved 2 methods: the floor-wage method and the
salary-ceiling method.

Floor-wage method- involves the fixing of a determinate amount that would be added to the prevailing
statutory minimum wage
-adopted in earlier wage orders
Salary-ceiling method- wage adjustment is applied to employees receiving a certain denominated salary
ceiling
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-used in RAs 6640 and 6727 as well as 11 COLA issuances
The shift is due to the labor disputes arising from wage distortions.

RA 6727 was intended to rationalize wages.
This is done by:
1. providing full-time boards to police wages round-the-clock
2. giving the boards enough power to achieve this objective
SO, if RA 6727 only intended boards to set floor wages only, the Act would not need a board but only an
accountant to keep track of the latest consumer price index or have Congress do it when the need arises.
The Board did not perform an unlawful act of legislation.
Congress may delegate he power to fix rates, provided that it leaves sufficient standards. RA 6727 gave
statutory standards for fixing the minimum wage.
ART. 124. Standards/Criteria for Minimum Wage Fixing The regional minimum wages to be
established by the Regional Board shall be as nearly adequate as is economically feasible to maintain the
minimum standards of living necessary for the health, efficiency and general well-being of the employees
within the framework of the national economic and social development program. In the determination
of such regional minimum wages, the Regional Board shall, among other relevant factors, consider the
following:
(a) The demand for living wages;
(b) Wage adjustment vis-a-vis the consumer price index;
(c) The cost of living and changes or increases therein;
(d) The needs of workers and their families;
(e) The need to induce industries to invest in the countryside;
(f) Improvements in standards of living;
(g) The prevailing wage levels;
(h) Fair return of the capital invested and capacity to pay of employers;
(i) Effects of employment generation and family income; and
(j) The equitable distribution of income and wealth along the imperatives of economic and social
development."
The wage order was not acted in excess of boards authority. The law gave reasonable limitations to the
delegated power of the board.

ECOP is of the mistaken impression that RA 6727 leaves labor and management alone to decide wages.
The Court does not believe RA 6727 is meant to deregulate the relation between labor and capital for
several reasons:
1. The Constitution calls upon the State to protect labor
2. The Constitution calls upon the State to intervene when the common goal so demands I
regulating property and property relations
3. The Charter urges Congress to diffuse the wealth of the nation and regulate the use of
property
4. The Charter recognizes the just share of labor in the fruits of production
5. Under the LC, the State shall regulate the relations between labor and management
6. Under RA 6727, the State is interested in seeing that workers receive fair and equitable wages
7. The Constitution is primarily a document of Social Justice and has not fully embraced the
concept of laissez-faire
Court cannot give an Act a meaning that will conflict with these basic principles.
The concept of minimum wage is more than setting of a floor wage to upgrade existing wages as ECOP
believes.
Minimum wages underlies the rationales of RA 6727 and the Constitution.
The salary-cap method serves the purposes of RA 6727. Whether or not it is a permanent policy of the
Board s a question we may only speculate. At the moment, it is a reasonable policy.
Dispositive: Petition denied.

Joeb M. Aliviado, et al. vs. Procter and Gamble Phils., Inc., et al., G.R. No. 160506, June 6, 2011.
Independent job contracting; required substantial capital. (J. Abad)
Petitioners assert that they are employees of P&G and that Promm-Gem and SAPS are merely labor-only
contractors providing manpower services to P&G. There is labor-only contracting where the person
supplying workers to an employer does not have substantial capital or investment in the form of tools,
equipment, machineries, work premises, among others, and the workers recruited and placed by such
person are performing activities which are directly related to the principal business of such employer. In
the instant case, the Supreme Court found that Promm-Gem has substantial investment which relates to
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the work to be performed. The financial statements show that it has authorized capital stock of P1
million and a substantial amount of paid-in capital and other assets to support its operations. Under the
circumstances, Promm-Gem cannot be considered a labor-only contractor; it is in fact a legitimate
independent contractor. On the other hand, the financial records of SAPS show that it has a paid-in
capital of only P31,250.00. There is no other evidence presented to show how much its working capital
and assets are. Furthermore, there is no showing of substantial investment in tools, equipment or other
assets. Considering that SAPS has no substantial capital or investment and the workers it recruited are
performing activities which are directly related to the principal business of P&G, SAPS is considered to be
engaged in labor-only contracting

JOSE MEL BERNARTE, petitioner, vs. PHILIPPINE BASKETBALL ASSOCIATION (PBA), JOSE EMMANUEL M.
EALA, and PERRY MARTINEZ, respondents.

G.R. No. 192084 September 14, 2011

CARPIO, J.

FACTS:

Complainants (Jose Mel Bernarte and Renato Guevarra) aver that they were invited to join the PBA as
referees. During the leadership of Commissioner Emilio Bernardino, they were made to sign contracts on
a year-to-year basis. During the term of Commissioner Eala, however, changes were made on the terms
of their employment. Complainant Bernarte, for instance, was not made to sign a contract during the
first conference of the All-Filipino Cup which was from February 23,2003 to June 2003. It was only during
the second conference when he was made to sign a one and a half month contract for the period July 1
to August 5, 2003. On January 15, 2004, Bernarte received a letter from the Office of the Commissioner
advising him that his contract would not be renewed citing his unsatisfactory performance on and off the
court. It was a total shock for Bernarte who was awarded Referee of the year in 2003. He felt that the
dismissal was caused by his refusal to fix a game upon order of Ernie De Leon. On the other hand,
complainant Guevarra alleges that he was invited to join the PBA pool of referees in February 2001. On
March 1, 2001, he signed a contract as trainee. Beginning 2002, he signed a yearly contract as Regular
Class C referee. On May 6, 2003, respondent Martinez issued a memorandum to Guevarra expressing
dissatisfaction over his questioning on the assignment of referees officiating out-of-town games.
Beginning February 2004, he was no longer made to sign a contract. Respondents aver, on the other
hand, that complainants entered into two contracts of retainer with the PBA in the year 2003. The first
contract was for the period January 1, 2003 to July 15, 2003; and the second was for September 1 to
December 2003. After the lapse of the latter period, PBA decided not to renew their contracts.
Complainants were not illegally dismissed because they were not employees of the PBA. Their respective
contracts of retainer were simply not renewed. PBA had the prerogative of whether or not to renew
their contracts, which they knew were fixed. In her 31 March 2005 Decision, the Labor Arbiter declared
petitioner an employee whose dismissal by respondents was illegal. Accordingly, the Labor Arbiter
ordered the reinstatement of petitioner and the payment of backwages, moral and exemplary damages
and attorneys fees. The NLRC affirmed the Labor Arbiter's judgment. Respondents filed a petition for
certiorari with the Court of Appeals, which overturned the decisions of the NLRC and Labor Arbiter.

ISSUE:

Whether petitioner is an employee of respondents, which in turn determines whether petitioner
was illegally dismissed

HELD:

NO, Petitioner is not an employee of the respondents. The SC DENIED the petition and AFFIRMED the
assailed decision of the Court of Appeals. To determine the existence of an employer-employee
relationship, case law has consistently applied the four-fold test, to wit: (a) the selection and
engagement of the employee; (b) the payment of wages; (c) the power of dismissal; and (d) the
employers power to control the employee on the means and methods by which the work is
accomplished. The so-called control test is the most important indicator of the presence or absence of
an employer-employee relationship.19 In this case, PBA admits repeatedly engaging petitioners services,
as shown in the retainer contracts. PBA pays petitioner a retainer fee, exclusive of per diem or
allowances, as stipulated in the retainer contract. PBA can terminate the retainer contract for
petitioners violation of its terms and conditions. However, respondents argue that the all-important
element of control is lacking in this case, making petitioner an independent contractor and not an
employee of respondents. The contractual stipulations do not pertain to, much less dictate, how and
when petitioner will blow the whistle and make calls. On the contrary, they merely serve as rules of
conduct or guidelines in order to maintain the integrity of the professional basketball league. As correctly
observed by the Court of Appeals, how could a skilled referee perform his job without blowing a whistle
and making calls? x x x [H]ow can the PBA control the performance of work of a referee without
controlling his acts of blowing the whistle and making calls? We agree with respondents that once in
the playing court, the referees exercise their own independent judgment, based on the rules of the
game, as to when and how a call or decision is to be made. The referees decide whether an infraction
was committed, and the PBA cannot overrule them once the decision is made on the playing court. The
referees are the only, absolute, and final authority on the playing court. Respondents or any of the PBA
officers cannot and do not determine which calls to make or not to make and cannot control the referee
when he blows the whistle because such authority exclusively belongs to the referees. The very nature of
petitioners job of officiating a professional basketball game undoubtedly calls for freedom of control by
respondents. Moreover, unlike regular employees who ordinarily report for work eight hours per day
for five days a week, petitioner is required to report for work only when PBA games are scheduled or
three times a week at two hours per game. In addition, there are no deductions for contributions to
the Social Security System, Philhealth or Pag-Ibig, which are the usual deductions from employees
salaries. These undisputed circumstances buttress the fact that petitioner is an independent contractor,
and not an employee of respondents

SONZA vs. ABS-CBN Case Digest
JOSE SONZA vs. ABS-CBN BROADCASTING CORPORATION
G.R. No. 138051
June 10, 2004
Facts: In May 1994, ABS-CBN signed an agreement with the Mel and Jay Management and Development
Corporation (MJMDC). ABS-CBN was represented by its corporate officers while MJMDC was
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represented by Sonza, as President and general manager, and Tiangco as its EVP and treasurer. Referred
to in the agreement as agent, MJMDC agreed to provide Sonzas services exclusively to ABS-CBN as
talent for radio and television. ABS-CBN agreed to pay Sonza a monthly talent fee of P310, 000 for the
first year and P317, 000 for the second and third year.
On April 1996, Sonza wrote a letter to ABS-CBN where he irrevocably resigned in view of the recent
events concerning his program and career. After the said letter, Sonza filed with the Department of
Labor and Employment a complaint alleging that ABS-CBN did not pay his salaries, separation pay,
service incentive pay,13th month pay, signing bonus, travel allowance and amounts under the
Employees Stock Option Plan (ESOP). ABS-CBN contended that no employee-employer relationship
existed between the parties. However, ABS-CBN continued to remit Sonzas monthly talent fees but
opened another account for the same purpose.
The Labor Arbiter dismissed the complaint and found that there is no employee-employer relationship.
NLRC affirmed the decision of the Labor Arbiter. CA also affirmed the decision of NLRC.
Issue: Whether or not there was employer-employee relationship between the parties.
Ruling: Case law has consistently held that the elements of an employee-employer relationship are
selection and engagement of the employee, the payment of wages, the power of dismissal and the
employers power to control the employee on the means and methods by which the work is
accomplished. The last element, the so-called "control test", is the most important element.
Sonzas services to co-host its television and radio programs are because of his peculiar talents, skills and
celebrity status. Independent contractors often present themselves to possess unique skills, expertise or
talent to distinguish them from ordinary employees. The specific selection and hiring of SONZA, because
of his unique skills, talent and celebrity status not possessed by ordinary employees, is a circumstance
indicative, but not conclusive, of an independent contractual relationship. All the talent fees and benefits
paid to SONZA were the result of negotiations that led to the Agreement. For violation of any provision
of the Agreement, either party may terminate their relationship. Applying the control test to the present
case, we find that SONZA is not an employee but an independent contractor.
The control test is the most important test our courts apply in distinguishing an employee from an
independent contractor. This test is based on the extent of control the hirer exercises over a worker. The
greater the supervision and control the hirer exercises, the more likely the worker is deemed an
employee. The converse holds true as well the less control the hirer exercises, the more likely the
worker is considered an independent contractor. To perform his work, SONZA only needed his skills and
talent. How SONZA delivered his lines, appeared on television, and sounded on radio were outside ABS-
CBNs control. ABS-CBN did not instruct SONZA how to perform his job. ABS-CBN merely reserved the
right to modify the program format and airtime schedule "for more effective programming." ABS-CBNs
sole concern was the quality of the shows and their standing in the ratings.
Clearly, ABS-CBN did not exercise control over the means and methods of performance of Sonzas work.
A radio broadcast specialist who works under minimal supervision is an independent contractor. Sonzas
work as television and radio program host required special skills and talent, which SONZA admittedly
possesses.
ABS-CBN claims that there exists a prevailing practice in the broadcast and entertainment industries to
treat talents like Sonza as independent contractors. The right of labor to security of tenure as guaranteed
in the Constitution arises only if there is an employer-employee relationship under labor laws. Individuals
with special skills, expertise or talent enjoy the freedom to offer their services as independent
contractors. The right to life and livelihood guarantees this freedom to contract as independent
contractors. The right of labor to security of tenure cannot operate to deprive an individual, possessed
with special skills, expertise and talent, of his right to contract as an independent contractor.

Manila Electric Company vs. Rogelio Benamira, et al.
[G.R. No. 145271 July 14, 2005]

Facts:
The individual respondents are licensed security guards formerly employed by Peoples
Security, Inc. and deployed as such at MERALCOs head office in Ortigas Avenue, Pasig, Metro
Manila. On Nov. 30, 1990, the security service agreement between PSI and MERALCO was
terminated. Immediately thereafter, 56 of PSIs security guards, including herein eight individual
respondents, filed a complaint for unpaid monetary benefits against PSI and MERALCO.
Meanwhile, the security service agreement between respondent Armed Security & Detective
Agency, Inc., (ASDAI) and MERALCO took effect on Dec. 1, 1990. Subsequently, the individual
respondents were absorbed by ASDAI and retained at MERALCOs head office.
On June 29, 1992, the labor arbiter rendered a decision in favor of the former PSI security
guards, including the individual respondents. Less than a month later, the individual respondents filed
another complaint for unpaid monetary benefits, this time against ASDAI and MERALCO.
On July 25, 1992, the security service agreement between respondent Advance Forces
Security & Investigation Services, Inc. (AFSISI) and MERALCO took effect, terminating the previous
security service agreement with ASDAI. Except as to the number of security guards, the amount to be
paid the agency, and the effectivity of the agreement, the terms and conditions were substantially
identical with the security service agreement with ASDAI.
The individual respondents amended their complaint to implead AFSISI as party
respondent. They then again amended their complaint to allege that AFSISI terminated their services on
August 6, 1992 without notice and just cause and therefore guilty of illegal dismissal. The individual
respondents alleged that: MERALCO and ASDAI never paid their overtime pay, service incentive leave
pay, premium pay for Sundays and Holidays, P50.00 monthly uniform allowance and underpaid their 13
th

month pay; on July 24, 1992, when the security service agreement of ASDAI was terminated and AFSISI
took over the security functions of the former on July 25, 1992, respondent security guard Benamira was
no longer given any work assignment when AFSISI learned that the former has a pending case against
PSI, in effect, dismissing him from the service without just cause; and, the rest of the individual
respondents were absorbed by AFSISI but were not given any assignments, thereby dismissing them
from the service without just cause. ASDAI denied in general terms any liability for the claims of the
individual respondents, claiming that there is nothing due them in connection with their services.
On the other hand, MERALCO denied liability on the ground of lack of employer-employee
relationship with individual respondents. It averred that the individual respondents are the employees
of the security agencies it contracted for security services; and that it has no existing liability for the
individual respondents claims since said security agencies have been fully paid for their services per
their respective security service agreement.
For its part, AFSISI asserted that: it is not liable for illegal dismissal since it did not absorb or
hire the individual respondents, the latter were merely hold-over guards from ASDAI; it is not obliged to
employ or absorb the security guards of the agency it replaced since there is no provision in its security
service agreement with MERALCO or in law requiring it to absorb and hire the guards of ASDAI as it has
its own guards duly trained to service its various clients.
7



SC Ruling:
At the outset, we note that the individual respondents never alleged in their complaint in the
Labor Arbiter, in their appeal in the NLRC and even in their petition for certiorari in the CA that MERALCO
was their employer. They have always advanced the theory that AFSISI is their employer. A perusal of
the records shows it was only in their Memorandum in the CA that this thesis was presented and
discussed for the first time. We cannot ignore the fact that this position of individual respondents runs
contrary to their earlier submission in their pleadings filed in the Labor Arbiter, NLRC and even in the
petition for certiorari in the CA that AFSISI is their employer and liable for their termination. As the
object of the pleadings is to draw the lines of battle, so to speak, between the litigants and to indicate
fairly the nature of the claims or defenses of both parties, a party cannot subsequently take a position
contrary to, or inconsistent, with his pleadings.
Moreover, it is a fundamental rule of procedure that higher courts are precluded from
entertaining matters neither alleged in the pleadings nor raised during the proceedings below, but
ventilated for the first time only in a motion for reconsideration or on appeal.

The individual respondents
are bound by their submissions that AFSISI is their employer and they should not be permitted to change
their theory. Such a change of theory cannot be tolerated on appeal, not due to the strict application of
procedural rules but as a matter of fairness. A change of theory on appeal is objectionable because it is
contrary to the rules of fair play, justice and due process. Thus, the CA should not have considered the
new theory offered by the individual respondents in their memorandum.
In this case, the terms and conditions embodied in the security service agreement between
MERALCO and ASDAI expressly recognized ASDAI as the employer of individual respondents.
Under the security service agreement, it was ASDAI which (a) selected, engaged or hired and
discharged the security guards; (b) assigned them to MERALCO according to the number agreed upon; (c)
provided the uniform, firearms and ammunition, nightsticks, flashlights, raincoats and other
paraphernalia of the security guards; (d) paid them salaries or wages; and, (e) disciplined and supervised
them or principally controlled their conduct. The agreement even explicitly provided that *n+othing
herein contained shall be understood to make the security guards under this Agreement, employees of
the COMPANY, it being clearly understood that such security guards shall be considered as they are,
employees of the AGENCY alone. Clearly, the individual respondents are the employees of ASDAI.
As to the provision in the agreement that MERALCO reserved the right to seek replacement of
any guard whose behavior, conduct or appearance is not satisfactory, such merely confirms that the
power to discipline lies with the agency. It is a standard stipulation in security service agreements that
the client may request the replacement of the guards to it. Service-oriented enterprises, such as the
business of providing security services, generally adhere to the business adage that the customer or
client is always right and, thus, must satisfy the interests, conform to the needs, and cater to the
reasonable impositions of its clients.
Neither is the stipulation that the agency cannot pull out any security guard from MERALCO
without its consent an indication of control. It is simply a security clause designed to prevent the agency
from unilaterally removing its security guards from their assigned posts at MERALCOs premises to the
latters detriment.
The clause that MERALCO has the right at all times to inspect the guards of the agency
detailed in its premises is likewise not indicative of control as it is not a unilateral right. The agreement
provides that the agency is principally mandated to conduct inspections, without prejudice to
MERALCOs right to conduct its own inspections.
Needless to stress, for the power of control to be present, the person for whom the services
are rendered must reserve the right to direct not only the end to be achieved but also the means for
reaching such end.

Not all rules imposed by the hiring party on the hired party indicate that the latter is
an employee of the former.

Rules which serve as general guidelines towards the achievement of the
mutually desired result are not indicative of the power of control.
The security service agreements in the present case provided that all specific instructions by
MERALCO relating to the discharge by the security guards of their duties shall be directed to the agency
and not directly to the individual respondents. The individual respondents failed to show that the rules
of MERALCO controlled their performance.
Moreover, ASDAI and AFSISI are not labor-only contractors. There is labor only contract
when the person acting as contractor is considered merely as an agent or intermediary of the principal
who is responsible to the workers in the same manner and to the same extent as if they had been
directly employed by him. On the other hand, job (independent) contracting is present if the following
conditions are met: (a) the contractor carries on an independent business and undertakes the contract
work on his own account under his own responsibility according to his own manner and method, free
from the control and direction of his employer or principal in all matters connected with the
performance of the work except to the result thereof; and (b) the contractor has substantial capital or
investments in the form of tools, equipment, machineries, work premises and other materials which are
necessary in the conduct of his business. Given the above distinction and the provisions of the security
service agreements entered into by petitioner with ASDAI and AFSISI, we are convinced that ASDAI and
AFSISI were engaged in job contracting.
The individual respondents can not be considered as regular employees of the MERALCO for,
although security services are necessary and desirable to the business of MERALCO, it is not directly
related to its principal business and may even be considered unnecessary in the conduct of MERALCOs
principal business, which is the distribution of electricity.
Furthermore, the fact that the individual respondents filed their claim for unpaid monetary
benefits against ASDAI is a clear indication that the individual respondents acknowledge that ASDAI is
their employer.

We cannot give credence to individual respondents insistence that they were absorbed by
AFSISI when MERALCOs security service agreement with ASDAI was terminated. The individual
respondents failed to present any evidence to confirm that AFSISI absorbed them into its
workforce. Thus, respondent Benamira was not retained in his post at MERALCO since July 25, 1992 due
to the termination of the security service agreement of MERALCO with ASDAI. As for the rest of the
individual respondents, they retained their post only as hold-over guards until the security guards of
AFSISI took over their post on August 6, 1992.
In the present case, respondent Benamira has been off-detail for seventeen days while the
rest of the individual respondents have only been off- detail for five days when they amended their
complaint on August 11, 1992 to include the charge of illegal dismissal. The inclusion of the charge of
illegal dismissal then was premature. Nonetheless, bearing in mind that ASDAI simply stopped giving the
individual respondents any assignment and their inactivity clearly persisted beyond the six-month period
allowed by Article 286 of the Labor Code, the individual respondents were, in effect, constructively
dismissed by ASDAI from employment, hence, they should be reinstated.
The fact that there is no actual and direct employer-employee relationship between
MERALCO and the individual respondents does not exonerate MERALCO from liability as to the monetary
claims of the individual respondents. When MERALCO contracted for security services with ASDAI as the
security agency that hired individual respondents to work as guards for it, MERALCO became an indirect
employer of individual respondents pursuant to Article 107 of the Labor Code, which reads:
ART. 107. Indirect employer - The provisions of the immediately preceding Article shall
likewise apply to any person, partnership, association or corporation which, not being an
employer, contracts with an independent contractor for the performance of any work, task,
job or project.
When ASDAI as contractor failed to pay the individual respondents, MERALCO as principal becomes
jointly and severally liable for the individual respondents wages, under Articles 106 and 109 of the Labor
Code, which provide:
ART. 106. Contractor or subcontractor. - Whenever an employer enters into a contract with
another person for the performance of the former*s+ work, the employees of the contractor
8

and of the latter*s+ subcontractor, if any, shall be paid in accordance with the provisions of
this Code.
In the event that the contractor or subcontractor fails to pay the wages of his employees in
accordance with this Code, the employer shall be jointly and severally liable with his
contractor or subcontractor to such employees to the extent of the work performed under
the contract, in the same manner and extent that he is liable to employees directly employed
by him. xxx
ART. 109. Solidary liability - The provisions of existing laws to the contrary notwithstanding,
every employer or indirect employer shall be held responsible with his contractor or
subcontractor for any violation of any provision of this Code. For purpose of determining the
extent of their civil liability under this Chapter, they shall be considered as direct employers.

ASDAI is held liable by virtue of its status as direct employer, while MERALCO is deemed the
indirect employer of the individual respondents for the purpose of paying their wages in the event of
failure of ASDAI to pay them. This statutory scheme gives the workers the ample protection
consonant with labor and social justice provisions of the 1987 Constitution.
However, as held in Mariveles Shipyard Corp. vs. Court of Appeals, the solidary liability of
MERALCO with that of ASDAI does not preclude the application of Article 1217 of the Civil Code on the
right of reimbursement from his co-debtor by the one who paid, which provides:
ART. 1217. Payment made by one of the solidary debtors extinguishes the obligation. If two
or more solidary debtors offer to pay, the creditor may choose which offer to accept.

He who made the payment may claim from his co-debtors only the share which corresponds
to each, with the interest for the payment already made. If the payment is made before the debt is due,
no interest for the intervening period may be demanded.
When one of the solidary debtors cannot, because of his insolvency, reimburse his share to
the debtor paying the obligation, such share shall be borne by all his co-debtors, in proportion to the
debt of each.
ASDAI may not seek exculpation by claiming that MERALCOs payments to it were inadequate
for the individual respondents lawful compensation. As an employer, ASDAI is charged with knowledge
of labor laws and the adequacy of the compensation that it demands for contractual services is its
principal concern and not any others.

MANILA WATER COMPANY, INC., petitioner, vs. HERMINIO D. PENA, et. al., respondents. [G.R. No.
158255. July 8, 2004]

Petitioner Manila Water Company, Inc. is one of the two private concessionaires contracted by the
Metropolitan Waterworks and Sewerage System (MWSS) to manage the water distribution system in the
East Zone of Metro Manila. Under the Concession Agreement, petitioner undertook to absorb former
employees of the MWSS whose names and positions were in the list furnished by the latter, while the
employment of those not in the list was terminated on the day petitioner took over the operation of the
East Zone, which was on August 1, 1997. Private respondents, being contractual collectors of the MWSS,
were among the 121 employees not included in the list; nevertheless, petitioner engaged their services
without written contract from August 1, 1997 to August 31, 1997. Thereafter, on September 1, 1997,
they signed a three-month contract to perform collection services for eight branches of petitioner in the
East Zone.
Before the end of the three-month contract, the 121 collectors incorporated the Association Collectors
Group, Inc. (ACGI), which was contracted by petitioner to collect charges for the Balara Branch.
Subsequently, most of the 121 collectors were asked by the petitioner to transfer to the First Classic
Courier Services, a newly registered corporation. Only private respondents remained with ACGI.
Petitioner continued to transact with ACGI to do its collection needs until February 8, 1999, when
petitioner terminated its contract with ACGI.

Private respondents filed a complaint for illegal dismissal and money claims against petitioner,
contending that they were petitioners employees as all the methods and procedures of their collections
were controlled by the latter.

ACGI is considered merely an agent of the petitioner. In labor-only contracting, the statute creates an
employer-employee relationship for a comprehensive purpose: to prevent a circumvention of labor laws.
The contractor is considered merely an agent of the principal employer and the latter is responsible to
the employees of the labor-only contractor as if such employees had been directly employed by the
principal employer. Since ACGI is only a labor-only contractor, the workers it supplied should be
considered as employees of the petitioner.
Virginia G. Neri vs. National Labor Relations Commission, et al.
[224 SCRA 717 July 23, 1993]

Facts:
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.
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.

Issue:
Whether or not BCC is only a job contracting company, hence petitioners are not regular
employees of FEBTC.
SC Ruling:
9

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.

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.
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.
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.
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.
Furthermore, BCC was to be paid in lump sum unlike in the situation in Philippine Bank of
Communications 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."
The Petition for Certiorari is dismissed.

San Miguel Corporation vs. Semillano
G.R. No. 164257. July 5, 2010.
Petitioner: San Miguel Corporation
Respondent: Vicente B. Semillano, Nelson Mondejar, Jovito Remada, Alangilan Multi-Purpose Coop
(AMPCO) and Merlyn V. Polidario
Ponente: J. Carpio
RELEVANT FACTS:
Semillano et al filed a complaint for illegal dismissal with the Labor Arbiter against AMPCO,
Merlyn V. Polidario, SMC and Rufino I. Yatar on July 17, 1995.
The complainants claimed that they were fillers of SMC Bottling Plant, engaged in activities
necessary and desirable in the usual business of SMC. They assert, therefore, that they are
regular employees of SMC.
SMC utilized AMPCO, thus making it appear that the latter was the complainants employer,
with intentions of evading the responsibility of paying the benefits due to the complainants.
The complainants further claim that AMPCO and SMC failed to give them their 13
th
month
pay, and that they were prevented from entering the premises of SMC.
In its defense, SMC raised that it is not the employer of the complainants; that AMPCO is their
employer because it is an independent contractor. AMPCO directly paid their salaries and
respective benefits.
On April 30, 1988, Labor Arbiter Jesus N. Rodriguez, Jr. rendered his decision in favor of
Semillano et al, ordering that the complainants be reinstated without loss of seniority rights
and payment of full backwages; and to pay the complainants counsel attorneys fees 10% of
the total award. The complainants filed a motion for partial execution of the LAs decision,
but SMC filed its opposition to the motion.
Semillano et al appealed the LA decision to the NLRC. The Fourth Division affirmed the
decision of the LA, with minor modifications in favour of Semillano et al.
SMC moved for a reconsideration of the NLRCs decision on February 28, 2002. The NLRC
reversed its earlier ruling, and instead held AMPCO liable to pay for the respondents
backwages, salaries, allowances and attorneys fees. The respondents filed their motion for
reconsideration, but this was denied.
Feeling aggrieved, respondents filed a petition for review on certiorari with the Court of
Appeals, which acted favourably in May 24, 2008. It applied the same control test that the
NLRC used, but found that SMC exercised control over the respondents, and had the power of
dismissal as well. The CA added that AMPCO was engaged in labor-only contracting since its
capital of nearly one million pesos was insufficient to qualify as an independent contractor.
SMC filed a motion for reconsideration, but this was denied by the CA. A petition for review
on certiorari was filed with the Supreme Court thereafter.
10

SMC argues that the CA erred in assuming that it exercised control over the respondents
simply because they worked within the premises of the company. SMC relied on the provision
of its service contract with AMPCO, wherein it was stipulated that the latter was to provide
the materials, tools and equipment needed to carry out the services contracted out by SMC.
The contract also provides that AMPCO shall have exclusive discretion over its personnel, and
that it also determines their wages.
SMC added that the respondents actions are for their regularization as employees of SMC
something that is not recognized or allowed by law.
ISSUE:
Whether or not AMPCO is a legitimate job contractor.
HELD:
Generally, the findings of the LA and NLRC are regarded with much respect and finality when
supported with sufficient evidence and affirmed by the CA.
Although there are many signs that AMPCO is indeed an independent contractor, other
factors prove otherwise. First, the LA found no evidence that AMPCO had substantial capital
or investment. The NLRC stated that AMPCOs main business is trading, maintaining a store
catering to members and the public thus making its activity of job contracting with SMC only
a sideline. Thus AMPCOs substantial capital is invested and used in its trading business.
The petitioner could not prove that AMPCO had substantial tools and equipment for use in
segregation and piling for SMC. The NLCR earlier pointed out that AMPCO had no fixed assets
that it could have used in any way for the completion of its contracted service with the
petitioner. The only logical conclusion is that the tools and equipment used by the
respondents are owned by SMC, thus proving that AMPCO has no independent business.
The Court is not convinced that AMPCO exercised exclusive direction in the discharge of
respondents, based on Merlyn Polidarios instructions to the respondents to wait for further
instructions from SMCs supervisor after being prevented from entering SMC premises.
Therefore, it would be logical to conclude that SMC wielded the power of control.
AMPCOs Certificate of Registration as an Independent Contractor issued by the proper
Regional office of the DOLE is not conclusive evidence. The totality of facts and surrounding
circumstances must also be considered. Therefore, SMC (principal employer) is liable along
with AMPCO (labor-only contractor) for all the respondents rightful claims.
The petition is DENIED, and the February 19, 2004 decision of the CA AFFIRMED.
Coca-Cola Bottlers Phils., Inc. vs. Alan M. Agito, et al.
[GR No. 179546 February 13, 2009]

FACTS:

Coca-Cola Bottlers Phils. Inc. (COKE), the petitioner herein is a domestic corporation engaged in
manufacturing, bottling and distributing soft drink beverages and other allied products.
Respondents were salesmen assigned at Coke Lagro Sales Office for years but were not regularized.
Coke 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
Coke and Interserve on 23 March 2002. Said Contract 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.

ISSUES:

1. Whether or not Inteserve is a legitimate job contractor;
2. Whether or not an employer-employee relationship exists between petitioner Coca-Cola Bottlers
Phils. Inc. and respondents.

SC RULING:

Supreme Court DENIED the petition.

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. 30 TIHDAa
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
11

the contractor or subcontractor merely recruits, supplies, or places workers to perform a job, work
or service for a principal, and any of the following elements are [is] present:
i) The contractor or subcontractor does not have substantial capital or investment which relates
to the job, work, or service to be performed and the employees recruited, supplied or placed by
such contractor or subcontractor are performing activities which are directly related to the main
business of the principal; or
ii) The contractor does not exercise the right to control the performance of the work of the
contractual employee.

The foregoing provisions shall be without prejudice to the application of Article 248(C) of the Labor
Code, as amended. "Substantial capital or investment" refers to capital stocks and subscribed
capitalization in the case of corporations, tools, equipment, implements, machineries and work
premises, actually and directly used by the contractor or subcontractor in the performance or
completion of the job, work, or service contracted out.
The "right to control" shall refer to the right reversed * to the person for whom the services of the
contractual workers are performed, to determine not only the end to be achieved, but also the
manner and means to be used in reaching that end. (Emphasis supplied.)

In sum, 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. It is, thus, evident that 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. It is also
apparent that 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.

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

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

With the finding that 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. Records also failed to show that petitioner afforded
respondents the twin requirements of procedural due process, i.e., notice and hearing, prior to
their dismissal. Respondents were not served notices informing them of the particular acts for
which their dismissal was sought. Nor were they required to give their side regarding the charges
made against them. Certainly, the respondents dismissal was not carried out in accordance with
law and, therefore, illegal.

LINGKOD MANGGAGAWA SA RUBBERWORLD, ADIDAS-ANGLO, its officers and members as
represented by SONIA ESPERANZA, Petitioners,
vs.
RUBBERWORLD (PHILS.) INC. and ANTONIO YANG, LAYA MANANGHAYA SALGADO & CO., CPAs (In its
capacity as liquidator of Rubberworld (Phils., Inc.), Respondents.
G.R. No. 153882 January 29, 2007
GARCIA, J.:

FACTS:
On August 26, 1994, Rubberworld filed with the Department of Labor and Employment (DOLE) a Notice
of Temporary Partial Shutdown due to severe financial crisis, therein announcing the formal actual
company shutdown a copy of which was served on the recognized labor union of Rubberworld, the Bisig
Pagkakaisa-NAFLU, the union with which the corporation had a collective bargaining agreement.
On September 1, 1994, Bisig Pagkakaisa-NAFLU staged a strike. It set up a picket line in front of the
premises of Rubberworld and even welded its gate. As a result, Rubberworld's premises closed
prematurely even before the date set for the start of its temporary partial shutdown.
On September 9, 1994, herein petitioner union, the Lingkod Manggagawa Sa Rubberworld, Adidas-Anglo
(Lingkod, for brevity), represented by its President, Sonia Esperanza, filed a complaint against
Rubberworld and its Vice Chairperson, Mr. Antonio Yang, for unfair labor practice (ULP), illegal
shutdown, and non-payment of salaries and separation pay. The said complaint was referred to Labor
Arbiter Ernesto Dinopol for appropriate action.
On November 22, 1994, while the aforementioned complaint was pending with Labor Arbiter Dinopol,
Rubberworld filed with the SEC a Petition for Declaration of a State of Suspension of Payments with
Proposed Rehabilitation Plan.
Notwithstanding the SEC's aforementioned suspension order and despite Rubberworld's submission on
January 10, 1995 of a Motion to Suspend Proceedings, Labor Arbiter Dinopol went ahead with the ULP
case and rendered his decision denying respondents motion to suspend proceedings and declaring
respondent Rubberworld Phils., Inc. to have committed unfair labor practice.
Its motion for reconsideration of the same Order having been denied by the NLRC in its Resolution 7 of
March 29, 1996, Rubberworld directly went to the Supreme Court on a Petition for Certiorari.
On April 22, 1998, the SEC issued an Order finding that the continuance in business [of Rubberworld]
would neither be feasible/profitable nor work to the best of interest of the stockholders, parties-
12

litigants, creditors, or the general public, xxx Rubberworld Philippines, Inc. was hereby declared as
DISSOLVED under Section 6(d) of P.D. 902-A. Accordingly, the suspension Order is LIFTED.
Eventually, in the herein assailed Decision dated January 18, 2002, the CA granted Rubberworlds
petition in CAG.R. SP. No. 53356 on the finding that the Labor Arbiter had indeed committed grave
abuse of discretion when it proceeded with the ULP case despite the SECs suspension order of
December 28, 1994, and accordingly declared the proceedings before it, including the subsequent orders
by the NLRC dismissing Rubberworlds appeal and the writ of execution, null and void. Hence, the
petition was filed.
ISSUES:
1) Whether the CA had committed grave abuse of discretion amounting to lack of jurisdiction
or an excess in the exercise thereof when it gave due course to the petition filed by
Rubberworld (Phils.), Inc. and annulled and set aside the decisions rendered by the labor
arbiter a quo and the NLRC, when the said decisions had become final and executory
warranting the outright dismissal of the aforesaid petition;
2) Whether the CA had committed grave abuse of discretion and reversible error when it
applied Section 5(d) and Section 6 (c) of P.D. No. 902-A, as amended, to the case at bar;
RULING:
1. NEGATIVE. CA did not commit grave abuse of discretion.
It cannot be said that the decision of the Labor Arbiter, or the decision/dismissal order and writ of
execution issued by the NLRC, could ever attain final and executory status. The Labor Arbiter completely
disregarded and violated Section 6(c) of Presidential Decree 902-A, as amended, which categorically
mandates the suspension of all actions for claims against a corporation placed under a management
committee by the SEC. Thus, the proceedings before the Labor Arbiter and the order and writ
subsequently issued by the NLRC are all null and void for having been undertaken or issued in violation of
the SEC suspension Order dated December 28, 1994. As such, the Labor Arbiters decision, including the
dismissal by the NLRC of Rubberworlds appeal, could not have achieved a final and executory status.
The Labor Arbiter's decision in this case is void ab initio, and therefore, non-existent. A void judgment is
in effect no judgment at all. No rights are divested by it nor obtained from it. Being worthless in itself, all
proceedings upon which the judgment is founded are equally worthless. It neither binds nor bars
anyone. All acts performed under it and all claims flowing out of it are void. In other words, a void
judgment is regarded as a nullity, and the situation is the same as it would be if there were no judgment.
It accordingly leaves the party-litigants in the same position they were in before the trial.

2. NEGATIVE. The CA did not commit grave abuse of discretion.
The Court addressed the more substantial issue in this case, namely, the applicability of the provisions of
Section 5 (d) and Section 6 (c) of P.D. No. 902-A, as amended, reorganizing the SEC, vesting it with
additional powers and placing it under the Office of the President, which respectively read:
Section 5. In addition to the regulatory adjudicative functions of the Securities and Exchange Commission
over corporations, partnerships and other forms of associations registered with it as expressly granted
under existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases
involving:
xxx xxx xxx
d) Petitions of corporations, partnerships or associations to be declared in the state of suspension of
payments in cases where the corporation, partnership or association possesses sufficient property to
cover all its debts but foresees the impossibility of meeting them when they respectively fall due or in
cases where the corporation, partnership or association has no sufficient assets to cover its liabilities, but
is under the management of a rehabilitation receiver or management committee created pursuant to
this Decree.
Section 6. In order to effectively exercise such jurisdiction, the Commission shall possess the following
powers:
xxx xxx xxx
c) To appoint one or more receivers of the property, real or personal, which is the subject of the action
pending before the Commission in accordance with the pertinent provisions of the Rules of Court in such
other cases whenever necessary in order to preserve the rights of the parties-litigants and/or protect the
interest of the investing public and creditors: x x x Provided, finally, That upon appointment of a
management committee, the rehabilitation receiver, board or body, pursuant to this Decree, all
actions for claims against corporations, partnerships, or associations under management or
receivership pending before any court, tribunal, board or body shall be suspended accordingly.
[Emphasis supplied]
xxx xxx xxx
x x x The law is clear: upon the creation of a management committee or the appointment of a
rehabilitation receiver, all claims for actions "shall be suspended accordingly." No exception in favor of
labor claims is mentioned in the law. Since the law makes no distinction or exemptions, neither should
this Court. Ubi lex non distinguit nec nos distinguere debemos. Allowing labor cases to proceed clearly
defeats the purpose of the automatic stay and severely encumbers the management committee's time
and resources. The said committee would need to defend against these suits, to the detriment of its
primary and urgent duty to work towards rehabilitating the corporation and making it viable again. To
rule otherwise would open the floodgates to other similarly situated claimants and forestall if not defeat
the rescue efforts. Besides, even if the NLRC awards the claims of private respondents, its ruling could
not be enforced as long as the petitioner is under the management committee.
WHEREFORE, the instant petition is DENIED and the assailed decision and resolution of the CA are
AFFIRMED.

Workers Preference

Development Bank of the Philippines vs. NLRC
[242 SCRA 59 (1995)]

Facts:
PSC obtained a loan in 1983 from the DBP to finance its iron smelting and steel manufacturing
business. To secure said loan, PSC mortgaged to DBP real properties with all the buildings and
improvements thereon and chattels. By virtue of the said loan agreement, DBP became the majority
stockholder of PSC, with stockholdings. Subsequently, it took over the management of PSC. When PSC
failed to pay its obligation with DBP, DBP foreclosed and acquired the mortgaged real estate and chattels
of PSC in the auction sales in 1987. Petitioners filed a Petition for Involuntary Insolvency in the RTC
against PSC and DBP, impleading as co-respondents therein Olecram Mining Corporation and Jose
Panganiban Ice Plant and Cold Storage, with said petitioners representing themselves as unpaid
employees of said private respondents. Herein private respondents filed a complaint with the
Department of Labor against PSC, including later on DBP, for non-payment of salaries, 13th month pay,
incentive leave pay and separation pay. DBP submits that when it foreclosed the assets of PSC, it did so
as a foreclosing creditor.

13

The pivotal issue for resolution is whether DBP, as foreclosing creditor, could be held liable
for the unpaid wages, 13th month pay, incentive leave pay and separation pay of the employees of PSC.
The terms 'declaration' of bankruptcy or 'judicial' liquidation in Article 110 of the Labor Code have been
eliminated by RA 6715, which took effect on March 21, 1989. Does this mean then that liquidation
proceedings have been done away with?

SC Ruling:
We opine in the negative. 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. In the event of insolvency, a principal objective should be to
effect an equitable distribution of the insolvent's property among his creditors. To accomplish this there
must first be some proceeding where notice to all of the insolvent's creditors may be given and where
the claims of preferred creditors may be bindingly adjudicated. 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 or 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. The DBP anchors its claim on a mortgage credit,
which 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 (Art. 2176, CC). 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.

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 (Art. 4, CC). Thereby, any
infringement on the constitutional guarantee on non-impairment of obligation of contracts (Sec. 10, Art.
III, 1987 Consti.) is also avoided. In point of fact, DBP's mortgage credit antedated by several years the
amendatory law, RA 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.

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. But, for an orderly settlement of a debtor's
assets, all creditors must be convened, their claims ascertained and inventoried, and thereafter the
preference determined in the course of judicial proceedings which have for their object the subjection of
the property of the debtor to the payment of his debts or other lawful obligations. Thereby, an orderly
determination of preference of creditors' claims is assured; the adjudication made will be binding on all
parties-in-interest, since those proceedings are proceedings in rem; and the legal scheme of
classification, concurrence and preference of credits in the Civil Code, the Insolvency Law, and the Labor
Code is preserved in harmony.

.Boliano et al vs. Padoliana
Facts: Petitioners A.N. Bolinao, Jr., et al. were all former employees of Sabena Mining Corporation(SMC).
In 1982 and 1983 they were laid off without being recalled. Petitioners filed a formal complaint for
collection of unpaid salaries, unused accrued vacation and sick leave benefits, 13th month pay and
separation pay before the NLRC against SMC and Development Bank of the Philippines.
On May,1984, a compromise agreement was entered into by the parties, wherein petitioners were to be
paid on a staggered basis the collective amount of P385,583.95. The company faithfully complied with
the scheduled payments only up to March, 1985 because it ceased operations effective April 1, 1985.
With this development, petitioners moved for the issuance of a writ of execution.
The Labor Arbiter issued a writ of execution against the company to collect the balance of P311,580.14
On June 27, 1985 Deputy Sheriff garnished the remaining amount of P150,279.64 in the savings account
of the company at the DBP). However, the same amount was previously garnished by two creditors of
the company; namely, Bank of America and Phelps Dodge (Phils.), Inc. Bank of America garnished the
amount in April, 1982 while Phelps Dodge garnished the amount in June, 1984.
The respondent court(RTC Manila) issued an order denying the motion to intervene and dismissing the
third party claim, declaring that the garnishment made by its Deputy Sheriff in favor of respondent
Phelps Dodge, Phils., Inc. superior to the rights of petitioners.
Petitioners contend that under Article 110 and its implementing rules; and regulations of the Labor
Code, the claims of the laborers for unpaid wages and other monetary benefits due them for services
rendered prior to bankruptcy enjoy first preference in the satisfaction of credits against a bankrupt
company. The respondent maintains that the rights of preference and first lien of petitioners, as former
employees of SMC, under aforesaid law and rules, are operative only in an insolvency court and in a
bankrupt case.

ISSUE: W/N petitioners enjoy preferential right or claim over the funds of Sabena Mining Corporation as
provided for under the provisions of Article 110 of the New Labor Code
HELD:NO. It is quite clear from the provisions of Article 110 of the Labor Code and Section 10, Rule VIII,
Book H of the Revised Rules and Regulations Implementing the Labor Code, that a declaration of
bankruptcy or a judicial liquidation must be present before the worker's preference may be enforced.
Thus, it was held that Article 110 of the Labor Code and its implementing rule cannot be invoked absent
a formal declaration of bankruptcy or a liquidation order
In the case at bar, there was no showing of any insolvency proceeding or declaration of bankruptcy or
judicial liquidation that was being filed by Sabena Mining Corporation. It is only an extra-judicial
foreclosure that was being enunciated as when DBP extra-judicially foreclosed the assets of Sabena
Mining Corporation.
ABUNDIO BARAYOGA vs. ASSET PRIVATIZATION TRUST
[G.R. No. 160073 October 24, 2005]
Facts:
Bisudeco-Philsucor Corfarm Workers Union is composed of workers of Bicolandia Sugar
Development Corporation (BISUDECO), a sugar plantation mill located in Himaao, Pili, Camarines Sur. On
December 8, 1986, [Respondent] Asset Privatization Trust (APT), a public trust was created under
Proclamation No. 50, as amended, mandated to take title to and possession of, conserve, provisionally
manage and dispose of non-performing assets of the Philippine government identified for privatization
or disposition. Pursuant to Section 23 of Proclamation No. 50, former President Corazon Aquino issued
Administrative Order No. 14 identifying certain assets of government institutions that were to be
14

transferred to the National Government. Among the assets transferred was the financial claim of the
Philippine National Bank against BISUDECO in the form of a secured loan. Consequently, by virtue of a
Trust Agreement executed between the National Government and APT on February 27, 1987, APT was
constituted as trustee over BISUDECOs account with the PNB. Sometime later, on August 28, 1988,
BISUDECO contracted the services of Philippine Sugar Corporation (Philsucor) to take over the
management of the sugar plantation and milling operations until August 31, 1992. Meanwhile, because
of the continued failure of BISUDECO to pay its outstanding loan with PNB, its mortgaged properties
were foreclosed and subsequently sold in a public auction to APT, as the sole bidder. On April 2, 1991,
APT was issued a Sheriffs Certificate of Sale. On July 23, 1991, the union filed a complaint for unfair
labor practice, illegal dismissal, illegal deduction and underpayment of wages and other labor standard
benefits plus damages. In the meantime, on July 15, 1992, APTs Board of Trustees issued a resolution
accepting the offer of Bicol-Agro-Industrial Cooperative (BAPCI) to buy the sugar plantation and mill.
Again, on September 23, 1992, the board passed another resolution authorizing the payment of
separation benefits to BISUDECOs employees in the event of the companys privatization. Then, on
October 30, 1992, BAPCI purchased the foreclosed assets of BISUDECO from APT and took over its sugar
milling operations under the trade name Peafrancia Sugar Mill (Pensumil). On December 17, 1992, the
union filed a similar complaint, later to be consolidated with its earlier complaint and docketed as RAB V
Case No. 07-00184-91. On March 2, 1993, it filed an amended complaint, impleading as additional party
respondents APT and Pensumil. In their Position Paper, the union alleged that when Philsucor initially
took over the operations of the company, it retained BISUDECOs existing personnel under the same
terms and conditions of employment. Nonetheless, at the start of the season sometime in May 1991,
Philsucor started recalling workers back to work, to the exception of the union members. Management
told them that they will be re-hired only if they resign from the union. Just the same, thereafter, the
company started to employ the services of outsiders under the pakyaw system. BISUDECO, Pensumil
and APT all interposed the defense of lack of employer-employee relationship.

After due proceedings, on April 30, 1998, Labor Arbiter Fructuoso T. Aurellano disposed that
APT pay petitioners the mandated employment benefits provided for under Section 27 of Proclamation
No. 50 which benefits had been earlier extended to other employees similarly situated. Both the union
and APT elevated the labor arbiters decision before NLRC. The NLRC affirmed APTs liability for
petitioners money claims. While no employer-employee relationship existed between members of the
petitioner union and APT, at the time of the employees illegal dismissal, the assets of BISUDECO had
been transferred to the national government through APT. Moreover, the NLRC held that APT should
have treated petitioners claim as a lien on the assets of BISUDECO. The Commission opined that APT
should have done so, considering its awareness of the pending complaint of petitioners at the time
BISUDECO sold its assets to BAPCI, and APT started paying separation pay to the workers. The NLRC
awarded to petitioners their money claims for underpayment, labor-standard benefits, and ECOLA. It
also awarded them their back wages, computed at the prevailing minimum wage, for the period May 1,
1991 (the date of their illegal dismissal) until October 30, 1992 (the sale of BISUDECO assets to the
BAPCI). On the other hand, the NLRC ruled that petitioners were not entitled to separation pay because
of the huge business losses incurred by BISUDECO, which had resulted in its bankruptcy.

Respondent sought relief from the CA via a Petition for Certiorari under Rule 65 of the Rules
of Court. The CA ruled that APT should not be held liable for petitioners claims for unfair labor practice,
illegal dismissal, illegal deduction and underpayment of wages, as well as other labor-standard benefits
plus damages. As found by the NLRC, APT was not the employer of petitioners, but was impleaded only
for possessing BISUDECOs mortgaged properties as trustee and, later, as the highest bidder in the
foreclosure sale of those assets. CA concluded that petitioners claims could not be enforced against APT
as mortgagee of the foreclosed properties of BISUDECO.

Issue:
Whether APT is Liable for the Claims of Petitioners Against Their Former Employer.

SC Ruling:
The Petition has no merit. The duties and liabilities of BISUDECO, including its monetary
liabilities to its employees, were not all automatically assumed by APT as purchaser of the foreclosed
properties at the auction sale. Any assumption of liability must be specifically and categorically agreed
upon. In Sundowner Development Corp. v. Drilon, the Court ruled that, unless expressly assumed, labor
contracts like collective bargaining agreements are not enforceable against the transferee of an
enterprise. Labor contracts are in personam and thus binding only between the parties.

Contrary to petitioners assertions, BISUDECO remained the owner of the mortgaged
properties in August 1988, when the Philippine Sugar Corporation (Philsucor) undertook the operation
and management of the sugar plantation until August 31, 1992, under a so-called Contract of Lease
between the two corporations. At the time, APT was merely a secured creditor of BISUDECO. It was only
in September 1992 (after the expiration of the lease/management Contract with Philsucor in August
1992), however, when APT took over BISUDECO assets, preparatory to the latters privatization.

No succession of employment rights and obligations can be said to have taken place between
the two. Between the employees of BISUDECO and APT, there is no privity of contract that would make
the latter a substitute employer that should be burdened with the obligations of the corporation. To rule
otherwise would result in unduly imposing upon APT an unwarranted assumption of accounts not
contemplated in Proclamation No. 50 or in the Deed of Transfer between the national government and
PNB.

Furthermore, under the principle of absorption, a bona fide buyer or transferee of all, or
substantially all, the properties of the seller or transferor is not obliged to absorb the latters employees.
The most that the purchasing company may do, for reasons of public policy and social justice, is to give
preference of reemployment to the selling companys qualified separated employees, who in its
judgment are necessary to the continued operation of the business establishment.

The liabilities of the previous owner to its employees are not enforceable against the buyer or
transferee, unless (1) the latter unequivocally assumes them; or (2) the sale or transfer was made in bad
faith. Thus, APT cannot be held responsible for the monetary claims of petitioners who had been
dismissed even before it actually took over BISUDECOs assets.

Moreover, it should be remembered that APT merely became a transferee of BISUDECOs
assets for purposes of conservation because of its lien on those assets -- a lien it assumed as assignee of
the loan secured by the corporation from PNB. Subsequently, APT, as the highest bidder in the auction
sale, acquired ownership of the foreclosed properties.

Relevant to this transfer of assets is Article 110 of the Labor Code, which reads:
Article 110. Workers preference in case of bankruptcy. In the event of bankruptcy or
liquidation of the employers business, his workers shall enjoy first preference as regards their unpaid
wages and other monetary claims shall be paid in full before the claims of the Government and other
creditors may be paid.

While this provision raises the workers money claim to first priority in the order of
preference established under Article 2244 of the Civil Code, the claim has no preference over special
preferred credits. This Court has ruled in a long line of cases that under Articles 2241 and 2242 of the
Civil Code, a mortgage credit is a special preferred credit that enjoys preference with respect to a
specific/determinate property of the debtor. On the other hand, the workers preference under Article
110 of the Labor Code is an ordinary preferred credit. Thus, the right of employees to be paid benefits
due them from the properties of their employer cannot have any preference over the latters mortgage
15

credit. In other words, being a mortgage credit, APTs lien on BISUDECOs mortgaged assets is a special
preferred lien that must be satisfied first before the claims of the workers.

Development Bank of the Philippines v. NLRC explained the rationale of this ruling as follows:
x x x. 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
insolvents assets. It is a right to a first preference in the discharge of the funds of the judgment debtor. x
x x

Furthermore, workers claims for unpaid wages and monetary benefits cannot be paid outside
of a bankruptcy or judicial liquidation proceedings against the employer. It is settled that the application
of Article 110 of the Labor Code is contingent upon the institution of those proceedings, during which all
creditors are convened, their claims ascertained and inventoried, and their preferences determined.
Assured thereby is an orderly determination of the preference given to creditors claims; and preserved
in harmony is the legal scheme of classification, concurrence and preference of credits in the Civil Code,
the Insolvency Law, and the Labor Code.

The Court hastens to add that the present Petition was brought against APT alone. In holding
that the latter, which has never really been an employer of petitioners, is not liable for their claims, this
Court is not reversing or ruling upon their entitlement to back wages and other unpaid benefits from
their previous employer. As a mere transferee of the mortgage credit and later as the purchaser in a
public auction of BISUDECOs foreclosed properties, APT cannot be held liable for petitioners claims
against BISUDECO: illegal dismissal, unpaid back wages and other monetary benefits.

Responsibility for the liabilities of a mortgagor towards its employees cannot be transferred
via an auction sale to a purchaser who is also the mortgagee-creditor of the foreclosed assets and
chattels. Clearly, the mortgagee-creditor has no employer- employee relations with the mortgagors
workers. The mortgage constitutes a lien on the determinate properties of the employer-debtor,
because it is a specially preferred credit to which the workers monetary claims is deemed subordinate.