Coca-Cola Bottlers Phils., Inc. vs. Alan M.

Agito, et al.
on 3:00 PM in Case Digests, Labor Law
0
G.R. No. 179546, February 13, 2009

FACTS:

Agito, et al. are salesmen assigned at the Lagro Sales Office of Coca-Cola for a number of years but
were not regularized. Their employment was terminated without just cause and due process. They
filed complaints against Coca-Cola, Interserve, Peerless Integrated Services, Inc. Better Builders,
Inc., and Excellent Partners, Inc. However, they failed to state a reason for filing complaints against
Interserve, Peerless, Better Builders and Excellent Partners.

Coca-Cola averred that Agito, et al. were employees of Interserve who were tasked to perform
contracted services in accordance with the provision of the Contract of Services. The contract
covering the period of April 1, 2002 to September 30, 2002 constituted legitimate job contracting.

To prove that Interserve is an independent contractor, Coca-Cola presented the following: (1) AOI
of Interserve; (2) Certificate of Registration of Interserve with BIR; (3) ITR with Audited Financial
Statements of Interserve for 2001; and (4) Certificate of Registration of Interserve as an independent
contractor issued by DOLE.

As a result, Coca-Cola asserted that Agito, et al. were employees of Interserve since it was the latter
which hired them, paid their wages and supervised their work, as proven by: (1) PDFs are in the
records of Interserve; (2) Contracts of Temporary Employment with Interserve; and (3) payroll
records of Interserve.

LA found for Coca-Cola and held that Interserve was a legitimate job contractor. The complaints
against Peerless, Better Building and Excellent Partners was dismissed for failure to pursue the case.

On appeal, NLRC affirmed LA's decision.

CA reversed the NLRC decision and ruled that Interserve was a labor-only contractor with
insufficient capital and investments for the services which it was contracted to perform.
Additionally, CA determined that Coca-Cola had effective control over the means and method of
Agito, et al.'s work as evidenced by the Daily Sales Monitoring Report, the Conventional Route
System Proposed Set-Up, and the memoranda issued by the supervisor of petitioner addressed to
workers. Respondents' tasks were directly related and necessary to the main business of Coca-Cola.
Finally, certain provisions of the Contract of Service between Coca-Cola and Interserve suggested
that the latter's undertaking did not involve a specific job but rather the supply of manpower.
ISSUE: Whether or not Interserve is a legitimate job contractor

HELD:

Legitimate Contracting vs. Labor-Only Contracting

The relations which may arise in a situation, where there is an employer, a contractor, and
employees of the contractor, are identified and distinguished under Article 106 of the Labor Code:

Article 106. Contractor or subcontractor. - Whenever an employer enters into a contract

with another person for the performance of the formers work, the employees of the contractor and
of the latters subcontractor, if any, shall be paid in accordance with the provisions of this Code.

In the event that the contractor or subcontractor fails to pay the wages of his employees in
accordance with this Code, the employer shall be jointly and severally liable with his contractor or
subcontractor to such employees to the extent of the work performed under the contract, in the
same manner and extent that he is liable to employees directly employed by him.

The Secretary of Labor may, by appropriate regulations, restrict or prohibit the contracting
out of labor to protect the rights of workers established under this Code. In so prohibiting or
restriction, he may make appropriate distinctions between labor-only contracting and job contracting
as well as differentiations within these types of contracting and determine who among the parties
involved shall be considered the employer for purposes of this Code, to prevent any violation or
circumvention of any provision of this Code.

There is labor-only contracting where the person supplying workers to an employee does not
have substantial capital or investment in the form of tools, equipment, machineries, work premises,
among others, and the workers recruited and placed by such persons are performing activities which
are directly related to the principal business of such employer. In such cases, the person or
intermediary shall be considered merely as an agent of the employer who shall be responsible to the
workers in the same manner and extent as if the latter were directly employed by him.

The afore-quoted provision recognizes two possible relations among the parties: (1) the
permitted legitimate job contract, or (2) the prohibited labor-only contracting.

A legitimate job contract, wherein an employer enters into a contract with a job contractor
for the performance of the formers 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
contractors 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 contractors employees.

On the other hand, labor-only contracting is an arrangement wherein the contractor merely
acts as an agent in recruiting and supplying the principal employer with workers for the purpose of
circumventing labor law provisions setting down the rights of employees. It is not condoned by
law.A finding by the appropriate authorities that a contractor is a labor-only contractor establishes
an employer-employee relationship between the principal employer and the contractors employees
and the former becomes solidarily liable for all the rightful claims of the employees.

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

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

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

When there is labor-only contracting, there is employer-employee relationship between the

principal and the contractual employee

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

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

shall be considered the employer of the contractual employee for purposes of enforcing the
provisions of the Labor Code and other social legislation. The principal, however, shall be solidarily
liable with the contractor in the event of any violation of any provision of the Labor Code, including
the failure to pay wages.

The principal shall be deemed the employer of the contractual employee in any of the
following case, as declared by a competent authority:
 a. where there is labor-only contracting; or
b. where the contracting arrangement falls within the prohibitions provided in
Section 6 (Prohibitions) hereof.

According to the foregoing provision, labor-only contracting would give rise to: (1) the
creation of an employer-employee relationship between the principal and the employees of the
contractor or sub-contractor; and (2) the solidary liability of the principal and the contractor to the
employees in the event of any violation of the Labor Code.

Even if employees are not performing activities indispensable to the business of the
principal, labor-contracting may still exist if the contractor does not demonstrate substantial
capital or investment

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

Interserve has no substantial capital; it is impossible to measure whether or not there is

substantial capital because the Contract between Coca-Cola and Interserve does not specify
the work or the project that needs to be performed or completed.

At the outset, the Court clarifies that although Interserve has an authorized capital stock amounting
toP2,000,000.00, only P625,000.00 thereof was paid up as of 31 December 2001. The Court does
not set an absolute figure for what it considers substantial capital for an independent job contractor,
but it measures the same against the type of work which the contractor is obligated to perform for
the principal. However, this is rendered impossible in this case since the Contract between petitioner
and Interserve does not even specify the work or the project that needs to be performed or
completed by the latters employees, and uses the dubious phrase tasks and activities that are
considered contractible under existing laws and regulations. Even in its pleadings, petitioner carefully
sidesteps identifying or describing the exact nature of the services that Interserve was obligated to
render to petitioner. The importance of identifying with particularity the work or task which
Interserve was supposed to accomplish for petitioner becomes even more evident, considering that
the Articles of Incorporation of Interserve states that its primary purpose is to operate, conduct, and
maintain the business of janitorial and allied services. But respondents were hired as salesmen and
leadman for petitioner. The Court cannot, under such ambiguous circumstances, make a reasonable
determination if Interserve had substantial capital or investment to undertake the job it was
contracting with petitioner.
Burden of proof of substantial capital rests in the contractor, or in its absence, the principal
claiming it to be an independent contractor

The contractor, not the employee, has the burden of proof that it has the substantial capital,
investment, and tool to engage in job contracting. Although not the contractor itself (since
Interserve no longer appealed the judgment against it by the Labor Arbiter), said burden of proof
herein falls upon petitioner who is invoking the supposed status of Interserve as an independent job
contractor. Noticeably, petitioner failed to submit evidence to establish that the service vehicles and
equipment of Interserve, valued at P510,000.00 and P200,000.00, respectively, were sufficient to
carry out its service contract with petitioner. Certainly, petitioner could have simply provided the
courts with records showing the deliveries that were undertaken by Interserve for the Lagro area, the
type and number of equipment necessary for such task, and the valuation of such
equipment. Absent evidence which a legally compliant company could have easily provided, the
Court will not presume that Interserve had sufficient investment in service vehicles and equipment,
especially since respondents allegation that they were using equipment, such as forklifts and pallets
belonging to petitioner, to carry out their jobs was uncontroverted.

Interserve did not exercise the right to control the performance of the work of the
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).

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

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

As the Court previously observed, 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.

Certification issued by DOLE is not sufficient to prove independent contractorship

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.

o Legitimate Contracting vs. Labor-only Contracting

o When there is labor-only contracting, an employer-employee exists between the contractual
employee and the principal
o Even if employees are not performing activities indispensable to the business of the
principal, labor-only contracting may still exist if the contractor does not demonstrate
substantial capital or investment
o To determine whether or not there is substantial capital for purposes of legitimate
contracting, one must examine the specific job, work or service provided in the Service
Agreement
o The burden of proof that the contractor is a legitimate contractor rests with the contractor,
or in its absence, the principalCertification from DOLE is not sufficient to prove
independent contractorship