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G.R. No.

179546 February 13, 2009

COCA-COLA BOTTLERS PHILS., INC., Petitioner,


vs.
ALAN M. AGITO, REGOLO S. OCA III, ERNESTO G. ALARIAO, JR., ALFONSO PAA, JR.,
DEMPSTER P. ONG, URRIQUIA T. ARVIN, GIL H. FRANCISCO, and EDWIN M.
GOLEZ, Respondents.

DECISION

CHICO-NAZARIO, J.:

This is a Petition for Review on Certiorari, under Rule 45 of the Rules of Court, assailing the
Decision1 dated 19 February 2007, promulgated by the Court of Appeals in CA-G.R. SP No. 85320,
reversing the Resolution2 rendered on 30 October 2003 by the National Labor Relations Commission
(NLRC) in NLRC NCR CA No. 036494-03. The Court of Appeals, in its assailed Decision, declared
that respondents Alan M. Agito, Regolo S. Oca III, Ernesto G. Alariao, Jr., Alfonso Paa, Jr.,
Dempster P. Ong, Urriquia T. Arvin, Gil H. Francisco, and Edwin M. Golez were regular employees
of petitioner Coca-Cola Bottlers Phils., Inc; and that Interserve Management & Manpower
Resources, Inc. (Interserve) was a labor-only contractor, whose presence was intended merely to
preclude respondents from acquiring tenurial security.

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

On 15 April 2002, respondents filed before the NLRC two complaints against petitioner, Interserve,
Peerless Integrated Services, Inc., Better Builders, Inc., and Excellent Partners, Inc. for
reinstatement with backwages, regularization, nonpayment of 13th month pay, and damages. The
two cases, docketed as NLRC NCR Case No. 04-02345-2002 and NLRC NCR Case No. 05-03137-
02, were consolidated.

Respondents alleged in their Position Paper that they were salesmen assigned at the Lagro Sales
Office of petitioner. They had been in the employ of petitioner for years, but were not regularized.
Their employment was terminated on 8 April 2002 without just cause and due process. However,
they failed to state the reason/s for filing a complaint against Interserve; Peerless Integrated
Services, Inc.; Better Builders, Inc.; and Excellent Partners, Inc.3

Petitioner filed its Position Paper (with Motion to Dismiss),4 where it averred that respondents were
employees of Interserve who were tasked to perform contracted services in accordance with the
provisions of the Contract of Services5 executed between petitioner and Interserve on 23 March
2002. Said Contract between petitioner and Interserve, covering the period of 1 April 2002 to 30
September 2002, constituted legitimate job contracting, given that the latter was a bona
fide independent contractor with substantial capital or investment in the form of tools, equipment,
and machinery necessary in the conduct of its business.

To prove the status of Interserve as an independent contractor, petitioner presented the following
pieces of evidence: (1) the Articles of Incorporation of Interserve;6 (2) the Certificate of Registration
of Interserve with the Bureau of Internal Revenue;7 (3) the Income Tax Return, with Audited
Financial Statements, of Interserve for 2001;8and (4) the Certificate of Registration of Interserve as
an independent job contractor, issued by the Department of Labor and Employment (DOLE).9
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;10 (2) respondents’ Contract of Temporary
Employment with Interserve;11 and (3) the payroll records of Interserve.12

Petitioner, thus, sought the dismissal of respondents’ complaint against it on the ground that the
Labor Arbiter did not acquire jurisdiction over the same in the absence of an employer-employee
relationship between petitioner and the respondents.13

In a Decision dated 28 May 2003, the Labor Arbiter found that respondents were employees of
Interserve and not of petitioner. She reasoned that the standard put forth in Article 280 of the Labor
Code for determining regular employment (i.e., that the employee is performing activities that are
necessary and desirable in the usual business of the employer) was not determinative of the issue of
whether an employer-employee relationship existed between petitioner and respondents. While
respondents performed activities that were necessary and desirable in the usual business or trade of
petitioner, the Labor Arbiter underscored that respondents’ functions were not indispensable to the
principal business of petitioner, which was manufacturing and bottling soft drink beverages and
similar products.

The Labor Arbiter placed considerable weight on the fact that Interserve was registered with the
DOLE as an independent job contractor, with total assets amounting to ₱1,439,785.00 as of 31
December 2001. It was Interserve that kept and maintained respondents’ employee records,
including their Personal Data Sheets; Contracts of Employment; and remittances to the Social
Securities System (SSS), Medicare and Pag-ibig Fund, thus, further supporting the Labor Arbiter’s
finding that respondents were employees of Interserve. She ruled that the circulars, rules and
regulations which petitioner issued from time to time to respondents were not indicative of control as
to make the latter its employees.

Nevertheless, the Labor Arbiter directed Interserve to pay respondents their pro-rated 13th month
benefits for the period of January 2002 until April 2002.14

In the end, the Labor Arbiter decreed:

WHEREFORE, judgment is hereby rendered finding that [herein respondents] are employees of
[herein petitioner] INTERSERVE MANAGEMENT & MANPOWER RESOURCES, INC.
Concomitantly, respondent Interserve is further ordered to pay [respondents] their pro-rated 13th
month pay.

The complaints against COCA-COLA BOTTLERS PHILS., INC. is DISMISMMED for lack of merit.

In like manner the complaints against PEERLESS INTEGRATED SERVICES, INC., BETTER
BUILDING INC. and EXCELLENT PARTNERS COOPERATIVE are DISMISSED for failure of
complainants to pursue against them.

Other claims are dismissed for lack of merit.

The computation of the Computation and Examination Unit, this Commission if (sic) made part of this
Decision. 15

Unsatisfied with the foregoing Decision of the Labor Arbiter, respondents filed an appeal with the
NLRC, docketed as NLRC NCR CA No. 036494-03.
In their Memorandum of Appeal,16 respondents maintained that contrary to the finding of the Labor
Arbiter, their work was indispensable to the principal business of petitioner. Respondents supported
their claim with copies of the Delivery Agreement17 between petitioner and TRMD Incorporated,
stating that petitioner was "engaged in the manufacture, distribution and sale of soft drinks and other
related products with various plants and sales offices and warehouses located all over the
Philippines." Moreover, petitioner supplied the tools and equipment used by respondents in their jobs
such as forklifts, pallet, etc. Respondents were also required to work in the warehouses, sales
offices, and plants of petitioner. Respondents pointed out that, in contrast, Interserve did not own
trucks, pallets cartillas, or any other equipment necessary in the sale of Coca-Cola products.

Respondents further averred in their Memorandum of Appeal that petitioner exercised control over
workers supplied by various contractors. Respondents cited as an example the case of Raul Arenajo
(Arenajo), who, just like them, worked for petitioner, but was made to appear as an employee of the
contractor Peerless Integrated Services, Inc. As proof of control by petitioner, respondents submitted
copies of: (1) a Memorandum18 dated 11 August 1998 issued by Vicente Dy (Dy), a supervisor of
petitioner, addressed to Arenajo, suspending the latter from work until he explained his disrespectful
acts toward the supervisor who caught him sleeping during work hours; (2) a Memorandum19 dated
12 August 1998 again issued by Dy to Arenajo, informing the latter that the company had taken a
more lenient and tolerant position regarding his offense despite having found cause for his dismissal;
(3) Memorandum20 issued by Dy to the personnel of Peerless Integrated Services, Inc., requiring the
latter to present their timely request for leave or medical certificates for their absences; (4) Personnel
Workers Schedules, 21prepared by RB Chua, another supervisor of petitioner; (5) Daily Sales
Monitoring Report prepared by petitioner;22and (6) the Conventional Route System Proposed Set-up
of petitioner. 23

The NLRC, in a Resolution dated 30 October 2003, affirmed the Labor Arbiter’s Decision dated 28
May 2003 and pronounced that no employer-employee relationship existed between petitioner and
respondents. It reiterated the findings of the Labor Arbiter that Interserve was an independent
contractor as evidenced by its substantial assets and registration with the DOLE. In addition, it was
Interserve which hired and paid respondents’ wages, as well as paid and remitted their SSS,
Medicare, and Pag-ibig contributions. Respondents likewise failed to convince the NLRC that the
instructions issued and trainings conducted by petitioner proved that petitioner exercised control
over respondents as their employer.24 The dispositive part of the NLRC Resolution states:25

WHEREFORE, the instant appeal is hereby DISMISSED for lack of merit. However, respondent
Interserve Management & Manpower Resources, Inc., is hereby ordered to pay the [herein
respondents] their pro-rated 13th month pay.

Aggrieved once more, respondents sought recourse with the Court of Appeals by filing a Petition
for Certiorari under Rule 65, docketed as CA-G.R. SP No. 85320.

The Court of Appeals promulgated its Decision on 9 February 2007, reversing the NLRC Resolution
dated 30 October 2003. The appellate court ruled that Interserve was a labor-only contractor, with
insufficient capital and investments for the services which it was contracted to perform. With only
₱510,000.00 invested in its service vehicles and ₱200,000.00 in its machineries and equipment,
Interserve would be hard-pressed to meet the demands of daily soft drink deliveries of petitioner in
the Lagro area. The Court Appeals concluded that the respondents used the equipment, tools, and
facilities of petitioner in the day-to-day sales operations.

Additionally, the Court of Appeals determined that petitioner had effective control over the means
and method of respondents’ 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, who, like respondents, were supposedly supplied by contractors.
The appellate court deemed that the respondents, who were tasked to deliver, distribute, and sell
Coca-Cola products, carried out functions directly related and necessary to the main business of
petitioner. The appellate court finally noted that certain provisions of the Contract of Service between
petitioner and Interserve suggested that the latter’s undertaking did not involve a specific job, but
rather the supply of manpower.

The decretal portion of the Decision of the Court of Appeals reads:26

WHEREFORE, the petition is GRANTED. The assailed Resolutions of public respondent NLRC are
REVERSED and SET ASIDE. The case is remanded to the NLRC for further proceedings.

Petitioner filed a Motion for Reconsideration, which the Court of Appeals denied in a Resolution,
dated 31 August 2007.27

Hence, the present Petition, in which the following issues are raised28:

WHETHER OR NOT THE COURT OF APPEALS ACTED IN ACCORDANCE WITH EVIDENCE ON


RECORD, APPLICABLE LAWS AND ESTABLISHED JURISPRUDENCE WHEN IT RULED THAT
INTERSERVE IS A LABOR-ONLY CONTRACTOR;

II

WHETHER OR NOT THE COURT OF APPEALS ACTED IN ACCORDANCE WITH APPLICABLE


LAWS AND ESTABLISHED JURISPRUDENCE WHEN IT CONCLUDED THAT RESPONDENTS
PERFORMED WORK NECESSARY AND DESIRABLE TO THE BUSINESS OF [PETITIONER];

III

WHETHER OR NOT THE COURT OF APPEALS COMMITTED SERIOUS ERROR WHEN IT


DECLARED THAT RESPONDENTS WERE EMPLOYEES OF [PETITIONER], EVEN ABSENT THE
FOUR ELEMENTS INDICATIVE OF AN EMPLOYMENT RELATIONSHIP; AND

IV

WHETHER OR NOT THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT CONCLUDED


THAT INTERSERVE WAS ENGAGED BY [PETITIONER] TO SUPPLY MANPOWER ONLY.

The Court ascertains that the fundamental issue in this case is whether Interserve is a legitimate job
contractor. Only by resolving such issue will the Court be able to determine whether an employer-
employee relationship exists between petitioner and the respondents. To settle the same issue,
however, the Court must necessarily review the factual findings of the Court of Appeals and look into
the evidence presented by the parties on record.

As a general rule, factual findings of the Court of Appeals are binding upon the Supreme Court. One
exception to this rule is when the factual findings of the former are contrary to those of the trial court,
or the lower administrative body, as the case may be. This Court is obliged to resolve an issue of
fact herein due to the incongruent findings of the Labor Arbiter and the NLRC and those of the Court
of Appeals. 29
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 former’s work, the employees of the contractor and of the latter’s
subcontractor, if any, shall be paid in accordance with the provisions of this Code.

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

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

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

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

A legitimate job contract, wherein an employer enters into a contract with a job contractor for the
performance of the former’s work, is permitted by law. Thus, the employer-employee relationship
between the job contractor and his employees is maintained. In legitimate job contracting, the law
creates an employer-employee relationship between the employer and the contractor’s employees
only for a limited purpose, i.e., to ensure that the employees are paid their wages. The employer
becomes jointly and severally liable with the job contractor only for the payment of the employees’
wages whenever the contractor fails to pay the same. Other than that, the employer is not
responsible for any claim made by the contractor’s employees.30

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. 31

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, 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.

Petitioner argues that there could not have been labor-only contracting, since respondents did not
perform activities that were indispensable to petitioner’s principal business. And, even assuming that
they did, such fact alone does not establish an employer-employee relationship between petitioner
and the respondents, since respondents were unable to show that petitioner exercised the power to
select and hire them, pay their wages, dismiss them, and control their conduct.

The argument of petitioner is untenable.


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

Respondents worked for petitioner as salesmen, with the exception of respondent Gil Francisco
whose job was designated as leadman. In the Delivery Agreement32 between petitioner and TRMD
Incorporated, it is stated that petitioner is engaged in the manufacture, distribution and sale of
softdrinks and other related products. The work of respondents, constituting distribution and sale of
Coca-Cola products, is clearly indispensable to the principal business of petitioner. The repeated re-
hiring of some of the respondents supports this finding.33 Petitioner also does not contradict
respondents’ allegations that the former has Sales Departments and Sales Offices in its various
offices, plants, and warehouses; and that petitioner hires Regional Sales Supervisors and District
Sales Supervisors who supervise and control the salesmen and sales route helpers.34

As to the supposed substantial capital and investment required of an independent job contractor,
petitioner calls the attention of the Court to the authorized capital stock of Interserve amounting to
₱2,000,000.00.35 It cites as authority Filipinas Synthetic Fiber Corp. v. National Labor Relations
Commission36 and Frondozo v. National Labor Relations Commission,37 where the contractors’
authorized capital stock of ₱1,600,000.00 and ₱2,000,000.00, respectively, were considered
substantial for the purpose of concluding that they were legitimate job contractors. Petitioner also
refers to Neri v. National Labor Relations Commission38 where it was held that a contractor ceases to
be a labor-only contractor by having substantial capital alone, without investment in tools and
equipment.

This Court is unconvinced.

At the outset, the Court clarifies that although Interserve has an authorized capital stock amounting
to ₱2,000,000.00, only ₱625,000.00 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 latter’s 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.39But 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.

Petitioner cannot seek refuge in Neri v. National Labor Relations Commission. Unlike in Neri,
petitioner was unable to prove in the instant case that Interserve had substantial capitalization to be
an independent job contractor. In San Miguel Corporation v. MAERC Integrated Services,
Inc.,40 therein petitioner San Miguel Corporation similarly invoked Neri, but was rebuffed by the Court
based on the following ratiocination41 :

Petitioner also ascribes as error the failure of the Court of Appeals to apply the ruling in Neri v.
NLRC. In that case, it was held that the law did not require one to possess both substantial capital
and investment in the form of tools, equipment, machinery, work premises, among others, to be
considered a job contractor. The second condition to establish permissible job contracting was
sufficiently met if one possessed either attribute.

Accordingly, petitioner alleged that the appellate court and the NLRC erred when they declared
MAERC a labor-only contractor despite the finding that MAERC had investments amounting to
₱4,608,080.00 consisting of buildings, machinery and equipment.

However, in Vinoya v. NLRC, we clarified that it was not enough to show substantial capitalization or
investment in the form of tools, equipment, machinery and work premises, etc., to be considered an
independent contractor. In fact, jurisprudential holdings were to the effect that in determining the
existence of an independent contractor relationship, several factors may be considered, such as, but
not necessarily confined to, whether the contractor was carrying on an independent business; the
nature and extent of the work; the skill required; the term and duration of the relationship; the right to
assign the performance of specified pieces of work; the control and supervision of the workers; the
power of the employer with respect to the hiring, firing and payment of the workers of the contractor;
the control of the premises; the duty to supply premises, tools, appliances, materials and labor; and
the mode, manner and terms of payment.

In Neri, the Court considered not only the fact that respondent Building Care Corporation (BCC) had
substantial capitalization but noted that BBC carried on an independent business and performed its
contract according to its own manner and method, free from the control and supervision of its
principal in all matters except as to the results thereof. The Court likewise mentioned that the
employees of BCC were engaged to perform specific special services for their principal. The status
of BCC had also been passed upon by the Court in a previous case where it was found to be a
qualified job contractor because it was a "big firm which services among others, a university, an
international bank, a big local bank, a hospital center, government agencies, etc." Furthermore, there
were only two (2) complainants in that case who were not only selected and hired by the contractor
before being assigned to work in the Cagayan de Oro branch of FEBTC but the Court also found
that the contractor maintained effective supervision and control over them.

Thus, in San Miguel Corporation, the investment of MAERC, the contractor therein, in the form of
buildings, tools, and equipment of more than ₱4,000,000.00 did not impress the Court, which still
declared MAERC to be a labor-only contractor. In another case, Dole Philippines, Inc. v.
Esteva,42 the Court did not recognize the contractor therein as a legitimate job contractor, despite its
paid-up capital of over ₱4,000,000.00, in the absence of substantial investment in tools and
equipment used in the services it was rendering.

Insisting that Interserve had substantial investment, petitioner assails, for being purely speculative,
the finding of the Court of Appeals that the service vehicles and equipment of Interserve, with the
values of ₱510,000.00 and ₱200,000.00, respectively, could not have met the demands of the Coca-
Cola deliveries in the Lagro area.

Yet again, petitioner fails to persuade.

The contractor, not the employee, has the burden of proof that it has the substantial capital,
investment, and tool to engage in job contracting.43 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 ₱510,000.00 and ₱200,000.00, 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.

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.

The Court, however, does not stop at this finding. It is also apparent that Interserve is a labor-only
contractor under Section 5(ii)44 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), pertinent portions of
which are reproduced below:

WHEREAS, the CONTRACTOR is engaged in the business, among others, of performing and/or
undertaking, managing for consideration, varied projects, jobs and other related management-
oriented services;

WHEREAS, the CONTRACTOR warrants that it has the necessary capital, expertise, technical
know-how and a team of professional management group and personnel to undertake and assume
the responsibility to carry out the above mentioned project and services;

WHEREAS, the CLIENT is desirous of utilizing the services and facilities of the CONTRACTOR for
emergency needs, rush jobs, peak product loads, temporary, seasonal and other special project
requirements the extent that the available work of the CLIENT can properly be done by an
independent CONTRACTOR permissible under existing laws and regulations;

WHEREAS, the CONTRACTOR has offered to perform specific jobs/works at the CLIENT as stated
heretofore, under the terms and conditions herein stated, and the CLIENT has accepted the offer.

NOW THEREFORE, for and in consideration of the foregoing premises and of the mutual covenants
and stipulations hereinafter set forth, the parties have hereto have stated and the CLIENT has
accepted the offer:

1. The CONTRACTOR agrees and undertakes to perform and/or provide for the CLIENT, on
a non-exclusive basis for tasks or activities that are considered contractible under existing
laws and regulations, as may be needed by the CLIENT from time to time.

2. To carry out the undertakings specified in the immediately preceding paragraph, the
CONTRACTOR shall employ the necessary personnel like Route Helpers, Salesmen,
Drivers, Clericals, Encoders & PD who are at least Technical/Vocational courses graduates
provided with adequate uniforms and appropriate identification cards, who are warranted by
the CONTRACTOR to be so trained as to efficiently, fully and speedily accomplish the work
and services undertaken herein by the CONTRACTOR. The CONTRACTOR represents that
its personnel shall be in such number as will be sufficient to cope with the requirements of
the services and work herein undertaken and that such personnel shall be physically fit, of
good moral character and has not been convicted of any crime. The CLIENT, however, may
request for the replacement of the CONTRACTOR’S personnel 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.

3. It is agreed and understood that the CONTRACTOR’S personnel will comply with CLIENT,
CLIENT’S policies, rules and regulations and will be subjected on-the-spot search by
CLIENT, CLIENT’S duly authorized guards or security men on duty every time the assigned
personnel enter and leave the premises during the entire duration of this agreement.

4. The CONTRACTOR further warrants to make available at times relievers and/or


replacements to ensure continuous and uninterrupted service as in the case of absences of
any personnel above mentioned, and to exercise the necessary and due supervision over
the work of its personnel.45

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

Also significant was the right of petitioner under paragraph 2 of the Contract to "request the
replacement of the CONTRACTOR’S personnel." True, this right was conveniently qualified by the
phrase "if from its judgment, the jobs or the projects being done could not be completed within the
time specified or that the quality of the desired result is not being achieved," but such qualification
was rendered meaningless by the fact that the Contract did not stipulate what work or job the
personnel needed to complete, the time for its completion, or the results desired. The said provision
left a gap which could enable petitioner to demand the removal or replacement of any employee in
the guise of his or her inability to complete a project in time or to deliver the desired result. The
power to recommend penalties or dismiss workers is the strongest indication of a company’s right of
control as direct employer.46
1av vphil.zw+

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 latter’s 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
Incorporation47 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.48

Given that respondents were illegally dismissed by petitioner, they are entitled to reinstatement, full
backwages, inclusive of allowances, and to their other benefits or the monetary equivalents thereof
computed from the time their compensations were withheld from them up to the time of their actual
reinstatement, as mandated under Article 279 of the Labor Code,.

IN VIEW OF THE FOREGOING, the instant Petition is DENIED. The Court AFFIRMS WITH
MODIFICATION the Decision dated 19 February 2007 of the Court of Appeals in CA-G.R. SP No.
85320. The Court DECLARES that respondents were illegally dismissed and, accordingly, ORDERS
petitioner to reinstate them without loss of seniority rights, and to pay them full back wages
computed from the time their compensation was withheld up to their actual reinstatement. Costs
against the petitioner.

SO ORDERED