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.

D E C I S I O N

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;8 and (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, 21 prepared by RB Chua, another supervisor of
petitioner; (5) Daily Sales Monitoring Report prepared by
petitioner;22 and (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.39 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.

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.461avvphil.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.