Friday, December 31, 2010

Labor-only contracting prohibited.

G.R. No. 186091

G.R. No. 186091
December 15, 2010


x x x.

Petitioners vigorously insist that they were employees of LSC; and that BMSI is not an independent contractor, but a labor-only contractor. LSC, on the other hand, maintains that BMSI is an independent contractor, with adequate capital and investment. LSC capitalizes on the ratiocination made by the CA.

In declaring BMSI as an independent contractor, the CA, in the challenged Decision, heavily relied on the provisions of the Agreement, wherein BMSI declared that it was an independent contractor, with substantial capital and investment.

De Los Santos v. NLRC[18] instructed us that the character of the business, i.e., whether as labor-only contractor or as job contractor, should

be measured in terms of, and determined by, the criteria set by statute. The parties cannot dictate by the mere expedience of a unilateral declaration in a contract the character of their business.

In San Miguel Corporation v. Vicente B. Semillano, Nelson Mondejas, Jovito Remada, Alilgilan Multi-Purpose Coop (AMPCO), and Merlyn N. Policarpio,[19] this Court explained:

Despite the fact that the service contracts contain stipulations which are earmarks of independent contractorship, they do not make it legally so. The language of a contract is neither determinative nor conclusive of the relationship between the parties. Petitioner SMC and AMPCO cannot dictate, by a declaration in a contract, the character of AMPCO's business, that is, whether as labor-only contractor, or job contractor. AMPCO's character should be measured in terms of, and determined by, the criteria set by statute.

Thus, in distinguishing between prohibited labor-only contracting and permissible job contracting, the totality of the facts and the surrounding circumstances of the case are to be considered.

Labor-only contracting, a prohibited act, is an arrangement where the contractor or subcontractor merely recruits, supplies, or places workers to perform a job, work, or service for a principal. In labor-only contracting, the following elements are present: (a) the contractor or subcontractor does not have substantial capital or investment to actually perform the job, work, or service under its own account and responsibility; and (b) the employees recruited, supplied, or placed by such contractor or subcontractor perform activities which are directly related to the main business of the principal.[20]

On the other hand, permissible job contracting or subcontracting refers to an arrangement whereby a principal agrees to put out or farm out with the contractor or subcontractor the performance or completion of a specific job, work, or service within a definite or predetermined period, regardless of whether such job, work, or service is to be performed or completed within or outside the premises of the principal. [21]

A person is considered engaged in legitimate job contracting or subcontracting if the following conditions concur:

(a) The contractor carries on a distinct and independent business and undertakes the contract work on his account under his own responsibility according to his own manner and method, free from the control and direction of his employer or principal in all matters connected with the performance of his work except as to the results thereof;

(b) The contractor has substantial capital or investment; and

(c) The agreement between the principal and the contractor or subcontractor assures the contractual employees' entitlement to all labor and occupational safety and health standards, free exercise of the right to self-organization, security of tenure, and social welfare benefits.[22]

Given the above standards, we sustain the petitioners’ contention that BMSI is engaged in labor-only contracting.

First, petitioners worked at LSC’s premises, and nowhere else. Other than the provisions of the Agreement, there was no showing that it was BMSI which established petitioners’ working procedure and methods, which supervised petitioners in their work, or which evaluated the same. There was absolute lack of evidence that BMSI exercised control over them or their work, except for the fact that petitioners were hired by BMSI.

Second, LSC was unable to present proof that BMSI had substantial capital. The record before us is bereft of any proof pertaining to the contractor’s capitalization, nor to its investment in tools, equipment, or implements actually used in the performance or completion of the job, work, or service that it was contracted to render. What is clear was that the equipment used by BMSI were owned by, and merely rented from, LSC.

In Mandaue Galleon Trade, Inc. v. Andales,[23] we held:

The law casts the burden on the contractor to prove that it has substantial capital, investment, tools, etc. Employees, on the other hand, need not prove that the contractor does not have substantial capital, investment, and tools to engage in job-contracting.

Third, petitioners performed activities which were directly related to the main business of LSC. The work of petitioners as checkers, welders, utility men, drivers, and mechanics could only be characterized as part of, or at least clearly related to, and in the pursuit of, LSC’s business. Logically, when petitioners were assigned by BMSI to LSC, BMSI acted merely as a labor-only contractor.

Lastly, as found by the NLRC, BMSI had no other client except for LSC, and neither BMSI nor LSC refuted this finding, thereby bolstering the NLRC finding that BMSI is a labor-only contractor.

The CA erred in considering BMSI’s Certificate of Registration as sufficient proof that it is an independent contractor. In San Miguel Corporation v. Vicente B. Semillano, Nelson Mondejas, Jovito Remada, Alilgilan Multi-Purpose Coop (AMPCO), and Merlyn N. Policarpio,[24] we held that a Certificate of Registration issued by the Department of Labor and Employment is not conclusive evidence of such status. The fact of registration simply prevents the legal presumption of being a mere labor-only contractor from arising.[25]

Indubitably, BMSI can only be classified as a labor-only contractor. The CA, therefore, erred when it ruled otherwise. Consequently, the workers that BMSI supplied to LSC became regular employees of the latter.[26] Having gained regular status, petitioners were entitled to security of tenure and could only be dismissed for just or authorized causes and after they had been accorded due process.

Petitioners lost their employment when LSC terminated its Agreement with BMSI. However, the termination of LSC’s Agreement with BMSI cannot be considered a just or an authorized cause for petitioners’ dismissal. In Almeda v. Asahi Glass Philippines. Inc. v. Asahi Glass Philippines, Inc.,[27] this Court declared:

The sole reason given for the dismissal of petitioners by SSASI was the termination of its service contract with respondent. But since SSASI was a labor-only contractor, and petitioners were to be deemed the employees of respondent, then the said reason would not constitute a just or authorized cause for petitioners’ dismissal. It would then appear that petitioners were summarily dismissed based on the aforecited reason, without compliance with the procedural due process for notice and hearing.

Herein petitioners, having been unjustly dismissed from work, are entitled to reinstatement without loss of seniority rights and other privileges and to full back wages, inclusive of allowances, and to other benefits or their monetary equivalents computed from the time compensation was withheld up to the time of actual reinstatement. Their earnings elsewhere during the periods of their illegal dismissal shall not be deducted therefrom.

Accordingly, we hold that the NLRC committed no grave abuse of discretion in its decision. Conversely, the CA committed a reversible error when it set aside the NLRC ruling.

WHEREFORE, the petition is GRANTED. The Decision and the Resolution of the Court of Appeals in CA-G.R. SP. No. 103804 are REVERSED and SET ASIDE. Petitioners Emmanuel Babas, Danilo T. Banag, Arturo V. Villarin, Sr., Edwin Javier, Sandi Bermeo, Rex Allesa, and Arsenio Estorque are declared regular employees of Lorenzo Shipping Corporation. Further, LSC is ordered to reinstate the seven petitioners to their former position without loss of seniority rights and other privileges, and to pay full backwages, inclusive of allowances, and other benefits or their monetary equivalent, computed from the time compensation was withheld up to the time of actual reinstatement.

No pronouncement as to costs.