PAL v. Enrique Ligan et al.

February 29, 2008| Carpio-Morales, J.

By: Justin
SUMMARY:

PAL and SYNERGY entered into an agreement for the performance

of work for PAL. It was stated in the agreement that the workers
provided by Synergy would not be considered as regular employees
of PAL. The workers were dismissed and filed complaint for
underpayment and regularization among others. PAL argued that
they were not regular employees since Synergy was a legitimate
contractor. Court ruled in favor of the workers. SC held that
although it was expressly stated in the agreement, the totality of
the facts and surrounding circumstances should determine the
relationship between PAL and the workers. SC relied on the
elements provided for in Sec. 5 of DO 18-02 to determine if there
was labor-only contracting. PAL failed to prove that Synergy had
substantial capital or investment and that the facts of the case
showed that the workers were placed under the control of PALs
managers and supervisors. Hence the workers should be
considered as regular employees of PAL.
DOCTRINE:
- For labor-only contracting to exist, Section 5 of D.O. No. 1802 which requires any of two elements to be present
o (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
o (ii) The contractor does not exercise the right to
control over the performance of the work of the
contractual employee.
- "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 reserved 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.

FACTS:
PAL as owner and Synergy Services Corporation as
contractor entered into an agreement whereby Synergy
undertook to prvied loading, unloading, delivery of baggage
and cargo and other related services to and from PALs
aircraft at the mactan station
The agreement expressly provided that Synergy was an
independent contractor and that there would be no
employer-employee relationship between Synergy and/or its
employees on the one hand and PAL on the other
Except for Benedicto Auxtero, the rest of the respondents
filed complaints before the NLRC Regional Office VII at Cebu
City against PAL, Synergy and their respective officials for
underpayment, non-payment of premium pay for holidays,
premium pay for rest days, SILP, 13th month pay and
allowances and for regularization of employment status with
PAL. They claimed that they had been performing duties for
the benefit of PAL since their job is directly connected with
PALs business
Auxtero initially filed a complaint against PAL and Synergy
for regularization but later alleged that he was without valid
ground, verbally dismissed, and then he filed a complaint
against PAL and Synergy and their respective officials for
illegal dismissal and reinstatement with full backwages. The
complaints of the respondents were consolidated
LA Dominador Almirante found Synergy an independent
contractor and dismissed the complaint for regularization
against PAL but granted their money claims
NLRC vacated the said decision on appeal and held that
Snergy was a labor-only contractor and ordered PAL to
accept as its regular employees all the complainants and to
give them the salaries and allowances and other
employment benefits and privileges of a regular employee
under the CBA. It also declared the dismissal of Auxtero
illegal and ordered reinstatement with PAL
PAL filed a petition for certiorari before the SC. But because
of the St. Martin ruling, it was referred to the CA. CA then
affirmed the NLRC decision. MR denied hence this petition.

ISSUES/HELD:
Whether Synergy is a mere job-only contractor or a legitimate
contractor. Synergy was a Labor only contractor
RATIO:

Pal argued that the law does not prohibit employer from
engaging an independent contractor like Synergy, which has
substantial capital to perform specific jobs. That the fact
that it is contracting out to synergy various services which
are directly related to its business does not make the
respondents its employees. It also alleged that the 4
elements of an employer-employee relationship was not
present in this case. Finally that reinstatement had been
rendered impossible because it had reduced its personnel
due to the heavy losses it had and that it actually
terminated the contract with Synergy as a cost-saving
measure
The statutory basis of a legitimate contracting or
subcontracting is provided in Art. 106 of the labor code.
Legitimate contracting and labor-only contracting are
defined in DO 18-02 Series of 2002 (rules implementing art.
105-109 of the labor code)1
Substantial Capital or investment and the right to
control are defines in the same sec. 5 of the DO

Section 3. Trilateral relationship in contracting arrangements. In

legitimate contracting, there exists a trilateral relationship under
which there is a contract for a specific job, work or service between
the principal and the contractor or subcontractor, and a contract of
employment between the contractor or subcontractor and its
workers. Hence, there are three parties involved in these
arrangements, the principal which decides to farm out a job or
service to a contractor or subcontractor, the contractor or
subcontractor which has the capacity to independently undertake
the performance of the job, work or service, and the contractual
workers engaged by the contractor or subcontractor to accomplish
the job, work or service.
Section 5. Prohibition against labor-only contracting. Labor-only
contracting is hereby declared prohibited. For this purpose, laboronly 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 [sic] 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 over
the performance of the work of the contractual employee.

"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.
o right to control" shall refer to the right reserved 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
from the records of the case it is shown that the work
performed by almost all the respondents is directly related
to the main business of PAL and the equipment used were
owned by PAL
PAL argues that mere compliance with substantial capital
requirement suffices for synergy to be considered a
legitimate contractor. It cited Neri v. NLRC. However the
court ruled that in the cited case the contractor was shown
to have a capital stock of P1M fully subscribed and paid for
and the status of it being an independent contractor had
been previously confirmed in an earlier case.
o However in this case, PAL failed to provide evidence
that Synergy has a substantial capital to engage in
legitimate contracting. It was only after the CA
rendered its decision when PAL in its MR sought to
prove it by attaching photocopies of Synergys
financial statements
o Also the respondents worked alongside the regular
employees of PAL. This is an indicium of labor-only
contracting
For labor-only contracting to exist, Section 5 of D.O. No. 1802 which requires any of two elements to be present
o (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
o (ii) The contractor does not exercise the right to
control over the performance of the work of the
contractual employee.
Even if only one is present, there is labor-only contracting.
o

One who claims to be an independent contractor has to

prove that he contracted to do the work according to his
own methods and without being subject to the employer's
control except only as to the results
PAL claimed that it was Synergys supervisors who actually
supervised the respondents, however it failed to identify
who were these supervisors
The agreement itself runs counter to this claim by PAL since
it expressly stated that the workers wer to comply with PALs
rules, regulations, procedures and riectives relative to the
safety and security of PALs premises, it also provided that
the IDs provided by synergy needed to be countersigned by
PAL and their uniforms needed to be approved by PAL. PAL
may also require Synergy to dismiss immediately and
prohibit entry to PALs premises any worker who in PALs
opinion is incompetent or does not comply with PALs
reasonable instructions
o PAL did not deny that it fixes the work schedule of
the respondents. NLRC also found that PALs
managers
and
supervisors
approved
the
respondents
weekly
work
assignments
and
respondents and regular PAL employees were
collectively called station attendants
Respondents having performed tasks which are usually
necessary and desirable in the air transportation business of
petitioner, they should be deemed its regular employees
and Synergy as a labor-only contractor
Although there was an express provision against this in the
agreement the court held that it is the totality of the facts
surrounding circumstances of the case which should
determine the relationship.
With regard to Auxterio PAL failed to prove that he
abandoned his work. PAL failed to prove elements of
abandonment: (1) the failure to report for work or absence
without valid or justifiable reason, and (2) a clear intention
to sever the employer-employee relationship manifested by
some overt acts
Auxterio a regular employee found to be illegally dismissed
should be entitled to salary differential from the time he
rendered one year service until dismissal, reinstatement
plus backwages. But since a long period of time has elapsed
since his dismissal it would be appropriate to award
separation pay instead of reinstatement (1 month salary per
year of service)
As for the respondents, PAL was ordered to accept them as
its regular employees and to give each of them the salaries,

allowances and other employment benefits and privileges of

a regular employee. Other than the bare allegations of PAL
that it could not comply with this order, theres no evidence
to substantiate this claim. PAL failed to raise this in its
memo before the CA. IT also terminated the contract with
synergy in disregard of a subsisting TRO to preserve status
quo.
- Respondents having been declared regular employees,
Synergy being a mere agent of PAL, had acquired security of
tenure, they could only be dismissed on the basis of just or
authorized cause and with observance of procedural due
process
Court of Appeals Decision of September 29, 2000 is AFFIRMED
with MODIFICATION. There being no data from which this Court
may determine the monetary liabilities of petitioner, the case is
REMANDED to the Labor Arbiter solely for that purpose.