Manila Water Co., vs Pena (2004) G.R.

158255
FACTS:
Petitioner Manila Water Company, Inc. is one of the two private concessionaires contracted by the Metropolitan Waterworks and Sewerage System (MWSS) to manage the water
distribution system in the East Zone of Metro Manila.

Under the Concession Agreement, petitioner undertook to absorb former employees of the MWSS whose names and positions were in the list furnished by the latter, while the
employment of those not in the list was terminated. Private respondents, being contractual collectors of the MWSS, were among the 121 employees not included in the list; nevertheless,
petitioner engaged their services without written contract for three months.

Before the end of the three-month contract, the 121 collectors incorporated the Association Collectors Group, Inc. (ACGI), which was contracted by petitioner to collect charges for the
Balara Branch. Subsequently, most of the 121 collectors were asked by the petitioner to transfer to the First Classic Courier Services, a newly registered corporation. Only private
respondents remained with ACGI.

Private respondents filed a complaint for illegal dismissal and money claims against petitioner, contending that they were petitioner’s employees as all the methods and procedures of
their collections were controlled by the latter. Petitioner on the other hand asserts that private respondents were employees of ACGI, an independent contractor. It maintained that it
had no control and supervision over private respondents’ manner of performing their work except as to the results.

Thus, petitioner did not have an employer-employee relationship with the private respondents, but only a service contractor-client relationship with ACGI.

ISSUE: Whether or not ACGI is an independent contractor;

HELD:
ACGI is an independent contractor but a labor- only contractor.
First, ACGI does not have substantial capitalization or investment in the form of tools, equipment, machineries, work premises, and other materials, to qualify as an independent
contractor. While it has an authorized capital stock of P1,000,000.00, only P62,500.00 is actually paid-in, which cannot be considered substantial capitalization.

The 121 collectors subscribed to four shares each and paid only the amount of P625.00 in order to comply with the incorporation requirements. Further, private respondents reported
daily to the branch office of the petitioner because ACGI has no office or work premises. In fact, the corporate address of ACGI was the residence of its president, Mr. Herminio D.
Peña. Moreover, in dealing with the consumers, private respondents used the receipts and identification cards issued by petitioner.

Second, the work of the private respondents was directly related to the principal business or operation of the petitioner. Being in the business of providing water to the consumers in
the East Zone, the collection of the charges therefore by private respondents for the petitioner can only be categorized as clearly related to, and in the pursuit of the latter’s business.
Lastly, ACGI did not carry on an independent business or undertake the performance of its service contract according to its own manner and method, free from the control and
supervision of its principal, petitioner. Prior to private respondents’ alleged employment with ACGI, they were already working for petitioner, subject to its rules and regulations in
regard to the manner and method of performing their tasks.

This form of control and supervision never changed although they were already under the seeming employ of ACGI. Petitioner issued memoranda regarding the billing methods and
distribution of books to the collectors; it required private respondents to report daily and to remit their collections on the same day to the branch office or to deposit them with Bank of
the Philippine Islands; it monitored strictly their attendance as when a collector cannot perform his daily collection, he must notify petitioner or the branch office in the morning of the
day that he will be absent; and although it was ACGI which ultimately disciplined private respondents, the penalty to be imposed was dictated by petitioner as shown in the letters it
sent to ACGI specifying the penalties to be meted on the erring private respondents.

These are indications that ACGI was not left alone in the supervision and control of its alleged employees. Consequently, it can be concluded that ACGI was not an independent
contractor since it did not carry a distinct business free from the control and supervision of petitioner.

Under this factual milieu, there is no doubt that ACGI was engaged in labor-only contracting, and as such, is considered merely an agent of the petitioner. In labor-only contracting,
the statute creates an employer-employee relationship for a comprehensive purpose: to prevent a circumvention of labor laws. The contractor is considered merely an agent of the
principal employer and the latter is responsible to the employees of the labor-only contractor as if such employees had been directly employed by the principal employer. Since ACGI
is only a labor-only contractor, the workers it supplied should be considered as employees of the petitioner.
SAN MIGUEL CORPORATION VS. PROSPERO ABALLA ET. AL.
GR No. 149011
June 28, 2005
Carpio-Morales, J.:
Facts:
San Miguel Corporation (SMC), entered into a one-year Contract of Services with Sunflower Multi-Purpose Cooperative (Sunflower) to be renewed on a month to month basis until
terminated by either party. Under the contract, Sunflower agrees and undertakes to perform and/or provide for the company the following services for the Bacolod Shrimp Processing
Plant: Messengerial/Janitorial, Shrimp Harvesting/Receiving, and Sanitation/Washing/Cold Storage. The cooperative shall employ the necessary personnel and provide adequate
equipment, materials, tools and apparatus, to efficiently, fully and speedily accomplish the work and services undertaken by the cooperative. The cooperative shall have the entire
charge, control and supervision of the work and services. There is no employer-employee relationship between the company and the cooperative, or the cooperative and any of its
members, or the company and any members of the cooperative. The cooperative shall, whenever possible, maintain and keep under its control the premises where the work under
this contract shall be performed. Respondents filed a complaint praying to be declared as regular employees of SMC, with claims for recovery of all benefits and privileges enjoyed by
SMC rank and file employees. Subsequently, they included illegal dismissal as additional cause of action following SMC’s closure of its Bacolod Shrimp Processing Plant which
resulted in the termination of their services. Moreover, SMC insists that respondents are the employees of Sunflower, an independent contractor. On the other hand, respondents
assert that Sunflower is a labor-only contractor.
Issue:
Whether or not Sunflower is an independent contractor?
Decision:
NO. The following considerations affirm by more than substantial evidence the existence of an employer-employee relationship between SMC and respondents: The Contract of
Services between SMC and Sunflower shows that the parties clearly disavowed the existence of an employer-employee relationship between SMC and respondents. The language
of a contract is not, however, determinative of the parties’ relationship; rather it is the totality of the facts and surrounding circumstances of the case. A party cannot dictate, by the
mere expedient of a unilateral declaration in a contract, the character of its business, i.e., whether as labor-only contractor or job contractor, it being crucial that its character be
measured in terms of and determined by the criteria set by statute. What appears is that Sunflower does not have substantial capitalization or investment in the form of tools, equipment,
machineries, work premises and other materials to qualify it as an independent contractor. And from the job description provided by SMC itself, the work assigned to private respondents
was directly related to the aquaculture operations of SMC. Undoubtedly, the nature of the work performed by respondents in shrimp harvesting, receiving and packing formed an
integral part of the shrimp processing operations of SMC. As for janitorial and messengerial services, that they are considered directly related to the principal business of the employer
has been jurisprudentially recognized. Furthermore, Sunflower did not carry on an independent business or undertake the performance of its service contract according to its own
manner and method, free from the control and supervision of its principal, SMC, its apparent role having been merely to recruit persons to work for SMC. Thus, it is gathered from the
evidence adduced by respondents before the LA that their daily time records were signed by SMC supervisors which fact shows that SMC exercised the power of control and
supervision over its employees. And control of the premises in which private respondents worked was by SMC. These tend to disprove the independence of the contractor.

Diamond Farms, Inc. v. SPFL et al.

November 3, 2017
G.R. Nos. 173254-55 & 173263
January 13, 2016
JARDELEZA, J.:

Facts:
DFI owns an 800-hectare banana plantation ("original plantation") in Alejal, Carmen, Davao. Pursuant to Republic Act No. 6657 or the Comprehensive Agrarian Reform Law of 1988
("CARL"), commercial farms shall be subject to compulsory acquisition and distribution, thus the original plantation was covered by the law. DFI offered to give up its rights and interest
over the original plantation in favor of the government by way of a Voluntary Offer to Sell. The DAR accepted DFI's offer to sell the original plantation. Out of the total 800 hectares,
the DAR only approved the disposition of 689.88 hectares.

The awarded plantation was turned over to qualified agrarian reform beneficiaries ("ARBs") under the CARL. These ARBs are the same farmers who were working in the original
plantation. They subsequently organized themselves into a multi-purpose cooperative named "DARBMUPCO," which is one of the respondents in this case.

DARBMUPCO entered into a Banana Production and Purchase Agreement ("BPPA") with DFI. Under the BPPA, DARBMUPCO and its members as owners of the awarded plantation,
agreed to grow and cultivate only high grade quality exportable bananas to be sold exclusively to DPI. The BPPA is effective for 10 years.18

Hampered by lack of manpower to undertake the agricultural operation under the BPPA, DFI engaged the services of the respondent-contractors, who in turn recruited the respondent-
workers to assist DARBMUPCO in meeting its production obligations under the BPPA,
Southern Philippines Federation of Labor ("SPFL")—a legitimate labor organization with a local chapter in the awarded plantation filed a petition for certification election in the Office
of the Med-Arbiter on behalf of some 400 workers (the respondent-workers in this petition) "jointly employed by DFI and DARBMUPCO" working in the awarded plantation.

In another case, SPFL, together with more than 300 workers, filed a case for underpayment of wages, nonpayment of 13th month pay and service incentive leave pay and attorney's
fees against DFI, DARBMUPCO and the respondent-contractors before the National Labor Relations Commission ("NLRC").

DARBMUPCO and DFI denied that they are the employers of the respondent-workers. They claimed, instead, that the respondent-workers are the employees of the respondent-
contractors.

Issue:
Who among DFI,DARBMUPCO and the respondent-contractors is the employer of the respondent-workers?

Ruling:
Petition is denied. Furthermore, the decision of the Court of Appeals declaring DFI to be the employer of respondent-workers is affirmed.

This case involves job contracting, a labor arrangement expressly allowed by law. Contracting or subcontracting is an arrangement whereby a principal (or employer) agrees to put
out or farm out with a 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.

The Omnibus Rules Implementing the Labor Code distinguishes between permissible job contracting (or independent contractorship) and labor-only contracting. Job contracting is
permissible under the Code if the following conditions are met:

(1) The contractor carries on an independent business and undertakes the contract work on his own 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 the work except as to the results thereof; and
(2) The contractor has substantial capital or investment in the form of tools, equipment, machineries, work premises, and other materials which are necessary in the conduct of his
business.

In contrast, job contracting shall be deemed as labor-only contracting, an arrangement prohibited by law, if a person who undertakes to supply workers to an employer:
(1) Does not have substantial capital or investment in the form of tools, equipment, machineries, work premises and other materials; and

(2) The workers recruited and placed by such person are performing activities which are directly related to the principal business or operations of the employer in which workers are
habitually employed.

Based on the conditions for permissible job contracting, we rule that respondent-contractors are labor only contractors.

There is no evidence showing that respondent-contractors are independent contractors. The respondent-contractors, DFI, and DARBMUPCO did not offer any proof that respondent-
contractors were not engaged in labor-only contracting.

Herein respondents, Voltaire Lopez, Jr., et al., were commissioned and contracted by petitioner, Diamond Farms, Inc. (DFI) to recruit farm workers, who are the complaining
[respondent-workers] (as represented by Southern Philippines Federation of Labor (SPFL) in this appeal by certiorari).

Farm tools, implements and equipment necessary to performance of such farm activities were supplied by petitioner DFI. Herein respondents Voltaire Lopez, Jr. et. al. had no adequate
capital to acquire or purchase such tools, implements, equipment, etc.

Herein respondents Voltaire Lopez, Jr., et. al. as well as rcspondents-SPFL, et. al. were being directly supervised, controlled and managed by petitioner DFI farm managers and
supervisors, specifically on work assignments and performance targets.

A finding that a contractor is a labor-only contractor is equivalent to a declaration that there is an employer-employee relationship between the principal, and the workers of the labor-
only contractor; the labor-only contractor is deemed only as the agent of the principal. Thus, in this case, respondent-contractors are the labor-only contractors and either DFI or
DARBMUPCO is their principal.
We hold that DFI is the principal. The records show that it is DFI which hired the individual [respondent-contractors] who in turn hired their own men to work in the 689.88 hectares
land of DARBMUPCO as well as in the managed area of the plantation.

DFI cannot argue that DARBMUPCO is the principal of the respondent-contractors because it (DARBMUPCO) owns the awarded plantation where respondent-contractors and
respondent-workers were working. That DARBMUPCO owns the awarded plantation where the respondent-contractors and respondent-workers were working is immaterial.DFI, as
the principal, hired the respondent-contractors and the latter, in turn, engaged the services of the respondent-workers.

Clearly, DFI is the true employer of the respondent-workers; respondent-contractors are only agents of DFI. Under Article 106 of the Labor Code, DFI shall be solidarily liable with the
respondent-contractors for the rightful claims of the respondent-workers, to the same manner and extent, as if the latter are directly employed by DFI.

Case Title: COCA-COLA BOTTLERS PHILS., INC., Coke, v. 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.
G.R. No. 179546 February 13, 2009
Justice Chico-Nazario

Facts: Coke is a domestic corporation duly registered with the SEC and engaged in manufacturing, bottling and distributing soft drink beverages and other allied products. On 15 April
2002, Agito et al. filed before the NLRC two complaints against Coke, Interserve, Peerless Integrated Services, Inc. (Interserve), Better Builders, Inc., and Excellent Partners, Inc. for
reinstatement with backwages, regularization, nonpayment of 13th month pay, and damages. The two cases were consolidated. Agito et al. alleged that they were salesmen assigned
at the Lagro Sales Office of Coke. They had been in the employ of Coke 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.

Coke averred that Agito et al. were employees of Interserve who were tasked to perform contracted services in accordance with the provisions of the Contract of Services executed
between Coke and Interserve on 23 March 2002. Said Contract between Coke and Interserve, covering the period of 1 April 2002 to 30 September 2002, constituted legitimate job
contracting, given that the Interserve 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, Coke presented the following pieces of evidence: (1) the Articles of Incorporation of Interserve;
(2) the Certificate of Registration of Interserve with the Bureau of Internal Revenue; (3) the Income Tax Return, with Audited Financial Statements, of Interserve for 2001; and (4) the
Certificate of Registration of Interserve as an independent job contractor, issued by DOLE.

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

Coke, thus, sought the dismissal of the 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 Coke and Agito et al.

LA Ruling/Ratio: The Labor Arbiter found that Agito et al. were employees of Interserve and not of Coke. 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 the parties. While Agito et al. performed activities that were necessary and desirable in the usual business
or trade of Coke, the LA underscored that their functions were not indispensable to the principal business of Coke, which was manufacturing and bottling soft drink beverages and
similar products. The LA placed considerable weight on the fact that Interserve was registered with the DOLE as an independent job contractor, with total assets amounting to
P1,439,785.00 as of 31 December 2001. It was Interserve that kept and maintained Agito et al.’s employee records, including their Personal Data Sheets; Contracts of Employment;
and remittances to the SSS, Medicare and Pag-ibig Fund, thus, further supporting the LA’s finding that Agito et al. were employees of Interserve. She ruled that the circulars, rules
and regulations which Coke issued from time to time to Agito et al. were not indicative of control as to make the latter its employees. Nevertheless, the LA directed Interserve to pay
Agito et al. their pro-rated 13th month benefits for the period of January 2002 until April 2002.

Aggrieved, Agito et al. filed an appeal with the NLRC. They maintained that contrary to the finding of the LA, their work was indispensable to the principal business of Coke. They
supported their claim with copies of the Delivery Agreement between Coke and TRMD Incorporated, stating that Coke 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, Coke supplied the tools and equipment used by
Agito et al. in their jobs such as forklifts, pallet, etc. They were also required to work in the warehouses, sales offices, and plants of Coke. They pointed out that, in contrast, Interserve
did not own trucks, pallets cartillas, or any other equipment necessary in the sale of Coca-Cola products.

They further averred that Coke exercised control over workers supplied by various contractors. They cited as an example the case of Raul Arenajo (Arenajo), who, just like them,
worked for Coke, but was made to appear as an employee of the contractor Peerless Integrated Services, Inc. As proof of control by Coke, Agito et al. submitted copies of: (1) a
Memorandum dated 11 August 1998 issued by Vicente Dy (Dy), a supervisor of Coke, 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 Memorandum 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) Memorandum 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, prepared by RB Chua, another
supervisor of Coke; (5) Daily Sales Monitoring Report prepared by Coke; and (6) the Conventional Route System Proposed Set-up of Coke.

NLRC Ruling/Ratio: The NLRC affirmed the LA’s Decision and pronounced that no employer-employee relationship existed between Coke and Agito et al. It reiterated the findings of
the LA 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 Agito
et al. wages, as well as paid and remitted their SSS, Medicare, and Pag-ibig contributions. They likewise failed to convince the NLRC that the instructions issued and trainings
conducted by Coke proved that Coke exercised control over Agito et al. as their employer.

Aggrieved once more, Agito et al. sought recourse with the Court of Appeals.

CA Ruling: CA reversed the NLRC Resolution and ruled that Interserve was a labor-only contractor, with insufficient capital and investments for the services which it was contracted
to perform. With only P510,000.00 invested in its service vehicles and P200,000.00 in its machineries and equipment, Interserve would be hard-pressed to meet the demands of daily
soft drink deliveries of Coke in the Lagro area. The Court Appeals concluded that the respondents used the equipment, tools, and facilities of Coke in the day-to-day sales operations.
Additionally, the CA determined that Coke had effective control over the means and method of Agito et al. work as evidenced by the Daily Sales Monitoring Report, the Conventional
Route System Proposed Set-up, and the memoranda issued by the supervisor of Coke addressed to workers, who, like Agito et al., were supposedly supplied by contractors. The
appellate court deemed that Agito et al., who were tasked to deliver, distribute, and sell Coca-Cola products, carried out functions directly related and necessary to the main business
of Coke. The appellate court finally noted that certain provisions of the Contract of Service between Coke and Interserve suggested that the latter’s undertaking did not involve a
specific job, but rather the supply of manpower.

Issue/s: Whether Interserve is a legitimate job contractor

SC Ruling/Ratio: The relations which may arise in a situation, where there is an employer, a contractor, and employees of the contractor, are identified and distinguished under Article
106 of the Labor Code:
“Article 106. Contractor or subcontractor. - Whenever an employer enters into a contract with another person for the performance of the formers work, the employees of the contractor
and of the latters subcontractor, if any, shall be paid in accordance with the provisions of this Code.

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

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

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

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

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

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

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

Section 5. Prohibition against labor-only contracting. Labor-only contracting is hereby declared prohibited. For this purpose, labor-only contracting shall refer to an arrangement where
the contractor or subcontractor merely recruits, supplies, or places workers to perform a job, work or service for a principal, and any of the following elements are [is] present:

i) The contractor or subcontractor does not have substantial capital or investment which relates to the job, work, or service to be performed and the employees recruited,
supplied or placed by such contractor or subcontractor are performing activities which are directly related to the main business of the principal; or

ii) The contractor does not exercise the right to control the performance of the work of the contractual employee.

The foregoing provisions shall be without prejudice to the application of Article 248(C) of the Labor Code, as amended.

Substantial capital or investment refers to capital stocks and subscribed capitalization in the case of corporations, tools, equipment, implements, machineries and work premises,
actually and directly used by the contractor or subcontractor in the performance or completion of the job, work, or service contracted out.

The right to control shall refer to the right reversed to the person for whom the services of the contractual workers are performed, to determine not only the end to be achieved, but
also the manner and means to be used in reaching that end. (Emphasis supplied.)

When there is labor-only contracting, 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.

Coke argues that there could not have been labor-only contracting, since Agito et al. did not perform activities that were indispensable to its principal business. And, even assuming
that they did, such fact alone does not establish an employer-employee relationship between Coke and Agito et al., since they were unable to show that Coke exercised the power to
select and hire them, pay their wages, dismiss them, and control their conduct. But the SC is not convinced. The law clearly establishes an employer-employee relationship between
the principal employer and the contractors employee upon a finding that the contractor is engaged in labor-only contracting. Article 106 of the Labor Code categorically states: There
is labor-only contracting where the person supplying workers to an employee does not have substantial capital or investment in the form of tools, equipment, machineries, work
premises, among others, and the workers recruited and placed by such persons are performing activities which are directly related to the principal business of such employer. Thus,
performing activities directly related to the principal business of the employer is only one of the two indicators that labor-only contracting exists; the other is lack of substantial capital
or investment. The Court finds that both indicators exist in the case at bar.

Agito et al. worked for Coke as salesmen, with the exception of respondent Gil Francisco whose job was designated as leadman. In the Delivery Agreement between Coke and TRMD
Incorporated, it is stated that Coke is engaged in the manufacture, distribution and sale of softdrinks and other related products. The work of Agito et al., constituting distribution and
sale of Coca-Cola products, is clearly indispensable to the principal business of Coke. The repeated re-hiring of some of the Agito et al. supports this finding. Coke also does not
contradict Agito et al.’s allegations that the former has Sales Departments and Sales Offices in its various offices, plants, and warehouses; and that Coke hires Regional Sales
Supervisors and District Sales Supervisors who supervise and control the salesmen and sales route helpers.
As to the supposed substantial capital and investment required of an independent job contractor, Coke calls the attention of the Court to the authorized capital stock of Interserve
amounting to P2,000,000.00. It cites as authority Filipinas Synthetic Fiber Corp. v. NLRC and Frondozo v. NLRC, where the contractors authorized capital stock of P1,600,000.00 and
P2,000,000.00, respectively, were considered substantial for the purpose of concluding that they were legitimate job contractors. Coke also refers to Neri v. NLRC 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 P2,000,000.00, only P625,000.00 thereof was paid up as of 31 December 2001.
The Court does not set an absolute figure for what it considers substantial capital for an independent job contractor, but it measures the same against the type of work
which the contractor is obligated to perform for the principal. However, this is rendered impossible in this case since the Contract between Coke 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, Coke carefully sidesteps identifying or describing the exact nature of the services that Interserve was obligated to render to
Coke. The importance of identifying with particularity the work or task which Interserve was supposed to accomplish for Coke becomes even more evident, considering that the Articles
of Incorporation of Interserve states that its primary purpose is to operate, conduct, and maintain the business of janitorial and allied services. But Agito et al. were hired as salesmen
and leadman for Coke. 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 Coke.

In Vinoya v. NLRC, the Court 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.

Insisting that Interserve had substantial investment, Coke assails, for being purely speculative, the finding of the Court of Appeals that the service vehicles and equipment of Interserve,
with the values of P510,000.00 and P200,000.00, respectively, could not have met the demands of the Coca-Cola deliveries in the Lagro area.
Coke fails to persuade the Court.

The contractor, not the employee, has the burden of proof that it has the substantial capital, investment, and tool to engage in job contracting. Although not the contractor
itself (since Interserve no longer appealed the judgment against it by the Labor Arbiter), said burden of proof herein falls upon Coke who is invoking the supposed status of Interserve
as an independent job contractor. Noticeably, Coke failed to submit evidence to establish that the service vehicles and equipment of Interserve, valued at P510,000.00 and P200,000.00,
respectively, were sufficient to carry out its service contract with Coke. Certainly, Coke 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 Coke, 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 Coke. 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 Agito et al. can be gleaned from the Contract of Services between Interserve (as the CONTRACTOR) and Coke (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 CONTRACTORS 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 CONTRACTORS personnel will comply with CLIENT, CLIENTS policies, rules and regulations and will be subjected on-the-spot search by
CLIENT, CLIENTS 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.

Paragraph 3 of the Contract specified that the personnel of contractor Interserve, which included Agito, et al., would comply with CLIENT as well as CLIENTs policies, rules and
regulations. It even required Interserve personnel to subject themselves to on-the-spot searches by Coke or its duly authorized guards or security men on duty every time the said
personnel entered and left the premises of Coke. Said paragraph explicitly established the control of Coke over the conduct of Agito et al. 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 Agito et al. or the manner in which it was actually exercised. There is even no showing that Interserve had representatives who supervised
their work while they were in the premises of Coke.

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

Paragraph 4 of the same Contract, in which Interserve warranted to Coke 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 Coke 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 Coke (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 Coke and would still pick out such personnel based on the criteria provided by Coke. In other words, Interserve did not obligate itself to perform an identifiable
job, work, or service for Coke, 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 Coke with workers performing tasks directly related to the latters 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 Incorporation of Interserve is misleading. According to its Articles of Incorporation, the principal business of Interserve is to provide janitorial and allied services. The delivery
and distribution of Coca-Cola products, the work for which Agito et al. were employed and assigned to Coke, 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, Coke shall be deemed the true employer of Agito et al. As regular employees of Coke, they 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 Coke against the charge of illegal dismissal being
that they were not its employees. Records also failed to show that Coke afforded Agito et al. the twin requirements of procedural due process, i.e., notice and hearing, prior to their
dismissal. They 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, their dismissal was not carried out in accordance with law and, therefore, illegal.

Given that they were illegally dismissed by Coke, 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,.

Dispositive Portion: 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.

National Food Authority (NFA) v. Masada Security Agency, Inc.

453 SCRA 70 (March 8, 2005)

Facts:
Masada entered into a 1 year contract to provide security services to NFA-REGION 1. Upon the expiration of the said contract, the parties extended the effectivity thereof on a monthly
basis under same terms and condition.

The Regional Tripartite Wages and Productivity Board (RTWPB) issued wage orders mandating increases in the daily wage rate. Masada requested NFA to increase the of the monthly
contract rate1. NFA only granted the request only with respect to the increase in daily wage

Respondent filed a case for recovery of sum of money against NFA with the RTC.

NFA CONTENTION: Respondent cannot demand an adjustment on the said salary benefits because it is bound by their contract expressly limiting NFA’s obligation to pay only the
increment in the daily wage.

Pre-trial Issue: WON respondent is entitled to recover from NFA wage related benefits of the security guards.

RTC Ruling: NFA is liable to pay the security guards’ wage related benefits pursuant to RA 6727, because the basis of the computation of said benefits, like overtime pay, holiday
pay, SSS and Pag-ibig premium, is the increased minimum wage. It also found NFA liable for the consequential adjustments in administrative costs and margin.

NFA appealed to the Court of Appeals but was dismissed

ISSUE(Supreme Court): WON the liability of principals in service contracts under Section 6 of RA 6727 and the wage orders issued by the RTWPB is limited only to the increment in
the minimum wage.

HELD/ RULING:

Payment of the increases in the wage rate of workers is ordinarily shouldered by the employer. Section 6 of RA 6727, however, expressly lodged said obligation to the principals or
indirect employers in construction projects and establishments providing security, janitorial and similar services.

1
Consisting of: (1)daily minimum wage of the security guards; (2) overtime pay; (3) holiday pay (4)13 th month pay; (5) holiday and rest day pay; (6) Social Security System [SSS];
(7) Pag-ibig premiums as well as administrative costs and margin.
The court found merit in NFA’s contention that its additional liability under the aforcited provision is only limited to the payment of the increment in the statutory minimum
wage rate i.e. the rate for a regular eight (8) hour work day.

Expresio unius est exclusio alterius. Where a statute, by its terms, is expressly limited to certain matters, it may not, by interpretation or construction, be extended to others. Since the
increase in wage referred to in Section 6 pertains to the “statutory minimum wage” as defined herein, principals in service contracts cannot be made to pay the corresponding wage
increase in the overtime pay, night shift differential, holiday and rest day pay, premium pay and other benefits granted to workers. While basis of said remuneration and benefits is the
statutory minimum wage, the law cannot be unduly expanded as to include those not stated in the subject provision.

Moreover, the law secures the welfare of the workers by imposing a solidary liability on principals and the service contractors. Under the second sentence of Section 6 of RA 6727, in
the event that the principal or client fails to pay the prescribed wage rates, the service contractor shall be held solidarily liable with the former.

The parties therefore acknowledged the application to their contract of the wage orders issued by the RTWPB pursuant to RA 6727. There being no assumption by NFA of a greater
liability than that mandated by Section 6 of the Act, its obligation is limited to the payment of the increased statutory minimum wage rates which, as admitted by respondent, had
already been satisfied by NFA. Under Article 1231 of the Civil Code, one of the modes of extinguishing an obligation is by payment. Having discharged its obligation to
respondent, NFA no longer have a duty that will give rise to a correlative legal right of respondent. The latter’s complaint for collection of remuneration and benefits
other than the increased minimum wage rate, should therefore be dismissed for lack of cause of action.

WHEREFORE, the petition is GRANTED. The February 12, 2004 decision and the April 30, 2004 resolution of the Court of Appeals which dismissed petitioner National Food Authority’s
appeal and motion for reconsideration, respectively, in CA-G.R. CV No. 76677, are REVERSED and SET ASIDE. The complaint filed by respondent MASADA Security Agency, Inc.,
docketed as Civil Case No. Q-01-43988, before the Regional Trial Court of Quezon, City, Branch 83, is ordered DISMISSED.

Art.1231. Obligations are extinguished:

1. By payment or performance;
2. By loss of the thing due;
3. By the condonation or remission of the debt;
4. By confusion or merger of the rights of the creditor
and debtor;
5. By compensation
6. By novation
Other causes of extinguishment of obligations, such as
annulment, rescission, fulfillment of a resolutory condition, and
prescription, are governed elsewhere in this Code.