[ G.R. No. 179546, February 13, 2009 ] http://elibrary.judiciary.gov.ph/dtSearch/dtisapi6.dll?cmd=getdoc&DocI...

598 Phil. 909

THIRD DIVISION
[ G.R. No. 179546, February 13, 2009 ]
COCA-COLA BOTTLERS PHILS., INC., PETITIONER, VS. ALAN M.
AGITO, REGOLO S. OCA III, ERNESTO G. ALARIAO, JR., ALFONSO
PAA, JR., DEMPSTER P. ONG, URRIQUIA T. ARVIN, GIL H.
FRANCISCO, AND EDWIN M. GOLEZ,RESPONDENTS.
DECISION

CHICO-NAZARIO, J.:

This is a Petition for Review on Certiorari, under Rule 45 of the Rules of Court, assailing the
Decision[1] dated 19 February 2007, promulgated by the Court of Appeals in CA-G.R. SP
No. 85320, reversing the Resolution[2] 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

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respondents were employees of Interserve who were tasked to perform contracted services in
accordance with the provisions of the Contract of Services[5] 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 P1,439,785.00 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]

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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 Agreement[17] 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 Memorandum[18] 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 Memorandum[19] 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[20] issued by Dy to the personnel of Peerless Integrated Services, Inc.,

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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 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 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.

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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 raised[28]:

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:

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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

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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

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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 Agreement[32] 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 P2,000,000.00.[35] It cites as authority Filipinas Synthetic Fiber
Corp. v. National Labor Relations Commission[36] and Frondozo v. National Labor Relations
Commission,[37] 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. Petitioner also refers to Neri v. National Labor

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Relations Commission[38] 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 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 ratiocination[41]:

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 P4,608,080.00 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

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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 P4,000,000.00 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 P4,000,000.00, 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 P510,000.00 and P200,000.00, 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 P510,000.00 and P200,000.00,
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

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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.

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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

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the removal or replacement of any employee in the guise of his or her inability to complete a
project in time or to deliver the desired result. The power to recommend penalties or dismiss
workers is the strongest indication of a company's right of control as direct employer.[46]

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 Incorporation[47] 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

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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.

Ynares-Santiago, (Chairperson), Austria-Martinez, Nachura, and Peralta, JJ., concur.

[1] Penned by Associate Justice Rosalinda Asuncion-Vicente with Associate Justices Elvi
John S. Asuncion and Enrico M. Lanzanas, concurring. Rollo, pp. 57-69.

[2] Rollo, pp. 152-157.

[3] Id. at 236-242.

[4] CA rollo, pp. 55-69.

[5] Id. at 71-76.

[6] Id. at 78-87.

[7] Id. at 88.

[8] Id. at 89-93.

[9] Id. at 131.

[10] Id. at 94, 97, 100, 103, 106, 109. Only six Personal Data Files were attached to the
Position Paper. Personal Data Files of two of the respondents, Alfonso Paa, Jr. and Edwin
Golez, were not submitted.

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[11] Id at 95-96, 98-99, 101-102, 104-405, 107-108, 110-111. Only six Contracts of
Temporary Employment were attached to the Position Paper. The Contracts for Temporary
Employment of two of the respondents, Alfonso Paa, Jr. and Edwin Golez, were not
submitted.

[12] Id. at 112-130.

[13] Id. at 66-69.

[14] Rollo, pp. 134-149.

[15] Id. at 149-150.

[16] CA rollo, pp. 150-170.

[17] Id. at 186.

[18] Id. at 193.

[19] Id. at 194.

[20] Id. at 195.

[21] Id. at 201-202.

[22] Id. at 196.

[23] Id. at 197.

[24] Rollo, pp.152-156.

[25] Id. at 156.

[26] Id. at 57-68.

[27] CA rollo, pp. 456-457.

[28] Rollo, p. 330.

[29] Filipinas Pre-Fabricated Building Systems (Filsystems), Inc. v. Puente, G.R. No. 153832,
18 March 2005, 453 SCRA 820, 826.

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[30] San Miguel Corporation v. MAERC Integrated Services, Inc., 453 Phil. 543, 566-567
(2003).

[31] Id. at 567.

[32] Rollo, p. 199.

[33] Based on respondents' Personal Data files, which were kept by Interserve, respondent
Regolo Oca worked in Coca-Cola in September 2000 as a salesman and his contract was
renewed three more times until he was dismissed in April 2002. Respondent Ernesto Alario
worked in Coca-Cola in October 2001, and his contract was renewed one more time before
his dismissal in April 2002. Respondent Gil Francisco worked in Coca-cola as a Driver on
August 1998 and later on as leadman in December 1998, and his contract was renewed until
he was dismissed in April 2002. Respondent Arvin Urquia worked as a salesman in Coca-
Cola in October 2001, and his contract was renewed in February 2002 until he was dismissed
in April 2002. Lastly, respondent Alan Agito worked in Coca-Cola as salesman in May 2002,
and his contract was renewed until he was dismissed in April 2002. (CA rollo, pp. 94, 97,
100, 103, 106, and 109.)

[34] Rollo, p. 283.

[35] Id. at 331-338.

[36] 327 Phil. 144 (1996).

[37] CA-G.R. SP No. 102442, 30 May 2008.

[38] G.R. Nos. 97008-09, 23 July 1993, 224 SCRA 717.

[39] CA rollo, p. 78.

[40] Supra note 30.

[41] Id. at 564-566.

[42] G.R. No. 161115, 30 November 2006, 509 SCRA 332, 353 and 377.

[43] Aboitiz Haulers, Inc. v. Dimapatoi, G.R. No. 148619, 19 September 2006, 502 SCRA
271, 289; Guarin v. National Labor Relations Commission, G.R. No. 86010, 3 October 1989,
178 SCRA 267, 273.

[44] According to Section 5 of the Rules Implementing Articles 106-109, as amended:

Section 5. Prohibition against labor-only contracting. Labor-only contracting is hereby

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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 use of the words "any" and "or" in the foregoing provision means that the elements of
labor-only contracting identified therein need not exist concurrently. The existence of one
element is sufficient to establish labor-only contracting.

[45] Rollo, pp. 74-75.

[46] Brotherhood Labor Unity Movement of the Philippines v. Zamora, G.R. No. L-48645, 7
January 1987, 147 SCRA 49, 59.

[47] CA rollo, p. 78.

[48] Abesco Construction and Development Corporation v. Ramirez, G.R. No. 141168, 10
April 2006, 487 SCRA 9, 15; Grandspan Development Corporation v. Bernardo, G.R. No.
141464, 21 September 2005, 470 SCRA 461, 470; Raycor Aircontrol Systems, Inc. v.
National Labor Relations Commission, 330 Phil. 306, 334 (1996).

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