Substantial investment in form of tools, equipment, machineries, work premises, among others, is one of the requirements for permissible contracting to exist.

If the premises being leased are not actually and directly used in the performance of the job contracted out then they cannot prove substantial investment.

The SC held in the following case as follows:

Petron Corporation vs. Armz Caberte, et al.

G.R. No. 182255, June 15, 2015

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On various dates from 1979 to 1998, Respondents Caberte, et al. were hired to work at Petron’s Bacolod Bulk Plant in San Patricio, Bacolod City, Negros Occidental as LPG/Gasul fillers, maintenance crew, warehousemen, utility workers and tanker receiving crew.

For the periods from March 1, 1996 to February 28, 1999 and November 1, 1996 to June 30, 1999, Petron and ABC, a labor contracting business owned and operated by Caberte Sr., entered into a Contract for Services and a Contract for LPG Assistance Services. Under both service contracts, ABC undertook to provide utility and maintenance services to Petron in its Bacolod Bulk Plant.

Caberte, Caberte Jr., Servicio, Develos, Gestupa, Ponteras, Blanco and Mariano filed before the Labor Arbiter a Complaint for illegal dismissal, among others, against Petron, ABC and Caberte Sr. Subsequently, Caberte, et al. Galorosa and Te separately filed similar Complaints. The three Complaints were consolidated by the Labor Arbiter.

Caberte, et al. averred that even before Petron engaged ABC as contractor in 1996, most of them had already been working for Petron for years. However, every time Petron engages a new contractor, it would designate such new contractor as their employer. Despite such arrangement, Petron exercised control and supervision over their work, the performance of which is necessary and desirable in its usual trade and business. Caberte, et al. added that ABC is a mere labor-only contractor which had no substantial capital and investment, and had no control over the manner and method on how they accomplished their work. Thus, Petron is their true employer.

On July 1, 1999, however, Petron no longer allowed them to enter and work in the premises of its Bacolod Bulk Plant. Hence, the complaints for illegal dismissal.

Petron asserted that ABC is an independent contractor which supplied the needed manpower for the maintenance of its bulk handling premises and offices, as well as for tanker assistance in the receiving and re-filling of its LPG products; that among the workers supplied by ABC were Caberte, et al., except Caberte Jr., who does not appear to be one of those assigned by ABC to work for it; that it has no direct control and supervision over Caberte, et al. who were tasked to perform work required by the service contracts it entered into with ABC; and, that it cannot allow the continuous employment of Caberte, et al. beyond the expiration of the contracts with ABC.

To prove the legitimacy and capacity of ABC as an independent contractor, Petron submitted the several documents, foremost of which were ABC’s Audited Financial Statements for the years 1992, 1993 and 1994, to prove substantial capitalization.

In addition, Petron averred that ABC, as a contractor, had duly posted a performance bond and took out insurance policies against liabilities. Petron likewise presented affidavits of two Petron employees stating that Caberte, et al. do not perform activities related to Petron’s business operation but only tasks which are intermittent and which can be contracted out.

Also submitted by Petron were affidavits of three former employees of ABC attesting to the fact that during their stint in Petron, they used materials such as floor polisher, floor wax, broom, dustpan, cleaning rags and other equipment owned by ABC to accomplish their tasks and that they worked under the supervision of Caberte Sr., through the latter’s designated overall supervisor, respondent Caberte.

Petron further revealed that ABC/Caberte Sr. has the power to hire and fire Caberte, et al. and was the one paying their wages.

LA Ruling:

The Executive Labor Arbiter held that ABC is an independent contractor that has substantial capital and that Caberte, et al. were its employees. He likewise ruled that ABC’s cessation of operation is a force majeure that justifies Caberte, et al.’ dismissal.

Caberte, et al. appealed to the NLRC where they insisted that they are regular employees of Petron since ABC is a labor-only contractor.

NLRC Ruling:

The NLRC affirmed the ruling of the Labor Arbiter after it found that ABC is not a mere labor contractor but a legitimate independent contractor. In so ruling, the NLRC took into account the following: (1) ABC/Caberte Sr. has the power of control over Caberte, et al. as Caberte Sr. was the one controlling and supervising Caberte, et al. in their work. While Petron intervened at times, the same was limited to safety precautions due to the hazardous nature of the products the workers were dealing with; (2) ABC possessed sufficient capital and equipment per the various documents that Petron submitted showing the former’s financial capability to maintain its status as an accredited contractor of the latter. In fact, Caberte Sr. was even able to establish ABC’s Bacolod City Office; and, (3) ABC/Caberte Sr. has the power to hire and dismiss Caberte, et al.

Caberte, et al. filed a Motion for Reconsideration which was, however, denied by the NLRC.

CA Ruling:

The CA found merit in Caberte, et al.’s Petition.

It ruled that ABC is engaged in labor-only contracting because: first, it did not have substantial capital or investment in the form of tools, equipment, implements, machineries and work premises, actually and directly used in the performance or completion of the job it contracted out from Petron; second, the work assigned to Caberte, et al. were directly related to Petron’s business; and, third, the nature of Petron’s business requires it to exercise control over the performance of Caberte, et al.’s work.

Consequently, the CA declared Caberte, et al. as Petron’s regular employees. And since Petron did not comply with the requirements under the Labor Code when it terminated their employment, Caberte, et al. were illegally dismissed and therefore entitled to reinstatement without loss of seniority rights and other privileges, with the alternative relief of separation pay in lieu of reinstatement, and to full backwages, inclusive of allowances, and to other benefits or their monetary equivalent computed from the time compensation was withheld up to the time of actual reinstatement.

Petron’s Motion for Reconsideration was denied by the CA. Hence, this present recourse.


Whether or not Financial Statements of the contractor pertaining to years not covered by the contract can establish substantial capitalization

Whether or not lease of the premises by the contractor can establish investment to carry out valid contracting

Whether or not there is labor-only contracting

SC Ruling:

The SC found merit in the petition.

The SC held that as defined under Article 106 of the Labor Code, labor-only contracting, a prohibited act, is an arrangement where the contractor, who does not have substantial capital or investment in the form of tools, equipment, machineries, work premises, among others, supplies workers to an employer and the workers recruited are performing activities which are directly related to the principal business of such employer.

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

A person is considered engaged in legitimate job contracting or subcontracting if the following conditions concur: (a) the contractor carries on a distinct and independent business and partakes the contract work on his account under his own responsibility according to his own manner and method, free from the control and direction of his employer or principal in all matters connected with the performance of his work except as to the results thereof; (b) the contractor has substantial capital or investment; and (c) the agreement between the principal and the contractor or subcontractor assures the contractual employees’ entitlement to all labor and occupational safety and health standards, free exercise of the right to self-organization, security of tenure, and social welfare benefits.

As for the financial statements presented, the SC observed that only the audited financial statements of ABC for the years 1992, 1993 and 1994 were submitted. These documents cannot be given much credence considering that the service contracts between Petron and ABC commenced in 1996 and ended in 1999. However, no audited financial statements for the years material to this case (1996, 1997, 1998 and 1999) were submitted.

Also, as per record, ABC was obligated to submit to Petron at least once every two years its latest audited financial statements, among others, as a requirement for the retention of its status as an accredited contractor of Petron. If it is true that ABC continued to possess its financial qualification after 1994, Petron should have presented ABC’s financial statements for the said years which are presumed to be in Petron’s possession considering that they are part of the requirements that it itself set for its accredited contractors.

Anent substantial investment in the form of equipment, tools, implements, machineries and work premises, Petron likewise failed to show that ABC possessed the same. Instead, what is evident in the records was that ABC had been renting a forklift from Petron in order to carry out the job of Caberte, et al. This only shows that ABC does not own basic equipment needed in the performance of Caberte, et al.’s job.

The fact that ABC leased a property for the establishment of its Bacolod office is immaterial since it was not shown that it was used in the performance or completion of the job contracted out. “Substantial capital or investment,” under Section 5, Rule VIII-A, Book III of the Omnibus Rules Implementing the Labor Code (Implementing Rules), as amended by Department Order No. 18-02,49 does not include those which are not actually and directly used in the performance of the job contracted out.

As to the work performed, the SC held that “the repeated and continuing need for the performance of the job is sufficient evidence of the necessity, if not indispensability of the activity to the business.

The SC found that Petron admitted in its Position Paper that the supervision of a Petron employee is required over LPG and tanker assistance jobs for inventory control and safety checking purposes. Petron explained that due to the hazardous nature of its products, constant checking of the procedures in their handling is essential considering the high possibility of fatal accidents. It also admitted that it was the one supplying the needed materials and equipment in discharging these functions to better insure the integrity, quality and safety of its products.

With such admission the SC held that Petron had the power of control over Caberte, et al. in the performance of their work. The power of control merely calls for the existence of the right to control and not necessarily the exercise thereof.

The SC concluded finally that Petron failed to discharge its burden of proving that ABC is not a labor-only contractor. Consequently, and as warranted by the facts, the SC declared ABC as a mere labor-only contractor. “A finding that a contractor is a ‘labor-only’ contractor is equivalent to declaring that there is an employer-employee relationship between the principal and the employees of the supposed contractor, and the ‘labor-only’ contractor is considered as a mere agent of the principal, the real employer.”

Accordingly in this case, Petron is declared to be the true employer of Caberte, et al. who are considered regular employees in view of the fact that they have been regularly performing activities which are necessary and desirable to the usual business of Petron for a number of years.

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