LABOR-ONLY CONTRACTING IS PRESUMED FOR FAILURE TO REGISTER IN THE PROPER REGIONAL OFFICE OF THE DEPARTMENT OF LABOR (DOLE)

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Labor-only contracting is prohibited. Contractors are required to register with the appropriate regional office of the Department of Labor and Employment (DOLE). Failure to register gives rise to the presumption that the contractor is a labor-only contractor. The same effect is found if the registration is made in the DOLE office where the contractor does not operate.

Thus, the SC held in the following case:

Alaska Milk Corporation vs. Paez,
G.R. No. 237277/G.R. No. 237317, November 27, 2019

Labor-only contracting; Registration; Registration with the DOLE Regional Office having jurisdiction; Substantial capital or investment; If the contractor adequately met the capitalization requirement it no longer needed to establish that it possessed investments in the form of tools or equipment; Evidence of substantial capitalization entails that proof of investments in the form of tools, equipment, machineries, or work premises may be dispensed with; If a contractor failed to participate in the appeal, the burden of proof shifts to the principal

Facts:

Petitioner Alaska Milk Corporation (Alaska), is a domestic corporation engaged in the business of manufacturing dairy products, while Petitioner Asiapro Multipurpose Cooperative (Asiapro), is a duly registered cooperative that contracts out the services of its worker-members.

Respondents Ruben P. Paez, Florentino M. Combite, Jr. Sonny O Bate, Ryan R. Medrano, and John Bryan S. Oliver (Paez, et al. collectively) worked as production helpers at Alaska’s San Pedro, Laguna (San Pedro Plan) milk manufacturing plant. All of them were originally members of Asiapro until respondents Bate, Combite, and Oliver transferred to 5S Manpower Services (5S) on June 26, 2013.

Through several Joint Operating Agreements, Asiapro and 5S undertook to provide Alaska with personnel who could perform “auxiliary functions” at the San Pedro plant. By virtue of such agreement, Medrano and Paez, who became members of Asiapro on May 1 and May 4, 2009, respectively, were assigned to work at the San Pedro plant immediately upon he acquisition of their membership. On the other hand, Bate, Combite, and Oliver were assigned to work at the same plant beginning September 2008, June 2010, and May 2007, respectively, and despite their transfer to 5S, they continued to work thereat.

As production helpers, Paez, et al. performed various post-production activities. They prepared raw materials, operated machinery, and monitored the release of defective products. Additionally, they assisted other workers at the San Pedro plant by packaging finished milk products for delivery.

On different dates in 2013, Paez, et al. were informed through separate memoranda that their respective assignments at Alaska were to be terminated later that year. They were then relieved of duty in different dates. Subsequently, Paez and Medrano requested that Asiapro transfer them to a different client-principal, while Bate, Combite, and Oliver made a similar request with 5S.

However, before the cooperatives acted on said requests, Paez, et al. filed with the Labor Arbiter (LA) separate complaints for illegal dismissal, regularization, and payment of money claims. The LA resolved to consolidate the said complaints.

LA Ruling:

The LA dismissed the complaints for lack of merit.

The LA found that Asiapro and 5S had the capacity to carry on an independent business, and that thecooperatives exercised control over Paez, et al through coordinators assigned at the premises of Alaska. Since they were not Alaska’s employees, the LA concluded that there was no illegal dismissal to speak of.

Dissatisfied, Paez, et al. appealed to the National Labor Relations Commission (NLRC).

NLRC Ruling:

The NLRC affirmed the LA’s Decision in toto.

The NLRC held that since Asiapro and 5S had sufficiently established their capacity to carry on an independent business, the cooperatives were engaged in legitimate contracting operations. Further, Paez, et al. were members of 5S and Asiapro and not employees of Alaska

Paez, et al. moved for reconsideration but it was denied. Thus, they filed a petition for certiorari before the Court of Appeals (CA).

CA Ruling:

The CA granted their “appeal” [note: certiorari is not an appeal] and reversed the NLRC’s Resolution.

The CA opined that Asiapro and 5S were engaged in labor-only contracting, and that Paez, et al. were regular employees of Alaska. Further, the two cooperatives lacked investments in the form of tools and equipment, and that the workers they armed out performed functions that were necessary and desirable to Alaska’s operations.

Consequently, Paez, et al. were found to have been illegally dismissed. Disgruntled, Alaska and Asiapro filed a motion for reconsideration which the CA denied. 5S did not take part in the proceedings after the rendition of said decision. Hence, the petitions before the Supreme Court (SC).

Issue/s:

Whether or not the registration with DOLE NCR is proper when the rules mandate that it should have been in the DOLE Regional Office based on cooperative’s principal place of operations in San Pedro, Laguna

Whether or not a DOLE registration made after the deployment of cooperative members is irregular

Whether or not a DOLE registration made after the deployment of cooperative members can be given retroactive effect

Whether or not the irregularities surrounding the DOLE registration gave rise to the presumption of labor-only contracting

Whether or not the presumption of labor-only contracting on the part of Asiapro can be successfully rebutted by compliance with substantial capital or investment, control over the work of its members

SC Ruling:

The SC modified the CA Decision.

The SC cited Article 106 of the Labor Code in defining labor-only contracting as an arrangement where a person without substantial capital or investment in the form of tools, equipment, machinery, or work premises, among other things, supplies workers to an employer, and such workers perform activities directly related to the principal business of the latter.

Nevertheless, not all forms of contracting are prohibited. Job contracting is the permissible yet regulated practice of farming out a specific job or service to a contractor for a definite or predetermined period of time, regardless of whether the contractor’s employees perform their assigned tasks within or outside the principal employer’s premises. The SC added that job contracting is a regulated practice. Accordingly, the law authorizes the Secretary of Labor to promulgate administrative rules that distinguish between valid job contracting and prohibited labor-only contracting, keeping with the fundamental state policy of protecting labor.

In view of the statutory directive to register, the DOLE requires contractors to register themselves with the DOLE Regional Office in which they operate, so as to monitor their compliance with the law’s guiding principles. Failure to comply with the registration requirement gives rise to a presumption that the contractor is engaged in labor-only contracting.

The SC held that Asiapro failed to show that it was registered with the proper DOLE Regional Office. It failed to show that  compliance with the registration requirement. It presented a certificate issued by the National Capital Region (NCR) branch of the ODLE, when it should have instead presented one issued by the DOLE, Region IV-A office, which exercises territorial jurisdiction over the San Pedro Plant.

Further, the registration of Asiapro is irregular since it reveals that Paez, et al.’s assignments at the San Pedro plant antedated Asiapro’s registration with the DOLE. Paez, et al. began working at Alaska’s premises on  various dates from 2007 to 2010, while Asiapro’s certificate of registration was issued only in 2011. For its part, 5S faces the same problem as its registration was only issued in 2014, after Paez, et al. The failure of both to register in accordance with the rules merely gave rise to a presumption of labor-only contracting.

The flaw was not conclusive as to their status as contractors. After all, in distinguishing between permissible job contracting and prohibited labor-only contracting, the totality of the facts and the surrounding circumstances of the case are to be considered, each case to be determined by its own facts, and all the features of the relationship assessed.

The SC found that Asiapro successfully and thoroughly rebutted the presumption while 5S failed to do so. Department Order (D.O.) No. 18-2, Series of 2002, which was effective when Paez, et al. first became worker-members of Asiapro and 5S, and D.O. No. 18-A, Series of 2011, effective during their respective assignments at and separation from Alaska. Unlike the registration requirement, which serves only to raise a disputable presumption of job contracting, the possession of substantial capital or investments is indispensable in proving a contractor’s legitimacy.

D.O. No. 18-A provides a concrete numerical threshold for determining substantial capital. The capitalization requirement is met by corporations, partnerships, and cooperative that have at least PhP3,000,000.00 in paid-up capital stocks/shares. Here, Asiapro was able to prove that it possessed the requisite substantial capital. As of 2010, it had PhP3,130,000.00 in paid-up capital shares. In 2011, it increased to PhP4,000,000.00.

Clearly, therefore, Asiapro adequately met the capitalization requirement found in the rules, and, having done so, it no longer needed to establish that it possessed investments in the form of tools or equipment that facilitated the performance of the Paez, et al.’s work with Alaska. Citing Neri vs. NLRC, the SC held that case law dictates that evidence of substantial capitalization entails that proof of investments in the form of tools, equipment, machineries, or work premises may be dispensed with.

On the part of 5S, it failed to prove that it possessed substantial capital or investments, and since it never bothered to appeal the adverse CA decision, this burden of proof shifted to Alaska. While it shows that 5S had total assets amounting to PhP8,373,044, a sum of assets, without more, is insufficient to prove that an entity is engaged in valid job contracting. In the plain language of D.O. 18-2, such assets must be manifested as investments relating to the job, work, or service to be performed, and as clarified by D.O. No. 18-A, these investments may come in form of tools, equipment, machineries, and work premises, among others.

It was never established that 5S furnished its worker-members with the tools or equipment necessary to carry out the services of a production helper at Alaska’s milk manufacturing plant. This heavily militates against its ability to engage in its own independent business. On this score alone, 5S cannot be considered a legitimate job contractor.

The SC held further that under D.O. 18-2 and D.O. 18-A, the fact that the contractor does not exercise control over its purported employees is another conclusive indicator of labor-only contracting. The most important criterion in determining the existence of an employer-employee relationship is the power to control the means and methods by which employees perform their work.

Pursuant to the so-called “control test,” the employer is the person who has the power to control both the end achieved by his or her employees, and the manner and means they use to achieve that end. It is not essential that the employer actually exercises the power of control, as the ability to wield the same issufficient.

The evidence on record clearly established that Asiapro controlled the means and methods used by its worker-members in carrying out their duties at the San Pedro plant. The Joint Operating Agreement between Alaska and Asiapro unequivocally indicates that the latter retained the right to control the means and methods by which Paez and Medrano performed their work. While the language of the Joint Operating Agreement cannot be determinative of the nature of the relationship between and among the parties thereto, the labor tribunals found that the realities of the workplace operations were such that Asiapro indeed controlled the means and methods utilized by its worker-members at the San Pedro plant.

Persual of the totality of the circumstances surrounding the separate businesses of Asiapro and 5S lends credence to the conclusion that the former is engaged in valid job contracting while the latter is not. Asiapro was clearly able to substantiate its assertion that it carried on its own independent business. Aside from it substantial capital, it showed that its existence began as far back as 199, and that it has since provided services to a noteworthy clientele. This is in stark contrast to the operations of 5S, which was not registered as a cooperative until 2011. Moreover, unlike Asiapro, it was not shown that 5S had clients other than Alaska. Worse, 5S merely has five regular employees, and does not own any tools, machinery, or equipment that is worker-members can use in the performance of their duties. These, taken together, make it highly improbable that 5S had the ability to carry on its own independent business, and are detrimental to the claim that 5S is a legitimate job contractor.

Because of the finding that 5S was engaged in labor-only contracting, Bate, Combite, and Oliver, who were terminated from Alaska due to expiration of contracts with 5S, are, by fiction of law, considered as Alaska’s regular employees. Hence, having been terminated without lawful cause, they are entitled to reinstatement without loss of seniority rights and other privileges, in addition to full backwages, inclusive of allowances and benefits, pursuant to Article 279 of the Labor Code.

On the other hand, Medrano and Paez were not illegally dismissed. In fact, they were not dismissed at all. After their contracts with Alaska expired, they refused to report to Asiapro for reassignment to another client-principal.