EMPLOYER-EMPLOYEE RELATIONSHIP B. Independent Contractors and Labor-Only Contractors Labor Code: Art. 106-109 Art. 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 and Employment 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 restricting, 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 employer 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 person 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. Art. 107. Indirect employer. The provisions of the immediately preceding article shall likewise apply to any person, partnership, association or corporation which, not being an employer, contracts with an independent contractor for the performance of any work, task, job or project. Art. 108. Posting of bond. An employer or indirect employer may require the contractor or subcontractor to furnish a bond equal to the cost of labor under contract, on condition that the bond will answer for the wages due the employees should the contractor or subcontractor, as the case may be, fail to pay the same. Art. 109. Solidary liability. The provisions of existing laws to the contrary notwithstanding, every employer or indirect employer shall be held responsible with his contractor or subcontractor for any violation of any provision of this Code. For purposes of determining the extent of their civil liability under this Chapter, they shall be considered as direct employers.

Department Order No. 18, series of 2002 DEPARTMENT ORDER NO. 18 02 (Series of 2002) RULES IMPLEMENTING ARTICLES 106 TO 109 OF THE LABOR CODE, AS AMENDED By virtue of the power vested in the Secretary of Labor and Employment under Articles 5 (Rule-making) and 106 (Contractor or Subcontractor) of the Labor Code of the Philippines, as amended, the following regulations governing contracting and subcontracting arrangements are hereby issued: Section 1. Guiding principles. Contracting and subcontracting arrangements are expressly allowed by law and are subject to regulation for the promotion of employment and the observance of the rights of workers to just and humane conditions of work, security of tenure, self-organization, and collective bargaining. Labor-only contracting as defined herein shall be prohibited. Section 2 . Coverage. These Rules shall apply to all parties of contracting and subcontracting arrangements where employer-employee relationship exists. Placement activities through private recruitment and placement agencies as governed by Articles 25 to 39 of the Labor Code are not covered by these Rules. Section 3. Trilateral Relationship in Contracting Arrangements. In legitimate contracting, there exists a trilateral relationship under which there is a contract for a specific job, work or service between the principal and the contractor or subcontractor, and a contract of employment between the contractor or subcontractor and its workers. Hence, there are three parties involved in these arrangements, the principal which decides to farm out a job or service to a contractor or subcontractor, the contractor or subcontractor which has the capacity to independently undertake the performance of the job, work or service, and the contractual workers engaged by the contractor or subcontractor to accomplish the job work or service. Section 4. Definition of Basic Terms. The following terms as used in these Rules, shall mean: (a) Contracting or subcontracting refers to an arrangement whereby a principal 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. (b) Contractor or subcontractor refers to any person or entity engaged in a legitimate contracting or subcontracting arrangement. (c) Contractual employee includes one employed by a contractor or subcontractor to perform or complete a job, work or service pursuant to an arrangement between the latter and a principal. (d) Principal refers to any employer who puts out or farms out a job, service or work to a contractor or subcontractor.

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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 present: (i) The contractor or subcontractor does not have substantial capital or investment which relates to the job, work or service to be performed and the employees recruited, supplied or placed by such contractor or subcontractor are performing activities which are directly related to the main business of the principal; or (ii) the contractor does not exercise the right to control over the performance of the work of the contractual employee. 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 reserved to the person for whom the services of the contractual workers are performed, to determine not only the end to be achieved, but also the manner and means to be used in reaching that end. Section 6. Prohibitions. Notwithstanding Section 5 of these Rules, the following are hereby declared prohibited for being contrary to law or public policy: (a) Contracting out of a job, work or service when not done in good faith and not justified by the exigencies of the business and the same results in the termination of regular employees and reduction of work hours or reduction or splitting of the bargaining unit; (b) Contracting out of work with a cabo as defined in Section 1 (ii), Rule I, Book V of these Rules. Cabo refers to a person or group of persons or to a labor group which, in the guise of a labor organization, supplies workers to an employer, with or without any monetary or other consideration whether in the capacity of an agent of the employer or as an ostensible independent contractor; (c) Taking undue advantage of the economic situation or lack of bargaining strength of the contractual employee, or undermining his security of tenure or basic rights, or circumventing the provisions of regular employment, in any of the following instances: (i) In addition to his assigned functions, requiring the contractual employee to perform functions which are currently being performed by the regular employees of the principal or of the contractor or subcontractor; (ii) Requiring him to sign, as a precondition to employment or continued employment, an antedated resignation letter; a blank payroll; a waiver of labor standards including minimum wages and social or welfare benefits; or a quitclaim

releasing the principal, contractor or subcontractor from any liability as to payment of future claims; and (iii) Requiring him to sign a contract fixing the period of employment to a term shorter than the term of the contract between the principal and the contractor or subcontractor, unless the latter contract is divisible into phases for which substantially different skills are required and this is made known to the employee at the time of engagement; (d) Contracting out of a job, work or service through an in-house agency which refers to a contractor or subcontractor engaged in the supply of labor which is owned, managed or controlled by the principal and which operates solely for the principal; (e) Contracting out of a job, work or service directly related to the business or operation of the principal by reason of a strike or lockout whether actual or imminent; (f) Contracting out of a job, work or service being performed by union members when such will interfere with, restrain or coerce employees in the exercise of their rights to self organization as provided in Art. 248 (c) of the Labor Code, as amended. 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 cases 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. Section 8. Rights of Contractual Employees. Consistent with Section 7 of these Rules, the contractual employee shall be entitled to all the rights and privileges due a regular employee as provided for in the Labor Code, as amended, to include the following: (a) Safe and healthful working conditions; (b) Labor standards such as service incentive leave, rest days, overtime pay, holiday pay, 13th month pay and separation pay; (c) Social security and welfare benefits; (d) Self-organization, collective bargaining and peaceful concerted action; and (e) Security of tenure. Section 9. Contract between contractor or subcontractor and contractual employee. Notwithstanding oral or written stipulations to the contrary, the contract between the contractor or subcontractor and the contractual employee, which shall be in writing, shall include the following terms and conditions:

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(a) The specific description of the job, work or service to be performed by the contractual employee; (b) The place of work and terms and conditions of employment, including a statement of the wage rate applicable to the individual contractual employee; and (c) The term or duration of employment, which shall be coextensive with the contract of the principal and subcontractor, or with the specific phase for which the contractual employee is engaged, as the case may be. The contractor or subcontractor shall inform the contractual employee of the foregoing terms and conditions on or before the first day of his employment. Section 10. Effect of Termination of Contractual Employment. In cases of termination of employment prior to the expiration of the contract between the principal and the contractor or subcontractor, the right of the contractual employee to separation pay or other related benefits shall be governed by the applicable laws and jurisprudence on termination of employment. Where the termination results from the expiration of the contract between the principal and the contractor or subcontractor, or from the completion of the phase of the job, work or service for which the contractual employee is engaged, the latter shall not be entitled to separation pay. However, this shall be without prejudice to completion bonuses or other emoluments, including retirement pay as may be provided by law or in the contract between the principal and the contractor or subcontractor. Section 11. Registration of Contractors or Subcontractors. Consistent with the authority of the Secretary of Labor and Employment to restrict or prohibit the contracting out of labor through appropriate regulations, a registration system to govern contracting arrangements and to be implemented by the Regional Offices is hereby established. The registration of contractors and subcontractors shall be necessary for purposes of establishing an effective labor market information and monitoring. Failure to register shall give rise to the presumption that the contractor is engaged in labor-only contracting. Section 12. Requirements for registration. A contractor or subcontractor shall be listed in the registry of contractors and subcontractors upon completion of an application form to be provided by the DOLE. The applicant contractor or subcontractor shall provide in the application form the following information: (a) The name and business address of the applicant and the area or areas where it seeks to operate; (b) The names and addresses of officers, if the applicant is a corporation, partnership, cooperative or union; (c) The nature of the applicants business and the industry or industries where the applicant seeks to operate;

(d) The number of regular workers; the list of clients, if any; the number of personnel assigned to each client, if any and the services provided to the client; (e) The description of the phases of the contract and the number of employees covered in each phase, where appropriate; and (f) A copy of audited financial statements if the applicant is a corporation, partnership, cooperative or a union, or copy of the latest ITR if the applicant is a sole proprietorship. The application shall be supported by: (a) A certified copy of a certificate of registration of firm or business name from the Securities and Exchange Commission (SEC), Department of Trade and Industry (DTI), Cooperative Development Authority (CDA), or from the DOLE if the applicant is a union; and (b) A certified copy of the license or business permit issued by the local government unit or units where the contractor or subcontractor operates. The application shall be verified and shall include an undertaking that the contractor or subcontractor shall abide by all applicable labor laws and regulations. Section 13. Filing and processing of applications. The application and its supporting documents shall be filed in triplicate in the Regional Offices where the applicant principally operates. No application for registration shall be accepted unless all the foregoing requirements are complied with. The contractor or subcontractor shall be deemed registered upon payment of a registration fee of P100.00 to the Regional Office. Where all the supporting documents have been submitted, the Regional Office shall deny or approve the application within seven (7) working days after its filing. Upon registration, the Regional Office shall return one set of the duly-stamped application documents to the applicant, retain one set for its file, and transmit the remaining set to the Bureau of Local Employment. The Bureau shall devise the necessary forms for the expeditious processing of all applications for registration. Section 14. Duty to produce copy of contract between the principal and the contractor or subcontractor. The principal or the contractor or subcontractor shall be under an obligation to produce a copy of the contract between the principal and the contractor in the ordinary course of inspection. The contractor shall likewise be under an obligation to produce a copy of the contract of employment of the contractual worker when directed to do so by the Regional Director or his authorized representative. A copy of the contract between the contractual employee and the contractor or subcontractor shall be furnished the certified bargaining agent, if there is any. Section 15. Annual Reporting of Registered Contractors. The contractor or subcontractor shall submit in triplicate its annual report using a prescribed form to the appropriate Regional Office not later than the 15th of January of the following year. The report shall include:

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(a) A list of contracts entered with the principal during the subject reporting period; (b) The number of workers covered by each contract with the principal; (c) A sworn undertaking that the benefits from the Social Security System (SSS), the Home Development Mutual Fund (HDMF), PhilHealth, Employees Compensation Commission (ECC), and remittances to the Bureau of Internal Revenue (BIR) due its contractual employees have been made during the subject reporting period. The Regional Office shall return one set of the duly-stamped report to the contractor or subcontractor, retain one set for its file, and transmit the remaining set to the Bureau of Local Employment within five (5) days from receipt thereof. Section 16. Delisting of contractors or subcontractors. Subject to due process, the Regional Director shall cancel the registration of contractors or subcontractors based on any of the following grounds: (a) Non-submission of contracts between the principal and the contractor or subcontractor when required to do so; (b) Non-submission of annual report; (c) Findings through arbitration that the contractor or subcontractor has engaged in labor-only contracting and the prohibited activities as provided in Section 6 (Prohibitions) hereof; and (d) Non-compliance with labor standards and working conditions. Section 17. Renewal of registration of contractors or subcontractors. All registered contractors or subcontractors may apply for renewal of registration every three years. For this purpose, the Tripartite Industrial Peace Council (TIPC) as created under Executive Order No. 49, shall serve as the oversight committee to verify and monitor the following: (a) Engaging in allowable contracting activities; and (b) Compliance with administrative reporting requirements. Section 18. Enforcement of Labor Standards and Working Conditions. Consistent with Article 128 (Visitorial and Enforcement Power) of the Labor Code, as amended, the Regional Director through his duly authorized representatives, including labor regulation officers shall have the authority to conduct routine inspection of establishments engaged in contracting or subcontracting and shall have access to employers records and premises at any time of the day or night whenever work is being undertaken therein, and the right to copy therefrom, to question any employee and investigate any fact, condition or matter which may be necessary to determine violations or which may aid in the enforcement of the Labor Code and of any labor law, wage order, or rules and regulations issued pursuant thereto. The findings of the duly authorized representative shall be referred to the Regional Director for appropriate action as provided for in Article 128, and shall be furnished the collective bargaining agent, if any.

Based on the visitorial and enforcement power of the Secretary of Labor and Employment in Article 128 (a), (b), (c) and (d), the Regional Director shall issue compliance orders to give effect to the labor standards provisions of the Labor Code, other labor legislation and these guidelines. Section 19. Solidary liability. The principal shall be deemed as the direct employer of the contractual employees and therefore, solidarily liable with the contractor or subcontractor for whatever monetary claims the contractual employees may have against the former in the case of violations as provided for in Sections 5 (Labor-Only contracting), 6 (Prohibitions), 8 (Rights of Contractual Employees) and 16 (Delisting) of these Rules. In addition, the principal shall also be solidarily liable in case the contract between the principal and contractor or subcontractor is preterminated for reasons not attributable to the fault of the contractor or subcontractor. Section 20. Supersession. All rules and regulations issued by the Secretary of Labor and Employment inconsistent with the provisions of this Rule are hereby superseded. Contracting or subcontracting arrangements in the construction industry, under the licensing coverage of the PCAB and shall not include shipbuilding and ship repairing works, however, shall continue to be governed by Department Order No. 19, series of 1993. Section 21. Effectivity. This Order shall be effective fifteen (15) days after completion of its publication in two (2) newspapers of general circulation. Manila, Philippines, 21 February 2002. PATRICIA A. STO. TOMAS Secretary Cases: Philippine Airlines v. Ligan (GR 146408, February 29, 2008) SC previously ordered PAL to accept Ligan et al. as regular employees and to pay them wages and benefits plus salary differential and to pay respondent Auxtero salary differential, backwages, and separation pay, in lieu of reinstatement. Since there were no data to determine PALs monetary liabilities, the case was remanded to the Labor Arbiter for that purpose. PAL contended that it was Synergy Services Corporation (Synergy) who employed Ligan et al. The employees alleged they were terminated under the guise of retrenchment. SC later on modified its decision because the claims of respondents Pilapil and Auxtero were deemed extinguishedthere was a valid dismissal due to Pilapils misconduct and PAL already paid his separation pay, while Auxtero attempted forum-shopping. SC clarified that Synergy was only an agent of PAL, thus, the employees acquired security of tenure and could only be dismissed on the basis of a just cause with the observance of procedural due process. SC did not take cognizance of the dismissals validity because this was beyond the cases issues and was being heard by CA in another case. SC also stated that PAL failed to establish economic losses which made it impossible to accept Ligan et al. as regular employees. If an authorized cause for dismissal is later proved, PAL should still pay their benefits and salary differential. If there is a finding of illegal dismissal, an order for reinstatement with full backwages does not conflict with the declaration of their regular employee status. What are the elements for labor only contracting to exist?

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For labor-only contracting to exist, Section 5 of D.O. No. 18-02 requires any of two elements to be present: (i) The contractor or subcontractor does not have substantial capital or investment which relates to the job, work or service to be performed and the employees recruited, supplied or placed by such contractor or subcontractor are performing activities which are directly related to the main business of the principal; or (ii) The contractor does not exercise the right to control over the performance of the work of the contractual employee. 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. (PAL vs. Ligan, G.R. No. 146408, February 29, 2008) San Miguel Corporation v. Aballa (GR 149011, June 28, 2005) The test to determine the existence of independent contractorship is whether one claiming to be an independent contractor has contracted to do the work according to his own methods and without being subject to the control of the employer, except only as to the results of the work. Sunflower is a labor-only contractor. The language of the contract that there is no employer-employee relationship between SMC and the private respondents is not controlling. It is to be noted 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. It is gathered that the lot, building, machineries and all other working tools utilized by private respondents in carrying out their tasks were owned and provided by SMC. 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 private 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. SMC also had control over the private respondents as evidenced by the fact that their daily time records were signed by SMC supervisors and control of the premises in which private respondents worked was by SMC. Meralco Industrial Engineering Services v. NLRC (GR 145402, March 14, 2008) An indirect employer (as defined by Article 107) can only be held solidarily liable with the independent contractor or subcontractor (as provided under Article 109) in the event that the latter fails to pay the wages of its employees (as described in Article 106). Hence, while it is true that the petitioner was the indirect employer of the complainants, it cannot be held liable in the same way as the employer in every respect. The petitioner may be considered an indirect employer only for purposes of unpaid wages. As this Court succinctly explained in Philippine Airlines, Inc. v. National Labor Relations Commission37: While USSI is an independent contractor under the security service agreement and PAL may be considered an indirect employer, that status did not make PAL the employer of the security guards in every respect. PAL may be considered an indirect employer only for purposes of unpaid wages since Article 106, which is applicable to the situation contemplated in Section 107, speaks of wages. The concept of indirect employer only relates or refers to the liability for unpaid wages. Read together,

Articles 106 and 109 simply mean that the party with whom an independent contractor deals is solidarily liable with the latter for unpaid wages, and only to that extent and for that purpose that the latter is considered a direct employer. Further, there is no question that private respondents are operating as an independent contractor and that the complainants were their employees. There was no employer-employee relationship that existed between the petitioner and the complainants and, thus, the former could not have dismissed the latter from employment. Only private respondents, as the complainants employer, can terminate their services, and should it be done illegally, be held liable therefor. The only instance when the principal can also be held liable with the independent contractor or subcontractor for the backwages and separation pay of the latters employees is when there is proof that the principal conspired with the independent contractor or subcontractor in the illegal dismissal of the employees, thus: Manila Electric Company v. Benamira (GR 145271, July 14, 2005) Whether or not an employer-employee relationship exists between MERALCO and the security guards? SC held that no such relationship exists. Under the security service agreement, it was ASDAI which (a) selected, engaged or hired and discharged the security guards; (b) assigned them to MERALCO according to the number agreed upon; (c) provided the uniform, firearms and ammunition, nightsticks, flashlights, raincoats and other paraphernalia of the security guards; (d) paid them salaries or wages; and, (e) disciplined and supervised them or principally controlled their conduct. The agreement even explicitly provided that such security guards shall be considered as employees of the AGENCY alone. In fact, the security service agreements provided that all specific instructions by MERALCO relating to the discharge by the security guards of their duties shall be directed to the agency and not directly to the individual respondents. This clearly shows that MERALCO has no control over their performance. As such, respondents cannot be considered as regular employees of the MERALCO and the Agnecy is not engaged in labor-only contracting services since, although security services are necessary and desirable to the business of MERALCO, it is not directly related to its principal business and may even be considered unnecessary in the conduct of MERALCOs principal business, which is the distribution of electricity. However, even if there is no actual and direct employer-employee relationship Meralco is still liable to respondents for unpaid monetary claims. When MERALCO contracted for security services with ASDAI, MERALCO became an indirect employer and shall be solidarily liable with the agency. Art. 107. Indirect employer - The provisions of the immediately preceding Article shall likewise apply to any person, partnership, association or corporation which, not being an employer, contracts with an independent contractor for the performance of any work, task, job or project. Dole Phils. v. Esteva (GR No. 161115, November 30, 2006) Whether or not CAMPCO is engaged in labor-only contracting? SC held that CAMPCO is engaged in labor-only contracting because although some factors exists as to qualify it as an independent job contractor,

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(1) It initially started only at P6,600 paid-up capital. It only managed to increase its capitalization and assets in the succeeding years by continually engaging in laboronly contracting. (2) CAMPCO did not carry out an independent business from petitioner. It was precisely established to render services to petitioner to augment its workforce during peak seasons. They used tools and equipment of DOLE when rendering services to the latter. (3) DOLE has control over CAMPCO employees despite presence of supervisor. They had to undergo instructions and pass the training provided by petitioners personnel. Petitioner prepared the work assignments of the CAMPCO members. (4) CAMPCO merely acted as a recruitment agency for petitioner. Since the undertaking of CAMPCO did not involve the performance of a specific job, but rather the supply of manpower only. (5) CAMPCO members, including respondents, performed activities directly related to the principal business of petitioner. They worked as can processing attendant, feeder of canned pineapple and pineapple processing, nata de coco processing attendant, fruit cocktail processing attendant, and etc. Sec. 9, DO 18-02: Labor-Only Contracting a) Any person who undertakes to supply workers to an employer shall be deemed to be engaged in labor-only contracting where such person: 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 operation of the employer to which workers are habitually employed. b) Labor-only contracting as defined herein is hereby prohibited and the person acting as contractor shall be considered merely as an agent or intermediary 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. Violation of the afore-quoted provision is considered a labor standards violation and thus, within the visitorial and enforcement powers of the Secretary of Labor and Employment (Art. 128). The existence of an independent and permissible contractor relationship is generally established by the following criteria: whether or not the contractor is 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 a specified piece of work; the control and supervision of the work to another; the employer's power with respect to the hiring, firing and payment of the contractor's workers; the control of the premises; the duty to supply the premises tools, appliances, materials and labor; and the mode, manner and terms of payment. The primary standard, therefore, of determining a regular employment is the reasonable connection between the particular activity performed by the employee in relation to the usual business or trade of the employer. The test is whether the former is usually necessary or desirable in the usual business or trade of the employer. Aliviado v. Procter and Gamble (GR 160506, March 9, 2010)

Indeed, it is management prerogative to farm out any of its activities, regardless of whether such activity is peripheral or core in nature. However, in order for such outsourcing to be valid, it must be made to an independent contractor because the current labor rules expressly prohibit labor-only contracting. There is labor-only contracting when the contractor or sub-contractor merely recruits, supplies or places workers to perform a job, work or service for a principal, and any of the following elements are present: (i) the contractor or subcontractor does not have substantial capital or investment which relates to the job, work or service to be performed and the employees recruited, supplied or placed by such contractor or subcontractor are performing activities which are directly related to the main business of the principal; or (ii) the contractor does not exercise the right to control over the performance of the work of the contractual employee. In the instant case, the financial statements of Promm-Gem show that it has authorized capital stock of P1 million and a paid-in capital, or capital available for operations, of P500,000.00 as of 1990. It also has long term assets worth P432,895.28 and current assets of P719,042.32. Promm-Gem has also proven that it maintained its own warehouse and office space with a floor area of 870 square meters. It also had under its name three registered vehicles, which were used for its promotional/merchandising business. Promm-Gem also has other clients aside from P&G. Under the circumstances, we find that Promm-Gem has substantial investment, which relates to the work to be performed. Under these circumstances, Promm-Gem cannot be considered a labor-only contractor. On the other hand, the Articles of Incorporation of SAPS show that it has a paid-in capital of only P31,250.00. There is no other evidence to prove how much its working capital and assets are. Furthermore, there is no showing of substantial investment in tools, equipment or other assets. SAPS lack of substantial capital is highlighted by the records which show that its payroll for its merchandisers alone for one month would already total P44,561.00. It had 6-month contracts with P&G. Yet SAPS failed to show that it could complete the 6-month contracts using its own capital and investment. Its capital is not even sufficient for one months payroll. SAPS failed to show that its paid-in capital of P31,250.00 is sufficient for the period required for it to generate revenues to sustain its operations independently. Substantial capital refers to capitalization used in the performance or completion of the job, work or service contracted out. In the present case, SAPS has failed to show substantial capital. Furthermore, the employees in this case performed merchandising and promotion of the products of P&G, which are activities that the Court has considered directly related to the manufacturing business of P&G. Considering that SAPS has no substantial capital or investment and the workers it recruited are performing activities which are directly related to the principal business of P&G, we find that SAPS is engaged in labor-only contracting. Temic Automotive v. Temic Automotive Phils. Employees Union (GR 186965, December 23, 2009) Outsourcing. The employer was within its right in entering the forwarding agreements with the forwarders as an exercise of its management prerogative. The employers declared objective for the arrangement is to achieve greater economy and efficiency in its operations a universally accepted business objective and standard that the union has never questioned. In Meralco v. Quisumbing,[G.R. No. 127598, January 27, 1999] the Court joined this universal recognition of outsourcing as a legitimate activity when it held that a company can determine in its best judgment whether it should contract out a part of its work for as long as the

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employer is motivated by good faith; the contracting is not for purposes of circumventing the law; and does not involve or be the result of malicious or arbitrary action.

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Labor Law Review Independent Contractors and Labor-Only Contractors

Smart Communications v. Astorga (GR 148132, January 28, 2008) An employers demand for payment of the market value of the car or, in the alternative, the surrender of the car, is not a labor, but a civil, dispute; A dispute which in involves the relationship of debtor and creditor rather than employeeemployer relations. As such, the dispute falls within the jurisdiction of the regular courts It is plain to see that the vehicle was issued to Astorga by SMART as part of the employment package. We doubt that SMART would extend to Astorga the same car plan privilege were it not for her employment as district sales manager of the company. Furthermore, there is no civil contract for a loan between Astorga and SMART. Consequently, We find that the car plan privilege is a benefit arising out of employer-employee relationship. Thus, the claim for such falls squarely within the original and exclusive jurisdiction of the labor arbiters and the NLRC. Astorga was terminated due to redundancy, which is one of the authorized causes for the dismissal of an employee. Coca-Cola Bottlers v. Agito (GR 179546, February 13, 2009) 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.

For reference: Vinoya v. NLRC (GR 126586, February 2, 2000) Labor-only contracting, a prohibited act, is an arrangement where the contractor or subcontractor merely recruits, supplies or places workers to perform a job, work or service for a principal. The elements of labor-only contracting are: (a) The contractor or subcontractor does not have substantial capital or investment to actually perform the job, work or service under its own account and responsibility; and (b) 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. Permissible job contracting or subcontracting refers to an arrangement whereby a principal 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. Its elements are: (a) The contractor or subcontractor carries on a distinct and independent business and undertakes to perform the job, work or service on its own account and under its own responsibility according to its own manner and method, and free from the control and direction of the principal in all matters connected with the performance of the work except as to the results thereof; (b) The contractor or subcontractor has substantial capital or investment; and (c) The agreement between the principal and 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 and welfare benefits. In determining the existence of employer-employee relationship the following elements of the "four-fold test" are generally considered, namely: (1) the selection and engagement of the employee or the power to hire; (2) the payment of wages; (3) the power to dismiss; and (4) the power to control the employee. Rosewood Processing, Inc. v. NLRC (290 SCRA 408) Under Art 106-109 of the Labor Code, should the contractor fail to pay the wages of its employees in accordance with law, the indirect employer (Rosewood in this case), is jointly and severally liable with the contractor, but such responsibility should be understood to be limited to the extent of the work performed under the contract, in the same manner and extent that he is liable to the employees directly employed by him. Similarly, the solidary liability for payment of back wages and separation pay is limited, under Article 106, to the extent of the work performed under the contract; under Article 107, to the performance of any work, task, job or project; and under Article 109, to the extent of their civil liability under this Chapter [on payment of wages]. These provisions cannot apply to Rosewood, considering that the complainants were no longer working for or assigned to it when they were illegally dismissed. Furthermore, an order to pay back wages and separation pay is invested with a punitive character, such that an indirect employer should not be made liable without a finding that it had committed or conspired in the illegal dismissal. There being no

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 was not carried out in accordance with law and, therefore, illegal. 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). 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 latters principal business.

Compiled by Eir Antig, AC Castaneda 8

Labor Law Review Independent Contractors and Labor-Only Contractors

proof of such commission or conspiracy, Rosewood cannot be held liable for the backwages and separation pay. An employer is solidarily liable for legal ages due security guards for the period of time they were assigned to it by its contracted security agency. However, in the absence of proof that the employer itself committed the acts constitutive of illegal dismissal or conspired with the security agency in the performance of such acts, the employer shall not be liable for back wages and/or separation pay arising as a consequence of such unlawful termination.

Compiled by Eir Antig, AC Castaneda 9

Labor Law Review Independent Contractors and Labor-Only Contractors