COCA-COLA BOTTLERS PHILS., G.R. No.

179546
INC.,

Petitioner, Present:

YNARES-SANTIAGO, J.,
- versus - Chairperson,
AUSTRIA-MARTINEZ, ,

CHICO-NAZARIO,
ALAN M. AGITO, REGOLO
S. OCA III, ERNESTO G. NACHURA, and
ALARIAO, JR., ALFONSO
PAA, JR., DEMPSTER P. PERALTA, JJ.
ONG, URRIQUIA T. ARVIN,
GIL H. FRANCISCO, and
EDWIN M. GOLEZ,
Respondents.
Promulgated:

February 13, 2009

x-------------------------------------------------x

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

1
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 13 th 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
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]
2
 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 Arbiters 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
13 month benefits for the period of January 2002 until April 2002.[14]
th

In the end, the Labor Arbiter decreed:

3
 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.
4
 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., 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 Arbiters 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 13 th 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.

5
 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
latters 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.

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]:

6
 I

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

7
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:

Article 106. Contractor or subcontractor. - Whenever an employer enters into a

contract with another person for the performance of the formers work, the employees
of the contractor and of the latters subcontractor, if any, shall be paid in accordance
with the provisions of this Code.

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

The Secretary of Labor may, by appropriate regulations, restrict or prohibit the

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

8
 There is labor-only contracting where the person supplying workers to an
employee does not have substantial capital or investment in the form of tools,
equipment, machineries, work premises, among others, and the workers recruited and
placed by such persons are performing activities which are directly related to the
principal business of such employer. In such cases, the person or intermediary shall be
considered merely as an agent of the employer who shall be responsible to the
workers in the same manner and extent as if the latter were directly employed by him.

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

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

9
 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:
10
 Section 7. Existence of an employer-employee relationship.The contractor or
subcontractor shall be considered the employer of the contractual employee for
purposes of enforcing the provisions of the Labor Code and other social legislation. The
principal, however, shall be solidarily liable with the contractor in the event of any
violation of any provision of the Labor Code, including the failure to pay wages.

The principal shall be deemed the employer of the contractual employee in any
of the following case, as declared by a competent authority:

a. where there is labor-only contracting; or

b. where the contracting arrangement falls within the prohibitions provided

in Section 6 (Prohibitions) hereof.

According to the foregoing provision, labor-only contracting would give rise to: (1) the
creation of an employer-employee relationship between the principal and the employees of
the contractor or sub-contractor; and (2) the solidary liability of the principal and the
contractor to the employees in the event of any violation of the Labor Code.

Petitioner argues that there could not have been labor-only contracting, since
respondents did not perform activities that were indispensable to petitioners 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 contractors employee upon a finding that the contractor is engaged in labor-
11
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 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
12
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 latters 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,
13
 jurisprudential holdings were to the effect that in determining the existence of an
independent contractor relationship, several factors may be considered, such as, but
not necessarily confined to, whether the contractor was carrying on an independent
business; the nature and extent of the work; the skill required; the term and duration
of the relationship; the right to assign the performance of specified pieces of work; the
control and supervision of the workers; the power of the employer with respect to the
hiring, firing and payment of the workers of the contractor; the control of the
premises; the duty to supply premises, tools, appliances, materials and labor; and the
mode, manner and terms of payment.

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
14
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 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:
15
 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.

16
 2. To carry out the undertakings specified in the immediately preceding
paragraph, the CONTRACTOR shall employ the necessary personnel like Route Helpers,
Salesmen, Drivers, Clericals, Encoders & PD who are at least Technical/Vocational
courses graduates provided with adequate uniforms and appropriate identification
cards, who are warranted by the CONTRACTOR to be so trained as to efficiently, fully
and speedily accomplish the work and services undertaken herein by the
CONTRACTOR. The CONTRACTOR represents that its personnel shall be in such number
as will be sufficient to cope with the requirements of the services and work herein
undertaken and that such personnel shall be physically fit, of good moral character and
has not been convicted of any crime. The CLIENT, however, may request for the
replacement of the CONTRACTORS personnel if from its judgment, the jobs or the
projects being done could not be completed within the time specified or that the
quality of the desired result is not being achieved.

3. It is agreed and understood that the CONTRACTORS personnel will comply

with CLIENT, CLIENTS policies, rules and regulations and will be subjected on-the-spot
search by CLIENT, CLIENTS duly authorized guards or security men on duty every time
the assigned personnel enter and leave the premises during the entire duration of this
agreement.

4. The CONTRACTOR further warrants to make available at times relievers

and/or replacements to ensure continuous and uninterrupted service as in the case of
absences of any personnel above mentioned, and to exercise the necessary and due
supervision over the work of its personnel.[45]

Paragraph 3 of the Contract specified that the personnel of contractor Interserve, which
included the respondents, would comply with CLIENT as well as CLIENTs policies, rules and
regulations. It even required Interserve personnel to subject themselves to on-the-spot
searches by 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
17
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 CONTRACTORS personnel. True, this right was conveniently qualified by
the phrase if from its judgment, the jobs or the projects being done could not be completed
within the time specified or that the quality of the desired result is not being achieved, but
such qualification was rendered meaningless by the fact that the Contract did not stipulate
what work or job the personnel needed to complete, the time for its completion, or the results
desired. The said provision left a gap which could enable petitioner to demand the removal or
replacement of any employee in the guise of his or her inability to complete a project in time
or to deliver the desired result. The power to recommend penalties or dismiss workers is the
strongest indication of a companys right of control as direct employer. [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 latters principal business.

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 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 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.

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SO ORDERED.

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