Alilin vs. Petron Corporation

Where the principal asserts that its contractor is a legitimate job contractor, the principal bears the burden of proving the contractor’s substantial capital or investment; failure to prove that requisite for the period when the workers began their service renders the contractor a labor-only contractor, and the principal becomes the workers’ employer and is solidarily liable with the contractor for illegal dismissal.

Petron Corporation is a domestic corporation engaged in the oil business and operates bulk plants for receiving, storing, and distributing petroleum products. RDG, the successor to Romualdo D. Gindang Contractor, supplied manpower to Petron’s Mandaue Bulk Plant. The dispute concerns the characterization of that manpower arrangement under the Labor Code and its implementing rules on permissible job contracting and prohibited labor-only contracting, particularly DOLE Department Order No. 10, series of 1997, and Sections 8 and 9, Rule VIII, Book III of the implementing rules.

Petron Corporation is a domestic corporation engaged in the oil business and owns several bulk plants for receiving, storing, and distributing petroleum products. In 1968, Romualdo D. Gindang Contractor, owned and operated by Romualdo D. Gindang, started recruiting laborers for fielding to Petron’s Mandaue Bulk Plant. When Romualdo died in 1989, his son Romeo D. Gindang, through Romeo D. Gindang Services (RDG), took over the business and continued to provide manpower services to Petron. Petitioners were among those recruited by Romualdo D. Gindang Contractor and RDG to work in the premises of the bulk plant, with the following claimed dates of hiring and duties: Eutiquio Gindang (1968; utility/tanker receiver/barge loader/warehouseman/mixer), Eugema L. Laurente (June 1979; telephone operator/order taker), Teodoro Calesa (August 1, 1981; utility/tanker receiver/barge loader/sounder/gauger), Rex Gabilan (July 1, 1987; warehouseman/forklift driver/tanker receiver/barge loader), Charlie T. Hindang (September 18, 1990; utility/tanker receiver/barge loader/sounder/gauger), Allan P. Sungahid (September 18, 1990; filler/sealer/painter/tanker receiver/utility), Maximo S. Lee (September 18, 1990; gasul filler/painter/utility), Avelino S. Alilin (July 16, 1992; carpenter/driver), and Jose Gerry M. Morato (March 16, 1993; cylinder checker/tanker receiver/grass cutter/janitor/utility).

On June 1, 2000, Petron and RDG entered into a Contract for Services for the period from June 1, 2000 to May 31, 2002, whereby RDG undertook to provide Petron with janitorial, maintenance, tanker receiving, packaging, and other utility services in its Mandaue Bulk Plant. The contract was extended on July 31, 2002 and further extended until September 30, 2002. Upon expiration, no further renewal of the service contract was done. Alleging that they were barred from continuing their services on October 16, 2002, petitioners Alilin, Calesa, Hindang, Gindang, Sungahid, Lee, Morato, and Gabilan filed a complaint for illegal dismissal, underpayment of wages, damages, and attorney’s fees against Petron and RDG on November 12, 2002. Petitioner Laurente filed another complaint for illegal dismissal, underpayment of wages, non-payment of overtime pay, holiday pay, premium pay for holiday, rest day, 13th month pay, service incentive leave pay, allowances, separation pay, retirement benefits, damages, and attorney’s fees against Petron and RDG. The complaints were later consolidated.

Petitioners did not deny that RDG hired them and paid their salaries. They claimed, however, that RDG was a labor-only contractor that merely acted as an agent of Petron, their true employer. They asserted that their jobs were directly related to Petron’s business, that they worked inside Petron’s premises using equipment and tools furnished by Petron, and that they were subject to Petron’s supervision. Claiming to be regular employees, petitioners asserted that their dismissal allegedly due to the expiration of the service contract between Petron and RDG was illegal. RDG corroborated petitioners’ claim that they were regular employees of Petron, alleging that Petron directly supervised their activities, that they performed jobs necessary and desirable to Petron’s business, that Petron provided supplies, tools, and equipment, and that their workplace since the start of their employment was at Petron’s bulk plant in Mandaue City. RDG denied liability and argued that Petron could not capitalize on the service contract to escape liability.

Petron maintained that RDG was an independent contractor and the real employer of petitioners. It argued that RDG hired and selected petitioners, paid their salaries and wages, and directly supervised their work. Petron submitted a joint affidavit of two former RDG employees and an affidavit of Petron’s Mandaue Terminal Superintendent, as well as documents including RDG’s DOLE Certificate of Registration dated December 27, 2000; RDG’s DTI Certificate of Registration of Business Name dated August 18, 2000; Contractor’s Pre-Qualification Statement; Conflict of Interest Statement signed by Romeo Gindang as manager of RDG; RDG’s Audited Financial Statements for 1998, 1999, and 2000; RDG’s Mayor’s Permit for 2000 and 2001; RDG’s DTI Certificate of Accreditation issued in October 1991; performance bond and insurance policy; SSS Online Inquiry System Employee Contributions and Employee Static Information; and Romeo’s affidavit stating that he paid the salaries of his employees assigned to Petron for November 4, 2001 to December 31, 2001. Petron argued that with the expiration of the service contract, petitioners’ term of employment ended and that, not being the employer, it could not be held liable for illegal dismissal.

The Labor Arbiter found that petitioners’ jobs were directly related to Petron’s business operations, that they worked under the supervision of Petron’s foreman and supervisor, and that they used Petron’s tools and equipment. The Labor Arbiter also found that Petron merely utilized RDG to hide the existence of an employee-employer relationship between it and petitioners and to avoid liability under labor laws; with no showing of just or authorized cause, petitioners were declared illegally dismissed. The NLRC likewise found petitioners to be Petron’s regular employees because they performed job assignments germane to Petron’s main business. The Court of Appeals, on the other hand, found no employer-employee relationship, noting that the records did not show that petitioners were directly hired, selected, or employed by Petron; that their wages and wage-related benefits were paid by Petron; or that Petron controlled the manner by which they carried out their tasks. It found that RDG paid petitioners’ wages, that SSS records showed RDG as their employer and the remitter of contributions, and that two former RDG employees and the Terminal Superintendent attested that Romeo and his brother Alejandre Gindang supervised the work, not Petron’s foreman or supervisor. The Court of Appeals also found RDG to be an independent labor contractor with sufficient capitalization and investment based on its year-end 2000 financial statement and characterized the contracted works as menial and neither directly related nor sensitive and critical to Petron’s principal business. Petitioners later attached affidavits of former Petron employees attesting that their jobs were critical to Petron’s business operations and were carried out under the control of a Petron employee.

• Labor-Only Contracting: Petitioners maintained that RDG is a labor-only contractor and merely acted as an agent of Petron, making Petron their true employer.
• Regular Employment and Illegal Dismissal: Petitioners asserted that their jobs were directly related to Petron’s business, performed inside Petron’s premises with Petron’s tools and equipment, and under Petron’s supervision; thus they were regular employees whose dismissal upon expiration of the service contract was illegal.
• Control and Sensitive Operations: In their motion for reconsideration, petitioners insisted that they performed jobs sensitive to Petron’s business operations and attached affidavits of former Petron employees attesting that their jobs were critical and carried out under the control of a Petron employee.

• Independent Contractor: Petron maintained that RDG is an independent contractor and the real employer of petitioners.
• Hiring, Wages, and Supervision: Petron argued that RDG hired and selected petitioners, paid their salaries and wages, and directly supervised their work.
• Evidence of Independence: Petron presented RDG’s DOLE and DTI registrations, financial statements, permits, accreditation, performance bond, insurance policy, SSS records, and affidavits to show RDG’s independent status and payment of wages.
• Expiration of Service Contract: Petron argued that with the expiration of the service contract, petitioners’ term of employment ended and that Petron, not being the employer, cannot be held liable for illegal dismissal.
• Burden of Proof: Petron insisted that petitioners, not Petron, bore the burden of proving RDG’s status.

• Contractor Status: Whether RDG is a legitimate job contractor.
• Employer-Employee Relationship: Whether an employer-employee relationship exists between Petron and petitioners.
• Illegal Dismissal and Liability: Whether Petron is liable for illegal dismissal and monetary claims.

• Contractor Status: No. RDG is a labor-only contractor; Petron, which bore the burden as the principal claiming legitimacy, failed to prove RDG’s substantial capital or investment at the time petitioners began working, and petitioners performed work directly related to Petron’s business.
• Employer-Employee Relationship: Yes. A finding of labor-only contracting is equivalent to declaring an employer-employee relationship between the principal and the contractor’s employees; Petron also exercised control over petitioners.
• Illegal Dismissal and Liability: Yes. Petitioners attained regular status, and expiration of the service contract was not a just or authorized cause; Petron, as principal employer, and RDG, as labor-only contractor, are solidarily liable for illegal dismissal and monetary claims.

• Contractor Status: The prevailing rule when Petron and RDG entered the June 2000 Contract for Services was DOLE Department Order No. 10, series of 1997. Under Section 4(f), labor-only contracting exists where the contractor merely recruits, supplies, or places workers to perform a job, work, or service for a principal and (i) the contractor does not have substantial capital or investment to perform the job under its own account and responsibility, and (ii) the employees perform activities directly related to the main business of the principal. Section 6 allows permissible contracting only if, among other conditions, the contractor carries on a distinct and independent business, undertakes the work on its own account and responsibility, is free from control except as to results, has substantial capital or investment, and assures the contractual employees’ labor and occupational safety and health standards, self-organization, security of tenure, and social welfare benefits. Generally, a contractor is presumed to be labor-only unless it proves substantial capital, investment, tools, and the like; but where the principal claims the contractor is legitimate, the principal bears the burden. Petron therefore had to prove RDG’s status. Petron showed RDG’s financial capability for the 2000 contract, with a maximum financial capability of Php4.807 Million as of December 1998 and Php1.611 Million as of December 2000, but this only covered the last service contract. Petitioners had worked for Petron long before 2000, with undisputed start dates in 1968, 1979, 1981, 1987, 1990, 1992, and 1993 and continuous service until October 16, 2002. Petron failed to establish RDG’s substantial capital or investment at the time petitioners actually began working. Under Sections 8 and 9, Rule VIII, Book III of the implementing rules of the Labor Code, in force since 1976 and prior to DOLE Department Order No. 10, series of 1997, substantial capital or investment was required for permissible job contracting. Because Petron failed to show this condition, RDG is a labor-only contractor. The works performed by petitioners were also directly related to Petron’s business, another factor negating independent contracting.
• Employer-Employee Relationship: A finding that a contractor is a labor-only contractor is equivalent to declaring an employer-employee relationship between the principal and the employees of the supposed contractor. The relationship between Petron and petitioners was made more apparent by Petron’s power of control. Under the four-fold test in Orozco vs. The Fifth Division of the Hon. Court of Appeals, the elements of an employment relationship are (a) selection and engagement of the employee, (b) payment of wages, (c) power of dismissal, and (d) power to control the employee’s conduct. The power to control is the most crucial and most determinative factor, so important that the other elements may even be disregarded. Thus, the facts that petitioners were hired by Romeo or his father and that their salaries were paid by them did not detract from the conclusion that an employer-employee relationship existed because of Petron’s power of control. One manifestation of control is the power to transfer employees from one work assignment to another; Petron could order petitioners to do work outside their regular maintenance/utility job. Petitioners were also required to report for work every day at the bulk plant, observe an 8:00 a.m. to 5:00 p.m. daily work schedule, and wear proper uniform and safety helmets as prescribed by safety and security measures within the bulk plant. In an industry where safety is of paramount concern, control and supervision over sensitive operations such as those performed by petitioners were inevitable, especially because Petron deals with highly volatile and flammable commodities that may cause serious injuries and damage to property and the environment if mishandled. Supervision by Petron was essential in every aspect of product handling to avoid compromising the integrity, quality, and safety of the products distributed to the consuming public.
• Illegal Dismissal and Liability: Petitioners were given various work assignments such as tanker receiving, barge loading, sounding, gauging, warehousing, mixing, painting, carpentry, driving, gasul filling, and other utility works. Although Petron referred to these as menial works that any able-bodied individual could perform, they were nevertheless necessary and related to Petron’s business operations; without these tasks, Petron’s products would not reach consumers in their proper state. The undisputed fact that for many years the same able-bodied individuals performed the tasks for Petron was a strong indication that the works were necessary to Petron’s business. Considering their length of service, petitioners were deemed by law to have attained the status of Petron’s regular employees. Petron could not terminate their services on the pretext that the service contract with RDG had lapsed; regular status had already attached even before the execution of the 2000 service contract, and the expiration of that contract was not a just or authorized cause for valid dismissal of regular employees. In sum, RDG is a labor-only contractor and is considered merely an agent of Petron. The employer-employee relationship exists between petitioners as employees and Petron as their employer. Petron, as principal employer, and RDG, as labor-only contractor, are solidarily liable for petitioners’ illegal dismissal and monetary claims.

• Labor-Only Contracting vs. Permissible Job Contracting — Labor-only contracting is a prohibited arrangement where the contractor or subcontractor merely recruits, supplies, or places workers to perform a job, work, or service for a principal and (i) the contractor does not have substantial capital or investment to perform the job under its own account and responsibility, and (ii) the employees perform activities directly related to the main business of the principal. Permissible job contracting requires, among other conditions, that the contractor carry on a distinct and independent business, undertake the work on its own account and responsibility, be free from control except as to results, have substantial capital or investment, and assure the contractual employees’ labor and occupational safety and health standards, self-organization, security of tenure, and social welfare benefits. The Court applied these definitions and held RDG to be a labor-only contractor because Petron failed to prove RDG’s substantial capital at the time petitioners began working and because petitioners performed work directly related to Petron’s business.
• Burden of Proof in Contractor Status — A contractor is generally presumed to be a labor-only contractor unless it proves that it has substantial capital, investment, tools, and the like. Where the principal is the one claiming that the contractor is a legitimate contractor, the burden of proving the supposed status of the contractor rests on the principal. The Court applied this rule to Petron and held that Petron failed to discharge its burden.
• Four-Fold Test of Employer-Employee Relationship — The elements of an employment relationship are (a) selection and engagement of the employee, (b) payment of wages, (c) power of dismissal, and (d) power to control the employee’s conduct. The power to control is the most crucial and most determinative factor, so important that the other elements may even be disregarded. The Court applied this test and found that despite RDG’s hiring and payment of wages, Petron exercised control over petitioners through work assignments, daily schedule, uniform, and safety requirements.
• Totality of Facts in Contracting Arrangements — In distinguishing prohibited labor-only contracting from permissible job contracting, the totality of the facts and the surrounding circumstances of the case shall be considered. The Court applied this principle in evaluating RDG’s status and Petron’s control over petitioners.
• Regular Employment by Length of Service and Necessity of Work — The engagement of petitioners for the same works for a long period of time was a strong indication that such works were necessary to Petron’s business. Considering their length of service, petitioners were deemed by law to have attained the status of regular employees under the Labor Code. The Court applied this in holding that expiration of the service contract was not a just or authorized cause for dismissal.
• Solidary Liability of Principal and Labor-Only Contractor — A finding that a contractor is a labor-only contractor is equivalent to declaring that there is an employer-employee relationship between the principal and the employees of the supposed contractor. The principal employer and the labor-only contractor are solidarily liable for the employees’ illegal dismissal and monetary claims. The Court applied this in holding Petron and RDG solidarily liable.

• "A contractor is presumed to be a labor-only contractor, unless it proves that it has the substantial capital, investment, tools and the like. However, where the principal is the one claiming that the contractor is a legitimate contractor, the burden of proving the supposed status of the contractor rests on the principal." — This passage states the burden-of-proof rule that controlled the case; because Petron claimed RDG was legitimate, Petron had to prove RDG’s status.
• "Labor-only contracting, on the other hand, is a prohibited act, defined as 'supplying workers to an employer who 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.'" — This is the canonical definition of labor-only contracting applied by the Court to RDG.
• "Of these four elements, it is the power to control which is the most crucial and most determinative factor, so important, in fact, that, the other elements may even be disregarded." — This passage, drawn from the four-fold test, explains why RDG’s hiring and payment of wages did not negate Petron’s status as employer.
• "In sum, the Court finds that RDG is a labor-only contractor. As such, it is considered merely as an agent of Petron. Consequently, the employer-employee relationship which the Court finds to exist in this case is between petitioners as employees and Petron as their employer. Petron therefore, being the principal employer and RDG, being the labor-only contractor, are solidarily liable for petitioners' illegal dismissal and monetary claims." — This is the ratio decidendi and final conclusion on contractor status, employment relationship, and solidary liability.

• Garden of Memories Park and Life Plan, Inc. vs. National Labor Relations Commission, G.R. No. 160278, February 8, 2012, 665 SCRA 293, 306 — Cited for the rule that a contractor is presumed to be a labor-only contractor unless it proves substantial capital, investment, tools, and the like, and that where the principal claims the contractor is legitimate, the burden rests on the principal.
• Javier vs. Fly Ace Corporation, G.R. No. 192558, February 15, 2012, 666 SCRA 382, 394-395 — Cited for the general rule that the Court does not review factual questions, and for the exception where conflicting findings of the Labor Arbiter and NLRC on one hand and the Court of Appeals on the other constrain factual review.
• Gallego vs. Bayer Philippines, Inc., 612 Phil. 250, 261-262 (2009) — Cited for the definition and conditions of permissible job contracting or subcontracting.
• Digital Telecommunications Philippines, Inc. vs. Digitel Employees Union (DEU), G.R. Nos. 184903-04, October 10, 2012, 683 SCRA 466, 477 — Cited for the definition of labor-only contracting as a prohibited act.
• Babas vs. Lorenzo Shipping Corporation, G.R. No. 186091, December 15, 2010, 638 SCRA 735, 745 — Cited for the rule that the totality of facts and surrounding circumstances shall be considered in distinguishing prohibited labor-only contracting from permissible job contracting.
• 7K Corporation vs. National Labor Relations Commission, 537 Phil. 664, 678-679 (2006) — Cited in connection with the burden of proving contractor status.
• DOLE Philippines, Inc. vs. Esteva, 538 Phil. 817, 857 (2006) — Cited for the applicability of Sections 8 and 9, Rule VIII, Book III of the implementing rules of the Labor Code, in force since 1976 and prior to DOLE Department Order No. 10, series of 1997.
• Superior Packaging Corporation vs. Balagsay, G.R. No. 178909, October 10, 2012, 683 SCRA 394, 405 — Cited for the rule that a finding of labor-only contracting is equivalent to declaring an employer-employee relationship between the principal and the contractor’s employees, and for the solidary liability of the principal employer and labor-only contractor.
• Orozco vs. The Fifth Division of the Hon. Court of Appeals, 562 Phil. 36, 48-49 (2008) — Cited for the four-fold test of employer-employee relationship and the rule that the power to control is the most crucial and most determinative factor.
• South Davao Development Company, Inc. and/or Pacquiao vs. Gamo, 605 Phil. 604, 613 (2009) — Cited for the rule that the power to transfer employees from one work assignment to another is a manifestation of the power of control.

• Section 4(f), DOLE Department Order No. 10, series of 1997 — Defines labor-only contracting as an arrangement where the contractor or subcontractor merely recruits, supplies, or places workers to perform a job, work, or service for a principal and (i) the contractor does not have substantial capital or investment to actually perform the job under its own account and responsibility, and (ii) the employees perform activities directly related to the main business of the principal. The Court applied this provision in finding RDG a labor-only contractor.
• Section 6, DOLE Department Order No. 10, series of 1997 — Lists permissible contracting or subcontracting and its conditions, including that the contractor carries on a distinct and independent business, undertakes the contract work on its own account and responsibility according to its own manner and method, free from the control and direction of the principal except as to results; that the contractor has substantial capital or investment; and that the agreement assures the contractual employees’ entitlement to labor and occupational safety and health standards, self-organization, security of tenure, and social welfare benefits. The Court used this provision to distinguish permissible job contracting from labor-only contracting.
• Sections 8 and 9, Rule VIII, Book III, Implementing Rules of the Labor Code — Section 8 provides that job contracting is permissible only if, among other conditions, the contractor has substantial capital or investment in the form of tools, equipment, machineries, work premises, and other materials necessary in the conduct of its business. Section 9 defines labor-only contracting and states that a labor-only contractor is considered merely 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. These rules were in force since 1976 and prior to DOLE Department Order No. 10, series of 1997; Petron failed to show that RDG met the substantial-capital requirement at the time petitioners began working.

Antonio T. Carpio (Chairperson), Arturo D. Brion, Jose Portugal Perez, and Estela M. Perlas-Bernabe.