Baguio vs. NLRC

An employer who contracts with an independent contractor for the performance of work not directly related to its principal business is an "indirect employer" under Article 107 of the Labor Code and is solidarily liable with the contractor for the latter's violations of the Labor Code pursuant to Article 109, regardless of whether the contractor subsequently becomes insolvent.

General Milling Corporation (GMC) is a domestic corporation engaged in flour and feeds manufacturing, operating a plant in Cebu City. Feliciano Lupo is a building contractor who, sometime in 1983, entered into a contract with GMC for the construction of an annex building inside GMC's plant. In connection with that contract, Lupo hired the petitioners as carpenters, masons, or laborers. The dispute arose when Lupo terminated the petitioners' services on different dates, prompting them to file complaints for unpaid wages, COLA differentials, bonus, and overtime pay against both Lupo and GMC before the NLRC Regional Arbitration Branch No. VII in Cebu City.

Sometime in 1983, Feliciano Lupo, a building contractor, entered into a contract with General Milling Corporation (GMC), a domestic corporation engaged in flour and feeds manufacturing, for the construction of an annex building inside GMC's plant in Cebu City. In connection with that contract, Lupo hired the petitioners—Franklin Baguio and 15 others, Bonifacio Igot and 6 others, Roy Magallanes and 4 others, Claudio Bongo, Eduardo Andales and 4 others—either as carpenters, masons, or laborers.

Subsequently, Lupo terminated the petitioners' services on different dates. As a result, the petitioners filed complaints against Lupo and GMC before the NLRC Regional Arbitration Branch No. VII in Cebu City, seeking recovery of unpaid wages, COLA differentials, bonus, and overtime pay.

On November 21, 1984, the Executive Labor Arbiter of Branch VII rendered a decision finding Lupo and GMC jointly and severally liable to the petitioners, premised on Article 109 of the Labor Code, and ordering them to pay the aggregate amount of ₱95,382.92. The case was elevated on appeal on December 14, 1984, and the NLRC First Division denied the appeal for lack of merit in a resolution dated December 27, 1985. Upon motion for reconsideration filed on February 27, 1986, the case was reassigned to the Third Division, which, in a resolution dated February 27, 1987, absolved GMC from any liability. The Third Division opined that the petitioners were only hired by Lupo as workers in his construction contract with GMC and were never meant to be employed by the latter.

The petitioners then assailed that resolution before the Supreme Court via a petition for certiorari, contending that GMC is jointly and severally liable with Lupo for the latter's obligations to them.

• Solidary Liability of GMC: Petitioners contended that GMC is jointly and severally liable with Lupo for the latter's obligations to them, seeking recovery from GMC based on Article 106 of the Labor Code, which holds the employer jointly and severally liable with his contractor for unpaid wages of the contractor's employees.

• Inapplicability of Article 106: GMC and the NLRC maintained that Article 106 finds no application because it is limited to situations where the work performed by the contractor's employees is directly related to the principal business of the employer.
• Inapplicability of Article 109: The NLRC further opined that Article 109 on solidary liability finds no application either because GMC was neither the petitioners' employer nor indirect employer.
• Alternative Basis (Solicitor General): The Solicitor General, in a manifestation in lieu of comment, recognized the solidary liability of GMC and Lupo but based recovery on Article 108 of the Labor Code, contending that GMC's failure to require Lupo to post a bond to answer for his obligations to his employees, as required by said provision, should render GMC solidarily liable.

• Applicable Legal Basis for Solidary Liability: Whether GMC is solidarily liable with Lupo for the latter's unpaid obligations to the petitioners, and under which provision of the Labor Code such liability properly lies.
• Labor-Only Contracting vs. Job Contracting: Whether the arrangement between GMC and Lupo constitutes labor-only contracting under Article 106 or job contracting under Article 107 of the Labor Code.
• Indirect Employer Status: Whether GMC qualifies as an "indirect employer" under Article 107 notwithstanding that it is an "employer" as defined under Article 97(b) of the Labor Code.

• Applicable Legal Basis for Solidary Liability: Yes. GMC is solidarily liable with Lupo for the latter's labor law violations, the liability being predicated on Articles 107 and 109 of the Labor Code, which respectively classify GMC as an indirect employer and impose solidary liability upon it for any violation of the Labor Code by its contractor.
• Labor-Only Contracting vs. Job Contracting: No, Article 106 is inapplicable. The arrangement is job contracting under Article 107, not labor-only contracting, because the construction of an annex building has no relation to GMC's principal business of flour and feeds manufacturing, and Lupo carried on an independent business with substantial capital.
• Indirect Employer Status: Yes. The phrase "not being an employer" in Article 107 must be read in conjunction with Article 106, meaning "not a direct employer" in the sense contemplated by Article 106; GMC, while an employer in its own right, is not the direct employer of Lupo's workers and thus qualifies as an indirect employer under Article 107.

• Applicable Legal Basis for Solidary Liability: The Court upheld the solidary liability of GMC and Lupo. Recovery, however, was not based on Article 106, which treats specifically of labor-only contracting, but on Articles 107 and 109. Under Article 107, the provisions of Article 106 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. Under Article 109, every employer or indirect employer is held responsible with a contractor or subcontractor for any violation of the Labor Code, and for purposes of determining civil liability, they are considered direct employers. The last sentence of Article 109 deems the indirect employer a "direct employer" of the contractor's employees, from which solidary liability follows. Additionally, Article 108 requires the posting of a bond by the contractor; GMC's failure to require Lupo to post such a bond further obliges GMC to answer for whatever liabilities Lupo incurred to his employees, without prejudice to GMC's right to seek reimbursement from Lupo.

• Labor-Only Contracting vs. Job Contracting: Article 106 defines labor-only contracting as existing where (1) the person supplying workers does not have substantial capital or investment in the form of tools, equipment, machineries, work premises, among others, and (2) the workers are performing activities directly related to the principal business of the employer. Since the construction of an annex building inside the company plant has no relation whatsoever to GMC's business of flour and feeds manufacturing, labor-only contracting does not exist. Instead, job contracting under Article 107 is involved, which requires (1) the contractor to carry on an independent business, undertaking the contract work on his own account under his own responsibility, free from the control and direction of the employer except as to results, and (2) the contractor to have substantial capital or investment. Lupo's subsequent insolvency was an after-the-fact development that did not detract from his status as an independent contractor.

• Indirect Employer Status: The NLRC's submission that Article 107 does not apply because its coverage is limited to one "not an employer," whereas GMC is an employer under Article 97(b), was rejected. The Court clarified that the phrase "not being an employer" in Article 107 must be read in conjunction with Article 106. Under the peculiar setup, GMC is "not an employer" in the sense of not being a direct employer as understood in Article 106, but qualifies as an "indirect employer" under Article 107. A contrary interpretation would render Article 107 meaningless, since every time an employer engages a contractor, the latter always acts in the interest of the former. The distinction between the two articles lies in the nature of the contracting: Article 106 deals with labor-only contracting, where the contractor is a mere agent and the employer is directly responsible; Article 107 deals with job contracting, where the contractor is the direct employer and the principal is merely an indirect employer by operation of law, with no employer-employee relationship existing between the project owner and the contractor's employees.

• Distinction Between Labor-Only Contracting and Job Contracting — Labor-only contracting exists where (1) 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 (2) the workers recruited are performing activities directly related to the principal business of the employer. In labor-only contracting, the contractor is considered a mere agent of the employer, who is responsible to the workers as if they were directly employed. In job contracting, the contractor carries on an independent business, undertakes the contract work on his own account under his own responsibility, free from the control and direction of the employer except as to results, and has substantial capital or investment. No employer-employee relationship exists between the project owner and the contractor's employees; the owner is merely an indirect employer by operation of law. The Court applied this distinction to hold that the construction of an annex building, being unrelated to GMC's flour and feeds manufacturing business, constituted job contracting, not labor-only contracting.

• Solidary Liability of the Indirect Employer — Under Article 109 of the Labor Code, every employer or indirect employer is held responsible with the contractor or subcontractor for any violation of the Labor Code, and for purposes of determining civil liability, they are considered direct employers. The Court applied this to hold GMC solidarily liable with Lupo for unpaid wages, notwithstanding that GMC was not the direct employer of the petitioners.

• Bond Requirement Under Article 108 — An employer or indirect employer may require the contractor to furnish a bond equal to the cost of labor under contract, to answer for wages due the employees should the contractor fail to pay. The Court held that GMC's failure to require Lupo to post such a bond further obliges GMC to answer for Lupo's liabilities to his employees, without prejudice to GMC's right to seek reimbursement.

• "Since the construction of an annex building inside the company plant has no relation whatsoever with the employer's business of flour and feeds manufacturing, 'labor-only' contracting does not exist. Article 106 is thus inapplicable." — This passage articulates the ratio decidendi distinguishing job contracting from labor-only contracting, establishing that direct relation to the employer's principal business is the decisive criterion.

• "Being an 'indirect employer,' GMC is solidarily liable with LUPO for any violation of the Labor Code pursuant to Article 109 thereof." — This statement defines the statutory basis for the solidary liability of the principal in a job contracting arrangement, linking Articles 107 and 109.

• "The phrase 'not being an employer' found in Article 107 must be read in conjunction with Article 106. A contrary interpretation would render the provisions of Article 107 meaningless considering that everytime an employer engages a contractor, the latter is always acting in the interest of the former, whether directly or indirectly, in relation to his employees." — This passage resolves the interpretive tension between Articles 106 and 107, clarifying that "not being an employer" means "not a direct employer" in the Article 106 sense, not "not an employer" under the general definition in Article 97(b).

• Deferia vs. NLRC, G.R. No. 78713, Feb. 27, 1991 — Applied as precedent for the proposition that Articles 107 and 109 serve as the statutory basis for the joint and several liability of the employer with his contractor, in addition to Article 106, where the situation involves labor-only contracting.
• Associated Anglo-American Tobacco Corp. vs. Clave, G.R. No. 50915, Aug. 30, 1990, 189 SCRA 127 — Cited for the doctrine that a finding of labor-only contracting is equivalent to declaring an employer-employee relationship between the project owner and the contractor's employees, since the labor-only contractor is a mere agent of the employer.
• Industrial Timber Corp. vs. NLRC, G.R. No. 83616, Jan. 20, 1989, 169 SCRA 341 — Cited alongside Associated Anglo-American Tobacco Corp. vs. Clave for the same proposition on the legal effect of labor-only contracting findings.

• Article 106, Labor Code — Defines contractor or subcontractor and labor-only contracting. The Court held this provision inapplicable because the construction work was not directly related to GMC's principal business, precluding a finding of labor-only contracting.
• Article 107, Labor Code — Defines indirect employer, providing that the provisions of Article 106 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. The Court applied this provision to classify GMC as an indirect employer.
• Article 108, Labor Code — Requires the posting of a bond by the contractor to answer for wages due employees should the contractor fail to pay. The Court held that GMC's failure to require Lupo to post such a bond further obliges GMC to answer for Lupo's liabilities.
• Article 109, Labor Code — Imposes solidary liability on every employer or indirect employer with the contractor or subcontractor for any violation of the Labor Code, deeming them direct employers for purposes of determining civil liability. The Court applied this as the statutory basis for GMC's solidary liability with Lupo.
• Article 97(b), Labor Code — Defines "employer" as any person acting directly or indirectly in the interest of an employer in relation to an employee. The Court addressed the NLRC's argument based on this definition, clarifying that GMC, while an employer under this provision, is "not an employer" in the Article 106 sense and thus qualifies as an indirect employer under Article 107.
• Article 1728, Civil Code — Provides that the contractor is liable for all claims of laborers and others employed by him. The Court referenced this as the existing law referred to in Article 109's phrase "the provisions of existing laws to the contrary notwithstanding."

Paras, Sarmiento, and Regalado, JJ., concurred.

Padilla, J., filed a separate opinion concurring in the result but disagreeing with the legal basis. He argued that GMC's solidary liability should be predicated on the second paragraph of Article 106 of the Labor Code—which covers employers (not non-employers) and provides that the employer shall be solidarily liable to the contractor's employees to the extent of the work performed—rather than on Article 107, which he contended applies only to non-employers (e.g., a homeowner who engages a contractor to build a residence). In his view, Article 106 deals with three situations in the employer-contractor-employee relationship, not solely with labor-only contracting, and the second paragraph thereof directly addresses the scenario where the contractor defaults on wage obligations.