Broadway Motors, Inc. vs. NLRC

The "control test" is the most important criterion in determining the existence of an employer-employee relationship, and where the putative employer exercises complete control and supervision over the worker's conduct, the worker is deemed an employee, not an independent contractor. A contractor who does not have substantial capital or investment and whose workers perform activities directly related to the principal business of the employer is a "labor-only" contractor, and the law itself establishes an employer-employee relationship between the employer and the contractor's workers.

Petitioner Broadway Motors, Inc. is an automotive repair shop. Private respondent Vicente Apolinario was engaged by the petitioner Corporation through a written undated "Work Contract" to perform auto painting work. The contract was signed by Apolinario as "Contractor" and by Mr. Johnny L. Chieng, the Parts and Service Operations Manager of the petitioner Corporation. The statutory backdrop includes the Labor Code and its Implementing Rules, specifically Sections 8 and 9 of Rule VIII, Book III of the Omnibus Rules Implementing the Labor Code, which define and distinguish "job contracting" from "labor-only" contracting.

Private respondent Vicente Apolinario began work as an auto painter in the premises of petitioner Broadway Motors, Inc. in March 1967, by virtue of a written undated "Work Contract." The contract was signed by Apolinario as "Contractor" and by Mr. Johnny L. Chieng, the Parts and Service Operations Manager of the petitioner Corporation. Apolinario worked as an auto painter for eighteen years, until 23 January 1985, when he was barred from entering the premises of the petitioner Corporation following his alleged involvement in a fist-fight with the shop superintendent the day before.

On 21 February 1985, Apolinario commenced an action for illegal dismissal with the National Capital Region Arbitration Branch of the NLRC, docketed as NLRC Case No. 2587-85, seeking separation pay of P66,676.95 based on an alleged monthly income of P7,408.55, moral damages of P50,000.00, and attorney's fees of P10,000.00. The Labor Arbiter dismissed the complaint, holding that under the Work Contract and an "Addendum to Work Contract" dated 28 April 1984, Apolinario was a mere contractor who supplied his own workers and could not be considered an employee. On appeal, the NLRC reversed, finding a valid employer-employee relationship and declaring the dismissal illegal for non-compliance with procedural due process.

The record showed that Apolinario was hired directly by petitioner Corporation to work in its auto repair shop as an auto painter. Apolinario and his men, designated as "Contract Workers," were compensated in lump sum payments described as "payment for sub-contract painting," from which an unexplained "three percent (3%) of fifteen percent (15%) withholding tax" was deducted. Apolinario invoiced the salaries of his "Contract Workers" under the designation "VM Automotive Repair Service," adding a three percent (3%) "sales tax." The Work Contract provided that Broadway Motors would negotiate only with Apolinario on work orders and would refrain from dealing with any member of his group.

The Work Contract required Apolinario and his "Contract Workers" to keep regular working hours and render overtime service when necessitated by the volume or immediacy of the work. They were not allowed to negotiate with customers regarding additional work beyond that authorized by the petitioner Corporation. Any defect in workmanship was subject to correction by the petitioner Corporation's designated supervisors and inspectors while the work was still in progress. Apolinario and his men were required to abide by the petitioner Corporation's regulations and policies, particularly on wearing uniforms and identification cards, which had to be worn at all times within the work premises. Their "casual workers" were required to deposit their ID cards with the security guard at the end of the working day.

Petitioner Corporation supplied all the tools, equipment, machinery, and materials necessary for Apolinario to carry out his assigned painting jobs, which were executed within the premises owned and maintained by the petitioner Corporation. There was no evidence that Apolinario had substantial capital investment in "VM Automotive Repair Service" or that it carried on a separate car repair business in its own premises. The alleged "Contract Work," except overtime, was performed during regular working hours six days a week, making it virtually impossible for Apolinario and his men to carry on an independent auto painting business outside the premises. The work performed — automobile painting — was directly related to, if not an integral part of, the regular business operations of the petitioner Corporation.

• Independent Contractor Status: Petitioner Corporation urged that Apolinario was not its employee but an independent contractor who conducted his own separate business under the trade name "VM Automotive Repair Service" and had his own "Contract Workers."
• Lack of Grave Abuse of Discretion: Petitioner Corporation argued that the NLRC had not been shown to have acted with grave abuse of discretion, or without or in excess of jurisdiction, in rendering its decision dated 4 February 1987.

• Employer-Employee Relationship: Respondent Apolinario maintained that he was an employee of petitioner Corporation, having been hired directly to work as an auto painter in its premises.
• Illegal Dismissal: Respondent argued that his dismissal was illegal because no investigation was conducted by petitioner Corporation to ascertain his participation in the fistfight within company premises, violating the requirements of procedural due process.

• Existence of Employer-Employee Relationship: Whether an employer-employee relationship existed between petitioner Corporation and private respondent Apolinario despite the existence of a "Work Contract" designating him as a "Contractor."
• Legality of Dismissal: Whether the dismissal of Apolinario was illegal for non-compliance with the requirements of procedural due process.

• Existence of Employer-Employee Relationship: Yes. An employer-employee relationship existed between petitioner Corporation and private respondent Apolinario, whether as a result of the contractual arrangements between them or as a result of the operation of the Labor Code and its Implementing Rules, because Apolinario was a "labor-only" contractor, not a true independent contractor.
• Legality of Dismissal: Yes, the dismissal was illegal. No compelling reason was shown to overturn the NLRC's finding that Apolinario was dismissed without any opportunity to present his side on the charge against him, violating procedural due process.

• Existence of Employer-Employee Relationship: The Court applied the four-factor test for determining the existence of an employer-employee relationship: (a) the manner of selection and engagement; (b) the mode of payment of wages; (c) the presence or absence of a power of dismissal; and (d) the presence or absence of a power to control the putative employee's conduct. The "control test" is the most important criterion. The record showed Apolinario was hired directly by petitioner Corporation, which reserved the power of dismissal, as evidenced by its unilateral termination of his relationship. The control exercised by petitioner Corporation was well-nigh complete: Apolinario and his men were required to keep regular working hours, render overtime, were not allowed to negotiate with customers, were subject to correction by supervisors and inspectors during work, and were required to wear uniforms and ID cards at all times. The Court distinguished "job contracting" from "labor-only" contracting under Sections 8 and 9 of Rule VIII, Book III of the Omnibus Rules Implementing the Labor Code. A "labor-only" contractor does not have substantial capital or investment and supplies workers performing activities directly related to the principal business of the employer. Here, petitioner Corporation supplied all tools, equipment, machinery, and materials; Apolinario had no substantial capital investment; and the painting work was directly related to the petitioner's automotive repair business. Under the law, a "labor-only" contractor is considered merely an agent or intermediary of the employer, and the law itself establishes an employer-employee relationship between the employer and the contractor's workers. The Court cited Philippine Bank of Communications vs. National Labor Relations Commission for the proposition that where labor-only contracting exists, the statute itself implies or establishes an employer-employee relationship between the employer and the employees of the labor-only contractor.
• Legality of Dismissal: The Court found no compelling reason to overturn the NLRC's factual finding that Apolinario was dismissed without any opportunity to present his side on the charge against him. The dismissal was therefore declared illegal for non-compliance with the requirements of procedural due process.

• Control Test — The most important criterion in determining the existence of an employer-employee relationship is the presence or absence of a power to control the putative employee's conduct. In this case, the Court found that petitioner Corporation exercised well-nigh complete control and supervision over Apolinario and his "Contract Workers" from the moment they entered the work premises until shop closing time, including requiring them to keep regular working hours, render overtime, wear uniforms and ID cards, and submit to correction by supervisors and inspectors during work.
• Labor-Only Contracting — Under Section 9 of Rule VIII, Book III of the Omnibus Rules Implementing the Labor Code, a person who undertakes to supply workers to an employer is 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 are performing activities directly related to the principal business or operations of the employer. Labor-only contracting is prohibited, and the contractor is considered merely an agent or intermediary of the employer, who is responsible to the workers as if they were directly employed by the employer. The Court applied this doctrine to find that Apolinario was a labor-only contractor, as petitioner Corporation supplied all tools and materials, and the painting work was integral to its automotive repair business.
• Job Contracting vs. Labor-Only Contracting — Under Section 8 of Rule VIII, Book III of the Omnibus Rules Implementing the Labor Code, job contracting is permissible only if (1) the contractor carries on an independent business and undertakes the contract work on his own account under his own responsibility according to his own manner and method, free from the control and direction of the employer except as to results, and (2) the contractor has substantial capital or investment in the form of tools, equipment, machineries, work premises, and other materials. The Court found that Apolinario did not meet these requisites, as he had no substantial capital and was subject to the complete control of petitioner Corporation.

• "Four factors are generally considered in determining the existence of an employer-employee relationship, namely: (a) the manner of selection and engagement of the putative employee; (b) the mode of payment of wages; (c) the presence or absence of a power of dismissal; and (d) the presence or absence of a power to control the putative employee's conduct. It is this latter factor, the so-called 'control test,' which is the most important criterion in such determination." — This passage articulates the canonical four-factor test and establishes the primacy of the control test in Philippine labor jurisprudence.
• "The legal effect of a finding that a contractor was not a true independent contractor or 'job contractor' but, rather, merely a 'labor-only' contractor was explained in Philippine Bank of Communications v. National Labor Relations Commission et al." — This passage introduces the controlling precedent on the legal effect of labor-only contracting, which is that the employer is responsible to the contractor's employees as if they were directly employed.
• "Thus, a finding that a contractor was a 'labor-only' contractor is equivalent to a finding that an employer-employee relationship existed between the owner and the 'labor-only' contractor including the latter's 'Contract Workers,' that relationship being attributed by the law itself." — This passage states the operative legal consequence of a labor-only contracting finding, which is the statutory establishment of an employer-employee relationship.

• Philippine Bank of Communications vs. National Labor Relations Commission, 146 SCRA 347 (1986) — Controlling precedent cited for the proposition that where labor-only contracting exists, the statute itself implies or establishes an employer-employee relationship between the employer and the employees of the labor-only contractor, and both the employer and the labor-only contractor are held responsible to the latter's employees for the safeguarding of their rights under the Labor Code.

• Section 8, Rule VIII, Book III, Omnibus Rules Implementing the Labor Code — Defines permissible job contracting, requiring that the contractor carries on an independent business free from the control and direction of the employer except as to results, and has substantial capital or investment in tools, equipment, machineries, work premises, and other materials. The Court applied this provision to determine that Apolinario did not qualify as a job contractor.
• Section 9, Rule VIII, Book III, Omnibus Rules Implementing the Labor Code — Defines labor-only contracting as occurring where the contractor does not have substantial capital or investment and the workers perform activities directly related to the principal business of the employer. The provision prohibits labor-only contracting and considers the contractor as merely an agent or intermediary of the employer. The Court applied this provision to find that Apolinario was a labor-only contractor and that an employer-employee relationship existed.

Fernan (Chairman), Gutierrez, Jr., Bidin, and Cortes, JJ., concurred.