Conqueror Industrial Peace Management Cooperative vs. Balingbing

A contractor possessing substantial capital of at least ₱3,000,000 cannot be deemed a labor-only contractor even if the workers it supplies perform activities directly related to the principal's main business, because the two requisites under Article 106 of the Labor Code—lack of substantial capital or investment, and direct relation of the employees' work to the principal's business—must concur; the absence of one negates labor-only contracting. The law uses the conjunction "or" between "substantial capital" and "investment," meaning a contractor need not have both, but the conjunction "and" between the lack-of-capital element and the direct-relation element means both must be present for labor-only contracting to exist.

Sagara Metro Plastics Industrial Corporation is a domestic corporation engaged in the manufacture of various plastic parts and tubes for automotive wiring harnesses, non-automotive applications, and fabrication of molding dies. Conqueror Industrial Peace Management Cooperative is a service cooperative engaged in performing specific jobs requiring special services for different clientele. The two entities maintained a Contract of Service under which Conqueror deployed workers to Sagara's plant to perform ancillary or logistic support services. Respondents were among the workers so deployed and sought to be declared regular employees of Sagara, claiming Conqueror was a mere labor-only contractor.

Sagara Metro Plastics Industrial Corporation is a domestic corporation engaged in the manufacture of various plastic parts and tubes for automotive wiring harnesses, non-automotive applications, and fabrication of molding dies. Conqueror Industrial Peace Management Cooperative is a service cooperative engaged in performing specific jobs requiring special services for different clientele. The two entities maintained a Contract of Service under which Conqueror deployed workers to Sagara's plant to perform ancillary and logistic support services, including manual transporting of materials from the storage warehouse to the work station, loading finished goods onto delivery trucks, labeling products, and recycling waste materials.

On June 8, 2015, respondents Joey Balingbing, Ernesto Quing, Ariel Velasquez, Elvin John Fernandez, and Lean Dennis Osena, for themselves and on behalf of 149 other employees, filed a Complaint for Inspection against Sagara and Conqueror with the DOLE, alleging violation of labor laws particularly DOLE Department Order No. 18-A, Series of 2011. Respondents claimed that Conqueror was a mere labor-only contractor and that Sagara was their true employer, citing three reasons: Conqueror was not registered with the DOLE, it had no substantial capital or investment in the form of tools or equipment, and Sagara exercised control and supervision over them. Respondents prayed that they be declared regular employees of Sagara and entitled to the benefits under its existing Collective Bargaining Agreement.

Acting on the complaint, DOLE Compliance Officers visited Sagara's plant and noted non-compliance with Sections 6 and 9 of DO 18-A-11. During the inspection, Conqueror also failed to present certain documents, including a solo parent leave policy, a list of safety officers and first-aiders, administrative reports on health and safety, and employment contracts. Conqueror submitted the required documents on June 29, 2015. Sagara filed an Opposition, manifesting that the question of whether an employer-employee relationship exists is evidentiary in nature and cannot be determined by a mere ocular inspection. At the mandatory conference on July 13, 2015, Conqueror filed its own Opposition, averring that it was a legitimate job contractor and submitting its current and previous Certificates of Registration issued by the DOLE.

As the parties failed to settle, the DOLE Regional Director required them to submit position papers. Respondents reiterated their arguments and submitted evidence including a list of employees who did not render overtime work, company identification cards, a machine operator and reliever schedule, and a finishing inspection production plan. Sagara denied that respondents were its employees, contending that Conqueror deployed them for non-core activities and presenting affidavits from its own employees explaining the nature of respondents' work and testifying that Sagara exercised no supervision over them. Conqueror asserted it was a legitimate job contractor and submitted its Certificates of Registration from 2008 to 2014 and its audited financial statement for 2014 showing it met the required substantial capitalization of ₱3,000,000.00. The DOLE Regional Director dismissed the complaint on October 6, 2015, finding both entities compliant with DO 18-A-11. On appeal, the DOLE Secretary affirmed this ruling on May 16, 2016, holding that Conqueror proved it met the substantial capital requirement and exercised control and supervision over respondents. The Secretary denied respondents' motion for reconsideration on October 24, 2016.

Respondents then elevated the matter to the Court of Appeals, which reversed the DOLE Secretary on June 28, 2019. The CA held that the labor officials committed grave abuse of discretion in finding Conqueror a legitimate job contractor, ruling instead that Conqueror was a labor-only contractor and Sagara was the actual employer. The CA relied on an inspection hourly monitoring report showing Sagara monitored respondents' output, Sagara's list of employees who did not render overtime work, and certifications showing that 17 respondents were former contractual or project-based employees of Sagara. The CA denied Sagara's motion for reconsideration on October 29, 2019, prompting the consolidated petitions before the Supreme Court.

• Legitimate Job Contractor Status: Conqueror argued that it was a legitimate job contractor, submitting its Certificates of Registration from 2008 to 2014 issued by the DOLE and its audited financial statement for 2014 showing it met the required substantial capitalization of ₱3,000,000.00.
• Non-Core Activities: Sagara maintained that respondents were not its employees, pointing out that Conqueror deployed them to perform non-core activities such as manual transporting of materials, printing of product labels, loading of finished goods to delivery trucks, recycling of waste materials, and other logistic support services.
• No Supervision by Principal: Sagara argued that it exercised no supervision over respondents, presenting affidavits from its own employees who explained the nature of respondents' work and testified that Sagara did not supervise them.
• Evidentiary Nature of Employer-Employee Relationship: Sagara manifested that the question of whether an employer-employee relationship exists is evidentiary in nature and cannot be determined by a mere ocular inspection.

• Labor-Only Contractor: Respondents argued that Conqueror was a mere labor-only contractor because it was not registered with the DOLE, had no substantial capital or investment in the form of tools or equipment, and Sagara exercised control and supervision over them.
• Sagara as True Employer: Respondents contended that Sagara was their true employer and prayed that they be declared regular employees of Sagara, entitled to the benefits enjoyed by its regular employees under the existing Collective Bargaining Agreement.
• Violation of DO 18-A-11: Respondents asserted that Conqueror and Sagara violated Sections 6 and 9 of DO 18-A-11, which prohibit labor-only contracting and prescribe required contracts.

• Nature of Activities: Whether respondents performed activities which were directly necessary to the line of business of Sagara.
• Legitimate Job Contractor: Whether Conqueror is a legitimate job contractor.
• Employer-Employee Relationship: Whether respondents were employees of Conqueror or Sagara.

• Nature of Activities: Not dispositive. Even assuming respondents' activities were directly related to Sagara's main business, this alone does not make Conqueror a labor-only contractor, as the two requisites under Article 106 of the Labor Code must concur.
• Legitimate Job Contractor: Yes. Conqueror had substantial capital of more than ₱3,000,000.00 and its own work premises, satisfying the statutory requirements for a legitimate job contractor under Article 106 of the Labor Code and Section 5(i) of DO 18-02.
• Employer-Employee Relationship: Conqueror was the employer. Applying the four-fold test, Conqueror selected, engaged, and deployed respondents; paid their wages; exercised the power of dismissal; and retained control over the means and methods of their work through its own supervisors.

• Nature of Activities: The Court did not definitively resolve whether respondents' activities were directly related to Sagara's main business, because this element alone is insufficient to establish labor-only contracting. Under Article 106 of the Labor Code and Section 5(i) of DO 18-02, labor-only contracting requires the concurrence of two elements: (1) the contractor does not have substantial capital or investment, and (2) the employees perform activities directly related to the principal's main business. The conjunction "and" between these elements means both must be present. Since Conqueror had substantial capital, the second element's presence or absence was rendered immaterial. The Court noted that outsourcing of services is not prohibited in all instances, and contractors are commonly outsourced to provide ancillary or logistic services such as janitorial, security, housekeeping, and other non-core services similar to those performed by respondents.

• Legitimate Job Contractor: Conqueror was presumed to have complied with all requirements of a legitimate job contractor by virtue of its Certificates of Registration issued by the DOLE. At any rate, Conqueror demonstrated substantial capital of more than ₱3,000,000.00 and maintained its own work premises at Unit 2807 Makati Corporate Office, City Land, Pasong Tamo Tower, Chino Roces Ave., Makati City. The Court emphasized that the law does not require a contractor to have both substantial capital and investment in the form of tools, equipment, and machineries, as gleaned from the use of the conjunction "or" in Article 106 and Section 5(i): "does not have substantial capital or investment." Had the legislature intended to require both, the conjunction "and" would have been used. Given the type of services Conqueror provided—manual transport, loading, labeling, and recycling—there was no need for it to invest in equipment or machineries in Sagara's plant. The CA erred in ruling that Conqueror was a labor-only contractor despite acknowledging its substantial capital, because the lack of substantial capital must concur with the direct-relation element, which concurrence was absent.

• Employer-Employee Relationship: Applying the four-fold test, the Court found that all elements pointed to Conqueror as the employer. On selection and engagement, Conqueror selected, engaged, and deployed respondents to Sagara. On payment of wages, the DOLE Compliance Officers found no transgression relating to salaries and benefits, and no finding that Sagara managed the payroll; Conqueror faithfully remitted SSS, PhilHealth, and Pag-IBIG contributions and its supervisors monitored attendance and released pay slips. On power of dismissal, Conqueror exercised disciplinary authority, as shown by a notice dated November 11, 2014 suspending respondent Pamplona for insubordination and a "Noticed to Explain" dated July 8, 2015 requiring another worker to explain absences; three respondents expressly recognized Conqueror as their employer in their resignation letters. On the power of control—the most important element—the CA erred in finding that Sagara exercised control based on its list of employees who did not render overtime work and its inspection hourly monitoring report. The Court explained that principals in service agreements routinely take cognizance of contractors' outputs to ascertain compliance with production quotas, and this practice does not establish control over the means and methods of work. Drawing on Orozco vs. Court of Appeals, the Court distinguished between rules that merely serve as guidelines toward achieving a desired result (which create no employer-employee relationship) and rules that control or fix the methodology (which do). Conqueror's supervisors—Edrozo, Fos, and Cariño—regularly monitored and supervised respondents' attendance and performance, inspected materials and work stations, and coordinated with Sagara representatives on manpower needs. The factual findings of the DOLE Regional Director and Secretary, who are deemed to have acquired expertise in matters within their jurisdiction, were in agreement and supported by substantial evidence, and were therefore accorded respect and finality.

• Labor-Only Contracting — Concurrence of Requisites — Under Article 106 of the Labor Code and Section 5(i) of DO 18-02, labor-only contracting exists when: (1) the contractor merely recruits, supplies, or places workers to perform a job for a principal; (2) the contractor does not have substantial capital of at least ₱3,000,000 or investment which relates to the job, work, or service to be performed; and (3) the employees are performing activities directly related to the main business of the principal. The second and third requisites must concur, as indicated by the conjunction "and." The absence of either negates labor-only contracting. In this case, because Conqueror had substantial capital exceeding ₱3,000,000, the second requisite was absent, and labor-only contracting could not be established regardless of whether respondents' activities were directly related to Sagara's business.

• Substantial Capital vs. Investment — "Or" Construction — The law uses the conjunction "or" between "substantial capital" and "investment" in Article 106 and Section 5(i), meaning a contractor need not possess both substantial capital and investment in the form of tools, equipment, and machineries. Possession of either is sufficient. Had the legislature intended to require both, it would have used "and." This construction recognizes the accustomed system in various industries where contractors provide ancillary or logistic services that do not require investment in equipment or machineries.

• Four-Fold Test of Employer-Employee Relationship — The existence of an employer-employee relationship is determined by the four-fold test: (1) the selection and engagement of the employee; (2) the payment of wages; (3) the power of dismissal; and (4) the power of control, which is the most important element. The totality of facts and surrounding circumstances must be considered. In this case, all four elements were satisfied by Conqueror, not Sagara.

• Control Test — Guidelines vs. Methodology — As articulated in Orozco vs. Court of Appeals, a distinction must be drawn between rules that merely serve as guidelines toward achieving a mutually desired result without dictating the means or methods, and rules that control or fix the methodology and bind the party hired to the use of such means. The former create no employer-employee relationship; the latter do. A principal's monitoring of a contractor's output to ascertain compliance with production quotas falls under the former category and does not establish control over the means and methods of the workers' performance.

• Respect for Factual Findings of Labor Officials — The factual findings of the DOLE Regional Director and Secretary, who are deemed to have acquired expertise in matters within their respective jurisdiction, are generally accorded not only respect but even finality, and bind the Court when supported by substantial evidence. This is especially true where, as in this case, both the Regional Director and the Secretary of DOLE are in agreement.

• "To be considered a labor-only contractor, the lack of substantial capital of the contractor must concur with the fact that the employees' work directly relates to the main business of the principal." — This passage states the core ratio decidendi: the two elements of labor-only contracting must concur, and the presence of substantial capital alone negates labor-only contracting regardless of the nature of the employees' work.

• "The law does not require a contractor to have both substantial capital and investment in the form of tools, equipment, machineries, etc. This can be gleaned from the use of the conjunction 'or' in Article 106 of the Labor Code and Section 5(i) of DO 18-02." — This passage defines the statutory construction governing the substantial capital requirement, clarifying that the disjunctive "or" means either capital or investment suffices—a formulation frequently relevant in contracting disputes.

• "Logically, the line should be drawn between rules that merely serve as guidelines towards the achievement of the mutually desired result without dictating the means or methods to be employed in attaining it, and those that control or fix the methodology and bind or restrict the party hired to the use of such means. The first, which aim only to promote the result, create no employer-employee relationship unlike the second, which address both the result and the means used to achieve it." — Quoted from Orozco vs. Court of Appeals, this passage articulates the canonical formulation of the control test distinction between result-oriented guidelines and methodology-fixing rules, a standard frequently cited in employer-employee relationship cases.

• "That Sagara had a list of employees who did not render overtime work and inspected the hourly outputs of respondents through its inspection hourly monitoring report does not sufficiently establish that Sagara exercised control over them." — This passage applies the control test to the specific facts, holding that a principal's monitoring of contractor output is a normal incident of service agreements and does not, by itself, establish employer-employee relationship.

• Neri vs. National Labor Relations Commission, 296 Phil. 610 (1993) — Cited for the principle that labor-only contracting requires the concurrence of lack of substantial capital and direct relation of the employees' work to the principal's main business.
• Orozco vs. Court of Appeals, 584 Phil. 35 (2008) — Cited for the control test distinction between guidelines that merely promote a result and rules that fix the methodology, the former creating no employer-employee relationship.
• Philippine Pizza, Inc. vs. Cayetano, G.R. No. 230030, August 29, 2018 — Cited for the proposition that a contractor is presumed to have complied with all requirements of a legitimate job contractor by virtue of its DOLE-issued Certificates of Registration.
• San Miguel Foods, Inc. vs. Rivera, 824 Phil. 961 (2018) — Cited in support of the construction that the conjunction "or" in the substantial capital/investment requirement means a contractor need not possess both.
• Fuji Television Network, Inc. vs. Espiritu, 749 Phil. 388 (2014) — Cited for the elements of the four-fold test in determining the existence of an employer-employee relationship.
• PCL Shipping Phil., Inc. vs. National Labor Relations Commission, 502 Phil. 554 (2005) — Cited for the doctrine that the factual findings of labor officials, who are deemed to have acquired expertise in matters within their jurisdiction, are accorded respect and even finality when supported by substantial evidence, especially when both the Regional Director and the Secretary of DOLE are in agreement.
• Lufthansa Technik Philippines, Inc. vs. Cuizon, G.R. No. 184452, February 12, 2020 — Cited for the exception allowing the Court to resolve factual questions in a petition for review on certiorari when the factual findings of the CA and the labor tribunals are contradictory.
• Universal Robina Corp. vs. Jumao-As, G.R. No. 212580, December 2, 2020 — Cited for the principle that outsourcing of services is not prohibited in all instances.
• Loreche-Amit vs. Cagayan De Oro Medical Center, Inc., G.R. No. 216635, June 3, 2019 — Cited for the principle that the totality of facts and surrounding circumstances must be considered in determining whether an employer-employee relationship exists.

• Article 106, Labor Code — Defines labor-only contracting as an arrangement where the person supplying workers to an employer does not have substantial capital or investment in the form of tools, equipment, machineries, work premises, among others, and the workers are performing activities directly related to the principal business of such employer. The Court applied this provision by holding that the conjunction "and" requires concurrence of both elements, and the conjunction "or" between "substantial capital" and "investment" means either suffices.
• Section 5(i), DOLE Department Order No. 18, Series of 2002 (DO 18-02) — Implements Article 106 by declaring labor-only contracting prohibited and defining it as an arrangement where the contractor does not have substantial capital or investment and the employees perform activities directly related to the main business of the principal, or where the contractor does not exercise the right to control over the performance of the work. The Court relied on this provision to establish the three requisites for labor-only contracting.
• Section 6, DOLE Department Order No. 18-A, Series of 2011 (DO 18-A-11) — Prohibits labor-only contracting and defines it similarly to Section 5(i) of DO 18-02, adding that the activities must be usually necessary or desirable to the operation of the company. Cited by respondents as allegedly violated by Conqueror and Sagara.
• Section 3(l), DO 18-A-11 — Defines "substantial capital" as paid-up capital stocks/shares of at least ₱3,000,000.00 in the case of corporations, partnerships, and cooperatives, or a net worth of at least ₱3,000,000.00 for single proprietorships. The Court applied this to confirm that Conqueror's capital of more than ₱3,000,000.00 met the statutory threshold.
• Section 9, DO 18-A-11 — Prescribes the required contracts under the rules, including employment contracts between the contractor and its employee and service agreements between the principal and the contractor. Cited by respondents as allegedly violated.

Perlas-Bernabe, S.A.J. (Chairperson), Hernando, Gaerlan, and Dimaampao, JJ., concurred.