De Silva vs. Urban Konstruct Studio, Inc.

A finding of labor-only contracting establishes an employer-employee relationship between the principal and the workers supplied by the contractor, and the employer bears the burden of proving a valid or authorized cause for dismissal; failure to discharge that burden renders the dismissal illegal and entitles the employee to backwages, retirement benefits, damages, and attorney's fees.

Nori Castro De Silva was a carpenter who claimed employment with three construction companies associated with Patrick Candelaria: Urban Konstruct Studio, Inc., formerly CA Team Plus Construction, Inc., and CNP Construction, Inc. The companies were engaged in general construction, maintenance, and landscaping of residential, commercial, and industrial structures. The dispute implicated the Labor Code provisions on labor-only contracting, illegal dismissal, and retirement benefits, as well as the constitutional policy of protection to labor and security of tenure. Respondents later characterized the arrangement as job contracting with M.L. Lopez Construction Services as the contractor or subcontractor.

Nori Castro De Silva was employed in April 2009 by Urban Konstruct Studio, Inc. as a carpenter. For eight years, he performed carpentry works for three construction companies owned by respondent Patrick Candelaria: CA Team Plus Construction, Inc., CNP Construction, Inc., and Urban Konstruct. As proof of employment, Nori submitted four company identification cards issued in his name by Urban Konstruct, CA Team Plus, and CNP Construction. All four IDs indicated his name, position, address, and date of validity. The CNP Construction ID and one CA Team Plus ID with validity date December 30, 2016 indicated M.L. Lopez Construction Services as his employer, while the employer was left blank on the IDs issued by Urban Konstruct and by CA Team Plus with validity date June 30, 2017.

On January 4, 2018, Nori's brother Adlir de Silva, the leadman of Urban Konstruct, informed Nori that he was already dismissed from employment, telling him, "Umuwi ka na, wag ka na daw magtrabaho." On January 25, 2018, Nori filed a complaint against Urban Konstruct, formerly CA Team Plus Construction, CNP Construction, and Patrick for constructive dismissal, non-payment of service incentive leave, and 13th month pay. He also claimed retirement pay for eight years of service and prayed for moral and exemplary damages and attorney's fees.

Respondents averred that Nori was employed only on January 25, 2017 when Urban Konstruct was incorporated. According to Urban Konstruct, Nori was initially an employee of M.L. Lopez Construction Services until the death of its owner, Marcos Lopez, sometime in December 2016; as Lopez's good friend, Patrick absorbed some of his employees, and Nori was one of them. On January 3, 2018, without the knowledge of respondents, Nori filed a complaint before the DOLE CAMANAVA Office for constructive dismissal, payment of retirement benefits, and other monetary claims. On January 4, 2018, Patrick received a letter from Nori requesting retirement pay and 13th month pay for eight years, claiming these benefits were mandatory under the Labor Code because he had reached retirement age. Upon receipt, Patrick asked Adlir to tell Nori to come to the office so they could talk about the demand. Nori did not go to the office and did not report again to work.

Romano M. Calayag, another foreman employed by Urban Konstruct, executed a Sinumpaang Salaysay on April 4, 2018. He narrated that on January 4, 2018, Adlir told him that Nori, instead of reporting for work, took his tools from the construction site. Romano reported the matter to Patrick, who instructed him to ask Adlir to have Nori come to the office for a personal meeting. Adlir refused to talk to his brother because of a misunderstanding between them. Romano relayed the message to Christopher Oligario, who later told him that Nori did not want to go to the office because he feared he might be sued or imprisoned by Patrick. Patrick eventually learned about the complaint Nori filed with the DOLE. Respondents argued that Nori was not illegally dismissed because he abandoned his work without justifiable cause, and that he was not entitled to retirement pay because he was employed for just more than a year, short of the five-year requirement under Article 302 of the Labor Code.

The Labor Arbiter found no evidence that Nori was illegally dismissed or entitled to his monetary claims; it noted that Nori could have submitted an affidavit from Adlir, that there was no written notice of dismissal and no proof Nori was prevented from entering the premises, and that there was no basis to treat the three construction companies as one and the same or to show Patrick owned and managed all three. The NLRC found Nori's letter demanding retirement benefits to be courteous and inconsistent with illegal dismissal, found no basis to pierce the corporate veil, and found from the records that Nori rendered service only at most one year with Urban Konstruct.

• Substantial Justice and Security of Tenure: Nori prayed that the case be resolved on the merits to advance social justice and for the protection of his constitutional right to security of tenure.
• Illegal Dismissal: Nori maintained that he was illegally dismissed when he was verbally instructed not to go to work.
• Retirement Pay: Nori insisted on his entitlement to retirement pay for having worked with respondents for eight years.

• Procedural Non-Compliance: Respondents pointed out petitioner's failure to strictly comply with the requirements of the Rules of Court and A.M. No. 10-3-7-S for filing a petition for review on certiorari.
• Failure to Substantiate: Respondents reiterated the finding of the labor tribunals that Nori failed to substantiate his claim of illegal dismissal and his entitlement to retirement benefits.
• Abandonment: Respondents argued that Nori was not illegally dismissed because he abandoned his work without justifiable cause.
• Retirement Eligibility: Respondents argued that Nori was not entitled to retirement pay because he was employed for just more than a year, short of the five-year requirement under Article 302 of the Labor Code.

• Procedural Relaxation: Whether the Court of Appeals erred in dismissing the petition for certiorari on technical grounds and whether the Supreme Court should relax the Rules of Court to resolve the case on the merits.
• Employer-Employee Relationship: Whether Nori was an employee of respondents from April 2009 to January 4, 2018, or only of Urban Konstruct from January 25, 2017.
• Labor-Only Contracting: Whether the arrangement with M.L. Lopez Construction Services was permissible job contracting or prohibited labor-only contracting, making respondents the direct employers.
• Illegal Dismissal: Whether Nori was illegally dismissed on January 4, 2018 or abandoned his work.
• Retirement and Monetary Benefits: Whether Nori is entitled to retirement pay, service incentive leave pay, and 13th month pay.
• Damages and Attorney's Fees: Whether Nori is entitled to moral and exemplary damages and attorney's fees.

• Procedural Relaxation: Yes. The Court of Appeals' technical dismissal was reversed and set aside; rules of procedure may be relaxed in labor cases to serve substantial justice and the constitutional protection to labor.
• Employer-Employee Relationship: Yes. Nori was an employee of respondents from April 2009 to January 4, 2018, as established by substantial evidence including company IDs and incorporation documents.
• Labor-Only Contracting: Yes. The arrangement was labor-only contracting; absent proof of the requisites for permissible contracting, respondents are the direct employers.
• Illegal Dismissal: Yes. Nori was illegally dismissed on January 4, 2018; respondents failed to prove a valid or authorized cause and procedural due process.
• Retirement and Monetary Benefits: Yes. Having served at least five years, Nori is entitled to retirement pay, service incentive leave pay, and 13th month pay, computed until December 6, 2019.
• Damages and Attorney's Fees: Yes. Bad faith and deception justified moral and exemplary damages of P50,000.00 each and attorney's fees of 10% of the total monetary award.

• Procedural Relaxation: The policy of the judicial system is to encourage full adjudication of the merits of an appeal, and technical rules may be relaxed where substantial justice would be better served. The CA dismissed Nori's petition for failure to indicate material dates, failure to attach proof of service, and because his motion for reconsideration before the NLRC was filed out of time. Citing Diamond Taxi vs. Llamas, Jr. and Article 221 (now Article 227) of the Labor Code, the Court emphasized that rules of procedure are mere tools designed to facilitate justice and that a strict, rigid application which frustrates rather than promotes substantial justice must be avoided. The dismissal of an employee's appeal on purely technical grounds is inconsistent with the constitutional mandate on protection to labor and security of tenure; thus, the petition was given due course.
• Employer-Employee Relationship: The existence of an employer-employee relationship is a question of fact, and substantial evidence is sufficient to establish it. Nori's evidence consisted of his own statements, four company IDs, and the Certificates of Incorporation, Articles of Incorporation, and By-Laws of the respondents; respondents relied on counter-statements, Romano's Sinumpaang Salaysay, and Nori's letter. The company IDs issued by CA Team Plus and Urban Konstruct showed the same business address and telephone number; their Articles of Incorporation stated the same primary purpose; Patrick was an incorporator of both Urban Konstruct and CNP Construction; respondents acknowledged that Urban Konstruct was formerly CA Team Plus; and the IDs issued by CNP Construction and CA Team Plus both indicated M.L. Lopez Construction Services as employer. These facts showed that the three construction companies were related, and there was no explanation why Nori was issued IDs by CNP Construction on December 30, 2011 and by CA Team Plus on December 30, 2016 and June 30, 2017 if he was hired only on January 25, 2017. With no proof that CNP Construction and CA Team Plus were dissolved, the evidence justified the conclusion that Nori was an employee of CA Team Plus, Urban Konstruct, and CNP Construction, not M.L. Lopez Construction Services.
• Labor-Only Contracting: Respondents portrayed the arrangement as job contracting, with themselves as principal, M.L. Lopez Construction Services as contractor or subcontractor, and Nori as the worker engaged by M.L. Lopez. Under Section 8, Department Order No. 174, Series of 2017, contracting or subcontracting is allowed only if all of the following concur: (1) the contractor is engaged in a distinct and independent business and performs the job on its own responsibility, according to its own manner and method; (2) the contractor has substantial capital to carry out the job, including investment in tools, equipment, machinery, and supervision; (3) the contractor is free from the control and direction of the principal in all matters connected with the performance of the work except as to the result; and (4) the Service Agreement ensures compliance with all rights and benefits of the contractor's employees under labor laws. Absent any requisite makes the entity a labor-only contractor, an arrangement prohibited under Article 106 of the Labor Code and its implementing rules. No evidence showed that M.L. Lopez Construction Services was an independent contractor, and respondents submitted no proof that it was not engaged in labor-only contracting. A finding of labor-only contracting is equivalent to a declaration that an employer-employee relationship exists between the principal and the employees of the supposed contractor, and this relationship was made more apparent because respondents issued the company IDs to Nori instead of M.L. Lopez Construction Services.
• Illegal Dismissal: Respondents' pleadings and filings did not convince the Court that Nori failed to adduce evidence of illegal dismissal. Respondents did not deny Nori's assertion that he was verbally instructed not to report for work; Romano's Sinumpaang Salaysay merely narrated how Patrick sought a meeting with Nori to settle the retirement pay issue. The Sinumpaang Salaysay was self-serving, having been executed only on April 4, 2018 when the complaint was already pending before the Labor Arbiter; a written response to Nori's letter would have been more prudent, and respondents should have issued a Notice to Return to Work when Nori stopped reporting. The fact that the complaint for illegal dismissal was filed a day before Nori wrote the letter demanding retirement benefits did not negate dismissal, and the absence of hostility in the letter could not indicate abandonment, since Nori could not adopt a belligerent attitude while asking for retirement pay after eight years of service. Nori was therefore dismissed on January 4, 2018 when Adlir told him "Umuwi ka na, wag ka na daw magtrabaho." Doubts in any controversy between a laborer and his master are resolved in favor of the laborer, and the burden of proving that dismissal was for a valid or authorized cause lies on the employer; respondents presented no such proof and no evidence of procedural due process.
• Retirement and Monetary Benefits: Under Article 302 of the Labor Code, five years is the minimum service required before an employee may avail of retirement benefits upon reaching optional or compulsory retirement age, and the entitlement was enacted as a labor protection measure. Having concluded that Nori was an employee of respondents since April 2009, and with respondents raising no other ground for relief from their duty to provide retirement benefits, Nori was entitled to retirement benefits under Article 302. The same reasoning applied to his entitlement to service incentive leave pay and 13th month pay. Nori was already 63 years old when he filed his complaint in January 2018; were it not for his illegal dismissal, he could have continued his employment until reaching the compulsory retirement age of sixty-five on December 6, 2019. Accordingly, backwages, retirement benefits, incentive leave pay, and 13th month pay were computed until December 6, 2019.
• Damages and Attorney's Fees: Moral damages are awarded in illegal dismissal cases when the employer acted (a) in bad faith or fraud; (b) in a manner oppressive to labor; or (c) in a manner contrary to morals, good customs, or public policy. Exemplary damages may be imposed by way of example or correction for the public good. Respondents acted in bad faith because there was deception when they tried to avoid Nori's entitlement to retirement benefits by making it appear that he was an employee of Urban Konstruct only. Nori was thus entitled to moral and exemplary damages, and attorney's fees of 10% of the total monetary award because he was forced to litigate to vindicate his rights which had been unjustly violated by respondents.

• Relaxation of Procedural Rules in Labor Cases — Under Article 221 (now Article 227) of the Labor Code and jurisprudence, rules of procedure are mere tools designed to facilitate the attainment of justice; a strict and rigid application that frustrates rather than promotes substantial justice should not be allowed, especially where dismissal of an employee's appeal on purely technical grounds would be inconsistent with the constitutional mandate on protection to labor and security of tenure. The Court applied this doctrine to give due course to Nori's petition despite the CA's dismissal for non-compliance with the Rules of Court.
• Labor-Only Contracting — Under Article 106 of the Labor Code and Section 8, Department Order No. 174, Series of 2017, contracting or subcontracting is allowed only if all of the following requisites concur: (1) the contractor or subcontractor is engaged in a distinct and independent business and undertakes to perform the job on its own responsibility, according to its own manner and method; (2) the contractor or subcontractor has substantial capital to carry out the job farmed out by the principal, including investment in tools, equipment, machinery, and supervision; (3) the contractor or subcontractor is free from the control and direction of the principal in all matters connected with the performance of the work except as to the result; and (4) the Service Agreement ensures compliance with all rights and benefits for all employees of the contractor or subcontractor under labor laws. Absent any requisite makes the entity a labor-only contractor, and a finding of labor-only contracting is equivalent to a declaration that an employer-employee relationship exists between the principal and the employees of the supposed contractor. The Court applied this doctrine because respondents failed to prove that M.L. Lopez Construction Services was an independent contractor and not a labor-only contractor.
• Employer-Employee Relationship and Substantial Evidence — The existence of an employer-employee relationship is essentially a question of fact, and substantial evidence is sufficient to establish it; no particular form of evidence is required, but the finding must rest on substantial evidence. The Court applied this doctrine by relying on company IDs, incorporation documents, shared business address and purpose, Patrick's incorporations, and the lack of explanation for IDs issued before the claimed hiring date to conclude that Nori was an employee of the three related construction companies.
• Burden of Proof in Illegal Dismissal — The burden of proving that an employee's dismissal was for a valid or authorized cause lies on the employer; failure to discharge this burden makes the employer liable for illegal dismissal. The Court applied this doctrine because respondents presented no proof of a valid or authorized cause and no evidence of procedural due process.
• Retirement Benefits under Article 302 — In the absence of a retirement plan or agreement, an employee who has served at least five years in the establishment and reaches the optional retirement age of sixty or the compulsory retirement age of sixty-five may retire and is entitled to retirement pay equivalent to at least one-half month salary for every year of service, with a fraction of at least six months considered one whole year. The Court applied this doctrine to hold that Nori, employed since April 2009, was entitled to retirement benefits, computed until December 6, 2019.
• Moral and Exemplary Damages in Illegal Dismissal — Moral damages are awarded in illegal dismissal cases when the employer acted (a) in bad faith or fraud; (b) in a manner oppressive to labor; or (c) in a manner contrary to morals, good customs, or public policy; exemplary damages may be imposed by way of example or correction for the public good. The Court applied this doctrine because respondents acted in bad faith by trying to avoid Nori's retirement benefits through the pretense that he was employed only by Urban Konstruct.
• Attorney's Fees — Attorney's fees may be recovered when a party is forced to litigate to vindicate rights unjustly violated. The Court applied this doctrine by awarding 10% of the total monetary award.

• "In dismissing Nori's petition on technicalities, the CA overlooked the right of Nori that his case be fully adjudicated on the merits. Rules of procedure are mere tools designed to expedite the decision or resolution of cases and other matters pending in court. A strict and rigid application of rules on the basis of technicalities that tend to frustrate rather than promote substantial justice must be avoided." — This passage states the ratio for relaxing procedural rules in labor cases and explains why the CA's technical dismissal was reversed.
• "A finding that a contractor is engaged in a 'labor-only' contracting arrangement is equivalent to a declaration that there is an employer-employee relationship between the principal and the employees of the supposed contractor." — This passage defines the legal consequence of labor-only contracting, which made respondents the direct employers of Nori.
• "Further, the burden of proving that the dismissal of an employee was for a valid or authorized cause lies on the employer. The failure to discharge this burden makes the employer liable for illegal dismissal." — This passage states the controlling rule on the burden of proof in illegal dismissal, which respondents failed to satisfy.
• "Under Article 302 of the Labor Code, five years is the minimum number of years to be rendered by the employee before he can avail of the retirement benefits upon reaching optional or compulsory retirement age." — This passage states the minimum service requirement for retirement benefits, which Nori met based on his employment since April 2009.

• Diamond Taxi vs. Llamas, Jr., 729 Phil. 364 (2014) — Instructive precedent cited for relaxing technical rules in labor cases under Article 221 (now Article 227) of the Labor Code; the Court quoted it to justify giving due course despite the CA's technical dismissal.
• Atty. Uy vs. Villanueva, 553 Phil. 69, 80 (2007) — Cited for the policy of encouraging full adjudication of the merits of an appeal.
• EDI Staff Builders International, Inc. vs. Magsino, 411 Phil. 730, 738 (2001) — Cited for relaxing technical rules where the ends of substantial justice are better served.
• Havtor Management Phils., Inc. vs. NLRC, 423 Phil. 509, 513 (2001) — Cited for disregarding procedural lapses to allow examination of the conflicting rights and responsibilities of the parties.
• Cusi-Hernandez vs. Sps. Diaz, 390 Phil. 1245, 1252 (2000) — Cited for avoiding strict application of rules that frustrates rather than promotes substantial justice.
• Masing and Sons Dev't. Corp. vs. Rogelio, 670 Phil. 120, 129-130 (2011) — Cited for substantial evidence as sufficient to prove the existence of an employer-employee relationship.
• Almeda vs. Asahi Glass Philippines, Inc., 586 Phil. 103, 111-112 (2008) — Cited for the requisites of permissible contracting or subcontracting under Department Order No. 174.
• Manila Water Co., Inc. vs. Pena, 478 Phil. 68, 78-79 (2004) and Corporal, Sr. vs. NLRC, 395 Phil. 890, 898-899 (2000) — Cited for labor-only contracting principles.
• Alilin vs. Petron Corporation, 735 Phil. 509, 527 (2014), citing Superior Packaging Corp. vs. Balagsay, 697 Phil. 62, 73 (2012) — Cited for the rule that labor-only contracting makes the principal the employer of the contractor's employees.
• Oro Enterprises, Inc. vs. National Labor Relations Commission, 308 Phil. 108, 116 (1994) — Cited for retirement benefits as a labor protection measure.
• Daguinod vs. Southgate Foods, Inc., G.R. No. 227795, February 20, 2019 — Cited for moral and exemplary damages in illegal dismissal.

• Article 302, Labor Code — Provides that in the absence of a retirement plan or agreement, an employee who has served at least five years and reaches the optional retirement age of sixty or the compulsory retirement age of sixty-five may retire and is entitled to retirement pay equivalent to at least one-half month salary for every year of service, with a fraction of at least six months considered one whole year. Applied to hold Nori entitled to retirement benefits, computed until December 6, 2019.
• Article 106, Labor Code — Governs contractor or subcontractor arrangements and prohibits labor-only contracting; where the contractor is a labor-only contractor, the contractor is considered merely an agent of the employer, who is responsible to the workers as if they were directly employed. Applied because respondents failed to prove M.L. Lopez Construction Services was an independent contractor.
• Section 8, Department Order No. 174, Series of 2017 — Lists the requisites for permissible contracting or subcontracting: independent business, substantial capital, freedom from principal's control except as to result, and a Service Agreement ensuring labor law rights and benefits. Applied to find that absent these requisites, the arrangement was labor-only contracting.
• Article 221 (now Article 227), Labor Code — Directs the Commission, its members, and Labor Arbiters to use every and all reasonable means to ascertain the facts speedily and objectively without regard to technicalities of law or procedure, in the interest of due process. Applied to relax procedural rules and give due course to Nori's petition.
• Section 3, paragraph 2, Rule 46; Section 3, paragraph 3, Rule 46; and Section 13, Rule 13, Revised Rules of Court — Cited as the procedural requirements the CA found violated: failure to indicate material dates, failure to attach proof of service, and the late motion for reconsideration before the NLRC. The Court relaxed these rules in the interest of substantial justice.
• A.M. No. 10-3-7-S — Re: Proposed Rules on E-Filing; respondents invoked petitioner's failure to comply with it in filing the petition for review on certiorari. The Court did not deny relief on this procedural ground.
• Constitution (protection to labor and security of tenure) — Cited generally in the decision as the constitutional basis for not allowing technical infirmities in labor pleadings to defeat the worker's right to security of tenure.

Leonen, Zalameda, Rosario, and Dimaampao, JJ., concur.