Ecal vs. National Labor Relations Commission

A person who supplies workers to perform activities directly related to the principal business without substantial capital or investment in tools, equipment, machineries, or work premises is a labor-only contractor deemed a mere agent, with the principal considered the employer of the workers. Applied to Ecal's supply of kiln-drying laborers working within Hi-Line's premises with its equipment, petitioners were thus regular employees illegally dismissed and entitled to reinstatement with three years backwages.

Hi-Line Timber, Inc. operates a sawmill with a kiln drying section in Wakas, Bocaue, Bulacan, where lumber is segregated by size and loaded and unloaded in dryers. Isagani Ecal was originally its payroll laborer in that section. Articles 106 and 107 of the Labor Code, as implemented by Sections 8 and 9, Rule VIII, Book III of the Omnibus Rules, govern contracting arrangements by distinguishing permissible job contracting from prohibited labor-only contracting and defining resulting employer liability.

Isagani Ecal, Crisologo Ecal, Nelson Buenaobra, Narding Bandogelio, Wilmer Echague, Rogelio Castillo, Alfredo Fernando, Oligario Bigata, Roberto Ferrer, and Honesto Tanael sought relief against Hi-Line Timber, Inc. and foreman Jimmy Matchuka. According to petitioners, Isagani Ecal had worked since February 1986, Crisologo Ecal, Buenaobra, Bandogelio, Fernando, Bigata, Ferrer, and Tanael since March 3, 1986, and Castillo and Echague since May 1, 1986. Except for Isagani Ecal, they received P35.00 a day and were required to report from 7:00 A.M. to 7:00 P.M. seven days a week, including rest days and legal holidays except Christmas and Good Friday, without living allowance, overtime pay, premium pay, 13th month pay, and service incentive leave pay.

Private respondents, for their part, denied direct employment and asserted that petitioners were under Isagani Ecal as independent contractor. Isagani Ecal had been a company laborer until his resignation on February 4, 1987, expressed in Filipino as leaving laborer work because contracting would yield greater income. Thereafter Hi-Line did not include petitioners in its payroll; instead a lump sum of P1,400.00 every four days was given to Ecal or his representative Solomon de los Santos to cover wages, which petitioners divided among themselves. Work was performed at the company compound in Wakas, Bocaue, Bulacan, at least eight hours daily seven days a week in the kiln drying section, sorting wet or fresh kiln lumber by size and carrying, loading, and unloading it for drying, under foremen Matchuka and Clemente S. Sales.

On June 6, 1987, petitioners were barred by security guards from entering the premises and told their services were no longer needed, allegedly because the contract with Ecal had expired. Private respondents alleged Ecal customarily removed laborers from the Hi-Line sawmill and assigned them to other sawmills, while petitioners' continuous on-site schedule left no time for other sawmill work. The parties also disputed engagement dates, with private respondents contending engagement only in April 1987, including April 24, 1986 to February 4, 1987 service for Isagani Ecal alone.

The labor arbiter credited the affidavit of personnel officer Elizabeth Natividad, company payrolls excluding petitioners, the sworn statement of union secretary-treasurer Jose Mendoza that only Isagani Ecal was a union member or employee, and sworn statements of guard Honorio T. Battung and foreman Sales that only Ecal worked and resigned to become an independent contractor, and dismissed for lack of merit. The NLRC affirmed on the ground that those findings were supported by substantial evidence.

• No Independent Contractorship: Petitioner argued that Isagani Ecal is not an independent contractor but a mere employee of Hi-Line.
• Denial of Due Process: Petitioner maintained that the NLRC based its decision solely on respondents' affidavits and payrolls, completely ignored petitioners' evidence, and made only a superficial evaluation without regard to particular circumstances, thus denying due process.
• Labor-Only Contracting: Petitioner urged that even assuming arguendo that Ecal is an independent contractor, he is only a labor supplier deemed an agent of the company, so petitioners enjoy the status of company employees and Hi-Line is liable for illegal dismissal and unpaid benefits.

• Absence of Employment Relationship: Private respondents countered that no employer-employee relationship existed between Hi-Line and petitioners because petitioners were under the employ of independent contractor Isagani Ecal, who had resigned as company laborer on February 4, 1987.
• Job Contracting: Private respondents maintained that Ecal is an independent or job contractor, claiming the contracted task did not require tools, equipment, and machineries and had to be executed in Hi-Line's premises, and that Ecal customarily transferred laborers to other sawmills.
• Expiration of Contract: Private respondents argued that petitioners' services ended because Ecal's contract had already expired.
• Question of Fact and Indirect Liability: The Solicitor General pointed out that existence of an employer-employee relationship is a question of fact conclusive if supported by substantial evidence, adopted the theory that Ecal is an independent contractor, but faulted the labor arbiter for failing to determine benefits due since Hi-Line as indirect employer is jointly and severally liable, seeking remand for computation.

• Employer-Employee Relationship: Whether an employer-employee relationship existed between Hi-Line Timber, Inc. and petitioners or merely an employer-independent contractor relationship with Isagani Ecal, with other petitioners as Ecal's contract workers.
• Character of Contracting: Whether Isagani Ecal was engaged in permissible job contracting or prohibited labor-only contracting.
• Liability and Dismissal: Whether Hi-Line is liable as employer or indirect employer, whether petitioners were illegally dismissed, and what reinstatement, backwages, and benefits are due.

• Employer-Employee Relationship: Yes in legal effect. Although Ecal validly resigned as laborer, his workers were deemed Hi-Line employees by operation of law on prohibited labor-only contracting.
• Character of Contracting: Labor-only contracting. Ecal lacked substantial capital or investment and supplied workers performing work directly related to Hi-Line's sawmill business.
• Liability and Dismissal: Hi-Line is liable as direct employer. Petitioners, as regular employees dismissed without just or authorized cause and due process, are entitled to reinstatement with three years backwages and remand for unpaid benefits.

• Employer-Employee Relationship: The four-way test — (1) selection and engagement, (2) payment of wages, (3) power of dismissal, and (4) power of control, the last being most important — was not utilized below, and payroll exclusivity was overemphasized. Hi-Line did not choose workers but accepted those selected by Ecal; wages were paid as a P1,400.00 lump sum every four days through Ecal or his representative for division among petitioners; dismissal was unilaterally effected by the company on June 6, 1987 without notice. Control existed through performance within the kiln drying premises under foremen Matchuka and Sales, with limited direct supervision explained by the simple nature of segregating and loading lumber and checking results. Ecal's February 4, 1987 resignation as laborer was amply supported and unsuccessfully rebutted, but the overall relationship required closer scrutiny under contracting law.
• Character of Contracting: Under Article 106 and Sections 8 and 9, Rule VIII, Book III, job contracting requires an independent business conducted under the contractor's own responsibility free from control except as to results plus substantial capital or investment; labor-only contracting exists where the supplier lacks such capital and the workers perform activities directly related to the principal business, and is prohibited with the supplier deemed a mere agent. Ecal, described as a poor laborer unable to afford treatment of his daughter for malnutrition who continued working as laborer while supplying manpower on task basis, definitely lacked sufficient capital, and by respondents' own allegations the work required no separate tools because it was executed in Hi-Line's premises using company machineries and equipment. Personnel officer Natividad admitted Ecal resigned to supply manpower on task basis, and the sorted, loaded, and dried lumber work was integral to sawmill production and sales.
• Liability and Dismissal: A finding of labor-only contracting establishes by statute an employer-employee relationship for comprehensive purposes, making both principal and intermediary responsible to safeguard employees' rights and prevent circumvention through payroll exclusion, four-day undertakings, and task-basis pay. Performing tasks usually necessary or desirable in the main business rendered petitioners regular employees regardless of whether engagement began in 1986 or April 1987, the precise dates being left to the labor arbiter as the Supreme Court is not a trier of facts. Barred from the premises on June 6, 1987 without due process and without valid expiration defense, petitioners could only be dismissed for just or authorized cause after due process, and illegal dismissal carried reinstatement with three years backwages without qualifications and deductions plus remand for unpaid benefits determination.

• Four-way test of employment — Selection and engagement, payment of wages, power of dismissal, and power to control the employee's conduct determine employment, with control the most important element. Applied without reliance on payrolls alone, acceptance of Ecal-selected workers, lump-sum wage delivery, unilateral company dismissal, and on-premises supervision through foremen established the relevant relationship notwithstanding absence from payroll.
• Job contracting vs. labor-only contracting — Job contracting is permissible only if (1) the contractor carries on an independent business and undertakes work on his own account under his own responsibility according to his own manner and method, free from control except as to results, and (2) the contractor has substantial capital or investment in tools, equipment, machineries, work premises, and other necessary materials. Labor-only contracting exists where (1) the supplier lacks substantial capital or investment and (2) the workers perform activities directly related to the principal business or operations in which workers are habitually employed; it is prohibited and the contractor is deemed a mere agent. Ecal satisfied both labor-only indicators and none of the job-contracting requisites.
• Effect of labor-only finding; indirect employer liability — Where a contractor fails to pay wages in accordance with the Code, Articles 106 and 107 make the principal jointly and severally liable to the extent of work performed, without creating a general employment relationship. Where labor-only contracting is found, the statute implies or establishes an employer-employee relationship between the owner and the contractor's employees for comprehensive Code purposes, holding both responsible. Hi-Line was thus treated as employer of Ecal's contract workers, not merely as indirect employer for wage shortfalls.
• Regular employment; illegal dismissal and relief — Employees performing activities usually necessary or desirable in the usual business are deemed regular employees, terminable only for just or authorized cause with due process. Because kiln-drying work was integral to sawmill operations and petitioners were summarily barred without process, dismissal was illegal, warranting reinstatement with backwages equivalent to three years without qualifications and deductions under prevailing jurisprudence and remand for unpaid benefits.

• "To determine whether there exists an employer-employee relationship, the four-way test should be applied, namely: (1) selection and engagement of the employee; (2) the payment of wages; (3) the power of dismissal; and (4) the power to control the employee's conduct—the last being the most important element." — States the canonical test the labor arbiter and NLRC failed to utilize, framing the re-evaluation of selection, wages, dismissal, and control.
• "There is "labor-only" contracting 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 recruited and placed by such person are performing activities which are directly related to the principal business of such employer. In such cases, the person or intermediary shall be considered merely as an agent of the employer who shall be responsible to the workers in the same manner and extent as if the latter were directly employed." — Quotes the controlling statutory definition applied to deem Ecal a mere manpower supplier and Hi-Line the employer.
• "A finding that Isagani Ecal is a "labor-only" contractor is equivalent to a finding that an employer-employee relationship exists between the company and Ecal including the latter's "contract workers" herein petitioners, the relationship being such as provided by the law itself." — Articulates the ratio that prohibited contracting creates employment by operation of law for comprehensive protection.
• "ako po ay magreresign na sa aking trabaho bilang "laborer" sapagka't nakita ko na mas malaki ang kikitain kung mangongontrata na lamang " — Reproduces Ecal's February 4, 1987 resignation language relied upon to sustain the finding that he had ceased to be a payroll laborer before supplying manpower.

• Philippine Bank of Communications vs. National Labor Relations Commission, 146 SCRA 347 (1986) — Controlling exposition of Articles 106-107: ordinary contracting creates wage liability only, while labor-only contracting makes the intermediary a mere agent and the principal responsible as if workers were directly employed; followed and quoted at length.
• Broadway Motors, Inc. vs. NLRC, 156 SCRA 522 (1987) — Cited as supporting the labor-only analysis and the employer-employee consequence imposed by law.
• Industrial Timber Corporation vs. NLRC, 169 SCRA 341 (1989) — Cited as supporting the labor-only analysis and the employer-employee consequence imposed by law.
• Brotherhood Labor Unity Movement of the Phils. vs. Zamora, 147 SCRA 49 (1987) — Cited for the four-way test of employer-employee relationship.
• Asim vs. Castro, 163 SCRA 344 (1988) — Cited for the four-way test and for the rule that NLRC factual findings conclusive if supported by substantial evidence.
• RJL Martinez Trading Corp. vs. NLRC, 127 SCRA 455 (1984) — Cited for the substantial-evidence conclusiveness of labor findings.
• Mafinco Trading Corp. vs. Ople, 70 SCRA 139 (1976) — Cited for the observation that employers attempt to avoid employment obligations connected with compensation, security, wages, termination pay, and unionism.
• A.M. Oreta & Co., Inc. vs. NLRC, 176 SCRA 218 (1989) — Cited for regular employment under Article 280 of the Labor Code.
• Wenphil Corporation vs. NLRC, 170 SCRA 69 (1989) — Cited for due-process requirements prior to dismissal under Rule XIV, Section 1, Book V of the Omnibus Rules.

• Article 106, Labor Code — Defines contractor/subcontractor wage responsibility, joint and several liability of the employer for unpaid wages to the extent of work performed, and labor-only contracting where the supplier lacks substantial capital and workers perform work directly related to the principal business, deeming the intermediary a mere agent. Applied to classify Ecal as labor-only contractor and Hi-Line as employer.
• Article 107, Labor Code — Extends Article 106 to any person or corporation contracting with an independent contractor for work, task, job, or project. Applied to support indirect-employer principles underlying Hi-Line's liability.
• Section 8, Rule VIII, Book III, Omnibus Rules — States the two requisites of permissible job contracting: independent business with freedom from control except as to results, and substantial capital or investment. Applied to find Ecal did not qualify as job contractor.
• Section 9, Rule VIII, Book III, Omnibus Rules — Defines and prohibits labor-only contracting under the two-pronged capital and business-relation test and deems the contractor an agent with the principal responsible as direct employer. Applied to establish Hi-Line's comprehensive employer responsibility.
• Article 280, Labor Code — Deems regular those performing activities usually necessary or desirable in the usual business. Applied to hold petitioners regular employees of the sawmill.
• Rule XIV, Section 1, Book V, Omnibus Rules — Requires due process prior to dismissal. Applied with the just- or authorized-cause requirement to hold the June 6, 1987 exclusion illegal.

Narvasa, Cruz, Griño-Aquino, and Medialdea, JJ., concurred.