Eparwa Security and Janitorial Services, Inc. vs. Liceo de Cagayan University

Although the principal and the contractor are solidarily liable to the contractor’s employees under Articles 106, 107, and 109 of the Labor Code, the principal is ultimately liable for wage differentials and premium pay; if the contractor pays the employees, it may claim reimbursement from the principal, but the principal cannot claim reimbursement from the contractor where the security services contract has expired without adjustment.

Eparwa Security and Janitorial Services, Inc. is a security and janitorial services corporation, while Liceo de Cagayan University is an educational institution. The two entities entered into a Contract for Security Services under which Eparwa would provide security guards to LDCU and LDCU would pay Eparwa ₱5,000 per guard per month. The Labor Code, particularly Articles 106, 107, and 109, governs the liability of principals and contractors for the wages and statutory benefits of the contractor’s employees.

On 1 December 1997, Eparwa and LDCU, through their representatives, entered into a Contract for Security Services. Under the contract, LDCU agreed to pay Eparwa ₱5,000 per guard per month, payable within fifteen days after Eparwa presented its service invoice. Eparwa was to furnish LDCU a monthly copy of the SSS contributions of guards and the monthly payroll of each guard assigned to LDCU’s premises. Eparwa allocated the ₱5,000 monthly contract rate per guard to basic pay, night differential pay, 13th month pay, five-day incentive leave, uniform allowance, employer SSS, Medicare, and ECC contributions, agency share, and VAT.

On 21 December 1998, eleven security guards whom Eparwa had assigned to LDCU from 1 December 1997 to 30 November 1998 filed a complaint before the NLRC Regional Arbitration Branch No. 10 in Cagayan de Oro City, docketed as NLRC-RABX Case No. 10-01-00102-99. The complaint was against both Eparwa and LDCU for underpayment of salary, legal holiday pay, 13th month pay, rest day, service incentive leave, night shift differential, overtime pay, and payment for attorney’s fees. LDCU made a cross-claim praying that Eparwa reimburse LDCU for any payment to the security guards.

In its decision dated 18 August 1999, the Labor Arbiter found that the security guards were entitled to wage differentials and premium for holiday and rest day work. The Labor Arbiter held Eparwa and LDCU solidarily liable pursuant to Article 109 of the Labor Code and ordered them to pay the guards a total of ₱463,540.95, with individual awards ranging from ₱20,321.10 to ₱46,819.95. The Labor Arbiter denied the claims for unpaid 13th month pay, service incentive leave, and night shift premium pay for lack of merit; ordered Eparwa to reimburse LDCU for whatever amount LDCU might be required to pay the guards; ordered Eparwa to pay LDCU ₱20,000 and ₱5,000 each to the guards as moral and exemplary damages; and ordered Eparwa to pay 10% attorney’s fees.

LDCU appealed to the NLRC, agreeing with the Labor Arbiter’s decision on the guards’ entitlement to salary differential but challenging the propriety of the amount of the award. LDCU alleged that security guards not similarly situated were granted uniform monetary awards and that the decision did not include the basis of the computation of the amount of the award. Eparwa also appealed, questioning its liability for the guards’ claims and the awarded cross-claim amounts. In its Resolution dated 19 January 2000, the NLRC Fifth Division found that the guards were entitled to wage differentials and premium for holiday and rest day work and held Eparwa and LDCU solidarily liable, but deleted the portions ordering Eparwa to reimburse LDCU and to pay damages for lack of legal basis; it ordered recomputation of the monetary awards according to the dates actually worked by each guard and fixed attorney’s fees at 10% of the aggregate monetary award as finally adjusted.

Both Eparwa and LDCU filed separate motions for partial reconsideration. LDCU questioned the NLRC’s deletion of LDCU’s entitlement to reimbursement by Eparwa, while Eparwa prayed that LDCU be made to reimburse Eparwa for whatever amount it might pay to the guards. In its Resolution dated 14 March 2000, the NLRC modified its earlier resolution by ordering LDCU to reimburse Eparwa for whatever amount Eparwa might have paid to the guards arising from the case.

The Labor Arbiter found the guards entitled to wage differentials and premium for holiday and rest day work, but denied their claims for unpaid 13th month pay, service incentive leave, and night shift premium pay. The NLRC likewise found the guards entitled to wage differentials and premium for holiday and rest day work. The Supreme Court’s analysis turned on the fact that the Contract for Security Services had expired and had not been amended to adjust the consideration in line with the wage orders; the guards were Eparwa’s employees, and there was no privity of contract between the guards and LDCU, although LDCU remained liable as an indirect employer under Articles 106, 107, and 109 of the Labor Code.

• Liability for the Guards’ Claims: Eparwa questioned its liability for the security guards’ claims and the awarded cross-claim amounts before the NLRC.
• Reimbursement by LDCU: Eparwa prayed that LDCU be made to reimburse Eparwa for whatever amount it may pay to the security guards.
• Ultimate Liability: Eparwa stressed that jurisprudence is consistent in ruling that the ultimate liability for the payment of the monetary award rests with LDCU alone.

• Reimbursement from Eparwa: LDCU made a cross-claim praying that Eparwa reimburse LDCU for any payment to the security guards.
• Computation of Awards: LDCU agreed with the guards’ entitlement to salary differential but challenged the propriety of the amount of the award, alleging that security guards not similarly situated were granted uniform monetary awards and that the decision did not include the basis of the computation.
• Opposition to Reimbursing Eparwa: LDCU filed a petition before the appellate court assailing the NLRC’s order that LDCU should reimburse Eparwa, stating that this would free Eparwa from any liability for payment of the security guards’ money claims.

• Ultimate Liability: Whether LDCU alone is ultimately liable to the security guards for the wage differentials and premium for holiday and rest day pay.

• Ultimate Liability: Yes. LDCU alone is ultimately liable to the security guards for the wage differentials and premium for holiday and rest day pay. Although Eparwa and LDCU are solidarily liable under Articles 106, 107, and 109 of the Labor Code, Eparwa may claim reimbursement from LDCU for any payment it makes, while LDCU cannot claim reimbursement from Eparwa.

• Ultimate Liability: The Court applied Articles 106, 107, and 109 of the Labor Code. Under these provisions, Eparwa, as the security guards’ direct employer, is liable for their wages and statutory benefits; LDCU, as the principal that contracted with Eparwa for security services, is the indirect employer and is solidarily liable with Eparwa to the guards. This solidary liability is mandated to assure compliance with the Labor Code and to give workers ample protection. For the guards, the actual source of payment does not matter as long as they are paid; they may collect from either solidary debtor, and solidary liability does not mean that, as between themselves, the two debtors are liable for only half of the payment. However, LDCU’s ultimate liability arises because the Contract for Security Services had expired. There is no privity of contract between the guards and LDCU, but LDCU’s liability remains under Articles 106, 107, and 109. Eparwa is already precluded from asking LDCU for an adjustment in the contract price because of the expiration of the contract, but Eparwa’s liability to the guards remains because of their employer-employee relationship. In lieu of an adjustment in the contract price, Eparwa may claim reimbursement from LDCU for any payment it may make to the guards. LDCU, on the other hand, cannot claim any reimbursement from Eparwa for any payment it may make to the guards. The Court relied on Eagle Security Agency, Inc. vs. NLRC and subsequent cases upholding the same rule. Thus, the NLRC Resolutions dated 19 January 2000 and 14 March 2000 were reinstated.

• Solidary liability of principal and contractor under Articles 106, 107, and 109 of the Labor Code — The contractor is the direct employer, while the principal that contracts with the contractor is the indirect employer. Both are solidarily liable to the contractor’s employees for wages and statutory benefits. This solidary liability is mandated to assure compliance with the Labor Code and to give workers ample protection. Creditors may collect from any solidary debtor, and solidary liability does not mean that, as between themselves, the two solidary debtors are liable for only half of the payment. Applied: Eparwa and LDCU were held solidarily liable for the guards’ wage differentials and premium for holiday and rest day work.
• Ultimate liability of the principal/client in security services contracts — In security services arrangements, the principal or client is ultimately liable for wage increases mandated by wage orders because the contract price is meant to cover the guards’ wages and the contractor may adjust the consideration. Applied: LDCU was held ultimately liable for the guards’ wage differentials and premium pay.
• Right of reimbursement among solidary debtors — A solidary debtor who pays may claim reimbursement from the co-debtor. Applied: Eparwa may claim reimbursement from LDCU for any payment it makes to the guards; LDCU cannot claim reimbursement from Eparwa because the Contract for Security Services had expired without adjustment and Eparwa was already precluded from seeking an adjustment in the contract price.
• No privity of contract between the principal and the contractor’s employees — The employees’ contractual relationship is with their immediate employer, the contractor. The principal’s liability to the employees arises from the Labor Code, not from contract. Applied: The guards’ immediate recourse was with Eparwa, but LDCU remained solidarily liable as an indirect employer under Articles 106, 107, and 109.
• Expiration of the security services contract and adjustment — Where the security services contract has expired without amendment to adjust the consideration under the wage orders, the contractor may no longer demand an adjustment in the contract price but may claim reimbursement from the principal for payments made to the guards. The principal cannot claim reimbursement from the contractor. Applied: The Court reinstated the NLRC resolutions allowing Eparwa to claim reimbursement from LDCU and disallowing LDCU’s reimbursement claim against Eparwa.

• "This joint and several liability of the contractor and the principal is mandated by the Labor Code to assure compliance of the provisions therein including the statutory minimum wage [Article 99, Labor Code]. The contractor is made liable by virtue of his status as direct employer. The principal, on the other hand, is made the indirect employer of the contractor’s employees for purposes of paying the employees their wages should the contractor be unable to pay them." — This passage, quoted from Eagle Security Agency, Inc. vs. NLRC, states the rationale for the solidary liability of the contractor and the principal under the Labor Code.
• "For the security guards, the actual source of the payment of their wage differentials and premium for holiday and rest day work does not matter as long as they are paid. This is the import of Eparwa and LDCU’s solidary liability. Creditors, such as the security guards, may collect from anyone of the solidary debtors. Solidary liability does not mean that, as between themselves, two solidary debtors are liable for only half of the payment." — This passage explains the nature and effect of solidary liability as applied to Eparwa and LDCU.
• "LDCU’s ultimate liability comes into play because of the expiration of the Contract for Security Services. There is no privity of contract between the security guards and LDCU, but LDCU’s liability to the security guards remains because of Articles 106, 107 and 109 of the Labor Code. Eparwa is already precluded from asking LDCU for an adjustment in the contract price because of the expiration of the contract, but Eparwa’s liability to the security guards remains because of their employer-employee relationship. In lieu of an adjustment in the contract price, Eparwa may claim reimbursement from LDCU for any payment it may make to the security guards. However, LDCU cannot claim any reimbursement from Eparwa for any payment it may make to the security guards." — This passage is the ratio decidendi on ultimate liability and reimbursement.
• "In the end, therefore, ultimate liability for the payment of the increases rests with the principal." — This passage, quoted from Eagle Security Agency, Inc. vs. NLRC, states the controlling rule on ultimate liability in security services contracts.

• Eagle Security Agency, Inc. vs. NLRC, G.R. No. 81314, 18 May 1989, 173 SCRA 479 — Controlling precedent. The Court quoted it extensively and applied its ruling on the solidary liability of the contractor and principal, the right of reimbursement, and the ultimate liability of the principal for wage increases.
• Spartan Security & Detective Agency, Inc. vs. NLRC, G.R. No. 90693, 3 September 1992, 213 SCRA 528 — Subsequent case cited as upholding the Eagle ruling on reimbursement.
• Development Bank of the Philippines vs. NLRC, G.R. Nos. 100376-77, 17 June 1994, 233 SCRA 250 — Subsequent case cited as upholding the Eagle ruling on reimbursement.
• Alpha Investigation and Security Agency, Inc. vs. NLRC, 339 Phil. 40 (1997) — Subsequent case cited as upholding the Eagle ruling on reimbursement.
• Helpmate, Inc. vs. NLRC, et al., 342 Phil. 277 (1997) — Subsequent case cited as upholding the Eagle ruling on reimbursement.
• Lapanday Agricultural Development Corporation vs. Court of Appeals, 381 Phil. 41 (2000) — Subsequent case cited as upholding the Eagle ruling on reimbursement.

• Article 106, Labor Code — Contractor or subcontractor. The employer is jointly and severally liable with the contractor or subcontractor to the employees to the extent of the work performed under the contract. Applied: LDCU, as the employer or principal, was held solidarily liable with Eparwa.
• Article 107, Labor Code — Indirect employer. The provisions on contractor or subcontractor apply to any person, partnership, association, or corporation which, not being an employer, contracts with an independent contractor for the performance of work. Applied: LDCU was treated as an indirect employer.
• Article 109, Labor Code — Solidary liability. Every employer or indirect employer is responsible with the contractor or subcontractor for any violation of the Labor Code and is considered a direct employer for purposes of civil liability. Applied: Eparwa and LDCU were held solidarily liable to the security guards.
• Article 1217, Civil Code — Right of reimbursement among solidary debtors. Cited in the Eagle discussion. Applied: Eparwa may claim reimbursement from LDCU for any payment it makes to the guards.
• Article 99, Labor Code — Statutory minimum wage. Cited in the Eagle discussion as one of the provisions whose compliance is assured by the joint and several liability of the contractor and the principal.
• Article II, Section 18 and Article XIII, Section 3, 1987 Constitution — Protection to labor. Cited in the Eagle discussion as the constitutional basis for giving workers ample protection through solidary liability.

Leonardo A. Quisumbing (Chairperson), Conchita Carpio Morales, Dante O. Tinga, and Presbitero J. Velasco, Jr.