Escario vs. NLRC

A contractor that carries on a distinct and independent business, possesses substantial capital or investment, and performs the contracted work on its own account and responsibility free from the principal's control is a legitimate independent job contractor and the true employer of the workers it supplies — not a labor-only contractor — and the principal is not liable as their employer.

Private respondent California Marketing Co. Inc. (CMC) is a domestic corporation engaged in the manufacture of food products and their distribution to wholesalers and retailers, and is not allowed by law to engage in retail or direct sales to end consumers. Private respondent Donna Louise Advertising and Marketing Associates, Inc. (D.L. Admark) is a duly registered promotional firm whose stated purpose includes advertising, promotion and publicity, sales and merchandising of goods and services, and survey and opinion polls, and which serves several clients including Purefoods, Corona Supply, Firstbrand, Splash Cosmetics, and CMC. The petitioners worked as merchandisers for CMC's products, and their services were terminated on 16 March 1992.

Private respondent California Marketing Co. Inc. (CMC) is a domestic corporation principally engaged in the manufacture of food products and the distribution of such products to wholesalers and retailers, and is not allowed by law to engage in retail or direct sales to end consumers. Private respondent Donna Louise Advertising and Marketing Associates, Inc. (D.L. Admark) is a duly registered promotional firm whose primary purpose is to carry on the business of advertising, promotion and publicity, the sales and merchandising of goods and services, and the conduct of survey and opinion polls; as an independent contractor it serves several clients, among them Purefoods, Corona Supply, Firstbrand, Splash Cosmetics, and CMC. The petitioners worked as merchandisers for CMC's products, and their services were terminated on 16 March 1992.

According to the petitioners, they were employed by CMC as merchandisers. Their assigned tasks included withdrawing stocks from the warehouse, fixing prices, price-tagging, displaying merchandise, and inventorying stocks, all done under the control, management and supervision of CMC. The materials and equipment necessary for the job — price markers, gun taggers, toys, pentel pen, streamers and posters — were provided by CMC, and their salaries were paid by CMC. The petitioners asserted that the hiring, control and supervision of the workers and the payment of salaries were all coursed by CMC through its agent D.L. Admark in order for CMC to avoid its liability under the law.

On 7 February 1992, the petitioners filed a case against CMC before the Labor Arbiter for the regularization of their employment status. While that case was pending, D.L. Admark sent the petitioners a notice of termination of employment effective 16 March 1992, and the complaint was accordingly amended to include illegal dismissal as a cause of action. Twenty-seven more persons thereafter joined as complainants. CMC filed a motion to implead D.L. Admark as party-defendant, and D.L. Admark filed a motion to intervene; both motions were granted.

CMC denied the existence of an employer-employee relationship between the petitioners and itself, contending that D.L. Admark is the employer. CMC maintained that while it manufactures and distributes food products, it is not allowed by law to engage in retail or direct sales to end consumers, and that it hired independent job contractors such as D.L. Admark to provide the necessary promotional activities for its product lines. For its part, D.L. Admark asserted that it is the employer of the petitioners, citing its primary purpose of carrying on advertising, promotion and publicity, sales and merchandising of goods and services, and survey and opinion polls, and its service to several clients including Purefoods, Corona Supply, Firstbrand, Splash Cosmetics, and CMC.

The Labor Arbiter found that the petitioners were employees of CMC because they were engaged in activities necessary and desirable in the usual business or trade of CMC, relying on Tabas vs. CMC, which likewise involved CMC and in which the merchandisers were held to be CMC's employees. The NLRC reversed, finding no employer-employee relationship between the petitioners and CMC, holding D.L. Admark to be a legitimate independent contractor and the employer of the petitioners, and finding no valid ground for their dismissal by D.L. Admark.

• Applicability of Tabas: Petitioners maintained that this Court's ruling in Tabas vs. CMC is applicable because the petitioners are merchandisers just as the petitioners in Tabas were merchandisers with the same nature of work; the respondent is California Manufacturing Co. Inc., the same respondent in Tabas; the agency in Tabas was Livi Manpower Services, while in this case there are at least three agencies, namely Livi Manpower Services, Rank Manpower Services, and D.L. Admark, whose participation was to give and pay the salaries of the petitioners with money coming from CMC as in Tabas; and the supervision, management and/or control rested upon CMC as found by the Labor Arbiter, which was also true in Tabas.
• Labor-Only Contracting: Petitioners took the position that D.L. Admark is a labor-only contractor, such that CMC should be deemed their true employer.

• No Employer-Employee Relationship with CMC: CMC denied the existence of an employer-employee relationship between the petitioners and itself, contending that it is D.L. Admark who is the employer of the petitioners.
• Independent Job Contracting: CMC argued that while it manufactures and distributes food products, it is not allowed by law to engage in retail or direct sales to end consumers, and that it hired independent job contractors such as D.L. Admark to provide the necessary promotional activities for its product lines.
• D.L. Admark as Employer: D.L. Admark asserted that it is the employer of the petitioners, its primary purpose being to carry on the business of advertising, promotion and publicity, the sales and merchandising of goods and services, and the conduct of survey and opinion polls, and that as an independent contractor it serves several clients among which are Purefoods, Corona Supply, Firstbrand, Splash Cosmetics, and CMC.

• Employer-Employee Relationship: Whether the petitioners are employees of CMC or of D.L. Admark.
• Nature of Contracting: Whether D.L. Admark is a labor-only contractor or a legitimate independent contractor.
• Illegal Dismissal: Whether the dismissal of the petitioners was valid.

• Employer-Employee Relationship: No employer-employee relationship existed between the petitioners and CMC. By the four-fold test, D.L. Admark selected and engaged the petitioners, paid their wages, and exercised the power of dismissal, and the evidence failed to establish CMC's control over their conduct.
• Nature of Contracting: D.L. Admark is a legitimate independent contractor, not a labor-only contractor. It carries on a distinct and independent business with substantial capital and investment and performs the contracted merchandising services on its own account and responsibility.
• Illegal Dismissal: The dismissal was illegal. D.L. Admark admitted dismissing the petitioners for allegedly disowning and rejecting it as their employer, a ground that is not a just cause, and no due process was shown to have been afforded.

• Employer-Employee Relationship: The determinative question was whether the petitioners were employees of CMC or of D.L. Admark, which in turn required resolving whether D.L. Admark was a labor-only contractor or an independent contractor. Applying 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 to control the employee's conduct — the Court found D.L. Admark to be the true employer. On the first element, the petitioners themselves admitted that they were selected and hired by D.L. Admark. On the second, D.L. Admark presented the payroll of the petitioners, sample SSS contribution forms it filed and submitted to the SSS, and an application for employment by R. de los Reyes, all tending to show that it paid the petitioners' salaries, while the petitioners submitted no evidence that CMC paid them; the billing rate and cost breakdown in the CMC–D.L. Admark agreement did not establish that CMC paid the salaries, such breakdown being a standard content of service contracts designed to insure that employees of the job contractor receive benefits mandated by law. On the third, the petitioners admitted that it was D.L. Admark who terminated their employment. On the fourth and most important element, the memoranda of CMC's sales and promotions manager relied upon by the petitioners did not show control: they were addressed to store or grocery owners announcing forthcoming sales promotions of CMC products, and although one memorandum stated that "our merchandisers and demonstrators will be assigned to pack the premium with your stocks in the shelves," this did not necessarily refer to the petitioners since CMC also had regular merchandisers and demonstrators; one memorandum was addressed to "All regular merchandisers/demonstrators." The documents failed to show anything suggesting that CMC controlled or supervised how the petitioners performed their work, and the petitioners, having filed a complaint for regularization against CMC and thereby conceding that they were not its regular employees, could not validly claim to be the persons referred to in those memoranda. Having proven the existence of an employer-employee relationship between D.L. Admark and the petitioners, it became irrelevant to determine whether the activities performed by the latter were necessary or desirable to the usual business or trade of CMC.
• Nature of Contracting: The petitioners' reliance on Tabas vs. CMC was misplaced. In Tabas, the contractor Livi Manpower Services was a mere placement agency that had simply supplied CMC with the manpower necessary to carry out its merchandising activity, using CMC's premises and equipment. The Court in Tabas itself qualified that the result would have been different had Livi been discretely a promotions firm hired by California to perform the latter's merchandising activities, in which case Livi would have been truly the employer of its employees and California its client. Thus, CMC could validly farm out its merchandising activities to a legitimate independent contractor. There is labor-only contracting when the contractor or sub-contractor merely recruits, supplies or places workers to perform a job, work or service for a principal, and its elements are: (a) the person supplying workers does not have substantial capital or investment in the form of tools, equipment, machineries, work premises, among others; and (b) the workers recruited and placed are performing activities directly related to the principal business of the employer. In contrast, there is permissible job contracting when a principal agrees to put out or farm out with a contractor the performance or completion of a specific job, work or service within a definite or predetermined period, regardless of whether it is performed within or outside the premises of the principal, and the conditions are: (a) the contractor carries on a distinct and 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 his employer or principal in all matters connected with the performance of his work except as to the results thereof; and (b) the contractor has substantial capital or investment in the form of tools, equipment, machineries, work premises, and other materials necessary in the conduct of his business. Citing Alexander Vinoya vs. NLRC, the Court noted that substantial capitalization or investment alone is not enough, and that additional factors must be considered: (a) whether the contractor is carrying on an independent business; (b) the nature and extent of the work; (c) the skill required; (d) the term and duration of the relationship; (e) the right to assign the performance of specified pieces of work; (f) the control and supervision of the workers; (g) the power of the employer with respect to the hiring, firing and payment of workers of the contractor; (h) the control of the premises; (i) the duty to supply premises, tools, appliances, materials, and labor; and (j) the mode, manner and terms of payment. Applying these criteria, D.L. Admark was found to be a legitimate independent contractor: its SEC registration certificate stated that it is a firm engaged in promotional, advertising, marketing and merchandising activities; the service contract between CMC and D.L. Admark provided for the supply of sales promoting merchandising services rather than manpower placement; it was actually engaged in several activities such as advertising, publication, promotions, marketing and merchandising, had merchandising contracts with companies like Purefoods, Corona Supply, Nabisco Biscuits, and Licron, and was engaged in the publication business through its magazine "Phenomenon"; and it had its own capital assets, current assets amounting to P6 million, an authorized capital stock of P500,000, several motor vehicles and other tools, materials and equipment, and paid rentals of ₱30,020 for its office space.
• Illegal Dismissal: The NLRC's finding that D.L. Admark admitted having dismissed the petitioners for allegedly disowning and rejecting it as their employer was upheld; such reason is not a just cause to terminate the petitioners. D.L. Admark's belated claim that the petitioners were not terminated but simply did not report to work was not supported by the evidence on record, and there was no showing that due process was afforded the petitioners.

• Labor-Only Contracting — There is labor-only contracting when the contractor or sub-contractor merely recruits, supplies or places workers to perform a job, work or service for a principal. Its elements are: (a) 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 (b) the workers recruited and placed by such person are performing activities directly related to the principal business of the employer. In this case, the Court found these elements absent as to D.L. Admark.
• Permissible Job Contracting — There is permissible job contracting when a principal agrees to put out or farm out with a contractor or sub-contractor the performance or completion of a specific job, work or service within a definite or predetermined period, regardless of whether the job is performed within or outside the premises of the principal. The conditions are: (a) the contractor carries on a distinct and 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 his employer or principal in all matters connected with the performance of his work except as to the results thereof; and (b) the contractor has substantial capital or investment in the form of tools, equipment, machineries, work premises, and other materials necessary in the conduct of his business. The Court applied this rule to hold CMC could validly farm out its merchandising activities to D.L. Admark.
• Four-Fold Test of Employer-Employee Relationship — The elements are: (1) the 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 Court applied the test to find D.L. Admark, not CMC, to be the employer of the petitioners, the power of control being the most important element.
• Vinoya Factors for Independent Contracting — In order to be considered an independent contractor it is not enough to show substantial capitalization or investment in the form of tools, equipment, machinery and work premises; the following factors must also be considered: (a) whether the contractor is carrying on an independent business; (b) the nature and extent of the work; (c) the skill required; (d) the term and duration of the relationship; (e) the right to assign the performance of specified pieces of work; (f) the control and supervision of the workers; (g) the power of the employer with respect to the hiring, firing and payment of workers of the contractor; (h) the control of the premises; (i) the duty to supply premises, tools, appliances, materials, and labor; and (j) the mode, manner and terms of payment. The Court applied these factors to confirm D.L. Admark's status as a legitimate independent contractor.

• "It would have been different, we believe, had Livi been discretely a promotions firm, and that California had hired it to perform the latter's merchandising activities. For then, Livi would have been truly the employer of its employees and California, its client." — This passage, quoted from Tabas vs. CMC, is the pivot of the Court's distinction: it explains why the earlier ruling did not control and why a genuine promotions firm hired to perform merchandising activities is itself the employer.
• "There is labor-only contracting when the contractor or sub-contractor merely recruits, supplies or places workers to perform a job, work or service for a principal." — This is the Court's canonical formulation of labor-only contracting, followed immediately by its two statutory elements, and is the definition applied to reject the petitioners' theory.
• "In the recent case of Alexander Vinoya vs. NLRC et al., this Court ruled that in order to be considered an independent contractor it is not enough to show substantial capitalization or investment in the form of tools, equipment, machinery and work premises." — This states the rule that capitalization alone is insufficient and introduces the multi-factor test the Court used to assess D.L. Admark's status.
• "Having proven the existence of an employer-employee relationship between D.L. Admark and petitioners, it is no longer relevant to determine whether the activities performed by the latter are necessary or desirable to the usual business or trade of CMC." — This is the ratio decidendi on the employer-employee issue: once D.L. Admark is established as the employer, the "necessary or desirable" inquiry relied upon by the Labor Arbiter becomes immaterial.

• Tabas vs. CMC, 169 SCRA 497 (1984) — Distinguished. In that case the contractor Livi Manpower Services was a mere placement agency that supplied CMC with manpower using CMC's premises and equipment; the Court quoted Tabas' own qualification that a genuine promotions firm hired to perform merchandising activities would be the true employer, thereby confining Tabas to its facts.
• Neri vs. NLRC, 224 SCRA 717 (1993) — Cited as authority for the definition and elements of labor-only contracting.
• Alexander Vinoya vs. NLRC, G.R. No. 126585, February 2, 2000 — Followed. Cited for the rule that substantial capitalization or investment alone does not make one an independent contractor and for the additional factors to be considered.
• Ponce et al. vs. NLRC et al., 293 SCRA 366 (1998) — Cited in Vinoya as the source of the additional factors for determining independent-contractor status.
• Maraguinot Jr. vs. NLRC (Second Division), 284 SCRA 539 (1998) — Cited as authority for the four-fold test of employer-employee relationship.

• Book III, Rule VIII, Sec. 8, Rules to Implement the Labor Code — Cited as the source of the conditions for permissible job contracting, namely that the contractor carries on a distinct and independent business and undertakes the contract work on his own account and responsibility free from the principal's control except as to results, and that the contractor has substantial capital or investment in tools, equipment, machineries, work premises, and other materials necessary in the conduct of his business. The Court applied these conditions to hold D.L. Admark a legitimate independent contractor.

Puno, Pardo, and Ynares-Santiago, JJ., concur. Davide, Jr., C.J. (Chairman), was on official leave abroad.