Filipinas Synthetic Fiber Corporation (FILSYN) vs. National Labor Relations Commission, et al.

A contractor with substantial capital or investment in the form of tools, equipment, machineries, or work premises is an independent job contractor, not a labor-only contractor, even if the workers it supplies perform activities directly related to the principal business of the employer. However, the principal employer remains jointly and severally liable with the independent contractor for monetary claims of the contractor's employees under Article 109 of the Labor Code, which holds every employer or indirect employer responsible with its contractor for any violation of the Code.

FILSYN is a domestic corporation engaged in the manufacture of polyester fiber, with its plant in Brgy. Don Jose, Sta. Rosa, Laguna. On 4 April 1991, FILSYN contracted with De Lima Trading and General Services (DE LIMA) for the performance of specific janitorial services at its plant. DE LIMA is a corporation duly registered with the Securities and Exchange Commission with substantial capitalization of P1,600,000.00, P400,000.00 of which is actually subscribed. The Labor Code distinguishes between labor-only contracting and legitimate job contracting, with the former prohibited and the latter permitted, and imposes liability on employers for violations of the Code by their contractors.

Filipinas Synthetic Fiber Corporation (FILSYN), a domestic corporation engaged in the manufacture of polyester fiber, contracted on 4 April 1991 with De Lima Trading and General Services (DE LIMA) for the performance of specific janitorial services at FILSYN's plant in Brgy. Don Jose, Sta. Rosa, Laguna. Pursuant to the agreement, Felipe Loterte, among others, was deployed at FILSYN to take care of the plants and maintain general cleanliness around the premises.

On 24 February 1992, Loterte sued FILSYN and DE LIMA as alternative defendants for illegal dismissal, underpayment of wages, non-payment of legal holiday pay, service incentive leave pay, and 13th month pay. He alleged that he was first assigned to perform janitorial work at FILSYN in 1981 by La Saga General Services; that La Saga was changed to DE LIMA in August 1991; that when a movement to demand increased wages and 13th month pay arose among the workers in December 1991, he was accused by a certain Dodie La Flores of having posted on the bulletin board at FILSYN an article attributing to management a secret understanding to block the demand; and that for denying responsibility, his gate pass was unceremoniously cancelled on 6 February 1992 and he was subsequently dismissed.

The Labor Arbiter ruled in favor of Loterte, classifying him as a regular employee on the ground that he performed tasks usually necessary or desirable in the main business of FILSYN for more than ten years or since 1981, citing Guarin vs. NLRC. FILSYN was declared the real employer of Loterte and DE LIMA a mere labor contractor. FILSYN was adjudged liable for Loterte's reinstatement, payment of salary differentials and back wages from 6 February 1992 up to the date of judgment, in addition to unpaid legal holiday pay, service incentive leave pay, and 13th month pay in the total amount of P56,394.90.

FILSYN appealed to the NLRC, contending that the application of the Guarin ruling was misplaced since the contractor in that case could not prove substantial capital, whereas DE LIMA presented its Certificate of Registration issued by the SEC and its Articles of Incorporation and By-Laws proving substantial capitalization. The NLRC debunked FILSYN's claim and affirmed the Labor Arbiter in finding DE LIMA a labor-only contractor. When its motion for reconsideration proved futile, FILSYN filed the instant petition. On 23 February 1994, a temporary restraining order staying execution of the NLRC decision was issued by the Court upon approval of a bond of P56,000.00.

• Labor-Only Contracting: Petitioner contended that the NLRC committed grave abuse of discretion in holding DE LIMA as a labor-only contractor with no substantial capital or investment, insisting that the evidence showed DE LIMA to be a corporation duly registered with the SEC with substantial capitalization of P1,600,000.00, P400,000.00 of which is actually subscribed.
• Necessity of Work: Petitioner argued that even assuming DE LIMA lacked substantial capital, FILSYN could not be considered the real employer of Loterte since his work was not necessary in the principal business of FILSYN, which is the manufacture of polyester, and that present jurisprudence holds that janitorial services, although directly related to the principal business, are unnecessary since non-performance thereof will not cause production and company sales to suffer.
• Scope of Article 106: In its Consolidated Reply, petitioner contended that Article 106 of the Labor Code cited by the Solicitor General applies only in cases where there is failure to pay wages, not in cases where the employee was illegally dismissed, as in Loterte's case.

• Position of the Solicitor General: The Solicitor General agreed with petitioner that DE LIMA is not a labor-only contractor and conceded that no employer-employee relationship exists between FILSYN and Loterte, but opined that FILSYN is still liable solidarily with DE LIMA, its contractor, for the satisfaction of the Labor Arbiter's awards in favor of Loterte as an indirect employer under Article 106 of the Labor Code.

• Labor-Only Contracting: Whether DE LIMA is a labor-only contractor or an independent job contractor.
• Employer-Employee Relationship: Whether an employer-employee relationship exists between FILSYN and Loterte.
• Solidary Liability: Whether FILSYN is jointly and severally liable with DE LIMA for Loterte's monetary claims.
• Computation of Awards: Whether the Labor Arbiter's computation of the monetary awards was correct.

• Labor-Only Contracting: No. DE LIMA is an independent job contractor, not a labor-only contractor, because it has substantial capitalization of P1,600,000.00, P400,000.00 of which is actually subscribed, and the janitorial services performed by Loterte, while directly related to FILSYN's principal business, are merely incidental and not necessary to its operation.
• Employer-Employee Relationship: No. No direct employer-employee relationship exists between FILSYN and Loterte, DE LIMA being an independent job contractor.
• Solidary Liability: Yes. FILSYN is jointly and severally liable with DE LIMA for Loterte's monetary claims under Article 109 of the Labor Code, which provides that every employer or indirect employer shall be held responsible with his contractor or subcontractor for any violation of any provision of the Code.
• Computation of Awards: Partially. The awards were reduced to cover only the period from August 1991, when Loterte started working for DE LIMA, not from June 1989 as the Labor Arbiter had computed.

• Labor-Only Contracting: Under the Labor Code, two elements must exist for a finding of labor-only contracting: (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 persons are performing activities directly related to the principal business of such employer. These two elements do not exist in the instant case. DE LIMA is a going concern duly registered with the SEC with substantial capitalization of P1,600,000.00, P400,000.00 of which is actually subscribed, and thus cannot be considered as engaged in labor-only contracting, being a highly capitalized venture. Moreover, while the janitorial services performed by Loterte may be considered directly related to the principal business of FILSYN, they are not necessary in its operation; they are merely incidental thereto, as opposed to being integral, without which production and company sales will not suffer. Judicial notice has been taken of the general practice in private as well as in government institutions and industries of hiring janitorial services on an independent contractor basis.
• Employer-Employee Relationship: DE LIMA being an independent job contractor, no direct employer-employee relationship exists between FILSYN and Loterte.
• Solidary Liability: Notwithstanding the lack of a direct employer-employee relationship between FILSYN and Loterte, FILSYN cannot totally exculpate itself from the fact that DE LIMA is an independent job contractor. The Court agreed with the Solicitor General that FILSYN is still jointly and severally liable with DE LIMA for Loterte's monetary claims under Article 109 of the Labor Code, which explicitly provides that every employer or indirect employer shall be held responsible with his contractor or subcontractor for any violation of any provision of the Code, and for purposes of determining the extent of their civil liability, they shall be considered as direct employers.
• Computation of Awards: A reduction of the Labor Arbiter's awards was in order. In computing the 13th month pay and service incentive leave pay due Loterte, the Labor Arbiter erroneously included the period starting June 1989 to the date of his decision. From Loterte's own admission, he started working for DE LIMA only in August 1991, and the Agreement between FILSYN and DE LIMA is dated 4 April 1991. Consequently, the joint and several liability of FILSYN and DE LIMA could not have covered the period before said date. The Court determined their joint and several liability on the basis of the computation of the Labor Arbiter, affirmed by the NLRC, as follows: P1,452.24 for underpayment, P1,232.01 for 13th month pay, P565.00 for service incentive leave pay, and P50,338.30 for back wages, totaling P53,587.55.

• Labor-Only Contracting — Under Article 106, paragraph 4 of the Labor Code, two elements must exist for a finding of labor-only contracting: (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 persons are performing activities directly related to the principal business of such employer. In this case, DE LIMA's substantial capitalization of P1,600,000.00 negated a finding of labor-only contracting.
• Necessary vs. Incidental Services — Janitorial services, although directly related to the principal business of an employer, are not necessary in its operation; they are merely incidental thereto, as opposed to being integral, without which production and company sales will not suffer. The Court took judicial notice of the general practice in private as well as in government institutions and industries of hiring janitorial services on an independent contractor basis.
• Indirect Employer Liability — Under Article 109 of the Labor Code, every employer or indirect employer shall be held responsible with his contractor or subcontractor for any violation of any provision of the Code. For purposes of determining the extent of their civil liability, they shall be considered as direct employers. This liability applies notwithstanding the absence of a direct employer-employee relationship between the principal and the contractor's employees.

• "Under the Labor Code, two (2) elements must exist for a finding of labor-only contracting: (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 persons are performing activities directly related to the principal business of such employer." — This passage states the canonical two-element test for labor-only contracting under Article 106, paragraph 4 of the Labor Code, which is the controlling doctrine in this case.
• "Moreover, while the janitorial services performed by Felipe Loterte pursuant to the agreement between FILSYN and DE LIMA may be considered directly related to the principal business of FILSYN which is the manufacture of polyester fiber, nevertheless, they are not necessary in its operation. On the contrary, they are merely incidental thereto, as opposed to being integral, without which production and company sales will not suffer." — This passage distinguishes between services directly related to the principal business and those necessary to its operation, holding that janitorial services fall into the former but not the latter category.
• "The provisions of existing laws to the contrary notwithstanding, every employer or indirect employer shall be held responsible with his contractor or subcontractor for any violation of any provision of this Code. For purposes of determining the extent of their civil liability under this Chapter, they shall be considered as direct employers." — This verbatim quotation of Article 109 of the Labor Code is the basis for holding FILSYN jointly and severally liable with DE LIMA despite the absence of a direct employer-employee relationship.

• Guarin vs. NLRC, G.R. No. 86010, 3 October 1989, 178 SCRA 267 — Cited by the Labor Arbiter to classify Loterte as a regular employee; distinguished by the Supreme Court because the contractor in that case could not prove substantial capital, unlike DE LIMA.
• Neri vs. NLRC, G.R. Nos. 97008-09, 23 July 1993, 224 SCRA 717 — Cited to support the proposition that a highly capitalized venture cannot be considered engaged in labor-only contracting.
• Ecal vs. NLRC, G.R. Nos. 92777-78, 13 March 1991, 195 SCRA 224 — Cited to support the proposition that janitorial services are not necessary to the principal business of the employer.
• Baguio vs. NLRC, G.R. Nos. 79004-08, 4 October 1991, 202 SCRA 465 — Cited to support the proposition that janitorial services are not necessary in the operation of the principal business, and for the indirect employer liability under Article 109.
• Rhone-Poulenc Agrochemicals Philippines, Inc. vs. NLRC, G.R. Nos. 102633-35, 19 January 1993, 217 SCRA 249 — Cited for judicial notice of the general practice of hiring janitorial services on an independent contractor basis.
• Kimberly Independent Labor Union For Solidarity, Activism and Nationalism-Organized Labor Association In Line Industries and Agriculture vs. Drilon, G.R. No. 77629, 9 May 1990, 185 SCRA 190 — Cited for judicial notice of the general practice of hiring janitorial services on an independent contractor basis.
• Associated Anglo-American Tobacco Corporation vs. Clave, G.R. No. 50915, 30 August 1990, 189 SCRA 127 — Cited to support the conclusion that no direct employer-employee relationship exists where the contractor is an independent job contractor.
• Broadway Motors, Inc. vs. NLRC, G.R. No. 78382, 14 December 1987, 156 SCRA 522 — Cited to support the conclusion that no direct employer-employee relationship exists where the contractor is an independent job contractor.
• Deferia vs. NLRC, G.R. No. 78713, 27 February 1991, 194 SCRA 525 — Cited to support the indirect employer liability of the principal under Article 109 of the Labor Code.

• Article 106, paragraph 4, Labor Code — Defines labor-only contracting and its two elements: lack of substantial capital or investment by the contractor, and performance of activities directly related to the principal business of the employer. Applied to determine that DE LIMA is not a labor-only contractor.
• Article 109, Labor Code — Provides that every employer or indirect employer shall be held responsible with his contractor or subcontractor for any violation of any provision of the Code, and that for purposes of determining the extent of their civil liability, they shall be considered as direct employers. Applied to hold FILSYN jointly and severally liable with DE LIMA for Loterte's monetary claims.

Padilla, Kapunan, and Hermosisima, Jr., JJ., concurred. Vitug, J., concurred in the result.