First Philippine Industrial Corporation vs. Calimbas and Mahilom

A manpower supplier with only ₱75,000.00 paid-in capital and no substantial investment in tools or equipment, whose assigned workers perform activities directly related to the principal’s business under the principal’s control, is a labor-only contractor; the principal is the true employer of the workers. A dismissal is valid only if supported by a just or authorized cause and complies with the twin notice and hearing requirements of procedural due process.

FPIC is a domestic corporation primarily engaged in the transportation of petroleum products by pipeline. DGMS is engaged in supplying manpower to render general clerical, building and grounds maintenance, and janitorial and utility services. The dispute concerns whether workers assigned by DGMS to FPIC became FPIC’s employees under Article 106 of the Labor Code and DOLE Department Order No. 10, Series of 1997, which distinguish permissible job contracting from prohibited labor-only contracting.

First Philippine Industrial Corporation (FPIC) is a domestic corporation primarily engaged in the transportation of petroleum products by pipeline. De Guzman Manpower Services (DGMS) is engaged in the business of supplying manpower to render general clerical, building and grounds maintenance, and janitorial and utility services. On March 29, 1993, FPIC, represented by its Senior Vice-President and Head of Administration Department Eustaquio Generoso, Jr., entered into a Contract of Special Services with DGMS, represented by its Operations Manager Manuel De Guzman. The contract took effect on April 1, 1993. Under it, DGMS agreed to undertake some aspects of building and grounds maintenance at FPIC’s premises, offices and facilities, and to provide clerical and other utility services as may be required from time to time by FPIC. Payment was to be based on individual timesheets prepared and submitted by DGMS and duly authenticated by FPIC’s representative, billed on a semi-monthly basis. The contract stated that there would be no employer-employee relationship between FPIC and DGMS or the persons DGMS might assign, and that DGMS warranted compliance with labor laws and held FPIC free from claims by DGMS employees.

Pursuant to the contract, Raquel M. Calimbas and Luisa P. Mahilom were engaged by DGMS to render services to FPIC. Calimbas was assigned as a department secretary at the Technical Services Department beginning June 3, 1996, while Mahilom served as a clerk at the Money Movement Section of the Finance Division starting February 13, 1996. They worked at FPIC’s offices in Ortigas Center, Pasig City for an uninterrupted period of five years, occupying the same positions in the same departments under the supervision of company officials. According to respondents, they used office equipment and materials owned by FPIC; DGMS never maintained any representative at FPIC’s office to supervise or oversee their work; and their direct superiors were managerial employees of FPIC who controlled their work and ensured compliance with FPIC’s policies.

On June 21, 2001, FPIC, through its Human Resources Manager Lorna Young, informed Calimbas and Mahilom that their services to the company would no longer be needed by July 31, 2001 as a result of a “Pace-Setting” Study conducted by an outside consultant. On July 9, 2001, Priscilla de Leon, Treasurer of DGMS, formally notified both respondents that their respective work assignments in FPIC were no longer available to them effective July 31, 2001, citing the termination of the Project Contract with FPIC as the main reason. The termination letters prepared by DGMS even stressed that they would formalize the verbal notice given by FPIC’s HR Administration personnel. On August 3, 2001, Calimbas and Mahilom signed quitclaims releasing and discharging DGMS from whatever claims they might have against it by virtue of their past employment, upon receipt of ₱17,343.10 and ₱23,459.14, respectively.

Despite executing the quitclaims, on August 16, 2001, Calimbas and Mahilom filed a complaint against FPIC for illegal dismissal and for collection of monetary benefits, damages, and attorney’s fees. They alleged that they were regular employees of FPIC after serving almost five years and that they were dismissed without cause. The complaint was docketed as NLRC NCR Case No. 00-08-04331-01 and raffled to Labor Arbiter Joel Lustria. After three mandatory conferences, the parties failed to reach an amicable settlement and were required to submit their respective position papers and documentary evidence.

In their position paper, Calimbas and Mahilom posited that they were regular employees of FPIC for having served it for almost five years, rendering services usually necessary or desirable in FPIC’s usual business or trade. They claimed that they were illegally dismissed when relieved from their work assignments on July 31, 2001 without valid and serious reasons. They maintained that their real employer was FPIC and that DGMS was merely its agent for having been engaged in prohibited labor-only contracting. They averred that DGMS did not have substantial capital or investment by way of tools, equipment, machines, work places and other materials; that they used office equipment and materials owned by FPIC; that DGMS never exercised control over them; and that their direct superiors, who were managerial employees of FPIC, had control over them and ensured compliance with FPIC’s policies.

FPIC insisted in its position paper and motion to dismiss that the complaint should be dismissed because the Labor Arbiter had no jurisdiction over the case since there was absolutely no employer-employee relationship between it and respondents. FPIC claimed that Calimbas and Mahilom had never been its employees; that their true employer was DGMS because they were hired by DGMS and assigned to FPIC to render services based on their contract; that they received their wages and other benefits from DGMS; and that they executed quitclaims in favor of DGMS. FPIC also submitted that the termination of respondents’ employment with DGMS was valid and lawful since they executed quitclaims with their employer. The Labor Arbiter found that respondents were regular employees of FPIC and had been illegally dismissed without just or authorized cause. On reconsideration, the NLRC found that DGMS was their employer. The Court of Appeals reinstated the Labor Arbiter’s finding.

• Employer-Employee Relationship: Petitioner argued that the existence of an employer-employee relationship must be substantially established and cannot be merely presumed, and that the Court of Appeals erred in not applying pertinent law and jurisprudence.
• No Jurisdiction / No Employer-Employee Relationship: Petitioner maintained that the Labor Arbiter had no jurisdiction because there was absolutely no employer-employee relationship between it and respondents; respondents were hired by DGMS, received wages and benefits from DGMS, and executed quitclaims in favor of DGMS.
• Validity of Termination: Petitioner submitted that the termination of respondents’ employment with DGMS was valid and lawful since they executed quitclaims with their employer.
• Court of Appeals Erred in Reversing the NLRC: Petitioner posited that the Court of Appeals committed grievous error in reversing the NLRC’s finding that respondents were not employees and therefore not illegally dismissed and not entitled to reinstatement, backwages, and attorney’s fees.

• Regular Employment: Respondents posited that they were regular employees of FPIC for having served almost five years, rendering services usually necessary or desirable in the usual business or trade of FPIC.
• Illegal Dismissal: Respondents claimed they were illegally dismissed when relieved from work assignments on July 31, 2001 without valid and serious reasons.
• Labor-Only Contracting: Respondents maintained that their real employer was FPIC and that DGMS was merely its agent engaged in prohibited labor-only contracting because DGMS did not have substantial capital or investment by way of tools, equipment, machines, work places and other materials.
• Control and Supervision: Respondents averred that DGMS never exercised control over them; they used FPIC’s office equipment and materials; DGMS never maintained a representative at FPIC’s office to supervise or oversee their work; and their direct superiors, managerial employees of FPIC, had control over them and ensured compliance with FPIC policies.

• Employer-Employee Relationship: Whether respondents Calimbas and Mahilom were employees of petitioner FPIC.
• Legality of Dismissal: Whether respondents were lawfully dismissed from their employment.

• Employer-Employee Relationship: Yes. Respondents were employees of petitioner; DGMS was engaged in labor-only contracting because it had no substantial capital or investment and petitioner exercised control over respondents.
• Legality of Dismissal: No. The dismissal was illegal; petitioner failed to show any valid or just cause under the Labor Code and failed to comply with the twin notice and hearing requirements of procedural due process.

• Employer-Employee Relationship: Article 106 of the Labor Code and Sections 8 and 9 of DOLE Department Order No. 10, Series of 1997 govern the distinction between permissible job contracting and prohibited labor-only contracting. Labor-only contracting exists where the person supplying workers does not have substantial capital or investment in tools, equipment, machineries, work premises, among others, and the workers recruited and placed perform activities directly related to the principal business. In such cases, the intermediary is merely an agent of the employer, who is responsible to the workers as if they were directly employed. The Court of Appeals’ findings were sustained. DGMS’s actual paid-in capital of ₱75,000.00 was not substantial capital under Vinoya vs. National Labor Relations Commission. DGMS also had no substantial equipment; respondents used FPIC’s office equipment and materials. Petitioner exercised control and supervision: respondents’ daily time records were countersigned by FPIC officials; DGMS assigned no representative to supervise them; and the test for independent contractorship is whether the contractor does the work according to its own methods without control except as to results. Additional facts reinforced this: respondents worked only at FPIC’s offices for an uninterrupted five years, occupying the same positions under company officials’ supervision; three weeks before DGMS’s termination letters, FPIC’s HR Manager Lorna Young notified them in a closed-door meeting that their services would end by July 31, 2001; DGMS’s termination letters stated they formalized the verbal notice given by FPIC’s HR Administration personnel; respondents’ direct superiors were FPIC managerial employees with direct control over their work-related activities and compliance with company policies; and DGMS never maintained a representative at FPIC’s office. An employer-employee relationship therefore existed, and having served almost five years, respondents attained regular employment status.
• Legality of Dismissal: For a dismissal to be valid, both procedural and substantive due process must be complied with, as held in Skippers United Pacific, Inc. vs. Daza. Procedural due process consists of the twin requirements of notice and hearing: the employer must furnish two written notices—the first apprising the employee of the particular acts or omissions for which dismissal is sought, and the second informing the employee of the decision to dismiss—and must give the worker an opportunity to be heard before the second notice; an actual hearing is not necessary. Substantive due process requires a just or authorized cause under Articles 282 to 284 of the Labor Code. Petitioner failed to show any valid or just cause for terminating respondents’ services. Apart from notifying them that their services had already been terminated, petitioner failed to notify them of the acts or omissions leading to termination and to give them an ample opportunity to contest the legality of their dismissal. The dismissal was therefore tainted with illegality. The Court of Appeals correctly held that respondents were entitled to reinstatement without loss of seniority rights and other privileges, and to full backwages inclusive of allowances and other benefits or their monetary equivalent from the time compensation was withheld until actual reinstatement. Because reinstatement was no longer feasible, respondents were entitled instead to separation pay equivalent to one month salary for every year of service.

• Labor-only contracting — Under Article 106 of the Labor Code and Sections 8 and 9 of DOLE Department Order No. 10, Series of 1997, labor-only contracting exists where the person supplying workers does not have substantial capital or investment in tools, equipment, machineries, work premises, among others, and the workers recruited and placed perform activities directly related to the principal business. The intermediary is merely an agent of the employer, who is responsible to the workers as if they were directly employed. The Court applied this doctrine because DGMS had only ₱75,000.00 paid-in capital, no substantial equipment, and its assigned workers performed clerical and secretarial work directly related to FPIC’s business; hence DGMS was a labor-only contractor and FPIC was the true employer.
• Substantial capital or investment — A contractor must have substantial capital or investment in tools, equipment, machineries, work premises, and other materials necessary for its business to qualify as a permissible job contractor. The Court, citing Vinoya vs. National Labor Relations Commission, held that an actual paid-in capital of ₱75,000.00 is not substantial capital. DGMS also had no substantial equipment, and respondents used FPIC’s office equipment and materials, reinforcing its status as a labor-only contractor.
• Control test for independent contractorship — The test is whether one claiming to be an independent contractor has contracted to do the work according to its own methods and without being subjected to the control of the employer, except only as to the results of the work. The Court found that FPIC exercised control and supervision over respondents: their daily time records were countersigned by FPIC officials, DGMS assigned no representative to supervise them, and their direct superiors were FPIC managerial employees who controlled their work-related activities and compliance with company policies.
• Regular employment — Having served for almost five years at petitioner’s company, respondents had already attained the status of regular employees. The Court used this finding to conclude that they were entitled to the protections due regular employees, including reinstatement and backwages, or separation pay when reinstatement is no longer feasible.
• Procedural and substantive due process in dismissal — For a worker’s dismissal to be valid, it must comply with both procedural and substantive due process. Procedural due process consists of the twin requirements of notice and hearing: the employer must furnish two written notices—the first apprising the employee of the particular acts or omissions for which dismissal is sought, and the second informing the employee of the decision to dismiss—and must give the worker an opportunity to be heard before the second notice; an actual hearing is not necessary. Substantive due process requires that the dismissal be made under a just or authorized cause under Articles 282 to 284 of the Labor Code. The Court found that petitioner failed to show any just or authorized cause and failed to comply with the notice and hearing requirements, rendering the dismissal illegal.
• Reinstatement and separation pay — Where reinstatement is no longer feasible, the dismissed employee is entitled instead to separation pay equivalent to one month salary for every year of service. The Court affirmed the award of reinstatement, backwages, and other privileges but modified the relief to separation pay because reinstatement was no longer feasible.

• “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 by him.” — This is the Court’s quotation of Article 106 of the Labor Code, which supplies the statutory definition of labor-only contracting and the legal consequence that the intermediary is merely the employer’s agent.
• “Given the foregoing standards, we sustain the findings of the CA that respondents are petitioner’s employees and that DGMS is engaged in labor-only contracting.” — This is the Court’s ratio decidendi on the first issue, applying Article 106 and DOLE Department Order No. 10, Series of 1997 to the facts.
• “For a worker’s dismissal to be considered valid, it must comply with both procedural and substantive due process. The legality of the manner of dismissal constitutes procedural due process, while the legality of the act of dismissal constitutes substantive due process.” — This passage, quoted from Skippers United Pacific, Inc. vs. Daza, states the controlling standard for the second issue and distinguishes procedural from substantive due process in dismissal cases.
• “Having failed to establish compliance with the requirements of termination of employment under the Labor Code, respondents’ dismissal is tainted with illegality.” — This is the Court’s conclusion that the dismissal was illegal because petitioner neither proved a just or authorized cause nor complied with the required notice and hearing.

• Vinoya vs. National Labor Relations Commission, 381 Phil. 460, 475-476 (2000) — Cited by the Court for the rule that an actual paid-in capital of ₱75,000.00 could not be considered substantial capital; applied to classify DGMS as a labor-only contractor.
• Skippers United Pacific, Inc. vs. Daza, G.R. No. 175558, February 8, 2012, 665 SCRA 412 — Cited for the rule that a valid dismissal requires both procedural and substantive due process; procedural due process consists of the twin requirements of notice and hearing, while substantive due process requires a just or authorized cause under Articles 282 to 284 of the Labor Code.

• Article 106, Labor Code — Defines contractor or subcontractor and labor-only contracting. The Court applied it to hold that DGMS was a labor-only contractor and that FPIC, as principal, was responsible to respondents as if they were directly employed by it.
• Sections 8 and 9, DOLE Department Order No. 10, Series of 1997 — Section 8 sets the conditions for permissible job contracting: the contractor must carry on an independent business, undertake the work on its own account and responsibility, free from the principal’s control except as to results, and have substantial capital or investment. Section 9 defines and prohibits labor-only contracting. The Court used these standards to assess DGMS’s status.
• Articles 282 to 284, Labor Code — Cited as the provisions enumerating just or authorized causes for dismissal under substantive due process. The Court found that petitioner failed to show any valid or just cause under these provisions.
• Rule 45, Rules of Court — The petition was filed under Rule 45 as a Petition for Review on Certiorari seeking reversal of the Court of Appeals’ decision and resolution.

Velasco, Jr. (Chairperson), Abad, Mendoza, and Leonen, JJ., concur.