Fonterra Brands Phils., Inc. vs. Largado

A fixed-term employment contract validly expires upon the agreed date of termination, and the employer's non-renewal of such contract is a valid management prerogative absent proof of bad faith. Additionally, an employee who voluntarily refuses to renew an employment contract and applies for work with another employer is deemed to have resigned, which is inconsistent with illegal dismissal.

Fonterra Brands Phils., Inc. is a company engaged in the marketing and sale of milk and dairy products. It contracted with Zytron Marketing and Promotions Corp. for the latter to provide trade merchandising representatives (TMRs) to promote Fonterra's products. Respondents Leonardo Largado and Teotimo Estrellado were among the TMRs supplied by Zytron. When Fonterra terminated its promotions contract with Zytron effective June 5, 2006, it engaged A.C. Sicat Marketing and Promotional Services as its new manpower supplier. The dispute arose from respondents' subsequent claims of illegal dismissal and regularization against Fonterra, Zytron, and A.C. Sicat.

Fonterra Brands Phils., Inc. contracted the services of Zytron Marketing and Promotions Corp. for the marketing and promotion of its milk and dairy products. Pursuant to the contract, Zytron provided Fonterra with trade merchandising representatives (TMRs), including respondents Leonardo Largado and Teotimo Estrellado. Largado's engagement began on September 15, 2003, while Estrellado's commenced on May 27, 2002. Both engagements ended on June 6, 2006.

On May 3, 2006, Fonterra sent Zytron a letter terminating its promotions contract, effective June 5, 2006. Fonterra thereafter entered into an agreement for manpower supply with A.C. Sicat Marketing and Promotional Services. Desirous of continuing their work as TMRs, respondents submitted their job applications with A.C. Sicat, which hired them for a term of five months, beginning June 7, 2006 up to November 6, 2006. Their employment contract with A.C. Sicat expressly stated that the need for their service was only for a specific project — to promote Fonterra Brands products — which was expected to be finished on or before November 6, 2006.

When respondents' five-month contracts with A.C. Sicat were about to expire, they allegedly sought renewal thereof, but were allegedly refused. This prompted respondents to file complaints for illegal dismissal, regularization, non-payment of service incentive leave and 13th month pay, and actual and moral damages, against Fonterra, Zytron, and A.C. Sicat. The Labor Arbiter dismissed the complaint, finding that respondents were not illegally dismissed and that they were the ones who refused to renew their contract, voluntarily complying with the requirements to claim their corresponding monetary benefits. The NLRC affirmed the Labor Arbiter, finding that respondents' separation from Zytron was brought about by the execution of the contract between Fonterra and A.C. Sicat, that respondents acquiesced to the transfer, and that they failed to refute the allegation that they voluntarily refused to renew their contract with A.C. Sicat.

The NLRC decision was assailed in a petition under Rule 65 before the Court of Appeals. The CA found that A.C. Sicat satisfied the requirements of legitimate job contracting, but Zytron did not. The CA ruled that Zytron's paid-in capital of ₱250,000 could not be considered substantial capital, that its Certificate of Registration was issued by DOLE months after respondents' supposed employment ended, and that its claim of possessing necessary tools and equipment was unsubstantiated. Accordingly, the CA declared respondents to be Fonterra's employees and ruled they were illegally dismissed, reckoned from the termination of their supposed employment with Zytron on June 6, 2006. The CA ordered Fonterra to reinstate respondents without loss of seniority rights, with full backwages and other benefits, and held Fonterra and Zytron jointly and severally liable for backwages and attorney's fees. Fonterra and Zytron moved for reconsideration, but the CA denied the same, prompting the present petition.

• Substantial Capital of Zytron: Petitioner argued that there is no absolute figure constituting "substantial" capital for an independent contractor, and that the same should be measured against the type of work obligated; Zytron's paid-in capital of ₱250,000 was as of 1990, the year it was incorporated.
• Zytron's Business History: Petitioner maintained that Zytron had been in business since 1990, more than a decade before signing the merchandising agreement with Fonterra, as shown in its Articles of Incorporation.
• Absence of Control: Petitioner argued that Fonterra never exercised the right to control respondents and other Zytron employees, and that respondents neither alleged that Fonterra exercised control over them nor presented proof in support thereof.
• No Illegal Dismissal: Petitioner maintained that respondents never claimed nor adduced evidence that they were dismissed from employment by Zytron, and that Zytron itself denies terminating them from work.

• Status of Contractors: Whether Zytron and A.C. Sicat are labor-only contractors, making Fonterra the employer of respondents.
• Illegal Dismissal: Whether respondents were illegally dismissed.

• Status of Contractors: As to Zytron, the issue was rendered immaterial because respondents voluntarily terminated their employment with Zytron. As to A.C. Sicat, no — it is a legitimate job contractor having substantial capital, an independent business, and a contract assuring contractual employees of all labor standards and benefits.
• Illegal Dismissal: No. Respondents voluntarily resigned from Zytron by refusing to renew their contracts and applying with A.C. Sicat, and their fixed-term employment with A.C. Sicat validly expired on November 6, 2006 by the parties' own agreement.

• Status of Contractors: The Court found it unnecessary to resolve whether Zytron was a labor-only contractor because respondents voluntarily terminated their employment with Zytron. As to A.C. Sicat, the Court deferred to the CA's findings, which were consistent with the rules on job contracting and supported by evidence. A.C. Sicat presented its Certificate of Business Registration, BIR registration, Mayor's Permit, SSS membership certificate, DOLE registration, company profile, and client certifications. It had assets totaling ₱5,926,155.76 as of December 31, 2006. Its agreement with Fonterra clearly provided that A.C. Sicat would be liable for wages, benefits, premiums, and government remittances of its employees. The Court agreed that Fonterra's issuance of Merchandising Guidelines, stock monitoring and inventory forms, and promo mechanics did not establish control over A.C. Sicat, as these were imposed only to ensure the effectiveness of promotion services. The three elements of legitimate job contracting were satisfied: A.C. Sicat carried on a distinct and independent business, had substantial capital, and the agreement assured contractual employees of all labor standards and benefits.

• Illegal Dismissal: The Court gave credence to the Labor Arbiter's conclusion that respondents were the ones who refused to renew their contracts with Zytron, and the NLRC's finding that they acquiesced to their transfer to A.C. Sicat. By refusing to renew their contracts with Zytron, respondents effectively resigned. Their voluntary refusal was motivated by their desire to continue their assignment at Fonterra, which could not happen because Zytron's contract with Fonterra had concluded. The CA itself acknowledged that respondents applied with A.C. Sicat "[t]o continuously work as merchandisers of Fonterra products." Respondents also voluntarily complied with the requirements to claim their monetary benefits from Zytron. Resignation being inconsistent with illegal dismissal, Zytron could not be said to have illegally dismissed respondents. As to A.C. Sicat, respondents were fixed-term employees whose employment contract expressly stated a specific date of termination — November 6, 2006. The determining factor of fixed-term contracts is the day certain agreed upon by the parties for commencement and termination, not the duty of the employee. By accepting the conditions of the contract, respondents were well aware of and acceded to the predetermined end date. The non-renewal of their contracts was a management prerogative, and respondents failed to prove bad faith. The expiration of the contract simply caused the natural cessation of their fixed-term employment.

• Legitimate Job Contracting — A contractor is engaged in legitimate job contracting when three conditions concur: (1) the contractor carries on a distinct and independent business and undertakes to perform the job on its own account and under its own responsibility, free from the control and direction of the principal except as to results; (2) the contractor has substantial capital or investment; and (3) the agreement between principal and contractor assures contractual employees entitlement to all labor and occupational safety and health standards, free exercise of the right to self-organization, security of tenure, and social and welfare benefits. The Court applied this test to A.C. Sicat and found all three elements satisfied.

• Labor-Only Contracting — Contracting is prohibited when the contractor merely recruits, supplies, or places workers for a principal and either (1) the contractor lacks substantial capital or investment and the employees perform activities directly related to the principal's main business, or (2) the contractor does not exercise control over the performance of the work. In labor-only contracting, the law creates an employer-employee relationship between the principal and the contractor's employees, treating the contractor as merely the agent of the principal.

• Resignation — Resignation is the voluntary act of employees who are compelled by personal reasons to dissociate themselves from their employment, done with the intention of relinquishing an office, accompanied by the act of abandonment. The Court held that respondents' voluntary refusal to renew their contracts with Zytron, their application with A.C. Sicat, and their work as A.C. Sicat's employees constituted resignation and abandonment of their previous employment, which is inconsistent with illegal dismissal.

• Fixed-Term Employment — Fixed-term employment contracts are not limited to those seasonal or for specific projects with predetermined completion dates; they also include contracts to which the parties by free choice have assigned a specific date of termination. The determining factor is the day certain agreed upon by the parties for commencement and termination, not the duty of the employee. Non-renewal of a fixed-term contract is a management prerogative, and absent proof of bad faith, the expiration of such contract causes the natural cessation of employment.

• "By refusing to renew their contracts with Zytron, respondents effectively resigned from the latter. Resignation is the voluntary act of employees who are compelled by personal reasons to dissociate themselves from their employment, done with the intention of relinquishing an office, accompanied by the act of abandonment." — This passage defines the doctrine of resignation and applies it to the facts, establishing that respondents' voluntary refusal to renew constituted resignation, which is legally inconsistent with illegal dismissal.

• "The determining factor of such contracts is not the duty of the employee but the day certain agreed upon by the parties for the commencement and termination of the employment relationship." — This articulates the controlling principle for fixed-term employment contracts, distinguishing them from other employment types by the parties' agreed-upon termination date rather than the nature of the work performed.

• "[T]he non-renewal of their contracts by A.C. Sicat is a management prerogative, and failure of respondents to prove that such was done in bad faith militates against their contention that they were illegally dismissed." — This establishes the standard that non-renewal of a fixed-term contract is presumptively valid absent proof of bad faith, placing the burden on the employee.

• Carlos vs. Court of Appeals, G.R. No. 168096, August 28, 2007, 531 SCRA 461 — Cited for the definition of resignation as the voluntary act of an employee to dissociate from employment, accompanied by abandonment. The Court applied this definition to conclude that respondents' refusal to renew their contracts with Zytron constituted resignation.
• Almeda vs. Asahi Glass Philippines, Inc., G.R. No. 177785, September 3, 2008, 564 SCRA 115 — Cited for the principle that in labor-only contracting, the law creates an employer-employee relationship between the principal and the labor-only contractor's employees, treating the contractor as merely the agent of the principal. Also cited for the three elements of legitimate job contracting.
• Aliviado vs. Procter & Gamble Phils., Inc., G.R. No. 160506, March 9, 2010, 614 SCRA 563 — Cited for the definition of prohibited labor-only contracting, specifically the elements that render contracting prohibited: lack of substantial capital or investment coupled with activities directly related to the principal's main business, or absence of control over the work performed.
• Price vs. Innodata Phils. Inc., G.R. No. 178505, September 30, 2008, 567 SCRA 269 — Cited for the doctrine that fixed-term employment contracts include those to which the parties by free choice have assigned a specific date of termination, and that the determining factor is the day certain agreed upon, not the duty of the employee. This in turn cited Brent School, Inc. vs. Zamora, No. L-48494, February 5, 1990.

• Labor Code provisions on job contracting and labor-only contracting — The decision applies the statutory and regulatory framework distinguishing legitimate job contracting from prohibited labor-only contracting, enumerating the requisites of each as derived from the Labor Code and its implementing rules. A.C. Sicat was found to satisfy all requisites of legitimate job contracting, while the issue of Zytron's status was rendered immaterial by the finding of voluntary resignation.

Diosdado M. Peralta, Martin S. Villarama, Jr., Bienvenido L. Reyes, and Francis H. Jardeleza concurred.