Mandaue Galleon Trade, Inc. and/or Gamallosons Traders, Inc. vs. Andales, et al.

A contractor that lacks substantial capital or investment and whose workers perform activities directly related to the principal’s business is a labor-only contractor; the principal is deemed the employer and is solidarily liable for the workers’ lawful claims. A final and executory judgment is immutable and may not be modified even to correct erroneous conclusions of fact or law.

Mandaue Galleon Trade, Inc. (MGTI) and Gamallosons Traders, Inc. (GTI) are business entities engaged in rattan furniture manufacturing for export, with principal place of business at Cabangcalan, Mandaue City. The dispute concerns workers who performed services in MGTI’s operations as weavers, grinders, sanders and finishers. Article 106 of the Labor Code and Sections 5 and 7 of the Rules Implementing Articles 106 to 109 govern permissible job contracting and prohibit labor-only contracting, under which the principal is deemed the employer of the contractor’s workers.

Mandaue Galleon Trade, Inc. (MGTI) and Gamallosons Traders, Inc. (GTI) are business entities engaged in rattan furniture manufacturing for export, with principal place of business at Cabangcalan, Mandaue City. Respondent Vicente Andales filed a complaint with the Labor Arbiter against both petitioners for illegal dismissal and non-payment of 13th month pay and service incentive leave pay. His other co-workers, numbering 260, filed a similar complaint against petitioner MGTI only. The records do not show any specific finding as to GTI’s liability to Andales; the findings of the Labor Arbiter and the NLRC focused only on MGTI, and the pleadings in the present petition do not discuss Andales’s relationship to GTI.

The complainants alleged that MGTI hired them on various dates as weavers, grinders, sanders and finishers. Sometime in August 1998, workers in the Finishing Department were told that they would be transferred to a contractor and were given Visitor Identification Cards (IDs), while workers in the Weaving Department were told to look for work elsewhere as the company had no work for them. Sometime in September 1998, workers in the Grinding Department were not allowed to enter the company premises, while workers in the Sanding Department were told that they could no longer work since there was no work available; workers who were issued IDs were allowed to go inside the premises. The complainants claimed they were dismissed without notice and just cause.

They further alleged that they were regular employees of MGTI because (a) they performed their work inside the company premises in Cabangcalan, Mandaue City; (b) they were issued uniforms by MGTI and were told to strictly follow company rules and regulations; (c) they were under the supervision of MGTI’s foremen, quality control personnel and checkers; (d) MGTI supplied the materials, designs, tools and equipment in the production of furniture; (e) MGTI conducted orientations on how the work was to be done and the safe and efficient use of tools and equipment; (f) MGTI issued memoranda regarding absences and waste of materials; and (g) MGTI exercised the power to discipline them.

MGTI denied the existence of an employer-employee relationship with the complainants, claiming that they were workers of independent contractors whose services were engaged temporarily and seasonally when the demands for its products were high and could not be met by its regular workforce. According to MGTI, the independent contractors recruited and hired the complainants, prepared the payroll and paid their wages, supervised and directed their work, and had authority to dismiss them. MGTI averred that due to the economic crisis and internal squabble in the company, the volume of orders from foreign buyers dived; as a survival measure, management decided to retrench its employees; and the substantial separation pay paid to retrenched employees caught the jealous eyes of the complainants, who caused the filing of the complaint for illegal dismissal.

The Labor Arbiter found that 183 complainants were regular piece-rate employees of MGTI because they performed functions necessary to MGTI’s rattan furniture manufacturing business; the independent contractors were not properly identified; and the absence of proof that the contractors had work premises of their own, substantial capital, or investment in tools, equipment and machineries made them only labor contractors. The Labor Arbiter also found that there was no dismissal but only a claim for separation pay. The NLRC affirmed the finding of employer-employee relationship and held that labor-only contracting, not job-contracting, was present because the alleged contractors did not have substantial capital in the form of equipment, machineries and work premises; it nevertheless found that the complainants were constructively dismissed when they were unilaterally transferred to a contractor to evade payment of separation pay as a result of the retrenchment. The CA affirmed these findings.

• Employer-Employee Relationship: Petitioners argued that the CA committed grave and reversible error in considering respondents as employees of petitioners absent the requisites or elements in jurisprudence determinative of the existence of an employer-employee relationship.
• Independent Contractors: Petitioners maintained that respondents were employees of independent contractors who had their own manpower, tools, equipment and capital.
• No Control or Employment Acts: Petitioners asserted that they did not have a hand in respondents’ recruitment and hiring, payment of wages, control and supervision, and dismissal; respondents did not have time cards or uniforms, nor were they subjected to petitioner’s company policies.

• Reduction of Separation Pay: Respondents contended that the CA’s Amended Decision had no justification for reducing the separation pay from one month to one-half month per year of service.
• Denial of Due Process: Respondents averred that they were denied their day in court when the CA did not resolve their Motion for Reconsideration of the Amended Decision.
• Backwages: Respondents maintained that because they were illegally dismissed, they were entitled to backwages and not only separation pay.

• Employer-Employee Relationship / Labor-Only Contracting: Whether the CA committed grave and reversible error in considering respondents as employees of petitioners absent the requisites or elements in jurisprudence determinative of the existence of an employer-employee relationship.
• Finality of Amended Decision / Separation Pay: Whether the CA’s reduction of separation pay from one month to one-half month per year of service may still be modified in the present petition.
• Due Process: Whether respondents were denied due process when the CA did not resolve their Motion for Reconsideration of the Amended Decision.

• Employer-Employee Relationship / Labor-Only Contracting: No. The CA did not commit grave and reversible error; the alleged contractors were labor-only contractors because they lacked substantial capital or investment and respondents performed work directly related to MGTI’s principal business, making MGTI the employer.
• Finality of Amended Decision / Separation Pay: No. The reduction of separation pay had become final and executory after respondents’ Petition for Certiorari in G.R. No. 162227 was dismissed and entry of judgment was made, so it is immutable and beyond modification.
• Due Process: No. Respondents had the opportunity to be heard when they assailed the reduction in G.R. No. 162227 but failed to comply with basic procedural requirements; they cannot resurrect a cause lost through negligence.

• Employer-Employee Relationship / Labor-Only Contracting: The Court began from the rule that factual findings of quasi-judicial bodies like the NLRC, when adopted and confirmed by the CA and supported by substantial evidence, are accorded respect and even finality; the existence of an employer-employee relationship is a factual matter generally not reviewed in a Rule 45 petition, and none of the recognized exceptions was shown. On the merits, Article 106 of the Labor Code and Sections 5 and 7 of the Implementing Rules define labor-only contracting as existing when (1) the contractor or subcontractor supplying workers lacks substantial capital or investment in tools, equipment, machineries, work premises, among others, and the workers recruited or placed perform activities directly related to the principal’s business, or (2) the contractor does not exercise the right to control the performance of the contractual employee’s work. The Court found both the direct-relation and lack-of-capital criteria satisfied: respondents worked as weavers, grinders, sanders and finishers, activities directly related to MGTI’s principal business of rattan furniture manufacturing; and MGTI presented no evidence of the contractors’ capitalization or of their investment in tools, equipment or implements actually used in the contracted work. Because the law places the burden on the contractor to prove substantial capital, investment and tools, and employees need not prove their absence, the contractors were labor-only contractors. A finding of labor-only contracting is equivalent to declaring an employer-employee relationship between the principal and the supposed contractor’s employees; the labor-only contractor is a mere agent of the principal, the real employer. MGTI was therefore solidarily liable for the employees’ rightful claims. The Court also noted that the prohibition against labor-only contracting is intended to prevent employers from circumventing labor laws. It thus saw no reason to disturb the NLRC and CA findings.

• Finality of Amended Decision / Separation Pay: The CA’s August 19, 2003 Amended Decision reduced the separation pay from one month to one-half month for every year of service. Respondents assailed that reduction in their Petition for Certiorari docketed as G.R. No. 162227, but the petition was dismissed on April 14, 2004 for failure to attach a clearly legible duplicate original or certified true copy of the Amended Decision, and entry of judgment was made on August 26, 2004. The reduction therefore became final and executory. Under the doctrine of finality of judgment, a decision that has acquired finality becomes immutable and unalterable and may no longer be modified in any respect, even if the modification is meant to correct erroneous conclusions of fact or law, whether by the court that rendered it or by the highest Court. The recognized exceptions are correction of clerical errors, nunc pro tunc entries that cause no prejudice to any party, void judgments, and circumstances transpiring after finality that render execution unjust and inequitable. None was present. The CA Amended Decision was not void because it was rendered by a tribunal with jurisdiction over the subject matter. Hence the Court could not amend, modify or reverse the reduced separation pay.

• Due Process: Respondents claimed they were denied their day in court because the CA did not resolve their Motion for Reconsideration of the Amended Decision. They had the opportunity to be heard when they assailed the reduction of separation pay in G.R. No. 162227, but they bungled that opportunity by failing to comply with basic procedural requirements. They could not be allowed to resurrect a cause lost through negligence in properly pursuing their case. There was thus no denial of due process.

• Labor-only contracting — Under Article 106 of the Labor Code and Sections 5 and 7 of the Rules Implementing Articles 106 to 109, labor-only contracting exists when (1) the contractor or subcontractor supplying workers lacks substantial capital or investment in the form of tools, equipment, machineries, work premises, among others, and the workers recruited or placed perform activities directly related to the principal’s business, or (2) the contractor does not exercise the right to control the performance of the contractual employee’s work. A finding of labor-only contracting is equivalent to declaring an employer-employee relationship between the principal and the employees of the supposed contractor; the labor-only contractor is considered a mere agent of the principal, the real employer. The Court applied this doctrine because MGTI’s contractors lacked proof of substantial capital and respondents performed work directly related to MGTI’s rattan furniture manufacturing business.

• Substantial capital or investment — “Substantial capital or investment” refers to capital stocks and subscribed capitalization in the case of corporations, and to tools, equipment, implements, machineries and work premises actually and directly used by the contractor or subcontractor in the performance or completion of the job, work or service contracted out. The burden is on the contractor to prove that it has substantial capital, investment and tools; employees need not prove that the contractor lacks them. MGTI failed to present any evidence of its contractors’ capitalization or investment, so the contractors were labor-only contractors.

• Right to control — The “right to control” refers to the right reserved to the person for whom the services of the contractual workers are performed to determine not only the end to be achieved but also the manner and means to be used in reaching that end. Under the Implementing Rules, labor-only contracting may exist where the contractor does not exercise the right to control the performance of the contractual employee’s work. The Court’s finding of labor-only contracting rested on the direct relation of respondents’ work to MGTI’s business and the contractors’ lack of substantial capital.

• Respect for factual findings of quasi-judicial bodies — Factual findings of quasi-judicial bodies like the NLRC, when adopted and confirmed by the CA and supported by substantial evidence, are accorded respect and even finality. The existence of an employer-employee relationship is a factual matter generally not reviewed in a Rule 45 petition. The recognized exceptions are: (1) when the findings are grounded entirely on speculation, surmises or conjectures; (2) when the inference made is manifestly mistaken, absurd or impossible; (3) when there is grave abuse of discretion; (4) when the judgment is based on a misapprehension of facts; (5) when the findings of fact are conflicting; (6) when in making its findings, the CA went beyond the issues of the case, or its findings are contrary to the admissions of both the appellant and the appellee; (7) when the findings are contrary to the trial court; (8) when the findings are conclusions without citation of specific evidence on which they are based; (9) when the facts set forth in the petition as well as in the petitioner’s main and reply briefs are not disputed by the respondent; (10) when the findings of fact are premised on the supposed absence of evidence and contradicted by the evidence on record; and (11) when the CA manifestly overlooked certain relevant facts not disputed by the parties, which, if properly considered, would justify a different conclusion. None of these exceptions was convincingly shown, so the Court upheld the NLRC and CA findings.

• Finality and immutability of judgment — A decision that has acquired finality becomes immutable and unalterable and may no longer be modified in any respect, even if the modification is meant to correct erroneous conclusions of fact or law, whether by the court that rendered it or by the highest Court of the land. The recognized exceptions are correction of clerical errors, nunc pro tunc entries that cause no prejudice to any party, void judgments, and circumstances transpiring after finality that render execution unjust and inequitable. The Court applied this doctrine to the CA’s Amended Decision reducing separation pay, which had become final after respondents’ Petition for Certiorari in G.R. No. 162227 was dismissed and entry of judgment was made.

• Due process and opportunity to be heard — Respondents were not denied due process because they had the opportunity to be heard when they assailed the reduction of separation pay in G.R. No. 162227, but they failed to comply with basic procedural requirements. A party cannot resurrect a cause lost through negligence in properly pursuing the case.

• "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 persons are performing activities which 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 passage defines labor-only contracting under Article 106 of the Labor Code and states the consequence that the intermediary is deemed a mere agent of the employer.
• "A finding that a contractor is a "labor-only" contractor is equivalent to declaring that there is an employer-employee relationship between the principal and the employees of the supposed contractor, and the "labor-only" contractor is considered as a mere agent of the principal, the real employer." — This is the Court’s ratio on why MGTI became the employer of the respondents despite the involvement of alleged contractors.
• "The law casts the burden on the contractor to prove that it has substantial capital, investment, tools, etc. Employees, on the other hand, need not prove that the contractor does not have substantial capital, investment, and tools to engage in job-contracting." — This passage states the burden-of-proof rule that defeated petitioners’ claim that the contractors were independent contractors.
• "Nothing is more settled in the law than that a decision that has acquired finality becomes immutable and unalterable and may no longer be modified in any respect even if the modification is meant to correct erroneous conclusions of fact or law and whether it will be made by the Court that rendered it or by the highest Court of the land." — This is the controlling formulation of the finality doctrine applied to the CA’s Amended Decision reducing separation pay.

• Manila Water Company, Inc. vs. Pena, G.R. No. 158255, July 8, 2004, 434 SCRA 53 — Cited for the rule that factual findings of quasi-judicial bodies, when supported by substantial evidence, are accorded respect and finality, and for the principle that employees tasked to undertake activities usually desirable or necessary in the usual business of the employer make the contractor a labor-only contractor.
• Acevedo vs. Advanstar Company, Inc., G.R. No. 157656, November 11, 2005, 474 SCRA 656 — Cited for the holding that a finding of labor-only contracting is equivalent to declaring an employer-employee relationship between the principal and the supposed contractor’s employees, with the labor-only contractor as mere agent.
• Baguio vs. National Labor Relations Commission, G.R. Nos. 79004-08, October 4, 1991, 202 SCRA 465 — Cited to the same effect on labor-only contracting and the principal’s liability.
• 7K Corporation vs. National Labor Relations Commission, G.R. No. 148490, November 22, 2006, 507 SCRA 509 — Cited for the rule that the burden is on the contractor to prove substantial capital, investment and tools, while employees need not prove their absence.
• Coca-Cola Bottlers, Phils., Inc. vs. Hingpit, 356 Phil. 90 (1998) — Cited for the same burden-of-proof rule on substantial capital.
• Guarin vs. National Labor Relations Commission, G.R. No. 86010, October 3, 1989, 178 SCRA 267 — Cited for the same burden-of-proof rule.
• Asiatic Development Corporation vs. Brogada, G.R. No. 169136, July 14, 2006, 495 SCRA 166 — Cited for the recognized exceptions to the rule that factual findings of quasi-judicial bodies are generally conclusive.
• Peña vs. Government Service Insurance System, G.R. No. 159520, September 19, 2006, 502 SCRA 383 — Cited for the doctrine that a final and executory judgment is immutable and unalterable, including its recognized exceptions.
• Siy vs. National Labor Relations Commission, G.R. No. 158971, August 25, 2005, 468 SCRA 154 — Cited for the same finality doctrine.
• Sacdalan vs. Court of Appeals, G.R. No. 128967, May 20, 2004, 428 SCRA 586 — Cited for the same finality doctrine.
• Mayon Estate Corporation vs. Altura, G.R. No. 134462, October 18, 2004, 440 SCRA 377 — Cited for the finality of the CA decision on the reduction of separation pay.
• Pilapil vs. Heirs of Maximino R. Briones, G.R. No. 150175, February 5, 2007, 514 SCRA 197 — Cited for the rule that the CA Amended Decision was not a void judgment because it was rendered by a tribunal with jurisdiction over the subject matter.
• Gomez vs. Concepcion, 47 Phil. 717 (1925) — Cited for the same principle on void judgments and jurisdiction.

• Article 106, Labor Code — Defines contractor or subcontractor relations and labor-only contracting. It provides that 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 are performing activities directly related to the principal business of the employer; in such cases, the person or intermediary is considered merely an agent of the employer, who is responsible to the workers as if they were directly employed. The Court applied this provision to hold that MGTI’s contractors were labor-only contractors and that MGTI was the employer.
• Sections 5 and 7, Rules Implementing Articles 106 to 109 of the Labor Code, as amended (Department Order No. 18-02) — Section 5 prohibits labor-only contracting and defines its elements, including lack of substantial capital or investment and performance of activities directly related to the principal’s main business, or the contractor’s failure to exercise control over the performance of the work. Section 7 provides that the principal is deemed the employer of the contractual employee in cases of labor-only contracting and is solidarily liable with the contractor for violations of the Labor Code, including failure to pay wages. The Court relied on these provisions in finding MGTI liable.
• Article 283, Labor Code — The CA invoked this provision in its Amended Decision when it computed the separation pay of the 183 private respondents at one-half month salary per year of service up to the promulgation of the Amended Decision. The Supreme Court did not disturb the reduction because the Amended Decision had become final and executory.
• Rule 45, Rules of Court — Governs petitions for review on certiorari to the Supreme Court, which may raise only questions of law. The Court noted that the existence of an employer-employee relationship is a factual matter generally not delved into in a Rule 45 petition, subject to recognized exceptions, none of which was shown.

Ynares-Santiago (Chairperson), Chico-Nazario, Nachura, and Reyes, JJ., concurred.