Manila Electric Company vs. Benamira

A principal that contracts with a legitimate independent contractor (job contractor) for security services is not the direct employer of the contractor's security guards, but is an indirect employer solidarily liable for the workers' unpaid wages under Articles 106, 107, and 109 of the Labor Code, with a right of reimbursement from the contractor under Article 1217 of the Civil Code.

The individual respondents are licensed security guards who were formerly employed by People's Security, Inc. (PSI) and deployed at MERALCO's head office in Ortigas Avenue, Pasig, Metro Manila. After PSI's security service agreement with MERALCO was terminated on November 30, 1990, the guards were absorbed by ASDAI, which entered into a new security service agreement with MERALCO effective December 1, 1990. When ASDAI's agreement was in turn terminated, AFSISI took over the security functions effective July 25, 1992, under a substantially identical agreement. The security service agreements contained standard provisions designating the agency as the employer of the guards and disclaiming any employer-employee relationship between MERALCO and the guards, while reserving to MERALCO certain rights such as requiring replacement of unsatisfactory guards and inspecting the guards detailed at its premises.

The individual respondents are licensed security guards who were formerly employed by People's Security, Inc. (PSI) and deployed at MERALCO's head office in Ortigas Avenue, Pasig, Metro Manila. On November 30, 1990, the security service agreement between PSI and MERALCO was terminated. Immediately thereafter, fifty-six of PSI's security guards, including the eight individual respondents, filed a complaint for unpaid monetary benefits against PSI and MERALCO, docketed as NLRC-NCR Case No. 05-02746-90.

Meanwhile, a new security service agreement between ASDAI and MERALCO took effect on December 1, 1990. Under the agreement, ASDAI was designated as the "AGENCY" and MERALCO as the "COMPANY." ASDAI undertook to provide 220 licensed, uniformed, bonded, and armed security guards to be assigned at MERALCO's premises, complete with nightsticks, flashlights, raincoats, and other paraphernalia. MERALCO was to pay ASDAI ₱3,800.00 a month per guard, ₱4,000.00 for the Shift Leader, and ₱4,200.00 for the Detachment Commander. The agreement expressly provided that the security guards were employees of ASDAI alone and that the contract did not constitute an employment relationship between MERALCO and any of the guards. MERALCO reserved the right to require, without explanation, the replacement of any guard whose behavior, conduct, or appearance was unsatisfactory, and the agency could not pull out any guard from MERALCO without the latter's consent. The individual respondents were subsequently absorbed by ASDAI and retained at MERALCO's head office.

On June 29, 1992, Labor Arbiter Manuel P. Asuncion rendered a decision in NLRC-NCR Case No. 05-02746-90 in favor of the former PSI security guards. Less than a month later, on July 21, 1992, the individual respondents filed another complaint for unpaid monetary benefits, this time against ASDAI and MERALCO, docketed as NLRC-NCR Case No. 00-07-03953-92. On July 25, 1992, the security service agreement between AFSISI and MERALCO took effect, terminating the previous agreement with ASDAI. The terms and conditions of the AFSISI agreement were substantially identical to those with ASDAI, except as to the number of guards (235), the amounts payable (₱4,837.00 per guard, ₱5,037.00 for the Shift In-Charge/Asst. Detachment Commander, and ₱5,237.00 for the Detachment Commander), and the effectivity date.

On July 29, 1992, the individual respondents amended their complaint to implead AFSISI as party respondent. On August 11, 1992, they again amended the complaint to allege that AFSISI terminated their services on August 6, 1992 without notice and just cause, thereby constituting illegal dismissal. The individual respondents claimed that MERALCO and ASDAI never paid their overtime pay, service incentive leave pay, premium pay for Sundays and holidays, ₱50.00 monthly uniform allowance, and underpaid their 13th month pay. They alleged that when ASDAI's agreement was terminated and AFSISI took over on July 25, 1992, respondent Benamira was no longer given any work assignment when AFSISI learned of his pending case against PSI, effectively dismissing him without just cause; the rest were absorbed by AFSISI but were not given any assignments, likewise dismissing them without just cause.

ASDAI denied liability in general terms. MERALCO denied liability on the ground of lack of employer-employee relationship, asserting that the individual respondents were employees of the security agencies and that the agencies had been fully paid for their services. AFSISI contended that it was not liable for illegal dismissal since it did not absorb or hire the individual respondents, who were merely hold-over guards from ASDAI, and that it had no obligation to absorb ASDAI's guards. The Labor Arbiter found ASDAI to be the employer and held ASDAI and MERALCO jointly and solidarily liable for the monetary claims totaling ₱146,002.55 plus 10% attorney's fees, while dismissing the complaint against AFSISI. The NLRC affirmed this decision in toto. The Court of Appeals, however, modified the ruling by declaring MERALCO as the direct employer, ordering reinstatement and full backwages.

• Four-Fold Test: Petitioner MERALCO submitted that none of the elements of the four-fold test — power to hire, payment of wages, power to dismiss, and power to control — were present. It contended there was no evidence that it participated in or influenced the agencies' hiring decisions; the guards received wages from their agency; the agreement provided that discipline and administration conformed to the agency's rules; and there was no evidence that the guards were subjected to MERALCO's control as to the manner or method of performing their work.
• Labor-Only Contracting: Petitioner insisted that ASDAI and AFSISI were not labor-only contractors because they had their own equipment, machineries, and work premises necessary in the conduct of their business, and the duties performed by the security guards were not necessary to MERALCO's principal business of electricity distribution.
• Regular Employment: Petitioner argued that the individual respondents could not be considered regular employees because security guard duties are not necessary to the conduct of MERALCO's principal business of distributing electricity.
• Due Process: Petitioner argued it was denied due process when the individual respondents raised for the first time in the CA the theory that MERALCO was their direct employer, since the respondents had always considered themselves employees of AFSISI and never raised this argument before the Labor Arbiter or the NLRC.
• Illegal Dismissal: Petitioner asserted it was not guilty of illegal dismissal because it had no direct hand or participation in the termination of the individual respondents, who themselves insisted that it was AFSISI which terminated their employment.
• Reinstatement: Petitioner maintained that the individual respondents were not entitled to reinstatement into its workforce because no employer-employee relationship existed.
• Right of Reimbursement: Petitioner asserted that, not being the direct employer, it had a right of reimbursement from ASDAI for the full amount it might pay to the individual respondents under Articles 106 and 107 of the Labor Code.

• Employer-Employee Relationship: The individual respondents maintained that the CA aptly found that all elements of the employer-employee relationship existed between them and MERALCO, and that there was no cogent reason to deviate from such factual findings.
• Jurisdiction over Factual Issues: ASDAI contended that the petition raised factual matters beyond the jurisdiction of the Supreme Court to resolve, since only questions of law may be raised in a petition for review on certiorari, and that MERALCO failed to establish that the case fell under any recognized exception.
• No Employer-Employee Relationship: AFSISI averred that there was no employer-employee relationship between MERALCO and the security guards of any of the security agencies under contract with MERALCO.

• Employer-Employee Relationship: Whether an employer-employee relationship exists between MERALCO and the individual respondents under the four-fold test.
• Nature of Contracting: Whether ASDAI and AFSISI are labor-only contractors or legitimate job contractors.
• Regular Employment: Whether the individual respondents are regular employees of MERALCO.
• Change of Theory on Appeal: Whether the CA erred in allowing the individual respondents to raise for the first time on appeal the theory that MERALCO was their direct employer.
• Illegal Dismissal: Whether MERALCO is guilty of illegal dismissal.
• Reinstatement: Whether the individual respondents are entitled to reinstatement into MERALCO's workforce.
• Right of Reimbursement: Whether MERALCO is entitled to reimbursement from ASDAI for the monetary claims it pays to the individual respondents.

• Employer-Employee Relationship: No. The security service agreements expressly designated the agency as employer, and none of the four-fold test elements — power to hire, payment of wages, power to dismiss, and power to control — were satisfied as against MERALCO.
• Nature of Contracting: ASDAI and AFSISI are legitimate job contractors, not labor-only contractors, because they carried on an independent business and had substantial capital or investments in the form of tools, equipment, and work premises necessary for their business.
• Regular Employment: No. Security services, while necessary and desirable to MERALCO's business, are not directly related to its principal business of electricity distribution and may even be considered unnecessary to it.
• Change of Theory on Appeal: The CA erred. The individual respondents never alleged that MERALCO was their employer before the Labor Arbiter, the NLRC, or even in their petition for certiorari before the CA; the theory was first raised only in their memorandum, which cannot be tolerated as a matter of fairness and due process.
• Illegal Dismissal: MERALCO is not guilty of illegal dismissal. The individual respondents were constructively dismissed by ASDAI, not MERALCO, after being "off-detail" beyond the six-month period under Article 286 of the Labor Code.
• Reinstatement: The individual respondents are not entitled to reinstatement into MERALCO's workforce, but they should be reinstated as regular security guards of ASDAI.
• Right of Reimbursement: Yes. MERALCO's solidary liability as indirect employer does not preclude its right of reimbursement from ASDAI under Article 1217 of the Civil Code.

• Employer-Employee Relationship: The security service agreements between MERALCO and the agencies expressly recognized the agencies as employers of the security guards. Under the agreements, it was ASDAI which selected, hired, and discharged the guards; assigned them to MERALCO; provided their uniforms, firearms, and paraphernalia; paid their wages; and disciplined and supervised them. The stipulation allowing MERALCO to request replacement of unsatisfactory guards merely confirmed that the power to discipline lay with the agency — it is a standard clause in security service agreements reflecting the business adage that the client is always right. The clause preventing the agency from pulling out guards without MERALCO's consent was simply a security clause, not indicative of control. MERALCO's right to inspect was not unilateral, as the agency was principally mandated to conduct inspections. For the power of control to exist, the principal must reserve the right to direct not only the end but also the means; MERALCO's specific instructions were directed to the agency, not to the guards directly. Relying on Social Security System vs. Court of Appeals and American President Lines vs. Clave, the Court held that instructions from a client to a guard carry no more weight than mere requests, the privity of contract being between the client and the agency.

• Nature of Contracting: Job contracting exists when the contractor carries on an independent business and undertakes the work on its own account under its own responsibility, free from the control and direction of the principal except as to the result, and has substantial capital or investments in tools, equipment, machineries, work premises, and other materials necessary for its business. ASDAI and AFSISI met these conditions: they provided the firearms, uniforms, and equipment for the guards, and conducted their own inspections and supervision. The guards' duties were not directly related to MERALCO's principal business of electricity distribution. Accordingly, the agencies were legitimate job contractors, not labor-only contractors.

• Regular Employment: While security services may be necessary and desirable to MERALCO's business, they are not directly related to its principal business of distributing electricity and may even be considered unnecessary to that business. The individual respondents therefore could not be considered regular employees of MERALCO. Furthermore, the fact that the individual respondents filed their claims for unpaid monetary benefits against ASDAI was a clear indication that they acknowledged ASDAI as their employer.

• Change of Theory on Appeal: The individual respondents never alleged in their complaint before the Labor Arbiter, in their appeal to the NLRC, or even in their petition for certiorari before the CA that MERALCO was their employer. They consistently advanced the theory that AFSISI was their employer. Only in their memorandum before the CA did they present the contrary thesis. A party cannot subsequently take a position contrary to or inconsistent with prior pleadings; a change of theory on appeal is objectionable as contrary to fair play, justice, and due process. The CA should not have considered the new theory.

• Illegal Dismissal: The individual respondents failed to present evidence that AFSISI absorbed them into its workforce. Benamira was not retained due to the termination of ASDAI's agreement with MERALCO, and the rest served only as "hold-over" guards until AFSISI's own guards took over on August 6, 1992. Benamira had been "off-detail" for seventeen days and the rest for only five days when they amended their complaint to include illegal dismissal, making the charge premature. However, since ASDAI stopped giving them assignments and their inactivity persisted beyond the six-month period allowed by Article 286 of the Labor Code, they were constructively dismissed by ASDAI, not by MERALCO.

• Reinstatement: Because no employer-employee relationship existed between MERALCO and the individual respondents, they are not entitled to reinstatement into MERALCO's workforce. They should instead be reinstated as regular security guards of ASDAI, their direct employer.

• Right of Reimbursement: Although MERALCO is not the direct employer, it is an indirect employer under Article 107 of the Labor Code because it contracted with ASDAI, an independent contractor, for security services. When ASDAI failed to pay the individual respondents, MERALCO became jointly and severally liable under Articles 106 and 109. However, following Mariveles Shipyard Corp. vs. Court of Appeals, this solidary liability does not preclude the application of Article 1217 of the Civil Code, which allows a solidary debtor who paid the obligation to claim reimbursement from co-debtors for their respective shares. ASDAI cannot exculpate itself by claiming MERALCO's payments were inadequate, since as an employer it is charged with knowledge of labor laws and the adequacy of compensation is its own principal concern.

• Four-Fold Test for Employer-Employee Relationship — The existence of an employer-employee relationship is determined by four elements: (1) the power to hire, (2) the payment of wages, (3) the power to dismiss, and (4) the power of control. The power of control is the most important element and requires that the principal reserve the right to direct not only the end to be achieved but also the means for reaching such end. In this case, none of the four elements were present as against MERALCO; the security service agreements designated the agency as employer, and MERALCO's instructions to the guards carried no more weight than mere requests, the privity of contract being between MERALCO and the agency.

• Job Contracting vs. Labor-Only Contracting — Job (independent) contracting exists when: (a) the contractor carries on an independent business and undertakes the contract work on its own account under its own responsibility, according to his own manner and method, free from the control and direction of the employer except as to the result; and (b) the contractor has substantial capital or investments in the form of tools, equipment, machineries, work premises, and other materials necessary in the conduct of his business. Labor-only contracting exists when the contractor is merely an agent or intermediary of the principal, who is responsible to the workers as if directly employed by him. The Court found ASDAI and AFSISI to be legitimate job contractors because they had their own equipment, uniforms, firearms, and work premises, and exercised their own supervision and discipline over the guards.

• Indirect Employer Liability and Right of Reimbursement — Under Articles 106, 107, and 109 of the Labor Code, a principal that contracts with an independent contractor is an indirect employer and is jointly and severally liable for the contractor's employees' unpaid wages. However, this solidary liability does not preclude the principal's right of reimbursement from the contractor under Article 1217 of the Civil Code, which allows a solidary debtor who paid the obligation to claim from co-debtors their respective shares.

• Prohibition Against Change of Theory on Appeal — A party cannot raise a new theory or cause of action for the first time on appeal, as it is contrary to the rules of fair play, justice, and due process. A party is bound by its submissions in the pleadings below and may not be permitted to take a position contrary to or inconsistent with its earlier pleadings.

• Constructive Dismissal Through "Off-Detail" Beyond Six Months — Under Article 286 of the Labor Code, when an employee is "off-detail" or suspended from operations for a period exceeding six months, the employment is deemed terminated, and the employee is constructively dismissed. The employer is then obligated to reinstate the employee to the former position without loss of seniority rights.

• "That in the course of a watchman's assignment the client conceivably issues instructions to him, does not in the least detract from the fact that private respondent is the employer of said watchman, for in legal contemplation such instructions carry no more weight than mere requests, the privity of contract being between the client and private respondent, not between the client and the guard or watchman." — This passage, quoted from Social Security System vs. Court of Appeals, articulates the controlling doctrine that a client's instructions to security guards deployed by an agency do not establish an employer-employee relationship between the client and the guards, because the privity of contract is between the client and the agency.

• "Needless to stress, for the power of control to be present, the person for whom the services are rendered must reserve the right to direct not only the end to be achieved but also the means for reaching such end." — This defines the controlling standard for the most critical element of the four-fold test, distinguishing permissible general guidelines from actual control indicative of employment.

• "A change of theory on appeal is objectionable because it is contrary to the rules of fair play, justice and due process." — This states the doctrinal basis for precluding parties from advancing new theories not raised in the proceedings below, which the Court applied to strike down the CA's consideration of the individual respondents' belated claim that MERALCO was their direct employer.

• "The solidary liability of MERALCO with that of ASDAI does not preclude the application of Article 1217 of the Civil Code on the right of reimbursement from his co-debtor by the one who paid." — This establishes that a principal's statutory solidary liability as indirect employer under the Labor Code coexists with its civil-law right to seek reimbursement from the contractor, ensuring that the ultimate burden falls on the direct employer.

• Social Security System vs. Court of Appeals, No. L-28134, June 30, 1971, 39 SCRA 629 — Controlling precedent followed. Held that security guards deployed by a security agency to a client's premises are employees of the agency, not the client, because the agency recruits, hires, assigns, pays, disciplines, and controls the guards. Instructions from the client are mere requests, not indicative of control, since privity of contract is between the client and the agency.
• American President Lines vs. Clave, No. L-51641, June 29, 1982, 114 SCRA 826 — Followed and reiterated the SSS doctrine. Held that the client's right to request replacement of a guard is proof that the power of dismissal lies with the agency, not the client; the agency stands between the client and the guards and is answerable for their conduct.
• Mariveles Shipyard Corp. vs. Court of Appeals, G.R. No. 144134, November 11, 2003, 415 SCRA 573 — Followed on the right of reimbursement. Held that the solidary liability of a principal under the Labor Code does not preclude application of Article 1217 of the Civil Code, allowing the principal who paid to seek reimbursement from the contractor.
• National Power Corporation vs. Court of Appeals, G.R. No. 119121, August 14, 1998, 294 SCRA 209 — Cited for the distinction between labor-only contracting and job contracting, setting forth the two conditions for legitimate job contracting.
• St. Martin Funeral Homes vs. NLRC, G.R. No. 130866, September 16, 1998, 295 SCRA 494 — Procedural reference; the Supreme Court referred the individual respondents' original petition for certiorari to the CA in accordance with this decision.

• Article 106, Labor Code — Provides that when an employer contracts with another person for the performance of work, the contractor's employees shall be paid in accordance with the Labor Code, and that if the contractor fails to pay wages, the employer is jointly and severally liable to the extent of work performed under the contract. Applied to hold MERALCO solidarily liable for ASDAI's failure to pay the individual respondents' monetary claims.
• Article 107, Labor Code — Defines "indirect employer" as any person, partnership, association, or corporation which, not being an employer, contracts with an independent contractor for the performance of any work, task, job, or project. Applied to classify MERALCO as an indirect employer of the individual respondents.
• Article 109, Labor Code — Provides that every employer or indirect employer shall be held responsible with the contractor or subcontractor for any violation of the Labor Code, and for purposes of determining civil liability, they shall be considered as direct employers. Applied to establish MERALCO's solidary liability.
• Article 286, Labor Code — Provides that the bona fide suspension of operations for a period not exceeding six months shall not terminate employment, and the employer shall reinstate the employee if the latter indicates desire to resume work. Applied to find that the individual respondents were constructively dismissed by ASDAI when they remained "off-detail" beyond the six-month period.
• Article 1217, Civil Code — Provides that payment made by one of the solidary debtors extinguishes the obligation, and the debtor who paid may claim from co-debtors only the share corresponding to each, with interest. Applied to uphold MERALCO's right of reimbursement from ASDAI.

Justice Reynato S. Puno, Justice Romeo J. Callejo, Sr., Justice Dante O. Tinga, and Justice Minita V. Chico-Nazario concurred. No separate concurring opinions were written.