Manila Memorial Park Cemetery, Inc. vs. Ezard D. Lluz, et al.

A contractor is engaged in labor-only contracting, and the principal is deemed the employer of the contracted workers, when the contractor does not have substantial capital or investment in the form of tools, equipment, machineries, and work premises, and the workers perform activities directly related to the principal's main business. The principal is also deemed the employer when the contractor does not exercise the right to control the performance of the workers' duties.

Petitioner Manila Memorial Park Cemetery, Inc. (Manila Memorial) is a corporation engaged in the business of developing, selling, and maintaining memorial parks and interment functions. Respondent Ward Trading and Services (Ward Trading) is a single proprietorship owned by Emmanuel Mayor Ward. On 23 February 2006, Manila Memorial entered into a Contract of Services with Ward Trading, under which Ward Trading, as an independent contractor, would render interment and exhumation services to supplement Manila Memorial's operations at its Parañaque City branch. The respondents were workers assigned by Ward Trading to perform services at the Manila Memorial Park.

On 23 February 2006, petitioner Manila Memorial Park Cemetery, Inc. (Manila Memorial) entered into a Contract of Services with respondent Ward Trading and Services (Ward Trading), a single proprietorship owned by Emmanuel Mayor Ward. Under the contract, Ward Trading, as an independent contractor, was to render interment and exhumation services and other related work to supplement Manila Memorial's operations at Manila Memorial Park, Parañaque City. Among those assigned by Ward Trading to perform services were respondents Ezard Lluz, Norman Corral, Erwin Fugaban, Valdimar Balisi, Emilio Fabon, John Mark Aplicador, Michael Curioso, Junlin Espares, and Gavino Farinas. They worked six days a week for eight hours daily and were paid P250 per day.

On 26 June 2007, respondents filed a Complaint for regularization and Collective Bargaining Agreement (CBA) benefits against Manila Memorial, its Executive Vice-President Enrique B. Lagdameo, and Ward Trading. On 6 August 2007, they filed an amended complaint to include illegal dismissal, underpayment of 13th month pay, and attorney's fees. Respondents alleged that they asked Manila Memorial to consider them regular workers within the bargaining unit covered by the CBA between Manila Memorial and the Manila Memorial Park Free Workers Union (MMP Union). Manila Memorial refused, stating that respondents were employed by Ward Trading. Respondents then joined the MMP Union, which sought their regularization, but Manila Memorial again declined. After respondents filed the complaint, they were dismissed by Manila Memorial, prompting the amendment to include reinstatement and back wages.

Manila Memorial sought dismissal of the complaint for lack of jurisdiction, arguing that no employer-employee relationship existed since respondents were employees of Ward Trading. The Labor Arbiter dismissed the complaint for failure to prove an employer-employee relationship. On appeal, the NLRC reversed, ruling that Ward Trading was a labor-only contractor and an agent of Manila Memorial, and declared respondents regular employees entitled to CBA benefits. The NLRC ordered Manila Memorial to pay wage differentials to each respondent. The CA affirmed the NLRC's ruling, finding the existence of an employer-employee relationship between Manila Memorial and respondents.

The Contract of Services contained a provision stating that Manila Memorial would sell company-owned equipment to Ward Trading for P1,400,000, payable in two years through monthly deductions of P58,335 from the contractor's billing. However, Manila Memorial presented no evidence that the sale actually pushed through or that payments were made. The contract also provided that Manila Memorial reserved the right to rent all or any of the contractor's equipment, and that Manila Memorial would provide the area to store the contractor's equipment and office space for its staff. Ward Trading's financial statements showed assets of P441,178.50 and property and equipment with a net book value of P86,026.50 as of 31 December 2005, and assets of P57,084.70 and property and equipment with a net book value of P1,426,468 as of 31 December 2006. Ward Trading's net income was only P53,800 in 2005 and P68,141.50 in 2006. Ward Trading's business permits had expired, and no proof was presented that it was registered as a contractor with the Department of Labor and Employment.

• Substantial Capitalization: Manila Memorial contended that Ward Trading had total assets in excess of P1.4 million according to its 2006 financial statements, proving sufficient capitalization to qualify as a legitimate independent contractor.
• Lack of Control: Manila Memorial insisted that nowhere in the Contract of Services did it control the manner and means by which respondents accomplished their work, stating that it only wanted its contractors and their employees to abide by company rules and regulations.

• Labor-Only Contractor: Respondents asserted that they were regular employees of Manila Memorial since Ward Trading could not qualify as an independent contractor but should be treated as a mere labor-only contractor.
• Lack of Substantial Capital: Respondents stated that there was enough proof that Ward Trading did not have substantial capital, investment, tools, and the like.
• Directly Related Activities: Respondents argued that the workers recruited and placed by the alleged contractor performed activities that were directly related to Manila Memorial's business.
• Lack of Control: Respondents maintained that Ward Trading did not exercise the right to control the performance of the work of the contractual employees.

• Employer-Employee Relationship: Whether an employer-employee relationship exists between Manila Memorial and respondents for the latter to be entitled to their claim for wages and other benefits.

• Employer-Employee Relationship: Yes. An employer-employee relationship exists between Manila Memorial and respondents because Ward Trading was a labor-only contractor, lacking substantial capital or investment and not exercising control over the workers' performance. Consequently, Manila Memorial is deemed the employer of respondents under Article 106 of the Labor Code and Department Order No. 18-02.

• Employer-Employee Relationship: The Court noted that as a general rule, factual findings of the CA are binding upon the Supreme Court, but an exception exists when the factual findings of the CA are contrary to those of the lower administrative body. Here, the Labor Arbiter's findings conflicted with those of the NLRC and the CA, obliging the Court to resolve the issue of fact. The Court reviewed Article 106 of the Labor Code, which defines labor-only contracting as a situation where the person supplying workers does not have substantial capital or investment in the form of tools, equipment, machineries, and work premises, and the workers perform activities directly related to the principal's business. In such cases, the intermediary is considered merely an agent of the employer. Sections 3, 5, and 7 of Department Order No. 18-02 distinguish between legitimate and labor-only contracting, with Section 5 declaring labor-only contracting prohibited when the contractor does not have substantial capital or investment and the workers perform activities directly related to the principal's main business, or when the contractor does not exercise the right to control the performance of the work. Section 7 provides that the principal is deemed the employer of the contractual employee where there is labor-only contracting.

Applying these provisions, the Court found that Ward Trading did not have substantial capital or investment. Although the Contract of Services stated that Manila Memorial would sell equipment to Ward Trading for P1,400,000, Manila Memorial presented no evidence that the sale actually pushed through or that payments were made. The contract also reserved Manila Memorial's right to rent the contractor's equipment, and Manila Memorial provided the work premises and office space for Ward Trading's staff. The Court agreed with the NLRC that Ward Trading was not the owner of the equipment, as its right to use it was subject to Manila Memorial's use at any time. The financial statements of Ward Trading showed that it could not have raised substantial capital from its income alone without the inclusion of the equipment allegedly sold by Manila Memorial. Furthermore, the records showed that respondents performed interment services directly related to Manila Memorial's business, and Manila Memorial retained the right to control the performance of the work, as evidenced by provisions allowing it to take over the functions of Ward's personnel if it found any part of the work unsatisfactory. Ward Trading also failed to register as a contractor with the DOLE, giving rise to the presumption that it was engaged in labor-only contracting, which it failed to overcome. Thus, the presumption stood, and Manila Memorial was deemed the employer of respondents, entitling them to their claims for wages and other benefits.

• Labor-Only Contracting — Labor-only contracting exists when the contractor or subcontractor merely recruits, supplies, or places workers to perform a job, work, or service for a principal, and any of the following elements are present: (1) the contractor does not have substantial capital or investment which relates to the job, work, or service to be performed, and the employees recruited, supplied, or placed are performing activities directly related to the main business of the principal; or (2) the contractor does not exercise the right to control the performance of the work of the contractual employee. In such cases, the contractor is considered merely an agent of the principal, who is deemed the employer of the workers. The Court applied this doctrine in finding that Ward Trading was a labor-only contractor because it lacked substantial capital or investment and did not exercise control over the respondents' work, making Manila Memorial their employer.

• Presumption of Labor-Only Contracting from Non-Registration — Under Section 11 of Department Order No. 18-02, failure to register as a contractor or subcontractor with the DOLE gives rise to the presumption that the contractor is engaged in labor-only contracting, unless the contractor overcomes the burden of proving that it has substantial capital, investment, tools, and the like. The Court applied this presumption against Ward Trading, which failed to register with the DOLE, and Manila Memorial failed to adduce evidence to prove that Ward Trading had substantial capital or investment to perform the work contracted for.

• "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 passage from Article 106 of the Labor Code defines the statutory concept of labor-only contracting and establishes the legal consequence that the principal becomes the employer of the contracted workers.

• "For failing to register as a contractor, a presumption arises that one is engaged in labor-only contracting unless the contractor overcomes the burden of proving that it has substantial capital, investment, tools and the like." — This excerpt articulates the evidentiary presumption arising from a contractor's failure to register with the DOLE, which was central to the Court's finding that Ward Trading was a labor-only contractor.

• "It is obvious that the aforementioned provision leaves respondent Ward at the mercy of petitioner Memorial Park as the contract states that the latter may take over if it finds any part of the services to be below its expectations, including the manner of its performance." — This passage from the CA's decision, quoted by the Court, supports the finding that Manila Memorial retained control over the performance of the work, an element of labor-only contracting.

• Aliviado vs. Procter & Gamble Phils., Inc., 628 Phil. 469, 483 (2010) — Cited as the source of the two elements that constitute labor-only contracting under Department Order No. 18-02, which the Court applied to the facts of this case.

• 7K Corporation vs. National Labor Relations Commission, 537 Phil. 664 (2006) — Cited for the rule that failure to register as a contractor gives rise to the presumption of labor-only contracting, which the contractor must overcome by proving substantial capital, investment, and tools.

• Article 106, Labor Code — Defines contractor or subcontractor arrangements and provides that in labor-only contracting, the 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 deem Manila Memorial the employer of respondents.

• Sections 3, 5, and 7, Department Order No. 18-02 — These sections distinguish between legitimate and labor-only contracting, prohibit labor-only contracting, and provide that the principal is deemed the employer of the contractual employee where labor-only contracting exists. The Court applied these provisions to find that Ward Trading was a labor-only contractor and Manila Memorial the employer.

• Section 11, Department Order No. 18-02 — Mandates registration of contractors or subcontractors with the DOLE and provides that failure to register gives rise to the presumption that the contractor is engaged in labor-only contracting. The Court applied this presumption against Ward Trading.

• Article 428, Civil Code — Provides that the owner has the right to enjoy and dispose of a thing without other limitations than those established by law. The Court cited this provision to show that Ward Trading was not the owner of the equipment, as its right to use it was subject to Manila Memorial's use at any time.

Velasco, Jr., J.; Del Castillo, J.; Mendoza, J. (on leave); and Leonen, J. (on leave) concurred in the decision.