Ortiz v. Forever Richsons Trading Corporation

A DOLE-registered contractor may still be deemed a labor-only contractor where it lacks substantial capital or investment, does not provide tools or equipment, and does not exercise control over the workers; in such case, the principal becomes the direct employer of the workers, the contractor becomes a mere agent of the principal, and the contractor need not be impleaded as an indispensable party.

Oscar S. Ortiz worked at the plywood manufacturing and marketing business of Forever Richsons Trading Corporation (now Charverson Wood Industry Corporation), owned by Adan Co, located in Mahayag, Bunawan, Davao City. The respondents had entered into a service agreement with Workpool Manpower Services, a contractor registered with the Department of Labor and Employment (DOLE), for the supply of workers to perform various jobs in the production and office areas. The dispute arose from Ortiz's complaint for illegal dismissal after he refused to sign a new 5-month employment contract, blank papers, and vouchers demanded by the respondents' paymaster.

Oscar S. Ortiz was hired in June 2011 to work at the plywood manufacturing and marketing business of Forever Richsons Trading Corporation (now Charverson Wood Industry Corporation), located in Mahayag, Bunawan, Davao City. He signed a 5-month employment contract with Workpool Manpower Services, a contractor engaged by the respondents to supply workers for production and office areas. Despite the expiration of that contract, Ortiz continued working for the respondents for approximately two years. He was assigned as receiver of the Dahul 1 machine used to strip bark from logs, spreader machine operator in the plywood finish assembly department, core cutter operator at the production section, and piling 3-feet cross band and gathering and burning of wood debris. The machines he operated were owned by the respondents, and it was the respondents' leadmen who trained him to use the equipment. His wages were paid by the respondents' paymaster, Paulino Tinoy, at a daily rate of P155.00, below the mandated minimum wage. He received no holiday pay, 13th month pay, service incentive leave pay, or overtime pay.

Sometime in April 2013, news spread among the respondents' personnel that five former employees had won their case in the Court of Appeals. Thereafter, paymaster Tinoy required the workers to sign new 5-month employment contracts, blank papers, and vouchers. Most employees acquiesced out of fear of termination, but Ortiz and one William Longakit refused to sign. Ortiz was subsequently dismissed.

On June 28, 2013, Ortiz filed a complaint for illegal dismissal and monetary claims against the respondents. He alleged that he was a regular employee of the respondents, having served them for two years after his initial contract expired while performing tasks necessary and desirable to their business. He claimed the respondents submitted forged documents to show he was an employee of Workpool Manpower. The respondents countered that Ortiz was an employee of Workpool Manpower, a legitimate job contractor certified by DOLE, pointing to a Contract Agreement he signed as a project worker covering January 24, 2013 to June 24, 2013, and presenting documents showing Workpool Manpower paid his wages and government contributions. Workpool Manpower's manager, Bethuel B. Cruzado, attested that Ortiz was its employee whose employment was terminated by contract expiration. The Labor Arbiter found that Ortiz became a regular employee of Workpool Manpower and that Workpool Manpower was a legitimate labor contractor, but dismissed the complaint for failure to implead Workpool Manpower as an indispensable party — a ruling affirmed by the NLRC and the CA.

• Regular Employment: Petitioner maintained that he was a regular employee of the respondents, having been directly hired by them in June 2011 at their office, serving for two years after his initial contract expired, and performing tasks necessary and desirable to the respondents' plywood manufacturing business.
• Labor-Only Contracting: Petitioner argued that Workpool Manpower is a labor-only contractor because the respondents exercised control and supervision over his work, the respondents owned the machines he operated, and the respondents paid his wages through their paymaster — indicating that Workpool Manpower lacked substantial capital, equipment, and control over the workers.
• Illegal Dismissal: Petitioner asserted that he was illegally dismissed for refusing to sign a new 5-month employment contract, and that he could not be dismissed without just cause and due process of law.
• Procedural Error: Petitioner contended that the CA erred in dismissing his petition on the purely technical ground of failure to implead Workpool Manpower as an indispensable party, in blatant violation of his substantive rights.

• No Employer-Employee Relationship: Respondents asserted that Oscar was not their employee, as shown by his employment contract with Workpool Manpower and numerous documents revealing that Workpool Manpower paid his wages and contributions to the Social Security System, Pag-IBIG Fund, and PhilHealth.
• Indispensable Party: Respondents argued that as Oscar's employer, Workpool Manpower was an indispensable party in the case and should have been impleaded.

• Labor-Only Contracting: Whether Workpool Manpower is a labor-only contractor, notwithstanding its DOLE registration.
• Employer-Employee Relationship: Whether an employer-employee relationship exists between Oscar and the respondents.
• Illegal Dismissal: Whether Oscar was illegally dismissed.
• Indispensable Party: Whether Workpool Manpower must be impleaded as an indispensable party before the case may be resolved.

• Labor-Only Contracting: Yes. Workpool Manpower is a labor-only contractor because it lacked substantial capital or investment, did not provide tools or equipment to its workers, and did not exercise control over the performance of their work.
• Employer-Employee Relationship: Yes. Because labor-only contracting exists, the respondents are the direct employer of Oscar, who rendered work necessary and desirable to their plywood manufacturing business for more than one year, making him a regular employee under Article 280 of the Labor Code.
• Illegal Dismissal: Yes. Oscar was illegally dismissed, the respondents having failed to prove any just or authorized cause for termination; contract expiration is not a valid ground for dismissing a regular employee.
• Indispensable Party: No. It is no longer necessary to implead Workpool Manpower as a party because in labor-only contracting, the personality of the principal and the contractor is merged into one, rendering the contractor a mere representative of the principal.

• Labor-Only Contracting: Article 106 of the Labor Code defines labor-only contracting as an arrangement where a person who does not have substantial capital or investment in the form of tools, equipment, machineries, or work premises supplies workers to an employer to perform activities directly related to the principal business. DO No. 18-A, series of 2011, further defines labor-only contracting as existing where (a) the contractor does not have substantial capital or investment and the employees perform activities necessary or desirable to the principal's business, or (b) the contractor does not exercise the right to control over the performance of the work. While DOLE registration is a strong badge of legitimacy, the elements of substantial capital and control may be examined to rebut the presumption of regularity. Here, the respondents presented only Workpool Manpower's certificates of registration but no proof of substantial capital or investment. Oscar testified that the workers used machines owned by the respondents, and that respondents' leadmen trained him. The agreement between the respondents and Workpool Manpower showed that the latter's obligation was solely to provide workers. The respondents did not dispute Oscar's testimony that he operated respondents' machines, was trained by respondents' leadmen, and was paid by respondents' paymaster. Workpool Manpower therefore cannot be considered an independent business with its own equipment, means, and method; it merely supplied manpower. The totality of the facts and surrounding circumstances established labor-only contracting.

• Employer-Employee Relationship: In a labor-only contracting situation, the contractor becomes a mere agent of the principal, and the principal controls not only the results but also the means and manner of achieving them. The party who would have been the principal in legitimate job contracting simply becomes the employer in labor-only contracting, with direct supervision and control over the contracted employees. Since Workpool Manpower is a labor-only contractor, the respondents are deemed Oscar's direct employer. Oscar rendered work — operating machines in the production and manufacturing of plywood — that is necessary and desirable to the respondents' usual business for more than one year. Under Article 280 of the Labor Code, he is a regular employee. The fact that he allegedly signed an employment contract with Workpool Manpower does not establish an employer-employee relationship with Workpool Manpower because the contract document was never presented as evidence, and the respondents' bare allegation that Workpool engaged him for a specific undertaking was unsupported.

• Illegal Dismissal: Regular employees may only be terminated for just or authorized cause, and the burden of proof rests on the employer. The respondents insisted that Oscar's employment was terminated due to the expiration of his contract. However, since Oscar is a regular employee — having performed work necessary and desirable to the respondents' primary business for more than one year — his dismissal must be for a valid cause and cannot be merely because of end of contract. The respondents failed to provide proof of either just or authorized cause for termination and did not discharge their burden of proof. Pursuant to Article 279 of the Labor Code, Oscar is entitled to reinstatement without loss of seniority rights and payment of backwages inclusive of allowances and other benefits from the time his compensation was withheld up to the time of actual reinstatement, or if reinstatement is no longer possible, separation pay equivalent to one month pay for every year of service.

• Indispensable Party: In a legitimate contracting relationship, three parties exist: the principal, the contractor, and the contractor's employees, with the contractor exercising pervasive control over its employees. In labor-only contracting, however, there is no contracting and no contractor; there is only the employer's representative who gathers and supplies people for the employer. The personality of the principal and the contractor is merged into one, and the contractor becomes a mere representative of the principal. As the Court held in Coca-Cola Bottlers Phils., Inc. vs. Dela Cruz, where labor-only contracting is found to exist, the question of whether the purported contractors are necessary parties is a non-issue because their personality is merged with that of the principal/employer. Thus, the issue of impleading Workpool Manpower is rendered academic by the conclusion that labor-only contracting exists.

• Labor-Only Contracting Doctrine — Labor-only contracting exists where the contractor does not have substantial capital or investment in the form of tools, equipment, machineries, or work premises, and the employees recruited and placed perform activities necessary or desirable to the principal's business, or where the contractor does not exercise the right to control over the performance of the work. In such a case, the contractor is deemed a mere agent or representative of the principal, and the principal becomes the direct employer of the workers. The Court applied this doctrine by finding that Workpool Manpower lacked substantial capital, did not provide equipment (the respondents owned the machines), and did not exercise control over the workers (respondents' leadmen trained and supervised Oscar, and respondents' paymaster paid his wages), thereby establishing labor-only contracting and making the respondents Oscar's direct employer.

• Control Test in Contracting Relationships — The right of control refers to the right reserved to the person for whom the services of 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. In legitimate job contracting, the contractor controls its employees with respect to both the results and the means and manner of achieving them. In labor-only contracting, the principal controls both the results and the means. The Court found that Workpool Manpower did not exercise control over Oscar's work — the respondents' leadmen trained him, the respondents owned the machines he operated, and the respondents' paymaster paid his wages — confirming labor-only contracting.

• Security of Tenure for Regular Employees — A regular employee — one who has rendered at least one year of service performing activities necessary and desirable to the employer's usual business — may only be terminated for just or authorized cause. The burden of proving valid cause and due process rests on the employer. The Court applied this doctrine by holding that Oscar, having performed work necessary and desirable to the respondents' plywood manufacturing business for more than one year, was a regular employee whose dismissal on the ground of contract expiration was invalid, and the respondents failed to prove any just or authorized cause.

• Merger of Personality in Labor-Only Contracting — In labor-only contracting, the personality of the principal and the contractor is merged into one; the contractor becomes a mere representative of the principal. Consequently, the contractor need not be impleaded as an indispensable party in a complaint for illegal dismissal, as the issue of whether the purported contractor is a necessary party is rendered academic by the finding of labor-only contracting. The Court applied this doctrine to reverse the lower tribunals' dismissal of Oscar's complaint for failure to implead Workpool Manpower.

• "In a labor-only contracting situation, the contractor simply becomes an agent of the principal; either directly or through the agent, the principal then controls the results as well as the means and manner of achieving the desired results. In other words, the party who would have been the principal in a legitimate job contracting relationship, and who has no direct relationship with the contractor's employees, simply becomes the employer in the labor-only contracting situation with direct supervision and control over the contracted employees." — This passage articulates the fundamental nature of labor-only contracting: the contractor's personality merges with the principal's, making the principal the direct employer, which is the ratio decidendi for dispensing with the need to implead the contractor.

• "Where, as in this case, the main issue is labor contracting and a labor-only contracting situation is found to exist as discussed below, the question of whether or not the purported contractors are necessary parties is a non-issue; these purported contractors are mere representatives of the principal/employer whose personality, as against that of the workers, is merged with that of the principal/employer." — Quoted from Coca-Cola Bottlers Phils., Inc. vs. Dela Cruz, this passage defines the procedural consequence of labor-only contracting: the contractor ceases to be an indispensable party, directly answering the procedural ground on which the lower tribunals dismissed the complaint.

• "While the existence of registration in favor of a contractor is a strong badge of legitimacy, the elements of substantial capital, or investment and control over the workers may be examined to rebut the presumption of regularity to prove that a contractor is not a legitimate one." — This passage establishes that DOLE registration alone does not conclusively establish legitimate job contracting; the substantive elements of capital and control must still be examined, a principle central to the Court's reversal of the labor tribunals' reliance on Workpool Manpower's registration.

• Coca-Cola Bottlers Phils., Inc. vs. Dela Cruz, 622 Phil. 886 (2009) — Controlling precedent on the merger of personality in labor-only contracting. The Court relied on this case for the propositions that the contract between the principal and contractor is not the final word on the workers' relationship to the principal, that in labor-only contracting the contractor becomes a mere agent of the principal, and that the question of whether the purported contractor is a necessary party is a non-issue when labor-only contracting is found to exist.

• Consolidated Building Maintenance, Inc. vs. Asprec, Jr., 832 Phil. 630 (2018) — Followed as an example of legitimate job contracting, where the contractor proved sufficient capital and investment, ran an independent trade, and retained the right of control over its employees. The Court distinguished this case from the present one, where Workpool Manpower failed to demonstrate these elements.

• Alaska Milk Corporation vs. Paez, G.R. No. 237277, November 27, 2019 — Cited for the proposition that the totality of facts and surrounding circumstances must be considered in distinguishing permissible job contracting from prohibited labor-only contracting, and that the possession of substantial capital or investment is indispensable in proving a contractor's legitimacy.

• Article 106, Labor Code — Defines labor-only contracting as an arrangement where a person who does not have substantial capital or investment in the form of tools, equipment, machineries, work premises, among others, supplies workers to an employer to perform activities directly related to the principal business. The Court applied this provision to classify Workpool Manpower as a labor-only contractor.

• Article 279, Labor Code — Provides security of tenure for regular employees, entitling an unjustly dismissed employee to reinstatement without loss of seniority rights and full backwages inclusive of allowances and other benefits computed from the time compensation was withheld up to actual reinstatement. The Court applied this provision to award reinstatement and backwages to Oscar.

• DO No. 18-A, Series of 2011, Section 5 — Defines labor-only contracting as an arrangement where the contractor merely recruits, supplies, or places workers and either (a) lacks substantial capital or investment while the employees perform activities necessary or desirable to the principal's business, or (b) does not exercise the right to control over the performance of the work. The Court applied this provision to find both indicators present: Workpool Manpower lacked substantial capital (defined as paid-up capital of at least P3,000,000) and did not exercise control over Oscar's work.

• DO No. 18-A, Series of 2011, Section 4 — Sets the requisites for legitimate contracting or subcontracting: the contractor must be registered, carry a distinct and independent business, perform the job on its own responsibility and free from the principal's control, have substantial capital and/or investment, and ensure compliance with all labor law rights and benefits. The Court found that Workpool Manpower failed to satisfy the substantial capital and control requisites.

Perlas-Bernabe (Senior Associate Justice, Chairperson), Gesmundo, Lazaro-Javier, and Lopez, JJ., concurred. Rosario, J., was on official leave.