Philippine Airlines, Inc. vs. Enrique Ligan, et al.

A contractor who does not have substantial capital or investment, or who does not exercise the right to control over the performance of the work of the contractual employee, is a labor-only contractor, and the workers it supplies are considered employees of the principal. The totality of the facts and surrounding circumstances, not contractual provisions declaring an independent contractor relationship, determines the existence of an employer-employee relationship.

Petitioner Philippine Airlines, Inc. (PAL) is an air transportation company. On July 15, 1991, PAL entered into an Agreement with Synergy Services Corporation (Synergy), whereby Synergy undertook to provide loading, unloading, delivery of baggage and cargo, and other related services to and from PAL's aircraft at the Mactan Station. The Agreement expressly provided that Synergy was "an independent contractor" and that there would be no employer-employee relationship between Synergy and/or its employees on the one hand, and PAL on the other. The statutory basis for legitimate contracting is Article 106 of the Labor Code, which distinguishes between labor-only contracting and legitimate job contracting.

Petitioner Philippine Airlines, Inc. (PAL) entered into an Agreement on July 15, 1991 with Synergy Services Corporation (Synergy), whereby Synergy undertook to provide loading, unloading, delivery of baggage and cargo, and other related services to and from PAL's aircraft at the Mactan Station. The Agreement specified that Synergy would furnish all necessary capital, workers, loading, unloading and delivery materials, facilities, supplies, equipment, and tools. It expressly provided that Synergy was "an independent contractor" and that there would be no employer-employee relationship between Synergy and/or its employees on the one hand, and PAL on the other.

Except for respondent Benedicto Auxtero, the respondents were assigned by Synergy to PAL following the execution of the Agreement. On March 3, 1992, they filed complaints before the NLRC Regional Office VII at Cebu City against PAL, Synergy, and their respective officials for underpayment, non-payment of premium pay for holidays, premium pay for rest days, service incentive leave pay, 13th month pay and allowances, and for regularization of employment status with PAL, claiming they were performing duties directly connected with PAL's business. Respondent Auxtero had initially filed a complaint for regularization of his employment status, and later filed a complaint for illegal dismissal and reinstatement with full backwages, alleging he was verbally dismissed without valid ground. The complaints were consolidated.

The work performed by almost all of the respondents — loading and unloading of baggage and cargo of passengers — was directly related to PAL's main business. The equipment used by respondents as station loaders, such as trailers and conveyors, were owned by PAL. Respondents worked alongside PAL's regular employees who were performing identical work. PAL admitted that it fixed the work schedule of respondents, as their work was dependent on the frequency of plane arrivals. PAL's managers and supervisors approved respondents' weekly work assignments, and respondents and other regular PAL employees were all referred to as "station attendants" of the cargo operation and airfreight services of PAL.

While petitioner asserted before the Labor Arbiter and the NLRC that Synergy had substantial capital to engage in legitimate contracting, it failed to present evidence thereon. It was only after the appellate court rendered its challenged Decision that petitioner, in its Motion for Reconsideration, sought to prove Synergy's substantial capitalization for the first time by attaching photocopies of Synergy's financial statements. Petitioner also claimed that it was Synergy's supervisors who actually supervised respondents, but it failed to present evidence thereon and did not even identify who the Synergy supervisors were. Auxtero, who had been working as utility man/helper since November 1988, was dismissed on November 15, 1992. Petitioner claimed he abandoned his work, but the Court found this claim unpersuasive.

• Independent Contractor Status: Petitioner argued that the law does not prohibit an employer from engaging an independent contractor, like Synergy, which has substantial capital in carrying on an independent business of contracting, to perform specific jobs.
• Direct Relation to Business: Petitioner argued that its contracting out to Synergy various services like janitorial, aircraft cleaning, baggage-handling, etc., which are directly related to its business, does not make respondents its employees.
• Absence of Employer-Employee Elements: Petitioner argued that none of the four elements of an employer-employee relationship between petitioner and respondents, viz: selection and engagement of an employee, payment of wages, power of dismissal, and the power to control employee's conduct, is present in the case.
• Impossibility of Reinstatement: Petitioner averred that reinstatement of respondents had been rendered impossible because it had reduced its personnel due to heavy losses, and it had in fact terminated its service agreement with Synergy effective June 30, 1998 as a cost-saving measure.

N/A — The decision does not recount the respondents' specific arguments in detail beyond their claims for regularization, money claims, and Auxtero's claim for illegal dismissal.

• Labor-Only Contracting: Whether Synergy is a mere labor-only contractor or a legitimate independent contractor, such that respondents could be considered regular employees of petitioner.
• Illegal Dismissal of Auxtero: Whether respondent Auxtero was illegally dismissed by petitioner, warranting reinstatement or separation pay.
• Impossibility of Compliance: Whether petitioner's claim of impossibility to comply with the orders due to heavy losses and termination of its contract with Synergy excuses its failure to accept respondents as regular employees.

• Labor-Only Contracting: Yes. Synergy was a labor-only contractor. Under Article 106 of the Labor Code and Section 5 of Department Order No. 18-02, labor-only contracting exists where the contractor does not have substantial capital or investment and the employees are performing activities directly related to the main business of the principal, OR the contractor does not exercise the right to control over the performance of the work. Even if only one of the two elements is present, there is labor-only contracting.
• Illegal Dismissal of Auxtero: Yes. Auxtero, being a regular employee of petitioner, was illegally dismissed for want of just or authorized cause and for non-compliance with procedural due process. Petitioner failed to discharge its burden of proving abandonment.
• Impossibility of Compliance: No. Petitioner presented nothing to substantiate its impossibility of compliance, and it waived this defense by failing to raise it in its Memorandum before the Court of Appeals. The notice of termination in 1998 was in disregard of a subsisting temporary restraining order issued by the Supreme Court in 1996.

• Labor-Only Contracting: The Court held that the decision hinges on whether Synergy is a mere labor-only contractor or a legitimate contractor. Under Article 106 of the Labor Code, labor-only contracting exists 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. Section 5 of D.O. No. 18-02 provides that labor-only contracting exists where any of two elements is present: (i) the contractor does not have substantial capital or investment which relates to the job, work or service to be performed and the employees are performing activities directly related to the main business of the principal; OR (ii) the contractor does not exercise the right to control over the performance of the work of the contractual employee. The Court found that the work performed by almost all of the respondents — loading and unloading of baggage and cargo of passengers — is directly related to the main business of petitioner. The equipment used by respondents, such as trailers and conveyors, were owned by petitioner. While petitioner asserted that Synergy had substantial capital, it failed to present evidence thereon before the Labor Arbiter and the NLRC. It was only after the appellate court rendered its decision that petitioner sought to prove Synergy's substantial capitalization for the first time. More significantly, respondents worked alongside petitioner's regular employees who were performing identical work, which is an indicium of labor-only contracting. The Court also applied the control test: one who claims to be an independent contractor has to prove that he contracted to do the work according to his own methods and without being subject to the employer's control except only as to the results. While petitioner claimed that it was Synergy's supervisors who actually supervised respondents, it failed to present evidence thereon. The Agreement itself showed that PAL had the right to require Synergy's workers to comply with PAL's rules, regulations, procedures and directives, and PAL could require Synergy to dismiss workers who did not comply with PAL's reasonable instructions. Petitioner admitted that it fixed the work schedule of respondents, and its managers and supervisors approved respondents' weekly work assignments. The express provision in the Agreement that Synergy was an independent contractor is not legally binding and conclusive, as contractual provisions are not valid determinants of the existence of an employer-employee relationship; it is the totality of the facts and surrounding circumstances which is determinative.

• Illegal Dismissal of Auxtero: The Court held that Auxtero, a regular employee of petitioner who had been working as utility man/helper since November 1988, was illegally dismissed for want of just or authorized cause and for non-compliance with procedural due process. Petitioner's claim that he abandoned his work did not persuade. The elements of abandonment are (1) the failure to report for work or absence without valid or justifiable reason, and (2) a clear intention to sever the employer-employee relationship manifested by some overt acts. The burden of proof lies with petitioner, which failed to discharge the same. Auxtero should be entitled to salary differential from the time he rendered one year of service until his dismissal, reinstatement plus backwages until the finality of the decision. However, in view of the long period of time that had elapsed since his dismissal on November 15, 1992, the Court found it appropriate to award separation pay of one month salary for each year of service, in lieu of reinstatement.

• Impossibility of Compliance: The Court held that petitioner's claim of impossibility to comply with the orders was unsubstantiated. Other than its bare allegations, petitioner presented nothing to substantiate its impossibility of compliance. In fact, petitioner waived this defense by failing to raise it in its Memorandum filed on June 14, 1999 before the Court of Appeals. Further, the notice of termination in 1998 was in disregard of a subsisting temporary restraining order to preserve the status quo, issued by the Supreme Court in 1996 before it referred the case to the Court of Appeals in January 1999. So as to thwart the attempt to subvert the implementation of the assailed decision, respondents are deemed to be continuously employed by petitioner, for purposes of computing the wages and benefits due respondents. Respondents, having been declared to be regular employees of petitioner, Synergy being a mere agent of the latter, had acquired security of tenure. As such, they could only be dismissed by petitioner, the real employer, on the basis of just or authorized cause, and with observance of procedural due process.

• Labor-Only Contracting — Under Article 106 of the Labor Code and Section 5 of D.O. No. 18-02, labor-only contracting exists where 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 is present: (i) the contractor or subcontractor 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 by such contractor or subcontractor are performing activities which are directly related to the main business of the principal; OR (ii) the contractor does not exercise the right to control over the performance of the work of the contractual employee. Even if only one of the two elements is present, there is labor-only contracting. 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. The Court applied this doctrine in finding Synergy a labor-only contractor because it failed to prove substantial capital, and PAL exercised control over the respondents' work.

• Control Test — 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. One who claims to be an independent contractor has to prove that he contracted to do the work according to his own methods and without being subject to the employer's control except only as to the results. The Court applied this test, finding that PAL exercised control over respondents by fixing their work schedules, approving their weekly work assignments, and requiring compliance with its rules and directives.

• Totality of Facts and Circumstances — Contractual provisions declaring an independent contractor relationship are not legally binding and conclusive, as contractual provisions are not valid determinants of the existence of an employer-employee relationship. It is the totality of the facts and surrounding circumstances of the case which is determinative of the parties' relationship. The Court applied this doctrine in disregarding the Agreement's express provision that Synergy was an independent contractor.

• Abandonment — The elements of abandonment are (1) the failure to report for work or absence without valid or justifiable reason, and (2) a clear intention to sever the employer-employee relationship manifested by some overt acts. The burden of proof lies with the employer, which must discharge the same. The Court applied this doctrine in finding that petitioner failed to prove Auxtero's abandonment of his work.

• "For labor-only contracting to exist, Section 5 of D.O. No. 18-02 which requires any of two elements to be present is, for convenience, re-quoted: (i) The contractor or subcontractor 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 by such contractor or subcontractor are performing activities which are directly related to the main business of the principal, OR (ii) The contractor does not exercise the right to control over the performance of the work of the contractual employee. Even if only one of the two elements is present then, there is labor-only contracting." — This passage articulates the controlling test for labor-only contracting under D.O. No. 18-02, establishing that the presence of either element suffices.

• "The express provision in the Agreement that Synergy was an independent contractor and there would be 'no employer-employee relationship between [Synergy] and/or its employees on one hand, and [petitioner] on the other hand' is not legally binding and conclusive as contractual provisions are not valid determinants of the existence of such relationship. For it is the totality of the facts and surrounding circumstances of the case which is determinative of the parties' relationship." — This passage states the doctrine that contractual stipulations cannot override the factual reality of an employer-employee relationship.

• "One who claims to be an independent contractor has to prove that he contracted to do the work according to his own methods and without being subject to the employer's control except only as to the results." — This passage defines the burden of proof on one claiming independent contractor status, applying the control test.

• "The elements of abandonment being (1) the failure to report for work or absence without valid or justifiable reason, and (2) a clear intention to sever the employer-employee relationship manifested by some overt acts, the onus probandi lies with petitioner which, however, failed to discharge the same." — This passage defines the elements of abandonment and places the burden of proof on the employer.

• Neri vs. National Labor Relations Commission, G.R. Nos. 97008-09, July 23, 1993, 224 SCRA 717 — Distinguished. In Neri, the corporation had a capital stock of P1 million fully subscribed and paid for, and its status as independent contractor had been previously confirmed. In contrast, petitioner failed to present evidence of Synergy's substantial capital.
• San Miguel Corporation vs. Aballa, G.R. No. 149011, June 28, 2005, 461 SCRA 392 — Followed. This case teaches that workers performing identical jobs alongside regular employees of the principal is an indicium of labor-only contracting.
• Dole Philippines, Inc. vs. Esteva, et al., G.R. No. 161115, November 30, 2006, 509 SCRA 332 — Followed. Cited for the same proposition that working alongside regular employees performing identical work is an indicium of labor-only contracting.
• St. Martin Funeral Homes vs. National Labor Relations Commission, September 16, 1998 — Followed. This case was the basis for the Supreme Court's referral of the case to the Court of Appeals for appropriate action and disposition.
• Acevedo vs. Advanstar Company, Inc., G.R. No. 157656, November 11, 2005, 474 SCRA 656 — Cited for the proposition that one who claims to be an independent contractor must prove that he contracted to do the work according to his own methods and without being subject to the employer's control.

• Article 106, Labor Code — The statutory basis of legitimate contracting or subcontracting. It provides that in the event the contractor or subcontractor fails to pay the wages of his employees, the employer shall be jointly and severally liable with his contractor or subcontractor to such employees to the extent of the work performed under the contract. It also provides that the Secretary of Labor may restrict or prohibit the contracting out of labor to protect the rights of workers, and may make appropriate distinctions between labor-only contracting and job contracting. The Court applied this provision in determining that Synergy was a labor-only contractor.
• Section 3, Department Order No. 18-02, Series of 2002 — Defines legitimate contracting as a trilateral relationship under which there is a contract for a specific job, work or service between the principal and the contractor or subcontractor, and a contract of employment between the contractor or subcontractor and its workers. The Court applied this in distinguishing legitimate contracting from labor-only contracting.
• Section 5, Department Order No. 18-02, Series of 2002 — Prohibits labor-only contracting and defines it as an arrangement where 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 is present: (i) the contractor does not have substantial capital or investment which relates to the job, work or service to be performed and the employees are performing activities directly related to the main business of the principal; OR (ii) the contractor does not exercise the right to control over the performance of the work of the contractual employee. The Court applied this provision in finding Synergy a labor-only contractor.

• Associate Justice Leonardo A. Quisumbing (on official leave per Special Order No. 485 dated February 14, 2008)
• Associate Justice Antonio T. Carpio (Acting Chairperson)
• Associate Justice Adolfo S. Azcuna
• Associate Justice Dante O. Tinga
• Associate Justice Presbitero J. Velasco, Jr.

N/A — No dissenting opinions are noted in the provided case text.