Philippine Airlines, Inc. vs. National Labor Relations Commission

The Court held that where a contractor carries on an independent business, undertakes the contract work on its own account under its own responsibility, possesses substantial capital or investment, and exercises control over its employees, the arrangement constitutes legitimate job contracting, and no employer-employee relationship arises between the principal and the contractor's employees. Furthermore, the Court ruled that janitorial workers supplied by a contractor are regular employees of the contractor, not project employees, when their work is necessary and desirable to the contractor's business of supplying manpower, notwithstanding stipulations fixing their employment to the duration of the service contract, especially when such contracts are repeatedly renewed.

In 1977, Philippine Airlines, Inc. (PAL) entered into a service agreement with Stellar Industrial Services, Inc. (STELLAR), a domestic corporation engaged in job contracting janitorial services. Pursuant to this agreement, STELLAR hired workers to perform janitorial and maintenance services at PAL's premises. STELLAR provided the personnel, equipment, supplies, and supervision for these operations. The service agreement was impliedly renewed year after year. On December 31, 1990, the service agreement expired. PAL subsequently bid out its janitorial requirements to three other contractors and formally informed STELLAR that the agreement would not be renewed effective November 16, 1991. STELLAR then dismissed the individual private respondents, who filed complaints for illegal dismissal and separation pay against both PAL and STELLAR.

• The Service Agreement: PAL and STELLAR entered into a service agreement in 1977 for the provision of janitorial and maintenance services. Under the contract, STELLAR undertook to provide sufficient personnel, equipment, supplies, and materials to carry out the work. STELLAR was responsible for selecting, engaging, discharging, and paying the wages of its employees, as well as complying with all legal requirements such as SSS, Medicare, and withholding taxes. The agreement explicitly stated that no authority was conferred upon STELLAR to hire any person on behalf of PAL and that STELLAR's employees would not be deemed employees or agents of PAL.
• STELLAR's Independent Operations: STELLAR possessed substantial capital in the form of tools and equipment, such as vacuum cleaners and polishers. STELLAR also had clients other than PAL, including San Miguel Corporation, Hongkong and Shanghai Bank, Eveready, Benguet Management Corporation, and Japan Airlines. STELLAR had its own collective bargaining agreement with its employees, including the individual private respondents, and the respondents worked under STELLAR's own supervisors and timekeepers.
• Expiration and Dismissal: The service agreement expired on December 31, 1990. PAL subsequently bid out its janitorial requirements to three other job contractors and formally informed STELLAR that the agreement would no longer be renewed effective November 16, 1991. Prior to this final termination, the workers continued to render services at PAL's premises under an implied renewal of the contract. STELLAR dismissed the individual private respondents upon the termination of the service agreement.
• The Labor Dispute: Alleging illegal dismissal, the individual private respondents filed complaints against PAL and STELLAR. The Labor Arbiter held PAL liable for separation pay. On appeal, the NLRC initially held PAL and STELLAR jointly and severally liable, but on reconsideration, absolved STELLAR and held PAL solely liable, finding that PAL was the employer due to labor-only contracting and its continued employment of the workers after the contract expired.

• Petitioner argued that the NLRC committed grave abuse of discretion in holding that the janitorial service agreement with STELLAR was a labor-only arrangement.
• Petitioner maintained that it did not continue employing the individual respondents after the service contract with STELLAR expired, as the continued work was merely a result of the implied renewal of the service agreement while bidding was ongoing.
• Petitioner contended that it should not be held liable for separation pay because no employer-employee relationship existed between PAL and the individual respondents.

• The NLRC argued that PAL engaged in labor-only contracting and became the employer of the individual respondents by continuing to employ them after the service contract with STELLAR expired.
• The individual private respondents argued that PAL became a successor-employer by allowing them to continue working after the expiration of the service agreement, resulting in their implied absorption as regular employees.
• STELLAR contended that the individual respondents were project employees whose employment was coterminous with the service agreement, and thus their termination upon the completion of the project was a valid cause for dismissal not requiring separation pay.

• Procedural Issues: Whether the existence of an employer-employee relationship is a question of law reviewable by the Supreme Court in a certiorari petition, notwithstanding the general rule against factual review.
• Substantive Issues:
  • Whether the individual private respondents are regular employees of PAL, which involves determining (1) whether PAL engaged in labor-only contracting with STELLAR, and (2) whether the respondents became regular employees of PAL due to continued work after the contract expired.
  • Whether petitioner PAL or respondent STELLAR is liable for separation pay, which involves determining whether the respondents were project employees of STELLAR.

• Procedural: The Court held that the existence of an employer-employee relationship is a question of law that falls squarely within the ambit of the Court's judicial review. Because the determination of labor-only contracting involves legal characterization, the Court was not bound by the NLRC's factual findings on the matter.
• Substantive:
  • The Court ruled that PAL did not engage in labor-only contracting. STELLAR possessed the earmarks of an employer: the power of selection and engagement, payment of wages, power of dismissal, and power to control the employees' conduct. STELLAR also had substantial capital, equipment, and other clients, and it carried out the contract on its own account, free from PAL's control except as to the result. Because legitimate job contracting exists, no employer-employee relationship arises between the principal and the job contractor's employees.
  • The Court rejected the application of the successor-employer doctrine because there was no transfer of the business of STELLAR to PAL. The continued work of the respondents after the contract's expiration was due to the implied renewal of the service agreement between PAL and STELLAR.
  • The Court ruled that STELLAR, not PAL, is liable for separation pay. The individual private respondents were regular employees of STELLAR, not project employees. A project employee is hired for a specific project distinct from the employer's main business with a determined or determinable duration. Here, the main business of STELLAR was the supply of manpower for janitorial services, and the respondents' work was necessary and desirable to this enterprise. Furthermore, the repeated renewals of the service agreement for thirteen consecutive years negated the project employment characterization. Because the respondents were regular employees illegally dismissed, STELLAR was solely liable for separation pay.

• Legitimate Job Contracting vs. Labor-Only Contracting — Permissible job contracting requires that (1) the contractor carries on an independent business and undertakes the contract work on its own account, under its own responsibility, according to its own manner and method, free from the control of the principal except as to the results; and (2) the contractor has substantial capital or investment in the form of tools, equipment, machinery, work premises, and other materials. Labor-only contracting exists where the person supplying workers lacks substantial capital or investment and the workers perform activities directly related to the principal business of the employer. In legitimate job contracting, no employer-employee relation exists between the principal and the contractor's employees, whereas in labor-only contracting, an employer-employee relation is created by law between the principal and the labor-only contractor's employees. The Court applied this doctrine to find that STELLAR was a legitimate job contractor, severing any employment liability between PAL and the janitorial workers.
• Project Employment vs. Regular Employment — A project employee is hired to carry out a specific project or undertaking, the duration and scope of which are specified at the time of engagement, and which is distinct, separate, and identifiable from the main business of the employer. If the work performed is necessary and desirable to the usual business of the employer, the employee is a regular employee. Stipulations in an employment contract fixing the term to the duration of a service agreement do not make an employee a project employee, especially when the service contracts are repeatedly renewed. The Court applied this doctrine to hold that the janitorial workers were regular employees of STELLAR because their work was necessary and desirable to STELLAR's business of supplying manpower, and the repeated renewals of the contract for 13 years negated the claim of project employment.

• "In legitimate job contracting, an independent contractor undertakes to perform work on its own account, under its own responsibility and according to its own manner and method, free from the control and direction of the principal. No employment relationship arises between its employees and the principal. Consequently, the said employees can claim separation pay only from the independent contractor, and not from the principal."
• "A regular employee is distinguished from a project employee by the fact that the latter is employed to carry out a specific project or undertaking, the duration or scope of which was specified at the time the employees were engaged. . . . In either case, the project must be distinct, separate and identifiable from the main business of the employer, and its duration must be determined or determinable."

• Sandigan Savings & Loan Bank, Inc. v. NLRC — Cited for the four-fold test of employer-employee relationship (selection and engagement, payment of wages, power of dismissal, power of control) and the definition of independent job contracting.
• International Container Terminal Services, Inc. v. NLRC — Cited for the successor-employer doctrine. The Court distinguished this case, holding that the doctrine was inapplicable because there was no transfer of STELLAR's business to PAL.
• Cosmos Bottling Corporation v. NLRC — Cited for the distinction between regular and project employees. The Court relied on this to hold that the janitorial workers were regular employees of STELLAR because their work was necessary and desirable to STELLAR's business.

• Article 106, Labor Code — Defines labor-only contracting and establishes that 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 as if they were directly employed by him. The Court used this provision to distinguish labor-only contracting from the legitimate job contracting present in the case.
• Article 280, Labor Code — Defines regular employment as including those engaged to perform activities which are usually necessary or desirable in the usual business or trade of the employer. The Court applied this provision to hold that the individual private respondents were regular employees of STELLAR because their janitorial work was necessary and desirable to STELLAR's business of supplying manpower.
• Articles 282 and 283, Labor Code — Enumerate the valid causes for termination of employment. The Court noted that the stipulations in the employment contract fixing the term to the duration of the service agreement are not included in these provisions as valid causes for dismissal.
• Section 8, Rule VIII, Book III, IRR of the Labor Code — Enumerates the conditions for permissible job contracting. The Court applied this to confirm that STELLAR was a legitimate job contractor.
• Section 9, Rule VIII, Book III, IRR of the Labor Code — Defines labor-only contracting. The Court applied this to determine that STELLAR did not fall under the definition of a labor-only contractor.

Davide, Jr., Vitug, and Quisumbing, JJ., concur. (Bellosillo, J., was on official business abroad.)