Rhone-Poulenc Agrochemicals Philippines, Inc. vs. National Labor Relations Commission, et al.

A contractor engaged in job contracting, not labor-only contracting, is the sole employer of the workers it supplies, and the principal is not liable for their dismissal. A contractor is engaged in permissible job contracting where it (1) carries on an independent business and undertakes the contract work on its own account, free from the control and direction of the principal except as to results, and (2) has substantial capital or investment in the form of tools, equipment, machineries, work premises, and other materials necessary in the conduct of its business. An innocent transferee of a business establishment has no liability to the employees of the transferor to continue employing them.

Petitioner Rhone-Poulenc Agrochemicals Philippines, Inc. is a domestic corporation engaged in the manufacture of agro-chemicals, involving the formulation, production, distribution, and sale of its products in the local market. On January 1, 1988, as a consequence of the sale by Union Carbide, Inc. of all its agricultural-chemical divisions worldwide in favor of Rhone-Poulenc Agrochemie, France, the petitioner's mother corporation, the petitioner acquired from Union Carbide Philippines Far East, Inc. (Union Carbide) the latter's agro-chemical formulation plant in Namayan, Mandaluyong, Metro Manila. Prior to the sale, in 1987, Union Carbide had entered into a contract with Contemporary Services, Inc. (CSI) for the latter's supply of janitorial services.

Petitioner Rhone-Poulenc Agrochemicals Philippines, Inc. (Rhone-Poulenc) is a domestic corporation engaged in the manufacture of agro-chemicals, with business operations involving the formulation, production, distribution, and sale of its products in the local market. On January 1, 1988, as a consequence of the sale by Union Carbide, Inc. of all its agricultural-chemical divisions worldwide in favor of Rhone-Poulenc Agrochemie, France, the petitioner's mother corporation, the petitioner acquired from Union Carbide Philippines Far East, Inc. (Union Carbide) the latter's agro-chemical formulation plant in Namayan, Mandaluyong, Metro Manila. Rhone-Poulenc and Union Carbide agreed on a three-month transition period for the turnover of the Namayan plant, so from January 1 to March 31, 1988, both companies shared and operated the same facilities.

In 1987, prior to the sale, Union Carbide had entered into a contract with Contemporary Services, Inc. (CSI) for the latter's supply of janitorial services. During the transition period, Union Carbide continued to avail itself of CSI's janitorial services, and Rhone-Poulenc found itself sharing the Namayan plant while the factory was being serviced and maintained by janitors supplied by CSI. Midway through the transition period, Union Carbide instructed CSI to reduce the number of janitors working at the plant from eight to seven. Private respondent Paulino Roman, one of the janitors, was recalled by CSI on February 15, 1988 for reassignment, but he refused to acknowledge receipt of the recall memorandum.

On March 9, 1988, Union Carbide formally notified CSI of the termination of their janitorial service agreement, effective April 1, 1988, citing as reason the global buy-out by Rhone-Poulenc Agrochemie, France of Union Carbide Inc.'s agro-chemical business. CSI thereafter issued a memorandum dated March 20, 1988 to the seven remaining janitors assigned to the Namayan plant, including respondent Urcisio Orain, recalling and advising them to report to the CSI office for reassignment. Like Roman, the janitors refused to acknowledge receipt of the recall memorandum. Meanwhile, in anticipation of the March 31, 1988 pull-out by Union Carbide, the petitioner started screening proposals by prospective service contractors. Rhone-Poulenc invited CSI to submit a cost quotation to its Bidding Committee, but another contractor, the Marilag Business and Industrial Services, Inc., passed the bidding committee's standards and obtained the janitorial services contract.

On April 1, 1988, the eight janitors reported for work at the Namayan plant but were refused admission and were told that another group of janitors had replaced them. These janitors then filed separate complaints for illegal dismissal, payment of 13th month salary, service leave, and overtime pay against Union Carbide, Rhone-Poulenc, and CSI. After the cases were submitted for decision, six of the original complainants tendered their resignations to CSI in consideration of the latter's settlement of all their claims, leaving only the claims of respondents Roman and Orain unsettled.

The labor arbiter ruled that CSI was a legitimate service contractor and that Roman and Orain were employees of CSI, ordering CSI to pay separation pay and absolving Union Carbide and Rhone-Poulenc from liability. The NLRC reversed, finding that CSI was a mere agent of Union Carbide and Rhone-Poulenc and holding Rhone-Poulenc guilty of illegal dismissal, relying heavily on the case of Guarin vs. NLRC, which it found to involve similar circumstances. The NLRC reasoned that Rhone-Poulenc's utilization of the janitors' services during the transition period constituted absorption that gave them the right to be retained.

• Employer-Employee Relationship: Petitioner maintained that it is CSI, and not Union Carbide and Rhone-Poulenc as successor, which is the actual employer of the respondent janitors.
• Legitimate Contractor: Petitioner insisted that, contrary to the NLRC's findings, CSI is a legitimate independent contractor providing janitorial services to a wide range of clientele including Union Carbide.
• Grave Abuse of Discretion: Petitioner averred that it was grave abuse of discretion on the part of the NLRC to conclude that Rhone-Poulenc absorbed Roman and Orain into its workforce.

• Labor-Only Contractor: The NLRC found that CSI was a mere agent of Union Carbide and Rhone-Poulenc, citing Guarin vs. NLRC as involving "circumstances similar, if not identical, to the circumstances obtaining in the case at bar."
• Absorption: The NLRC reasoned that Rhone-Poulenc's act of utilizing the complainants' services during the transition period, "which, in a way, attests to the necessity or desirability of the complainants' service to the operation of the respondent's business," constituted an absorption that gave them the right to be retained, and its refusal to readmit them constituted illegal dismissal.

• Employer-Employee Relationship: Whether the janitors were employees of Union Carbide.
• Labor-Only Contracting: Whether CSI is a labor-only contractor.
• Absorption: Whether petitioner Rhone-Poulenc absorbed the janitors into its workforce.

• Employer-Employee Relationship: No. There was no employer-employee relationship between Union Carbide and the respondent janitors, as the four-fold test — selection and engagement, payment of wages, power of dismissal, and power of control — pointed to CSI as the employer.
• Labor-Only Contracting: No. CSI was engaged in permissible job contracting, not labor-only contracting, because it had substantial capital or investment and the janitors' work was not directly related to the principal business of the employer within the meaning of the Labor Code and its Implementing Rules.
• Absorption: No. Rhone-Poulenc, as an innocent transferee of Union Carbide's business, was not compelled to absorb the janitors into its workforce, and its incidental benefit from their services during the transition period did not constitute absorption.

• Employer-Employee Relationship: The Court applied the four-fold test for determining the existence of an employer-employee relationship: (1) the selection and engagement of employees; (2) the payment of wages; (3) the power of dismissal; and (4) the power to control the employee's conduct, with the latter being the most important element. The respondents themselves admitted that they were selected and hired by CSI and were assigned to Union Carbide. CSI acknowledged that the two janitors were its employees. The janitors drew their salaries from CSI and not from Union Carbide. CSI exercised control over these janitors through Richard Barroga, also a CSI employee, who gave orders and instructions to CSI janitors assigned to the Namayan plant. Moreover, CSI had the power to assign its janitors to various clients and to pull out, as it had done on a number of occasions, any of its janitors working at Union Carbide.

• Labor-Only Contracting: The Court applied Sections 8 and 9 of the Implementing Rules of the Labor Code. Job contracting is permissible if (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 and direction of its employer or principal except as to results; and (2) the contractor has substantial capital or investment in the form of tools, equipment, machineries, work premises, and other materials necessary in the conduct of its business. Labor-only contracting exists where the person supplying workers does not have substantial capital or investment and the workers are performing activities directly related to the principal business of the employer. The Court found sufficient basis to conclude that CSI was engaged in job contracting, adopting the labor arbiter's findings that CSI was registered as a legitimate service contractor doing business with a number of known companies, had a contract with Union Carbide to assign janitorial and ground services for a fee, and supplied the tools of the janitors' trade. The Court distinguished Guarin vs. NLRC, noting that in that case the contractor failed to prove substantial capital or investment, whereas here CSI owned and maintained its own office, owned office equipment such as typewriters, calculators, xerox machines, mimeographing machines, airconditioning units, and transportation vehicles, and furnished its janitors cleaning equipment such as carpet vacuums and polishing machines. Additionally, the 120 workers in Guarin gave rise to suspicion of evasion of employer obligations, whereas only eight janitors were supplied by CSI to Union Carbide.

• Absorption: The Court held that even on the supposition that the janitors were employees of Union Carbide or that CSI was a labor-only contractor, Rhone-Poulenc, as purchaser of Union Carbide's business, was not compelled to absorb these janitors into its workforce, citing Central Azucarera del Davao vs. Court of Appeals for the proposition that an innocent transferee of a business establishment has no liability to the employees of the transferor to continue employing them. The NLRC's conclusion that Rhone-Poulenc's utilization of the janitors' services during the three-month transition period constituted absorption was incorrect. The Court noted that during the transition period, the service contract between Union Carbide and CSI was still in force, whatever benefit the petitioner derived was merely incidental, it was still Union Carbide who paid CSI for the services of these janitors, and the petitioner had already started screening its own service contractors even prior to the expiration of the transition period.

• Four-Fold Test for Employer-Employee Relationship — The existence of an employer-employee relationship is determined by: (1) the selection and engagement of employees; (2) the payment of wages; (3) the power of dismissal; and (4) the power to control the employee's conduct, with the power of control being the most important element. In this case, all four elements pointed to CSI as the employer of the janitors, not Union Carbide or Rhone-Poulenc.

• Job Contracting vs. Labor-Only Contracting — Job contracting is permissible under the Labor Code if: (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 and direction of its employer or principal in all matters connected with the performance of the work except as to the results thereof; and (2) the contractor has substantial capital or investment in the form of tools, equipment, machineries, work premises, and other materials necessary in the conduct of its business. Labor-only contracting exists where the person supplying workers does not have substantial capital or investment and the workers are performing activities directly related to the principal business of the employer. The Court found CSI to be a legitimate job contractor based on its substantial capital and investment.

• Innocent Transferee Doctrine — An innocent transferee of a business establishment has no liability to the employees of the transferor to continue employing them. The Court applied this doctrine to hold that Rhone-Poulenc, as purchaser of Union Carbide's business, was not compelled to absorb the janitors into its workforce.

• "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 persons, 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 test for labor-only contracting, which the Court applied to determine that CSI was a legitimate job contractor.

• "An innocent transferee of a business establishment has no liability to the employees of the transferor to continue employing them." — This statement articulates the controlling doctrine on successor-employer liability, which the Court applied to absolve Rhone-Poulenc from liability for the janitors' dismissal.

• "The public respondent failed to consider the fact that during the three-month transition period prior to Union Carbide's turnover of the facilities, the service contract between Union Carbide and CSI was still in force. Whatever benefit the petitioner derived from the continuous availment by Union Carbide of the services of CSI's janitors was merely incidental." — This passage explains why the NLRC's finding of absorption was erroneous, as the petitioner's benefit from the janitors' services was merely incidental to the ongoing contract between Union Carbide and CSI.

• Guarin vs. NLRC, 178 SCRA 267 (1987) — Distinguished. The Court found the facts in Guarin different from those in the present case: in Guarin, the contractor failed to prove substantial capital or investment, and the 120 workers assigned gave rise to suspicion of evasion of employer obligations, whereas in the present case CSI had substantial capital and only eight janitors were supplied.

• Philippine Bank of Communications vs. NLRC, 146 SCRA 347 (1986) — Cited for the proposition that where labor-only contracting exists, the statute itself implies or establishes an employer-employee relationship between the employer and the employees of the labor-only contractor for a comprehensive purpose.

• Central Azucarera del Davao vs. Court of Appeals, 137 SCRA 295 (1985) — Cited as controlling authority for the doctrine that an innocent transferee of a business establishment has no liability to the employees of the transferor to continue employing them.

• Kimberly Independent Labor Union vs. Drilon, 185 SCRA 190 (1990) — Cited for the Court's judicial notice of the general practice in several government and private institutions of hiring janitorial services on an independent contractor basis.

• Article 106, Labor Code — Defines contractor or subcontractor arrangements and provides that in labor-only contracting, the person or intermediary shall be considered merely as an agent of the employer who shall be responsible to the workers as if directly employed. The Court applied this provision to determine that CSI was not a labor-only contractor.

• Article 107, Labor Code — Provides that the provisions on contractor or subcontractor arrangements apply to 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.

• Article 109, Labor Code — Provides for solidary liability of every employer or indirect employer with his contractor or subcontractor for any violation of the Labor Code. The Court noted this provision in discussing the statutory framework for contractor arrangements.

• Section 8, Implementing Rules of the Labor Code — Defines permissible job contracting, requiring that the contractor carries on an independent business free from the control and direction of the principal except as to results, and has substantial capital or investment. The Court applied this test to find CSI engaged in job contracting.

• Section 9, Implementing Rules of the Labor Code — Defines labor-only contracting as existing where the person supplying workers does not have substantial capital or investment and the workers perform activities directly related to the principal business of the employer. The Court applied this test to determine that CSI was not a labor-only contractor.

Bidin, Davide, Jr., Romero, and Melo, JJ., concurred.