San Miguel Foods, Inc. vs. Rivera

A principal is not the employer of a contractor's employees where the contractor is a legitimate job contractor, not a labor-only contractor. Legitimate job contracting exists when: (a) the contractor carries on a distinct and 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 the principal except as to results; (b) the contractor has substantial capital or investment; and (c) the agreement assures the contractual employees' entitlement to labor standards, self-organization, security of tenure, and social welfare benefits. In such cases, the principal is jointly and severally liable with the contractor only for the payment of wages, and no employer-employee relationship arises between the principal and the contractor's employees.

San Miguel Foods, Inc. (SMFI) is a corporation engaged in the feeds, poultry, and meats businesses, including growing, breeding, dressing, sale, and marketing of poultry products. To maximize efficiency, SMFI outsourced its invoicing services, which it deemed ancillary to its business. In 2005, SMFI entered into a six-month invoicing services contract with IMSHR Corporate Support, Inc. (ICSI), an independent contractor duly registered with the Department of Labor and Employment (DOLE) and engaged in providing and supplying various services, including invoicing, to different companies. The contract provided that after its term expired, the parties would continue to be governed by the same contract on a month-to-month basis without written renewal. The applicable legal framework was Article 106 of the Labor Code and Department Order No. 18-02, which distinguish legitimate job contracting from prohibited labor-only contracting.

San Miguel Foods, Inc. (SMFI), a corporation engaged in the feeds, poultry, and meats businesses, outsourced its invoicing services to IMSHR Corporate Support, Inc. (ICSI), an independent contractor duly registered with the DOLE. Sometime in 2005, SMFI forged a six-month invoicing services contract with ICSI, from January 17, 2005 to July 16, 2005, with the agreement that after the contract term expired, the parties would continue to be governed by the same contract on a month-to-month basis. In compliance therewith, ICSI assigned its employees, including the respondents, to SMFI to perform invoicing services, which involved: (1) witnessing and checking the unloading of chicken products in designated outlets; (2) preparation of invoice, delivery receipt, and other documents required to complete delivery; (3) securing receiving documents and/or information necessary for liquidation and subsequent collection; and (4) submission of reports to SMFI on actual volumes delivered.

Sometime in 2009, SMFI decided to discontinue its invoicing operations at its JMT/GMA office (head office), where the respondents were assigned, and set up a new one at its San Fernando, Pampanga, and Nueva Ecija Plants. SMFI informed ICSI of this decision, and ICSI in turn informed its employees that all affected employees would be considered for assignment in San Fernando, Pampanga, with those interested instructed to submit a Request for Transfer on or before July 13, 2009. Of all the respondents, only one complied; the others submitted resignation letters, some continued working, and some no longer reported to work.

The respondents filed consolidated Complaints for Constructive Dismissal, Regularization, Underpayment of Salaries and Service Incentive Leave Pay, Non-Payment of 13th Month Pay, Vacation/Sick Leave, Maternity/Paternity Leave, Refund of Cash Bond, Tax Refund, Illegal Deduction - Variance Bond, Moral and Exemplary Damages, and Attorney's Fees against SMFI before the Labor Arbiter. The respondents alleged that SMFI employed them as Invoicers on different dates, the earliest in January 2005 and the latest in May 2009, and that their tasks were necessary and desirable in SMFI's usual trade or business. They claimed that SMFI assigned their daily work assignments, monitored their attendance through attendance forms countersigned by outlet/client representatives, and supervised them at the end of the day at SMFI's office. They also claimed that they represented SMFI in transactions with customers, wore uniforms bearing SMFI's name, and were subject to SMFI's direct supervision and control through various policies and instructions.

SMFI, for its part, maintained that it was not the respondents' employer but ICSI, as ICSI hired and selected them, paid their salaries, made deductions for SSS, PAG-IBIG, and Philhealth contributions, and exercised the power to control the means and manner of their work. ICSI itself affirmed that it was the respondents' employer, having the power to hire, discipline, and terminate their services, and that its officers assigned the respondents' daily time records and monitored their attendance. The respondents only reported to SMFI's Key Account Managers in exceptional cases, such as when deliveries were rejected and products needed to be diverted.

The Labor Arbiter dismissed the Complaints for lack of merit, holding that ICSI was a legitimate service contractor with substantial capital and that the four-fold test revealed an employer-employee relationship between ICSI and the respondents. The NLRC affirmed the LA Decision. The Court of Appeals reversed, holding that an employer-employee relationship existed between SMFI and the respondents, that ICSI was only an agent or intermediary, and that both SMFI and ICSI were solidarity liable for the respondents' claims.

• Error in Reversing the Dismissal: The petitioner argued that the CA erred in reversing the dismissal of the Complaints and the findings of the NLRC that the respondents are not the petitioner's employees.
• Error in Ordering Reinstatement: The petitioner argued that the CA erred in directing the petitioner to reinstate the respondents with full status and rights of regular employees and to grant them all benefits as may be provided for by law or any existing CBA.
• No Employer-Employee Relationship: The petitioner maintained that it is not the respondents' employer but ICSI, as ICSI hired and selected them, paid their salaries, made the necessary deductions for SSS, PAG-IBIG, and Philhealth contributions, and exercised the power to control the means and manner of their work.
• ICSI as Legitimate Contractor: The petitioner insisted that ICSI is a legitimate job contractor with substantial capital and investment, and that the respondents' employment was co-terminus with ICSI's contract of invoicing with the petitioner.

• Employer-Employee Relationship with SMFI: The respondents alleged that SMFI employed them as Invoicers and that their tasks were necessary and desirable in SMFI's usual trade or business, as they checked and counted chickens upon unloading, weighed chickens, issued delivery receipts or invoices, and prepared liquidation reports for SMFI.
• Control Exercised by SMFI: The respondents claimed that SMFI assigned their daily work assignments, monitored their attendance through attendance forms countersigned by outlet/client representatives, and supervised them at the end of the day at SMFI's office, where its finance officer supervised them.
• Representation of SMFI: The respondents avowed that they represented SMFI in transactions with customers, wore uniforms and utilized delivery receipts and commercial documents bearing SMFI's name, and that the signatories in the receipts showed they were under the direct supervision of SMFI.
• Constructive Dismissal: The respondents contended that on May 22, 2009, SMFI issued a memorandum to ICSI declaring it would not renew the contract for invoicing operations at its head office, and that those who would not accept new conditions should be properly separated under authorized causes, which prompted them to file a case for regularization and later amend their Complaints to include constructive dismissal.

• Legitimacy of Job Contractor: Whether ICSI is a legitimate job contractor or a mere labor-only contractor.
• Existence of Employer-Employee Relationship: Whether an employer-employee relationship exists between the petitioner and the respondents so as to hold the petitioner liable for the dismissal and all other claims of the respondents.

• Legitimacy of Job Contractor: Yes. ICSI is a legitimate job contractor. The petitioner successfully proved that ICSI is truly an independent contractor, having been duly registered with the SEC, BIR, SSS, Philhealth, PAG-IBIG, and DOLE, having substantial capital of P4 Million authorized capital stock and total assets of P30,820,419.34, having other A-list clients, and exercising control over the performance of its employees' work.
• Existence of Employer-Employee Relationship: No. No employer-employee relationship exists between the petitioner and the respondents. Being a legitimate contractor, the employer-employee relationship between ICSI and the respondents is maintained, and the four-fold test — selection and engagement, payment of wages, power of dismissal, and power of control — all pointed to ICSI as the respondents' employer.

• Legitimacy of Job Contractor: The Court reviewed the factual findings because of the conflict between the LA and NLRC, on one hand, and the CA, on the other. Under Article 106 of the Labor Code, two possible relations may arise: permitted legitimate job contracting or prohibited labor-only contracting. Legitimate job contracting requires: (a) the contractor carries on a distinct and independent business and partakes 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 the principal except as to results; (b) the contractor has substantial capital or investment; and (c) the agreement assures the contractual employees' entitlement to all labor and occupational safety and health standards, free exercise of the right to self-organization, security of tenure, and social welfare benefits. Labor-only contracting exists where the contractor does not have substantial capital or investment in the form of tools, equipment, machineries, work premises, among others, and the workers recruited are performing activities directly related to the principal business of the employer. The Court applied the totality of facts and circumstances test, noting that the contractor is presumed to be a labor-only contractor unless it overcomes the burden of proving substantial capital, investment, tools, and the like; where the principal claims the contractor is legitimate, the burden rests on the principal. The Court found that the petitioner successfully discharged this burden. ICSI was incorporated and duly registered with the SEC, BIR, SSS, Philhealth, PAG-IBIG, and DOLE, which prevented the legal presumption of being a mere labor-only contractor from arising. ICSI had substantial capital — authorized capital stock of P4 Million, gross income of P14,192,040, and total assets of P30,820,419.34. Citing Neri vs. NLRC, the Court held that the law does not require both substantial capital and investment in the form of tools, equipment, machineries, etc., as the use of the conjunction "or" makes these alternative requirements. ICSI also had other A-list clients apart from the petitioner, indicating it carried on a distinct and independent business. ICSI also had control over the performance of its employees' work, as its Base Controller gave the respondents their work schedule and its OIC monitored their attendance. The Court noted that the invoicing services had never been performed by the petitioner's regular employees, being merely incidental to its selling activities, and that while such services may be considered directly related to the principal business, they are not necessary in the conduct of the principal business.
• Existence of Employer-Employee Relationship: Applying the four-fold test, the Court found that all elements pointed to ICSI as the respondents' employer. The respondents applied with and were hired by ICSI, as evidenced by their individual Personal Information Sheets, employment contracts, and Letters of Appointment, and ICSI issued them their individual identification cards. ICSI paid the respondents' wages and other labor standard benefits, as shown by payrolls and disbursement vouchers, and reported them as its employees with the SSS, Philhealth, PAG-IBIG, and BIR, making the necessary deductions for their contributions. ICSI exercised the power of dismissal and discipline, as evident from the Notice to Explain and Memorandum it issued to erring employees. The Court held that the controverted letter dated May 22, 2009 issued by the petitioner to ICSI contained no instruction to transfer or terminate the respondents; rather, it merely informed ICSI of changes in their agreement regarding invoicing services and reminded ICSI to ensure that employees unwilling to comply with new terms be properly dealt with in accordance with law. The power of control similarly rested upon ICSI, as its officers had direct supervision over the respondents. The Court cited Royale Homes Marketing Corporation vs. Alcantara and Insular Life Assurance Co., Ltd. vs. NLRC for the principle that not every form of control is indicative of employer-employee relationship, and that rules that merely serve as guidelines toward the achievement of the mutually desired result without dictating the means or methods to be employed do not create an employer-employee relationship. The respondents' interaction with the petitioner's representatives was limited to exceptional cases, such as when deliveries were rejected and products needed to be diverted. The Court concluded that no employer-employee relationship exists between the petitioner and the respondents, and that the CA erred in ordering the petitioner to reinstate the respondents and grant them all benefits and privileges of regular employees.

• Legitimate Job Contracting — An arrangement whereby a principal agrees to put out or farm out with the contractor or subcontractor the performance or completion of a specific job, work, or service within a definite or predetermined period. The requisites are: (a) the contractor carries on a distinct and independent business and partakes 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 the principal except as to results; (b) the contractor has substantial capital or investment; and (c) the agreement assures the contractual employees' entitlement to all labor and occupational safety and health standards, free exercise of the right to self-organization, security of tenure, and social welfare benefits. In legitimate job contracting, the employer-employee relationship between the contractor and its employees is maintained, and the principal is jointly and severally liable with the contractor only for the payment of wages.
• Labor-Only Contracting — A prohibited 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 are 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. A finding of labor-only contracting gives rise to: (1) the creation of an employer-employee relationship between the principal and the employees of the contractor; and (2) the solidary liability of the principal and the contractor to the employees in the event of any violation of the Labor Code.
• Substantial Capital or Investment — Refers to capital stocks and subscribed capitalization in the case of corporations, tools, equipment, implements, machineries, and work premises, actually and directly used by the contractor or subcontractor in the performance or completion of the job, work, or service contracted out. The law does not require both substantial capital and investment in the form of tools, equipment, machineries, etc., as the use of the conjunction "or" makes these alternative requirements.
• 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. Not every form of control is indicative of employer-employee relationship; rules that merely serve as guidelines toward the achievement of the mutually desired result without dictating the means or methods to be employed do not create an employer-employee relationship.
• Four-Fold Test — The test to determine the existence of an employer-employee relationship, considering: (1) the selection and engagement of the employee; (2) the payment of wages; (3) the power of dismissal; and (4) the power of control. In this case, all four elements pointed to ICSI as the respondents' employer.
• Burden of Proof in Job Contracting — The contractor is presumed to be a labor-only contractor unless it overcomes the burden of proving that it has substantial capital, investment, tools, and the like. However, where the principal is the one claiming that the contractor is a legitimate contractor, the burden to prove the same rests on the principal.

• "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 the decision defines the statutory concept of labor-only contracting under Article 106 of the Labor Code, which is central to distinguishing prohibited arrangements from legitimate job contracting.
• "Not every form of control is indicative of employer-employee relationship. A person who performs work for another and is subjected to its rules, regulations, and code of ethics does not necessarily become an employee. As long as the level of control does not interfere with the means and methods of accomplishing the assigned tasks, the rules imposed by the hiring party on the hired party do not amount to the labor law concept of control that is indicative of employer-employee relationship." — This quotation, citing Royale Homes Marketing Corporation v. Alcantara and Insular Life Assurance Co., Ltd. v. NLRC, articulates the distinction between guidelines that promote results and control that fixes methodology, which is essential to the Court's finding that SMFI did not exercise control over the respondents.
• "Logically, the line should be drawn between rules that merely serve as guidelines towards the achievement of the mutually desired result without dictating the means or methods to be employed in attaining it, and those that control or fix the methodology and bind or restrict the party hired to the use of such means. The first, which aim only to promote the result, create no employer-employee relationship unlike the second, which address both the result and the means used to achieve it." — This passage from Insular Life Assurance Co., Ltd. v. NLRC, as cited in the decision, provides the canonical formulation for distinguishing permissible guidelines from impermissible control in determining employer-employee relationships.

• Neri, et al. vs. NLRC, et al., G.R. Nos. 97008-09, July 23, 1993 — Cited as controlling authority for the proposition that the law does not require both substantial capital and investment in the form of tools, equipment, machineries, etc., as the use of the conjunction "or" makes these alternative requirements. Also cited for the principle that invoicing services, while directly related to the principal business, are not necessary in the conduct of the principal business, and for judicial notice of the general practice of hiring independent contractors for special services.
• Royale Homes Marketing Corporation vs. Alcantara, G.R. No. 195190, July 28, 2014 — Cited for the principle that not every form of control is indicative of employer-employee relationship, and that rules imposed by the hiring party do not amount to labor law control as long as they do not interfere with the means and methods of accomplishing assigned tasks.
• Insular Life Assurance Co., Ltd. vs. National Labor Relations Commission, 259 Phil. 65 (1989) — Cited for the distinction between rules that merely serve as guidelines toward achieving the mutually desired result without dictating the means or methods, and those that control or fix the methodology; the former create no employer-employee relationship.
• Reyes vs. Glaucoma Research Foundation, Inc., et al., G.R. No. 189255, June 17, 2015 — Cited for the proposition that the Court may review factual findings where there is a conflict between the factual findings of the LA and NLRC, on one hand, and those of the CA, on the other.
• Coca-Cola Bottlers Phils., Inc. vs. Agito, et al., G.R. No. 179546, February 13, 2009 — Cited for the framework distinguishing legitimate job contracting from labor-only contracting under Article 106 of the Labor Code and DO 18-02.
• Petron Corporation vs. Caberte, et al., G.R. No. 182255, June 15, 2015 — Cited for the requisites of legitimate job contracting and the definition of labor-only contracting.
• Alilin, et al. vs. Petron Corporation, G.R. No. 177592, June 9, 2014 — Cited for the rule on burden of proof where the principal claims the contractor is legitimate.
• Valencia vs. Classic Vinyl Products Corporation, et al., G.R. No. 206390, January 30, 2017 — Cited for the proposition that registration with government agencies prevents the legal presumption of being a mere labor-only contractor from arising, and for the four-fold test.

• Article 106, Labor Code — The provision that identifies and distinguishes the relations that may arise in a situation where there is an employer, a contractor, and employees of the contractor, defining labor-only contracting and providing for the solidary liability of the employer with the contractor for payment of wages.
• Section 5, Department Order No. 18-02 — The implementing rules that declare labor-only contracting prohibited and define its elements: (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.
• Section 7, Department Order No. 18-02 — The implementing rules providing that the principal shall be deemed the employer of the contractual employee where there is labor-only contracting or where the contracting arrangement falls within the prohibitions provided in Section 6.
• Rule 45, Rules of Court — The procedural rule under which the petition for review on certiorari was filed.

Bersamin, Leonen, and Gesmundo, JJ., concurred. Martires, J., was on official leave.