Sanyo Seiki Stainless Steel Corporation vs. Leonil Amago, et al.

The status of a contractor as a legitimate job contractor or labor-only contractor must be determined on a case-by-case basis, considering the totality of facts and circumstances at the time each worker was engaged, and the four-fold test—not the necessity or desirability of the work—governs the determination of employer-employee relationship in contracting arrangements. A contractor's compliance with labor laws at one point does not cure prior irregularities, and subsequent compliance cannot retroactively validate earlier arrangements that circumvented workers' security of tenure.

Sanyo Seiki Stainless Steel Corporation is a domestic corporation engaged in stainless steel manufacturing, while Cebu General Services, Inc. is a service contractor providing manpower services. They executed a Service Contract for CGSI to perform specific jobs farmed out by Sanyo for one year, from October 27, 2016 until October 26, 2017. CGSI was registered with the Department of Labor and Employment as a legitimate job contractor pursuant to Department Order No. 18-A, Series of 2011, with Certificate of Registration No. ROII-2016-01-004-TCFO effective January 19, 2016 until January 18, 2019. The legal framework governing the dispute includes Article 106 of the Labor Code on contractor or subcontractor arrangements and Department Order No. 174, Series of 2017, which enumerates the requisites for permissible contracting or subcontracting arrangements.

Sanyo Seiki Stainless Steel Corporation is a domestic corporation engaged in stainless steel manufacturing, while Cebu General Services, Inc. is a service contractor providing manpower services. They executed a Service Contract where CGSI would perform specific jobs farmed out by Sanyo for a period of one year, from October 27, 2016 until October 26, 2017. The respondent workers—Leonil Amago, Elly Baylon, Noli Francisco Billones, Arwin Corton, Richard Crismundo, Jeff Cruz, Julius Patrick Gonzales, Marlon Ilarde, Edgar Marayan, Jacob Miguel, Jovito Molisimo, Jr., Jonathan Quinlog, Jeiel Ramirez, Jason Sanchez, Reynaldo Sonio, Jr., Alvin Suarez, and Reynante Versales—were employed by CGSI as drivers, warehouse workers, logistics personnel, machine operators, welders, maintenance workers, helpers, electrical technicians, sharpeners, and quality control inspectors, and were assigned to provide service requirements for Sanyo.

Prior to the execution of the Service Contract with CGSI, some of the respondents were already working with Sanyo, albeit for different independent contractors. Their employment start dates ranged from as early as April 2008 (Jeff Cruz) and June 2003 (Edgar Ilagan) to May 1, 2016, with several workers having been employed by Sanyo for many years through successive contractors. On February 24, 2017, Sanyo pre-terminated its Service Contract with CGSI for failing to pay the wages of its workers who were deployed at Sanyo's offices. Consequently, the workers had stopped performing their tasks, disrupting Sanyo's business operations and causing it financial distress. As a result, CGSI reassigned respondents to its other clients located in Cabuyao, Laguna, Las Piñas, Cavite, Cebu, Iloilo, Davao, Capiz, Palawan, Naga, and Bohol, but respondents rejected their new assignments.

Respondents, together with other workers, filed their respective illegal dismissal complaints on April 24, 2017, May 2, 2017, and May 29, 2017, against Sanyo and CGSI, including Gregory Chan (Sanyo's President), Jenny Chan (Sanyo's Vice-President), and Orlando V. Isobal (CGSI's General Manager) in their official capacities. In their position paper, respondents averred that they are regular employees of Sanyo since their services are necessary and desirable to Sanyo's business. Some were even moved by Sanyo from one contractor to another although they did not apply for employment with any of these contractors. They were shocked when they were subsequently barred from entering Sanyo's premises on March 24, 2017, following the pre-termination of its service contract with CGSI.

Sanyo and CGSI countered that CGSI has been engaged in legitimate job contracting for 40 years and was one of the biggest job contractors nationwide, registered with DOLE as a legitimate job contractor since 1997. CGSI presented its Certificate of Registration No. ROII-2016-01-004-TCFO issued by Regional Director Exequiel R. Sarcauga, effective for three years beginning January 19, 2016 until January 18, 2019. CGSI had a paid-up capital of PHP 10,000,000.00, net income of PHP 37,290,305.00 in 2016, and total assets of PHP 279,938,665.00 as of December 31, 2016. An Establishment Employment Report was also presented showing the names of its employees, including private respondents, who were dismissed due to the pre-termination of its service contract with Sanyo.

The labor arbiter found CGSI a legitimate job contractor as shown by its Articles of Incorporation, DOLE Certificate of Registration, and substantial capital per its Audited Financial Statements, noting that CGSI wielded the power of control over its employees and paid their wages and benefits. The NLRC affirmed CGSI's status as a legitimate job contractor but held that its status may vary for each employee assigned to Sanyo depending on the circumstances. The NLRC considered some respondents regular employees of Sanyo because they were employed prior to CGSI's DOLE registration and their employment contracts with CGSI as project employees were not presented in evidence. For other workers, CGSI was able to show their respective employment contracts for project employment, coupled with their inclusion in the Establishment Employment Report, and they were employed after CGSI's registration with DOLE.

The Court of Appeals reversed, declaring CGSI a labor-only contractor because the activities performed by its supposed employees were necessary and desirable to Sanyo's core business, and Sanyo failed to prove that CGSI is a legitimate job contractor. The Court of Appeals held Sanyo liable for illegal dismissal for failure to prove redundancy and the existence of other just or authorized causes for terminating respondents' services. Sanyo and CGSI both moved for reconsideration, which the Court of Appeals denied in its Resolution dated July 30, 2024, finding the motions to be mere reiterations of arguments already thoroughly addressed.

• Legitimate Job Contracting: Sanyo argued that CGSI is engaged in legitimate job contracting pursuant to Department Order 174, Series of 2017, as even core activities can be farmed out.
• Exercise of Control: Sanyo argued that CGSI exercised control over the concerned workers through its site supervisor, Kimpee Monceda.
• True Employer: Sanyo argued that it cannot be held liable for illegal dismissal because CGSI is the true employer of respondents.
• Contractor Status: CGSI reiterated its status as a legitimate job contractor as shown by its various compliance documents, its substantial capital, and its various clients other than Sanyo.
• No Illegal Dismissal: CGSI argued that there was no illegal dismissal as it was the workers who had refused the offer of reassignment to its other clients.

• Regular Employment: Respondents maintained that they were regular employees of Sanyo while CGSI is a labor-only contractor, since the main business of Sanyo is manufacturing stainless steel for local distribution and exportation, and the work performed by respondents as operators and welders is necessary and desirable to Sanyo's main business.
• Registration Not Conclusive: Respondents argued that CGSI's Certificates of Registration do not conclusively confirm that CGSI is a legitimate job contractor.
• Illegal Dismissal: Respondents argued that as regular employees, they were illegally dismissed by Sanyo when it pre-terminated the contract with CGSI.

• Contractor Status: Whether CGSI is a legitimate job contractor or a labor-only contractor.
• Illegal Dismissal: Whether respondents were illegally dismissed.
• Liabilities: Whether Sanyo or CGSI incurred any liabilities under the Labor Code.

• Contractor Status: Yes, CGSI is a legitimate job contractor. CGSI satisfied all the requisites under Section 8 of Department Order No. 174, Series of 2017, including being engaged in a distinct and independent business, having substantial capital, being free from the control of the principal, and ensuring compliance with labor laws. However, this status may vary on a case-by-case basis depending on when each worker was engaged.
• Illegal Dismissal: Yes, respondents were illegally dismissed. Workers assigned to Sanyo prior to CGSI's registration are regular employees of Sanyo who were illegally dismissed when Sanyo terminated its service contract with CGSI. Workers hired after CGSI's registration are fixed-term contractual employees of CGSI who were also illegally dismissed when the contract was pre-terminated for reasons attributable to CGSI.
• Liabilities: Yes. Sanyo is liable for separation pay in lieu of reinstatement, full backwages, and service incentive leave pay for its regular employees. CGSI is liable for reinstatement with full backwages and service incentive leave pay for its fixed-term employees. Sanyo and CGSI are solidarily liable for the monetary claims of CGSI's employees under Article 109 of the Labor Code, but this solidary liability does not extend to backwages and separation pay.

• Contractor Status: The Court upheld the uniform findings of the labor arbiter and the NLRC that CGSI complied with the requisites under Department Order No. 174, Series of 2017. First, CGSI submitted its DOLE Certificate of Registration for January 19, 2016 until January 18, 2019, giving rise to a presumption that it is engaged in legitimate job contracting. Second, CGSI has a distinct and independent business from Sanyo, having been incorporated and registered with the SEC since 1974, with a diverse range of clients other than Sanyo. Third, CGSI has substantial capital, with paid-up capital of PHP 10,000,000.00, exceeding the PHP 5,000,000.00 threshold under Department Order No. 174, and net assets of PHP 279,938,665.00 as of December 31, 2016. Fourth, CGSI wielded the power of control over the workers through its supervisor, Kimpee Monceda, who monitored their performance at Sanyo's premises daily. Lastly, CGSI's service contracts ensured compliance with labor laws, guaranteeing payment of SSS, PhilHealth, Pag-IBIG, and other mandated statutory benefits, which it in fact paid. The Court clarified that employers may contract out core activities as a matter of management prerogative, citing Serrano vs. Isetann Department Store, and that Department Order No. 174 does not contain a blanket prohibition on contracting out activities necessary or desirable to the main business of the employer.

• Case-by-Case Determination: The Court held that the status of a contractor as legitimate job contractor may vary on a case-by-case basis, citing Coca-Cola Bottlers, Phils., Inc. vs. Hingpit. A contractor's transactions with its supposed employees and with its principal must be consistent, and there is no room for complacency. A job contractor's initial compliance with labor laws shall not be used as defense to its subsequent irregular transaction, and subsequent compliance will not cure the illegality of its previous arrangement. The totality of facts and surrounding circumstances must be considered, including: (1) the dates when workers began rendering services to Sanyo; (2) the date of CGSI's registration as a job contractor; (3) the start date in the Service Contract; (4) the existence of project employment contracts; and (5) the workers' inclusion in the establishment employment report.

• Workers Assigned Prior to CGSI's Registration: For workers assigned to Sanyo prior to CGSI's registration (Leonil Amago, Jim Noe Asanza, Elly Baylon, Noli Billones, Richard Crismundo, Jeff Cruz, Julius Patrick Gonzales, Edgar Ilagan, Marlon Ilarde, Marvin Manuel, Edgar D. Marayan, Jacob Miguel, Ronnel Montebon, Jomar Policarpio, Rodolfo Punzalan, Jonathan Quinlog, Jeiel Ramirez, Jason Sanchez, Rodelio Signey, Reynaldo Sonio, Jr., Alvin Suarez, Rommel Tabia, and Reynante Versales), the contracting arrangement was resorted to by Sanyo to circumvent their tenurial security. The presumption that CGSI is a legitimate job contractor cannot be given retroactive effect. The subsequent intervening employment with CGSI was a mere ploy to contravene their security of tenure. For instance, Amago's services were first availed of by Sanyo from 2007 until 2008 under Southern Global Services Multi-Purpose Cooperative, then by Kabraso Multi-Purpose Cooperative until 2011, continuing to be assigned to Sanyo, until CGSI came into the picture in 2016. Despite being employed by different agencies, the workers always performed the same duties for the same employer, Sanyo. Every time Sanyo changed its agency, they were given new identification cards and new payslips bearing the name and logo of the new agency. This devious scheme of using multiple agencies helped the company mitigate labor costs and legal responsibilities at the expense of workers' rights and job security. These workers are regular employees of Sanyo and were illegally dismissed when Sanyo terminated its service contract with CGSI. Since Sanyo already closed its business on July 1, 2022, they are entitled to separation pay in lieu of reinstatement equivalent to one-month salary for every year of service.

• Four-Fold Test: The Court held that the four-fold test should be applied to determine the existence of employer-employee relationship, not the necessity or desirability of the work. The four factors are: (i) the selection and engagement of the employee; (ii) the payment of wages; (iii) the power of dismissal; and (iv) the power to control the employees' conduct. Among them, the power of control is the most crucial indicator. Citing Atok Big Wedge Company, Inc. vs. Gison, the Court held that Article 280 (now 295) of the Labor Code is not the yardstick for determining the existence of an employment relationship because it merely distinguishes between regular and casual employees. For workers employed after CGSI's registration, records show they were selected and hired by CGSI itself, which paid their wages and other benefits, and CGSI's supervisor monitored their performance daily. The absence of the element of control on the part of Sanyo engenders the conclusion that these workers were not its employees.

• Arwin Corton and Jovito Molisimo, Jr.: These workers are deemed regular employees of CGSI since their contracts of employment were not presented despite being included in the Establishment Employment Report. The Report per se will not suffice to determine if they were informed of the duration and scope of their employment at the time of engagement. Absent proof of such agreement in conformity with Article 295 of the Labor Code, a worker is presumed to be a regular employee. They are deemed illegally dismissed without any authorized or just cause.

• Azueta, Jr. et al. as Fixed-Term Employees: The workers hired by CGSI following its registration with DOLE in 2016—Loreto Azueta, Jr., Noel Barnes, Rodel Bilangel, Orleen Cabagua, Alvin Calamba, Albert Camarines, Nelson Estañero, Christofer Francisco, Michael Fuentes, Alexander Gono, Giovanni Leal, Paulino Margallo, Danilo Nimo, Rodolfo Punzalan, Renieboy Razon, Garry Rogano, Cristan Paul Sta. Rosa, and Roderick Villamar—are fixed-term contractual employees of CGSI as reflected in their respective employment contracts. Their contracts provided for employment for a fixed period effective May 1, 2016, conterminous with the term of CGSI's contract with the client. Article 280 of the Labor Code does not proscribe employment contracts with a fixed period provided they are entered into without force, duress, or improper pressure. Since they were assigned to Sanyo only once in 2016, after being hired by CGSI following its registration, the contractual arrangement was not adopted to circumvent their tenurial security. However, there was illegal dismissal when the contract was pre-terminated for reasons attributable to CGSI—the non-payment of statutory benefits by CGSI was the very cause of the pre-termination. CGSI cannot free itself from liability arising from the illegal dismissal of these workers who are entitled to reinstatement and backwages.

• Solidary Liability: Article 109 of the Labor Code provides for the solidary liability of CGSI and Sanyo for the monetary claims of employees of CGSI. This provision serves as a guarantee for payment of wages and other monetary claims in the event the contractor fails to pay them. The indirect employer is jointly and severally liable with the contractor, but such responsibility is limited to the extent of the work performed under the contract. This solidary liability, however, does not extend to the payment of backwages and separation pay which are punitive in character in the absence of any finding that Sanyo conspired with CGSI in the illegal dismissal of the workers.

• Moral and Exemplary Damages: The Court affirmed the findings of the labor arbiter, NLRC, and Court of Appeals that none of the respondents are entitled to moral and exemplary damages. The person claiming moral and exemplary damages must prove the existence of bad faith by clear and convincing evidence, as the law always presumes good faith. Records are devoid of any finding that CGSI or Sanyo acted in bad faith in terminating the services of private respondents. The award of attorney's fees was upheld since there was unlawful withholding of wages on the part of Sanyo and CGSI with respect to their respective employees.

• Case-by-Case Determination of Contractor Status — The status of a contractor as a legitimate job contractor or labor-only contractor may vary on a case-by-case basis. An agency may be considered a legitimate job contractor for some clients while simultaneously being deemed a labor-only contractor for others. The time and totality of circumstances under which employees were engaged by the principal must be taken into account. A contractor's initial compliance with labor laws shall not be used as defense to its subsequent irregular transaction, and subsequent compliance will not cure the illegality of its previous arrangement.

• Four-Fold Test for Employer-Employee Relationship — The existence of an employer-employee relationship is determined by four factors: (i) the selection and engagement of the employee; (ii) the payment of wages; (iii) the power of dismissal; and (iv) the power to control the employees' conduct. Among these, the power of control is the most crucial indicator. Under the control test, an employer-employee relationship exists where the person for whom the services are performed reserves the right to control not only the end achieved, but also the manner and means to be used in reaching that end. The necessity or desirability of the nature of work is not the yardstick for determining the existence of an employment relationship.

• Management Prerogative to Contract Out Core Activities — It is management prerogative to farm out any of its activities, regardless of whether such activity is peripheral or core in nature. Department Order No. 174, Series of 2017 does not contain a blanket prohibition on contracting out activities which are necessary or desirable to the main business of the employer. The prohibition on contracting out activities directly related to the principal's operation is qualified by the phrase "when not done in good faith and not justified by the exigencies of the business."

• Project Employee Requisites — For an employee to be considered project-based, the employer must show compliance with two requisites: (a) the employee was assigned to carry out a specific project or undertaking; and (b) the duration and scope of which were specified at the time they were engaged for such project. Informing the workers at the time they were hired of the scope and duration of the project is a crucial factor. The same requirement applies to fixed-term contractual employees who should be notified of the duration of their contract at the time they were engaged.

• Solidary Liability of Indirect Employer — Under Article 109 of the Labor Code, every employer or indirect employer shall be held responsible with his contractor or subcontractor for any violation of the Labor Code. This solidary liability serves as a guarantee for payment of wages and other monetary claims in the event the contractor fails to pay them. However, this liability is limited to the extent of the work performed under the contract and does not extend to backwages and separation pay which are punitive in character in the absence of any finding that the principal conspired with the contractor in the illegal dismissal of workers.

• "The status as a legitimate job contractor can only be invoked if all the requisites under the law are complied with each time the contractor employs a worker until it assigns the worker with a principal under a service agreement. A contractor's transactions with its supposed employees and with its principal must therefore be consistent. It must guarantee compliance with the laws each time, as there's no room for complacency. Otherwise, the Court will not hesitate to pronounce a contractor to be engaged in labor-only contracting." — This passage articulates the case-by-case determination of contractor status and the requirement of consistent compliance with labor laws, forming the core of the Court's reasoning on the contractor status issue.

• "This devious scheme of using multiple agencies helped the company mitigate labor costs and legal responsibilities, at the expense of the workers' rights and job security. This was the very evil sought to be avoided in regulating job contracting. Sanyo's management prerogative to contract out services should never be invoked to trample on the rights of workers." — This passage identifies the circumvention of tenurial security as the evil sought to be avoided in regulating job contracting, supporting the Court's finding that workers assigned prior to CGSI's registration are regular employees of Sanyo.

• "The necessity or desirability of the nature of work is material in determining the status of one's employment in a corporation. It presupposes that an employer-employee relationship already exists. It is not, however, the yardstick to determine the existence of an employer-employee relationship." — This passage clarifies the proper role of the necessity and desirability test, distinguishing it from the four-fold test for determining employer-employee relationship.

• "Being fixed-term contractual employees does not mean that they no longer have the right to security of tenure. Fixed-term contractual employees still have the right to security of tenure during the term of their contract. They can only be terminated upon the existence of a just or authorized cause, and upon the expiration of the period agreed upon." — This passage affirms that fixed-term employees retain security of tenure during the term of their contract, supporting the finding of illegal dismissal when the contract was pre-terminated for reasons attributable to CGSI.

• San Miguel Foods, Inc. vs. Rivera, 824 Phil. 961 (2018) — Cited for the proposition that the A-list clients listed in the roster of the contractor, apart from the principal involved in the case, strongly indicates that the labor contractor carried on a legitimate and independent business operation distinct from the operations of the principal.

• Serrano vs. Isetann Department Store, 380 Phil. 416 (2000) — Cited for the recognition of the employer's management prerogative to contract out activities which are necessary or desirable to the main business of the employer as long as it is done in good faith and justified by the exigencies of the business.

• Coca-Cola Bottlers, Phils., Inc. vs. Hingpit, 356 Phil. 90 (1998) — Cited for the principle that the status of a contractor as legitimate job contractor may vary on a case-by-case basis, and that substantial evidence must be presented to establish the contractor's character as an independent contractor.

• Atok Big Wedge Company, Inc. vs. Gison, 670 Phil. 615 (2011) — Cited for the proposition that Article 280 (now 295) of the Labor Code is not the yardstick for determining the existence of an employment relationship because it merely distinguishes between regular and casual employees.

• Del Rosario vs. ABS-CBN, 882 Phil. 130 (2020) — Cited for the four factors considered under the four-fold test for determining the existence of employer-employee relationship.

• Gadia vs. Sykes Asia, Inc., 752 Phil. 413 (2015) — Cited for the two requisites for an employee to be considered project-based: assignment to a specific project or undertaking, and specification of duration and scope at the time of engagement.

• Tuppil, Jr., et al. vs. LBP Service Corporation, 873 Phil. 910 (2020) — Cited for the proposition that Article 280 of the Labor Code does not proscribe employment contracts with a fixed period provided they are entered into without force, duress, or improper pressure.

• Rosewood Processing, Inc. vs. NLRC, 352 Phil. 1013 (1998) — Cited for the scope of solidary liability under Article 109 of the Labor Code, which is limited to the extent of the work performed under the contract and does not extend to backwages and separation pay which are punitive in character.

• Nacar vs. Gallery Frames, 716 Phil. 267 (2013) — Cited for the rule that monetary awards shall earn interest at the rate of 6% per annum from the date of the finality of the decision until fully paid.

• Article 106, Labor Code — Governs contractor or subcontractor arrangements, defining labor-only contracting where the person supplying workers does not have substantial capital or investment and the workers perform activities directly related to the principal business. Applied to determine whether CGSI is a legitimate job contractor or labor-only contractor.

• Article 109, Labor Code — Provides for the solidary liability of every employer or indirect employer with his contractor or subcontractor for any violation of the Labor Code. Applied to hold Sanyo and CGSI solidarily liable for the monetary claims of CGSI's employees, but not for backwages and separation pay which are punitive in character.

• Article 280 (now 295), Labor Code — Distinguishes between regular and casual employees for purposes of determining the right to benefits, union membership, and security of tenure. Held not to be the yardstick for determining the existence of an employment relationship.

• Section 8, Department Order No. 174, Series of 2017 — Enumerates the requisites for permissible contracting or subcontracting arrangements: (a) the contractor is engaged in a distinct and independent business; (b) the contractor has substantial capital; (c) the contractor is free from the control of the principal; and (d) the Service Agreement ensures compliance with labor laws. Applied to determine CGSI's status as a legitimate job contractor.

• Section 3(l), Department Order No. 174, Series of 2017 — Defines "substantial capital" as paid-up capital stock or shares of at least PHP 5,000,000.00. Applied to find that CGSI's paid-up capital of PHP 10,000,000.00 satisfied the requirement.

• Section 1, Rule 45, Rules of Court — Governs petitions for review on certiorari, providing that the petition shall raise only questions of law. Applied to establish the general rule that the Court does not review factual questions, subject to recognized exceptions.

• Article 228, Civil Code — Cited in support of the award of attorney's fees since there was unlawful withholding of wages on the part of Sanyo and CGSI with respect to their respective employees.

• Leonen, SAJ. (Chairperson)
• J. Lopez
• Kho, Jr.
• Villanueva