LEANDRO P. CRUZ AND RICARDO R. SALVADOR, PETITIONERS, VS. NATIONAL LABOR RELATIONS COMMISSION (FOURTH DIVISION), ENCHANTED KINGDOM, INC., MR. MARIO MAMON, MRS. NIMPHA MADULI AND…

Cruz versus Enchanted Kingdom

The Case

This is a petition for certiorari brought by Leandro Cruz and Ricardo Salvador against the National Labor Relations Commission, Enchanted Kingdom, Incorporated, its officers Mario Mamon and Nimpha Maduli, and the Fourth Dimension Multi-Purpose Cooperative. The petitioners were ride attendants and operators assigned to the Enchanted Kingdom theme park in Santa Rosa, Laguna. They claim they were regular employees of Enchanted Kingdom who were illegally dismissed, and that the cooperative that placed them there was engaged in labor-only contracting. The case matters because it fixes the test for labor-only contracting under the Labor Code and the governing Department Order, and because it draws the sharp line between an error of judgment, which certiorari cannot reach, and grave abuse of discretion, which it can.

Procedural History

The petitioners filed a complaint before the Labor Arbiter for illegal dismissal, regularization, money claims, damages, and attorney's fees. The Labor Arbiter, Robert Jerez, dismissed the complaint, holding that there was no employer-employee relationship between the petitioners and Enchanted Kingdom, and that the cooperative was an independent job contractor. The petitioners appealed to the National Labor Relations Commission. The Commission reversed the Labor Arbiter, declared the cooperative a labor-only contractor, declared the petitioners regular employees of Enchanted Kingdom, found them illegally dismissed, and held both Enchanted Kingdom and the cooperative jointly and severally liable. The private respondents moved for reconsideration, and the Commission reversed itself, reinstated the Labor Arbiter's decision, and relied on the certificate of registration issued by the Department of Labor and Employment and the cooperative's annual report. The petitioners' motion for reconsideration was denied. The petitioners then came to the Supreme Court by petition for certiorari, alleging grave abuse of discretion amounting to lack of jurisdiction.

Facts

Enchanted Kingdom operates an amusement and entertainment theme park. The Fourth Dimension Multi-Purpose Cooperative is a duly registered cooperative. The petitioners were members-owners of the cooperative, assigned to Enchanted Kingdom as ride attendants and operators of rides such as the Space Shuttle, Anchors Away, Jungle Logjam, Roller Skater, Up Up and Away, and Dodgem. Cruz was assigned in February 2005 and Salvador in April 2005.

Citing failure to meet standards on performance and attitude, the cooperative's coordinator issued a memorandum cancelling their assignments effective 28 June 2009. That cancellation was later revoked by another officer because the memorandum did not bear her signature. On 8 July 2009, the petitioners filed their complaint, insisting that they were regular employees of Enchanted Kingdom because they worked under the control and supervision of its regular employees and their work was related to its principal business.

Enchanted Kingdom answered that it was not the employer and should be dropped from the suit, and that the cooperative was a legitimate contractor with substantial paid-up capital. The cooperative maintained that it was a legitimate labor contractor registered with the Cooperative Development Authority and the Department of Labor and Employment, engaged in a business separate and distinct from its clients, with sufficient capital, and that the petitioners' assignment was under a service contract. It added that the petitioners were never terminated, since the cancellation was revoked, and that they simply refused to return to work or accept reassignment.

Issues

• Whether or not the National Labor Relations Commission committed grave abuse of discretion amounting to lack of jurisdiction in ruling that the Neri doctrine applies and that the cooperative is a legitimate job contractor rather than a labor-only contractor.
• Whether or not the National Labor Relations Commission committed grave abuse of discretion in ruling that Enchanted Kingdom is not the real employer of the petitioners.
• Whether or not the petitioners are entitled to their monetary claims and the reliefs prayed for.

Applicable Provisions

Article 106 of the Labor Code provides:

ART. 106. Contractor or subcontractor. – Whenever an employer enters into a contract with another person for the performance of the former's work, the employees of the contractor and of the latter's subcontractor, if any, shall be paid in accordance with the provisions of this Code.

This is the statutory anchor of legitimate job contracting, and the Court quotes its labor-only paragraph as the test to be applied.

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.

The conjunction "and" is decisive: both the absence of substantial capital and the performance of activities directly related to the principal business must concur before labor-only contracting exists.

Department Order Number 18-02, series of 2002, the prevailing rule at the time of the petitioners' employment, defines labor-only contracting:

Labor-only contracting is 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 are 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.

The Court uses this to show that the first element requires both requisites, so the absence of one negates labor-only contracting.

Section 13 of the Corporation Code provides:

The amount of capital stock to be subscribed at the time of incorporation shall be at least 25% of the authorized capital stock as stated in the articles of incorporation and at least 25% of the total subscription must be paid upon subscription and in no case shall the paid-up capital be less than P5,000.00.

The Court cites this, and the parallel rule in the Cooperative Code, to measure whether the cooperative's paid-up capital reflects substantial capitalization.

Ruling

On the first issue, the Court held that whether the cooperative is a legitimate job contractor is a question of fact, and that findings of labor tribunals supported by substantial evidence are accorded great respect absent a showing that the Commission acted capriciously and whimsically. The petitioners failed to discharge that burden. The Court upheld the Neri doctrine: once substantial capital is established, the contractor need no longer refute the claim that the work is directly related to the principal's business. It read Article 106's use of "and" to require both requisites, so the absence of one negates labor-only contracting under the first element. It noted that Department Order Number 18-A, series of 2011, pegs substantial capital at 3,000,000 pesos of paid-up shares, but declined to apply it strictly because no such requirement existed when the cooperative was incorporated in 2003; in any event, by 31 December 2010 its paid-up capital had risen to 6,305,000 pesos, more than twice the minimum. Even assuming the Commission erred in applying Neri, the Court said that would be an error of judgment, outside the province of certiorari, which is confined to issues of jurisdiction or grave abuse of discretion.

On the second issue, the Court found no grave abuse of discretion. The cooperative held a certificate of registration from the Department of Labor and Employment, served a wide range of clients, exercised the power to issue, transfer, or revoke assignments, paid the petitioners' salaries, and remitted their social security, housing, and health contributions. These showed a distinct and independent business. The service contract also made the cooperative responsible for the proper pay of its members-owners.

On the third issue, the Court declined to rule on illegal dismissal and the monetary claims. The petitioners' position paper alleged illegal dismissal only against Enchanted Kingdom, with no sufficient allegation against the cooperative, so there was no factual or legal basis to resolve those matters.

Doctrine

Labor-only contracting under the first element of Article 106 requires the concurrence of two requisites: that the contractor lacks substantial capital or investment relating to the job, work, or service, and that the workers perform activities directly related to the principal business. Because the statute uses the conjunction "and," both must be proved, and the absence of one negates labor-only contracting. Once substantial capital is established, the contractor need not refute the contention that the work is directly related to the principal's business. Whether a contractor is legitimate is a question of fact, and a petition for certiorari reaches only jurisdiction or grave abuse of discretion, not errors of judgment.

Disposition

The petition for certiorari was dismissed, and the resolutions of the National Labor Relations Commission finding the cooperative a legitimate job contractor were upheld.

Remember This

Memorize the line that labor-only contracting under Article 106 needs both requisites, since the law says "and," so substantial capital alone defeats the charge. Examiners use this case to test the Neri doctrine, the question-of-fact barrier to certiorari, and the difference between an error of judgment and grave abuse of discretion.