EPARWA SECURITY AND JANITORIAL SERVICES, INC., PETITIONER, VS. LICEO DE CAGAYAN UNIVERSITY, RESPONDENT.

Eparwa Security and Janitorial Services versus Liceo de Cagayan University

The Case

This is a petition for certiorari brought by Eparwa Security and Janitorial Services, Incorporated against Liceo de Cagayan University. The dispute began when eleven security guards assigned by Eparwa to the university filed a complaint for underpayment of wages and labor standard benefits. The guards impleaded both their immediate employer, Eparwa, and the university as principal. The case matters because it fixes, with precision, the boundary between two ideas that students often blur: the solidary liability of the principal and the contractor toward the workers, and the ultimate liability as between the principal and the contractor themselves. The Court tells us who really bears the burden, and who may claim reimbursement from whom.

Procedural History

The security guards filed their complaint before the Regional Arbitration Branch of the National Labor Relations Commission in Cagayan de Oro City. The Labor Arbiter ruled that the guards were entitled to wage differentials and to premium pay for holiday and rest day work. The Labor Arbiter held Eparwa and the university solidarily liable under Article 109 of the Labor Code, ordered Eparwa to reimburse the university for whatever the latter might pay, and awarded damages and attorney's fees.

Both Eparwa and the university appealed to the National Labor Relations Commission. The Commission affirmed the finding of solidary liability but deleted the reimbursement and damages in favor of the university, and ordered a recomputation of the awards. On the separate motions for reconsideration, the Commission modified itself and held that the university alone is ultimately liable, and ordered the university to reimburse Eparwa for whatever the latter may have paid the guards.

The university then went up to the Court of Appeals on certiorari. The appellate court granted the petition, reinstated the Labor Arbiter's decision, and remanded the case to the Regional Arbitration Board to compute what is due to the university from Eparwa. Eparwa's motion for reconsideration was denied. Hence this petition for review before the Supreme Court.

Facts

On the first of December 1997, Eparwa and the university entered into a Contract for Security Services. The university agreed to pay Eparwa five thousand pesos per guard a month, payable within fifteen days after Eparwa presented its service invoice. Eparwa, for its part, undertook to furnish the university a monthly copy of the guards' Social Security System contributions and a monthly payroll of each guard assigned to the premises.

Eparwa then allocated the contracted five thousand pesos per guard into its component parts: basic pay, night differential, thirteenth month pay, service incentive leave, uniform allowance, employer contributions, the agency's own share, and value added tax. From the first of December 1997 to the thirtieth of November 1998, Eparwa assigned eleven security guards to the university.

On the twenty first of December 1998, those eleven guards filed a complaint against both Eparwa and the university for underpayment of salary, legal holiday pay, thirteenth month pay, rest day pay, service incentive leave, night shift differential, overtime pay, and attorney's fees. The university filed a cross-claim asking that Eparwa reimburse it for any payment it might make to the guards. The contract of security services, by the time of the ruling, had already expired without being amended.

Issues

• Whether or not the university, as principal or indirect employer, is solidarily liable with Eparwa, the contractor, to the security guards for their wage differentials and premium pay for holiday and rest day work.
• Whether or not the university alone is ultimately liable for those amounts, such that Eparwa may claim reimbursement from the university rather than the other way around.

Applicable Provisions

Article 106 of the Labor Code provides:

Article 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. In the event that the contractor or subcontractor fails to pay the wages of his employees in accordance with this Code, the employer shall be jointly and severally liable with his contractor or subcontractor to such employees to the extent of the work performed under the contract, in the same manner and extent that he is liable to employees directly employed by him.

This is the source of the principal's joint and several liability to the contractor's workers.

Article 107 of the Labor Code provides:

Article 107. Indirect employer. — The provisions of the immediately preceding Article shall likewise 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.

This makes the university, which is not itself the guards' employer, an indirect employer bound by the same liability.

Article 109 of the Labor Code provides:

Article 109. Solidary liability. — The provisions of existing laws to the contrary notwithstanding, every employer or indirect employer shall be held responsible with his contractor or subcontractor for any violation of any provision of this Code. For purposes of determining the extent of their civil liability under this Chapter, they shall be considered as direct employers.

This fixes the solidary responsibility of both Eparwa and the university toward the guards.

Ruling

On the first issue, the Court held that the university is indeed solidarily liable with Eparwa to the security guards. The Court applied its earlier ruling in Eagle Security Agency against the National Labor Relations Commission, which it had repeatedly upheld in later cases. The joint and several liability of the contractor and the principal is mandated by the Labor Code to assure compliance with its provisions, including the statutory minimum wage. The contractor is liable by virtue of its status as direct employer; the principal is the indirect employer, made liable for the payment of wages should the contractor be unable to pay. This solidary liability facilitates, if not guarantees, payment to the workers.

On the second issue, the Court held that the university alone is ultimately liable. The reasoning turns on the nature of the security services contract. The guards' immediate recourse is against their direct employer, Eparwa. But to enable the agency to comply with the wage and allowance rates, the contract for security services must be amended as to its consideration, so that the principal bears the increase. The Court quoted Eagle with approval:

What the Wage Orders require, therefore, is the amendment of the contract as to the consideration to cover the service contractor's payment of the increases mandated. In the end, therefore, ultimate liability for the payment of the increases rests with the principal.

Here, however, the contract had already expired without being amended. Eparwa is therefore precluded from asking the university for an adjustment in the contract price. In lieu of that adjustment, Eparwa may claim reimbursement from the university for any payment it may make to the guards. The university, on the other hand, cannot claim reimbursement from Eparwa. The Court stressed that for the guards, the actual source of payment does not matter so long as they are paid; solidary liability means the creditor may collect from any one of the solidary debtors, and does not mean that as between themselves the two debtors are liable for only half.

Doctrine

First, under Articles 106, 107 and 109 of the Labor Code, the principal or indirect employer is solidarily liable with the contractor to the contractor's employees for violations of the Labor Code, including underpayment of wages and premium pay. Second, as between the principal and the contractor, the ultimate liability for wage increases rests with the principal, because the contract for security services is to be amended as to its consideration to cover the mandated increases. Third, where the contract has expired without such amendment, the contractor may no longer demand an adjustment in the contract price, but may instead claim reimbursement from the principal for any amount it pays the workers; the principal, in turn, cannot claim reimbursement from the contractor. Fourth, solidary liability is for the protection of the creditor, who may collect from any solidary debtor, and does not by itself allocate the burden between the debtors.

Disposition

The Court granted the petition, set aside the decision and resolution of the Court of Appeals, and reinstated the resolutions of the National Labor Relations Commission holding the university ultimately liable and ordering it to reimburse Eparwa.

Remember This

Memorize this line: the principal and the contractor are solidarily liable to the workers, but the ultimate liability rests with the principal, who must bear the wage increases through an adjustment in the contract price. Examiners use this case to test the distinction between solidary liability and ultimate liability, and the rule on reimbursement when the security services contract has expired without amendment.