PETRON CORPORATION, PETITIONER, VS. ARMZ CABERTE, ANTONIO CABERTE, JR., MICHAEL SERVICIO, ARIEL DEVELOS, ADOLFO GESTUPA, ARCHIE PONTERAS, ARNOLD BLANCO, DANTE MARIANO, VIRGILIO …

Petron versus Caberte

The Case

This is a labor case in which a group of workers at a petroleum company's bulk plant sued for illegal dismissal and money claims, naming both the company and the service contractor that had supplied them. The workers claimed that the contractor was a mere labor-only contractor, that the company was their true employer, and that they had been dismissed without cause when the service contracts ended. The case matters because it settles who carries the burden of proving a contractor's status, and because it applies the statutory test for labor-only contracting to declare the principal the real employer and the workers regular employees.

Procedural History

The workers filed complaints for illegal dismissal and monetary claims before the Labor Arbiter, who ruled that the contractor was a legitimate independent contractor, that the workers were its employees, and that its cessation of operations justified their dismissal, though he awarded separation pay and dismissed the claims against the company. The workers appealed to the National Labor Relations Commission, which affirmed the Labor Arbiter and later denied their motion for reconsideration. The workers then went to the Court of Appeals on a petition for certiorari, and the Court of Appeals reversed, declaring the contractor a labor-only contractor, the workers regular employees of the company, and their dismissal illegal, ordering reinstatement, backwages, and attorney's fees, while denying moral and exemplary damages. The company's motion for reconsideration was denied, so the company elevated the matter to the Supreme Court by petition for review on certiorari.

Facts

The company is a domestic corporation engaged in the manufacture and distribution of petroleum products, and it operates bulk plants for receiving, storing, and distributing its products. From 1979 to 1998, the workers were hired to work at its Bacolod bulk plant as liquefied petroleum gas fillers, maintenance crew, warehousemen, utility workers, and tanker receiving crew. For periods beginning in 1996 and ending in 1999, the company and the contractor, a labor contracting business owned by one individual, entered into a contract for services and a contract for liquefied petroleum gas assistance services, under which the contractor undertook to provide utility and maintenance services at the bulk plant.

In July 1999, the workers filed complaints for illegal dismissal, underpayment of wages, and non-payment of allowances, thirteenth month pay, overtime pay, holiday pay, service incentive leave pay, damages, and attorney's fees against the company, the contractor, and its owner. They alleged that most of them had worked for the company for years before the contractor was engaged in 1996, that each new contractor was simply designated as their employer, that the company exercised control over their work, and that the contractor was a mere labor-only contractor without substantial capital and without control over how they did their work. On July 1, 1999, the company no longer allowed them to enter and work in the premises.

The company countered that the contractor was an independent contractor that supplied manpower for maintenance and tanker assistance, that it had no direct control over the workers, and that it could not continue their employment beyond the contracts. It submitted registration papers, tax documents, financial statements for earlier years, a performance bond, and insurance policies, and it presented affidavits that the workers used the contractor's equipment and worked under the contractor's supervision. The company also admitted that supervision by its own employee was required over the gas and tanker jobs for inventory control and safety checking, and that it supplied the materials and equipment used in those functions.

Issues

• Whether or not the contractor is a mere labor-only contractor, such that the company is the true employer of the workers.
• Whether or not the workers, as regular employees of the company, were illegally dismissed when the service contracts ended.
• Whether or not the worker whose employment the company disputed from the start established an employer-employee relationship entitling him to relief.

Applicable Provisions

Article 106 of the Labor Code defines labor-only contracting, and the Court quotes it as follows:

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. The Secretary of Labor and Employment may, by appropriate regulations, restrict or prohibit the contracting out of labor to protect the rights of workers established under this Code. In so prohibiting or restricting, he may make appropriate distinctions between labor-only contracting and job contracting as well as differentiations within these types of contracting and determine who among the parties involved shall be considered the employer for purposes of this Code, to prevent any violation or circumvention of any provision of this Code. 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 person 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 provision supplies the two elements the Court applies: absence of substantial capital or investment, and work directly related to the principal's business.

The Implementing Rules, as amended, define substantial capital or investment, and the Court relies on this definition:

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.

This definition controls the Court's finding that the contractor's leased office and rented forklift do not count, because they were not actually and directly used in the contracted work.

Ruling

On the first issue, the Court held that the contractor is a labor-only contractor and that the company is the true employer. The law presumes a contractor to be a labor-only contractor, and it is the principal claiming independent-contractor status that bears the burden of proof. The company failed to overcome that presumption. Its registration and tax documents merely showed that the contractor was licensed to do business, and its financial statements covered years before the service contracts began, with none for the material years. The performance bond was not shown to be sufficient, and the contractor rented a forklift from the company, showing it did not own the basic equipment for the job. The workers' tasks as gas fillers, maintenance crew, supervisor, warehouseman, and tanker receiving crew were directly related to the company's main business, and the repeated and continuing need for the work was sufficient evidence of its necessity. The company also had the power of control, since the right to control suffices and need not be exercised, as shown by its admitted supervision for inventory and safety and its supplying of materials and equipment. A finding of labor-only contracting is equivalent to declaring an employer-employee relationship between the principal and the contractor's workers, with the contractor a mere agent of the principal.

On the second issue, the Court held that the workers, except the one whose employment was disputed, were illegally dismissed. As regular employees, they could be dismissed only for just or authorized causes, and the expiration of the service contracts is neither. They are entitled to reinstatement without loss of seniority rights, or separation pay if reinstatement is no longer feasible, and to full backwages from July 1, 1999 until actual reinstatement or finality of the decision, plus attorney's fees.

On the third issue, the Court held that the disputed worker's complaint must be dismissed. The issue of illegal dismissal presupposes an employer-employee relationship, and nothing in the records showed that he ever worked for the company.

Doctrine

A contractor is presumed by law to be a labor-only contractor, and the principal who claims that the contractor is legitimate bears the burden of proving that status; the workers are not expected to prove the negative. Labor-only contracting exists when the contractor lacks substantial capital or investment actually and directly used in the contracted work, and the workers perform activities directly related to the principal's business. Substantial capital or investment does not include property not actually and directly used in performing the contracted job. The power of control means the existence of the right to control, not its actual exercise. A finding of labor-only contracting establishes an employer-employee relationship between the principal and the contractor's workers, making the contractor a mere agent of the principal, and the workers become regular employees entitled to security of tenure.

Disposition

The petition was denied, the Court of Appeals decision was modified by dismissing the complaint of the disputed worker against the company, and the company was ordered to reinstate the remaining workers or pay separation pay, with full backwages and attorney's fees.

Remember This

Memorize this line: the principal who claims its contractor is legitimate bears the burden of overcoming the legal presumption that the contractor is labor-only. Examiners use this case to test the two-element test for labor-only contracting, the right-to-control standard, and the rule that a labor-only finding makes the principal the true employer of regular employees.