FONTERRA BRANDS PHILS., INC., PETITIONER, VS. LEONARDO LARGADO AND TEOTIMO ESTRELLADO, RESPONDENTS.

Fonterra Brands Philippines versus Largado

The Case

This is a petition for review on certiorari brought by Fonterra Brands Philippines against two trade merchandising representatives, Leonardo Largado and Teotimo Estrellado, who had been assigned to promote Fonterra's milk and dairy products through a series of manpower agencies. The respondents claimed they were illegally dismissed and sought regular employment, service incentive leave, thirteenth month pay, and damages. The case matters because it lets the Court separate two questions that are often blurred together: whether an agency is a legitimate job contractor, and whether the workers themselves were dismissed at all. It also gives a clean statement of the rules on labor-only contracting and on fixed-term employment.

Procedural History

The respondents filed their complaint before the Labor Arbiter, who dismissed it for lack of merit, finding no illegal dismissal and finding that the respondents had been employed consecutively by the two agencies, not by Fonterra. The National Labor Relations Commission affirmed the Labor Arbiter in full. The respondents then went to the Court of Appeals on a petition for certiorari. The Court of Appeals granted the petition, annulled the labor tribunals, held that the first agency, Zytron Marketing and Promotions Corporation, was not a legitimate contractor, declared the respondents to be Fonterra's employees, found them illegally dismissed, and ordered reinstatement with full backwages and attorney's fees, with Fonterra and Zytron solidarily liable. Reconsideration was denied. Fonterra then elevated the matter to the Supreme Court by petition for review on certiorari under Rule 45.

Facts

Fonterra engaged Zytron Marketing and Promotions Corporation to market and promote its milk and dairy products, and Zytron supplied trade merchandising representatives, among them the two respondents, whose engagements began in September 2003 and May 2002 respectively. In May 2006 Fonterra wrote Zytron terminating the promotions contract effective June 2006. Fonterra then entered into a manpower supply agreement with A.C. Sicat Marketing and Promotional Services.

Wanting to keep working as merchandisers at Fonterra, the respondents applied with A.C. Sicat, which hired them for five months, from June 2006 to November 2006. When that contract neared expiry, they allegedly sought renewal and were allegedly refused.

They then sued Fonterra, Zytron, and A.C. Sicat for illegal dismissal, regularization, unpaid service incentive leave and thirteenth month pay, and damages. The Labor Arbiter and the Commission both found that the respondents had themselves refused to renew their contracts with Zytron and had acquiesced in their transfer to A.C. Sicat. The Court of Appeals reversed, and the matter reached the Supreme Court.

Issues

• Whether or not Zytron and A.C. Sicat are labor-only contractors, making Fonterra the employer of the respondents.
• Whether or not the respondents were illegally dismissed.

Applicable Provisions

The decision applies the statutory test for legitimate job contracting, which it states as follows:

A person is considered engaged in legitimate job contracting or subcontracting if the following conditions concur: The contractor or subcontractor carries on a distinct and independent business and undertakes to perform the job, work or service on its own account and under its own responsibility according to its own manner and method, and free from the control and direction of the principal in all matters connected with the performance of the work except as to the results thereof; The contractor or subcontractor has substantial capital or investment; and The agreement between the principal and contractor or subcontractor 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 and welfare benefits.

This test determines whether the agency is a genuine contractor or a mere conduit, and therefore who is the true employer.

The decision also states the converse rule on prohibited contracting:

Contracting is prohibited when the contractor or subcontractor merely recruits, supplies or places workers to perform a job, work or service for a principal and if any of the following elements are present, thus: 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 The contractor does not exercise the right to control over the performance of the work of the contractual employee.

If either element is present, the contracting is labor-only and the principal becomes the employer by operation of law.

Ruling

On the first issue, the Court held that the status of Zytron as a legitimate contractor was immaterial to the illegal dismissal question, because the Court found that the respondents had voluntarily terminated their employment with Zytron. As for A.C. Sicat, the Court deferred to the Court of Appeals and held that it is a legitimate job contractor. It had substantial capital, with assets of more than five million pesos, and it submitted its business registration, tax registration, mayor's permit, Social Security System membership, labor department registration, company profile, and client certifications. Its agreement with Fonterra made it liable for wages, benefits, and statutory remittances. Fonterra's merchandising guidelines and monitoring forms did not amount to control, since they existed only to ensure effective promotion.

On the second issue, the Court held that there was no illegal dismissal. As to Zytron, the Court found that the respondents refused to renew their contracts, applied with A.C. Sicat, and worked there, thereby abandoning their prior employment. The Court put the rule plainly: resignation is inconsistent with illegal dismissal. As to A.C. Sicat, the respondents were fixed-term employees whose contracts stated a day certain for termination. The Court quoted the contract:

The need for your service being only for a specific project, your temporary employment will be for the duration only of said project of our client, namely to promote FONTERRA BRANDS products which is expected to be finished on or before Nov. 06, 2006.

The non-renewal of an expired fixed-term contract is a management prerogative, and the expiry caused the natural cessation of employment.

Doctrine

First, labor-only contracting exists when the contractor lacks substantial capital or investment relating to the work, and the workers perform activities directly related to the principal's main business, or when the contractor does not control the workers' performance. In that case the law treats the principal as the employer and the contractor as its mere agent. Second, a contractor with substantial capital, an independent business, and an agreement securing labor standards is a legitimate job contractor. Third, a fixed-term employment contract is valid where the parties freely agree on a day certain for commencement and termination; its determining factor is the agreed date, not the nature of the duties. Fourth, the non-renewal of an expired fixed-term contract is a management prerogative and is not illegal dismissal absent bad faith. Fifth, resignation is inconsistent with illegal dismissal; a worker who refuses renewal and moves to a new employer has voluntarily terminated the relationship.

Disposition

The petition was granted; the Court of Appeals decision and resolution were reversed and set aside, and the National Labor Relations Commission decision and resolution dismissing the complaint were reinstated. Fonterra won.

Remember This

Memorize the line that resignation is inconsistent with illegal dismissal, and that the expiry of a fixed-term contract is not dismissal. Examiners use this case to test labor-only contracting against legitimate job contracting, and to test whether non-renewal of a fixed-term contract amounts to illegal dismissal.