ALLIED BANKING CORPORATION, NOW MERGED WITH PHILIPPINE NATIONAL BANK, PETITIONER, VS. REYNOLD CALUMPANG, RESPONDENT.

Allied Banking Corporation versus Calumpang

The Case

This is a labor case about who is the real employer of a janitor assigned to a bank branch. Allied Banking Corporation, now merged with Philippine National Bank, filed the petition against Reynold Calumpang, who had been assigned to its Tanjay City Branch by a janitorial agency called Race Cleaners, Incorporated. Calumpang sued for illegal dismissal and underpayment of wages after the branch manager told him his services were no longer needed. The case matters because it shows how the Supreme Court treats a contractor that turns out to be a labor-only contractor, how the employer-employee relationship is then traced to the principal, and how the twin requirements of just cause and due process operate when the cause is valid but the procedure is not.

Procedural History

Calumpang filed a complaint for illegal dismissal and underpayment of wages before the National Labor Relations Commission. The Labor Arbiter ruled in his favor, declaring him an employee of the Bank, declaring him illegally dismissed, and ordering reinstatement with full backwages, or separation pay if reinstatement was not feasible. The Bank appealed to the National Labor Relations Commission, which dismissed the appeal and affirmed the Labor Arbiter. The Bank moved for reconsideration, but the Commission denied it. The Bank then went up to the Court of Appeals in Cebu City by petition for certiorari. The Court of Appeals denied the petition and affirmed the Commission, but ordered the Labor Arbiter to recompute the backwages and separation pay, and directed separation pay in lieu of reinstatement because of strained relations. The Bank's motion for reconsideration was denied, so it filed a petition for review on certiorari under Rule 45 before the Supreme Court. The Court required Calumpang to comment, but he never did, so he was deemed to have waived his right to comment and the Court ruled on the merits.

Facts

The Bank and Race Cleaners, Incorporated entered into a Service Agreement under which the agency would provide messengerial, janitorial, communication, and maintenance services and the personnel for them. On September 28, 2003, Calumpang was hired as a janitor by the agency and assigned to the Bank's Tanjay City Branch. He did janitorial work and also ran errands, such as delivering statements, delivering checks for clearing, and mailing letters, which required him to leave the branch at times.

The Bank observed that whenever Calumpang went out on errands, he took a long time to return. It turned out that during those times he was also plying his pedicab and ferrying passengers. The Bank also learned from clients of the branch, who told the branch manager, Oscar Infante, that Calumpang had been borrowing money from them. Because of these acts, the manager informed Calumpang that his services would no longer be required at the branch.

Calumpang then filed his complaint. He claimed that the four-fold test of employer-employee relationship was present between him and the Bank: he was assigned as a janitor with a salary of 4,200 pesos payable every fifteen days, the branch head gave him direct orders on the work to be done, the branch paid his wages, and the branch head terminated him. The Bank denied any employer-employee relationship, insisting that Calumpang was the agency's employee and that it merely exercised its prerogative under the Service Agreement to ask for the replacement of any personnel assigned to it.

Issues

• Whether or not the Court of Appeals erred in declaring that Race Cleaners, Incorporated is a labor-only contractor.
• Whether or not the Court of Appeals erred in declaring that there exists an employer-employee relationship between the Bank and Calumpang.
• Whether or not the Court of Appeals erred in declaring that Calumpang had been illegally dismissed and in granting his monetary claims.

Applicable Provisions

Article 106 of the Labor Code provides:

ART. 106. Contractor or subcontracting. - 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 the 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 is the provision that defines labor-only contracting and fixes the consequence that the intermediary is merely an agent of the real employer.

Section 8 of the Omnibus Rules Implementing the Labor Code provides:

SECTION 8. Job Contracting. - There is job contracting permissible under the Code if the following conditions are met: (a) The contractor carries on an independent business and undertakes the contract work on his own account under his own responsibility according to his own manner and method, free from the control and direction of his employer or principal in all matters connected with the performance of the work except as to the results thereof; and (b) The contractor has substantial capital or investment in the form of tools, equipment, machineries, work premises, and other materials which are necessary in the conduct of his business.

This sets the two conditions that a legitimate job contractor must satisfy, and the Bank failed to prove them.

Section 9 of the same Omnibus Rules provides:

SECTION 9. Labor-only contracting. - (a) Any person who undertakes to supply workers to an employer shall be deemed to be engaged in labor-only contracting where such person: (1) Does not have substantial capital or investment in the form of tools, equipment, machineries, work premises and other materials; and (2) The workers recruited and placed by such person are performing activities which are directly related to the principal business or operations of the employer in which workers are habitually employed. (b) Labor-only contracting as defined herein is hereby prohibited and the person acting as contractor shall be considered merely as an agent or intermediary 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 is the rule the Court applied in finding that the agency was a labor-only contractor and the Bank the real employer.

Ruling

On the first issue, the Court held that the Court of Appeals did not err. A contractor is presumed to be a labor-only contractor unless it overcomes the burden of proving substantial capital, investment, and tools. The Bank offered only a bare allegation of the agency's substantial capitalization and never submitted financial statements. Even the Service Agreement it relied on had lapsed in August 2005, as the Bank itself admitted, and the Bank never alleged when the agreement was executed. The Bank's claim that the agency controlled Calumpang was also belied by its own admission that its branch manager told Calumpang his services would no longer be required, an overt act showing direct control. Calumpang's work was related to the Bank's business and part of its banking operations.

On the second issue, the Court held that a finding of labor-only contracting is equivalent to declaring that an employer-employee relationship exists between the principal and the employees of the supposed contractor, with the labor-only contractor a mere agent of the principal, the real employer. The Bank is the principal employer and the agency the labor-only contractor, and both are solidarily liable for Calumpang's rightful claims.

On the third issue, the Court partly agreed with the Bank. Dismissal is justified where there is a just cause and the employee was afforded due process, and the burden of proof is on the employer. The Court found that the Bank's grounds were valid: Calumpang plied his pedicab and ferried passengers during work hours and borrowed money from branch clients, and he never denied these imputations, so his silence could be construed as admission. The Court quoted its ruling in King of Kings Transport, Incorporated versus Mamac on the requirements of procedural due process:

(1) The first written notice to be served on the employees should contain the specific causes or grounds for termination against them, and a directive that the employees are given the opportunity to submit their written explanation within a reasonable period. Reasonable opportunity under the Omnibus Rules means every kind of assistance that management must accord to the employees to enable them to prepare adequately for their defense. This should be construed as a period of at least five calendar days from receipt of the notice. Moreover, in order to enable the employees to intelligently prepare their explanation and defenses, the notice should contain a detailed narration of the facts and circumstances that will serve as basis for the charge against the employees. A general description of the charge will not suffice. Lastly, the notice should specifically mention which company rules, if any, are violated and/or which among the grounds under Article 288 of the Labor Code is being charged against the employees. (2) After serving the first notice, the employees should schedule and conduct a hearing or conference wherein the employees will be given the opportunity to (1) explain and clarify their defenses to the charge against them; (2) present evidence in support of their defenses; and (3) rebut the evidence presented against them by the management. During the hearing or conference, the employees are given the chance to defend themselves personally, with the assistance of a representative or counsel of their choice. (3) After determining that termination is justified, the employer shall serve the employees a written notice of termination indicating that: (1) all the circumstances involving the charge against the employees have been considered; and (2) grounds have been established to justify the severance of their employment.

Here, the Bank gave Calumpang neither a notice to explain nor a notice of termination, so his dismissal, though grounded on valid cause, was tainted with illegality. Because the substantive ground was valid, the Court deleted the awards of backwages and separation pay, but because procedural due process was violated, it awarded nominal damages to vindicate his right.

Doctrine

A contractor is presumed to be a labor-only contractor unless it proves substantial capital, investment, and tools. A finding of labor-only contracting means the principal is the real employer and the contractor is a mere agent, and both are solidarily liable to the worker. The dismissal of an employee requires both a just cause and compliance with the twin notice and hearing requirements of procedural due process. Where the cause is valid but procedure is not observed, the dismissal is illegal and the employer is liable for nominal damages, not backwages or separation pay.

Disposition

The petition was partly granted: the awards of backwages and separation pay were deleted, but the Bank was ordered to pay Calumpang nominal damages for violating his right to procedural due process.

Remember This

Memorize this line: a valid cause without due process makes the dismissal illegal, but the remedy is nominal damages, not backwages. Examiners use this case to test the labor-only contracting presumption and the twin requirements of dismissal.