DIGITAL TELECOMMUNICATIONS PHILIPPINES, INC., PETITIONER, VS. DIGITEL EMPLOYEES UNION (DEU), ARCEO RAFAEL A. ESPLANA, ALAN D. LICANDO, FELICITO C. ROMERO, JR., ARNOLD D. GONZALE…

Digital Telecommunications Philippines versus Digitel Employees Union

The Case

This is a labor case in which Digital Telecommunications Philippines, known as Digitel, challenged before the Supreme Court two rulings of the Court of Appeals that had gone against it. The first ruling affirmed an order of the Secretary of Labor compelling Digitel to commence collective bargaining negotiations with the Digitel Employees Union. The second ruling declared the dismissal of certain call center employees illegal, on the finding that the entity that had employed them, Digiserv, was a labor-only contractor and that the real employer was Digitel. The case matters because it gathers in one decision three recurring bar topics: the duty to bargain despite a pending petition to cancel a union's registration, the test for labor-only contracting, and the requisites of a valid retrenchment, including the effect of an assumption order issued by the Secretary of Labor.

Procedural History

The dispute began in the labor offices. The Secretary of Labor assumed jurisdiction over the bargaining deadlock and later ordered Digitel to commence collective bargaining negotiations with the Union. Digitel moved for reconsideration, arguing that the pending petition for cancellation of the Union's registration was a prejudicial question, but the motion was denied. Digitel then went to the Court of Appeals by petition for certiorari, docketed as one of the two consolidated cases, attributing grave abuse of discretion to the Secretary.

In the meantime, the unfair labor practice issue was certified for compulsory arbitration to the National Labor Relations Commission, which dismissed the unfair labor practice charge but declared the dismissal of the affected employees illegal and ordered their reinstatement with full backwages. Digitel challenged that decision in a second petition before the Court of Appeals. The Court of Appeals consolidated the two petitions. It dismissed the first petition and affirmed the orders of the Secretary of Labor in full. It partially granted the second petition, modifying the award to add separation pay in lieu of reinstatement should reinstatement no longer be feasible, and deleting the fine imposed on Digitel. Digitel's motion for reconsideration was denied, and Digitel elevated the matter to the Supreme Court by petition for review on certiorari.

Facts

By virtue of a certification election, the Digitel Employees Union became the exclusive bargaining agent of Digitel's rank and file employees in 1994. The parties began collective bargaining negotiations, which ended in a deadlock. The Union threatened to strike, but the Acting Labor Secretary assumed jurisdiction and eventually directed the parties to execute a collective bargaining agreement. No agreement was ever forged. Some Union members abandoned their employment, and the Union became dormant.

Ten years later, in September 2004, Digitel received a letter from Arceo Rafael A. Esplana, who identified himself as President of the Union, containing the list of officers, collective bargaining proposals, and ground rules. Digitel was reluctant to negotiate and demanded proof that the Union had complied with its Constitution and By-laws on membership and the election of officers. The Union then filed a case for preventive mediation before the National Conciliation and Mediation Board based on Digitel's violation of the duty to bargain, and later filed a notice of strike. In March 2005, the Secretary of Labor assumed jurisdiction over the labor dispute.

While the controversy was pending, Digiserv, a non-profit enterprise engaged in call center servicing, filed an establishment termination report stating that it would cease operations. The closure affected at least one hundred employees, forty-two of whom were Union members. The Union filed a second notice of strike for union busting, illegal lock-out, and violation of the assumption order, and the Secretary of Labor ordered that second notice subsumed by the earlier assumption order. Digitel, for its part, filed a petition to cancel the Union's registration, which was dismissed by the Regional Director and, on appeal, by the Bureau of Labor Relations.

Issues

• Whether or not the Secretary of Labor erred in issuing the assumption order and in directing Digitel to bargain collectively despite the pendency of the petition for cancellation of the Union's registration.
• Whether or not Digiserv is a legitimate job contractor rather than a labor-only contractor.
• Whether or not the affected employees were validly dismissed on the ground of closure of a department of Digitel's business.

Applicable Provisions

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

Labor-only contracting is expressly prohibited by our labor laws. Article 106 of the Labor Code defines labor-only contracting as supplying workers to an employer who 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.

This definition supplies the test the Court applies to Digiserv's arrangement with Digitel.

Section 5 of Rule VIII-A, Book III of the Omnibus Rules Implementing the Labor Code, as amended, sets out the prohibition and its elements:

Section 5. Prohibition against labor-only contracting. Labor-only contracting is hereby declared prohibited. For this purpose, labor-only contracting shall refer to 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 these elements to test whether Digiserv had substantial capital and whether it exercised control over the affected employees.

Article 263, paragraph g, of the Labor Code, on the assumption of jurisdiction by the Secretary of Labor, provides:

When, in his opinion, there exists a labor dispute causing or likely to cause a strike or lockout in an industry indispensable to the national interest, the Secretary of Labor and Employment may assume jurisdiction over the dispute and decide it or certify the same to the Commission for compulsory arbitration. Such assumption or certification shall have the effect of automatically enjoining the intended or impending strike or lockout as specified in the assumption or certification order. If one has already taken place at the time of assumption or certification, all striking or locked out employees shall immediately return to work and the employer shall immediately resume operations and readmit all workers under the same terms and conditions prevailing before the strike or lockout.

This provision matters because the dismissal of the affected employees came after an assumption order, which bears on the good faith of the retrenchment.

Ruling

On the first issue, the Court held that the pendency of a petition for cancellation of union registration does not preclude collective bargaining. The Court relied on its earlier ruling in Capitol Medical Center versus Trajano, quoting it with approval:

That there is a pending cancellation proceeding against the respondent Union is not a bar to set in motion the mechanics of collective bargaining. If a certification election may still be ordered despite the pendency of a petition to cancel the union's registration certificate, more so should the collective bargaining process continue despite its pendency. We must emphasize that the majority status of the respondent Union is not affected by the pendency of the Petition for Cancellation pending against it. Unless its certificate of registration and its status as the certified bargaining agent are revoked, the Hospital is, by express provision of the law, duty bound to collectively bargain with the Union.

On the second issue, the Court held that Digiserv is a labor-only contractor. Digiserv had no substantial capital: its authorized capital stock was one million pesos, but only two hundred fifty thousand pesos had been subscribed and only sixty-two thousand five hundred pesos paid up, with no increase in ten years. Its primary purpose was to provide manpower services, and the work of its employees as customer service representatives was directly related to Digitel's telecommunications business. Digiserv also did not exercise control over the affected employees, since it shared its Human Resources, Accounting, Audit and Legal Departments with Digitel, and Digitel itself issued commendations, plaques, and service awards to the employees. As a labor-only contractor, Digiserv created an employer-employee relationship between Digitel and the affected employees.

On the third issue, the Court treated the closure of Digiserv as retrenchment and laid down the elements of a valid retrenchment. It found that only the first three elements were satisfied. The fourth element, good faith, was absent. The Court noted that before Digiserv ceased operations, the Secretary of Labor had already issued an assumption order to enjoin an impending strike, and when the dismissals were effected, the Union filed another notice of strike, which the Secretary subsumed under the earlier assumption order. The assumption order enjoined the impending strike and required the employer to resume operations and readmit all workers under the same terms and conditions prevailing before the strike. The dismissals therefore could not stand as a good-faith retrenchment.

Doctrine

First, the pendency of a petition for cancellation of a union's certificate of registration does not bar collective bargaining. Unless the certificate of registration and the status as certified bargaining agent are revoked, the employer is duty bound to bargain collectively with the union.

Second, labor-only contracting exists where the contractor merely recruits, supplies, or places workers, and either the contractor lacks substantial capital or investment and the workers perform activities directly related to the principal's main business, or the contractor does not exercise control over the performance of the work. The legitimate job contractor provides services, while the labor-only contractor provides only manpower. Labor-only contracting creates an employer-employee relationship between the principal and the contractor's employees.

Third, for retrenchment to be valid, all five elements must concur: reasonable necessity to prevent substantial losses, written notice to the employees and the Department of Labor and Employment at least one month before the intended date, payment of separation pay of one month pay or at least one-half month pay for every year of service, whichever is higher, good faith on the part of the employer, and fair and reasonable criteria in selecting who would be dismissed. The absence of good faith invalidates the retrenchment.

Disposition

The Supreme Court denied Digitel's petition and affirmed the rulings of the Court of Appeals, upholding the order to bargain collectively and the finding that the affected employees were illegally dismissed.

Remember This

The one line to memorize is that a pending petition for cancellation of union registration does not bar collective bargaining, and that labor-only contracting makes the principal the real employer. Examiners use this case to test the duty to bargain, the labor-only contracting test, and the requisites of a valid retrenchment.