Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 146408 February 29, 2008

PHILIPPINE AIRLINES, INC., petitioner,

vs.
ENRIQUE LIGAN, EMELITO SOCO, ALLAN PANQUE, JOLITO OLIVEROS, RICHARD
GONCER, NONILON PILAPIL, AQUILINO YBANEZ, BERNABE SANDOVAL, RUEL
GONCER, VIRGILIO P. CAMPOS, JR., ARTHUR M. CAPIN, RAMEL BERNARDES,
LORENZO BUTANAS, BENSON CARESUSA, JEFFREY LLENOS, ROQUE PILAPIL,
ANTONIO M. PAREJA, CLEMENTE R. LUMAYNO, NELSON TAMPUS, ROLANDO
TUNACAO, CHERRIE ALEGRES, BENEDICTO AUXTERO, EDUARDO MAGDADARAUG,
NELSON M. DULCE, and ALLAN BENTUZAL, respondents.

DECISION

CARPIO MORALES, J.:

Petitioner Philippine Airlines as Owner, and Synergy Services Corporation (Synergy) as

Contractor, entered into an Agreement 1 on July 15, 1991 whereby Synergy undertook to "provide
loading, unloading, delivery of baggage and cargo and other related services to and from
[petitioner]'s aircraft at the Mactan Station."2

The Agreement specified the following "Scope of Services" of Contractor Synergy:

1.2 CONTRACTOR shall furnish all the necessary capital, workers, loading, unloading
and deliverymaterials, facilities, supplies, equipment and tools for the satisfactory
performance and execution of the following services (the Work):

a. Loading and unloading of baggage and cargo to and from the aircraft;

b. Delivering of baggage from the ramp to the baggage claim area;

c. Picking up of baggage from the baggage sorting area to the designated parked aircraft;

d. Delivering of cargo unloaded from the flight to cargo terminal;

e. Other related jobs (but not janitorial functions) as may be required and necessary;

CONTRACTOR shall perform and execute the aforementioned Work at the

following areas located at Mactan Station, to wit:

a. Ramp Area

b. Baggage Claim Area

c. Cargo Terminal Area, and

d. Baggage Sorting Area3 (Underscoring supplied)

And it expressly provided that Synergy was "an independent contractor and . . . that there w[ould]
be no employer-employee relationship between CONTRACTOR and/or its employees on the one
hand, and OWNER, on the other."4

On the duration of the Agreement, Section 10 thereof provided:

10. 1 Should at any time OWNER find the services herein undertaken by CONTRACTOR
to be unsatisfactory, it shall notify CONTRACTOR who shall have fifteen (15) days from
such notice within which to improve the services. If CONTRACTOR fails to improve the
services under this Agreement according to OWNER'S specifications and standards,
OWNER shall have the right to terminate this Agreement immediately and without
advance notice.

10.2 Should CONTRACTOR fail to improve the services within the period stated above or
should CONTRACTOR breach the terms of this Agreement and fail or refuse to perform
the Work in such a manner as will be consistent with the achievement of the result
therein contracted for or in any other way fail to comply strictly with any terms of this
Agreement, OWNER at its option, shall have the right to terminate this Agreement and to
make other arrangements for having said Work performed and pursuant thereto shall
retain so much of the money held on the Agreement as is necessary to cover the
OWNER's costs and damages, without prejudice to the right of OWNER to seek resort to
the bond furnished by CONTRACTOR should the money in OWNER's possession be
insufficient.

x x x x (Underscoring supplied)

Except for respondent Benedicto Auxtero (Auxtero), the rest of the respondents, who appear to
have been assigned by Synergy to petitioner following the execution of the July 15, 1991
Agreement, filed on March 3, 1992 complaints before the NLRC Regional Office VII at Cebu City
against petitioner, Synergy and their respective officials for underpayment, non-payment of
premium pay for holidays, premium pay for rest days, service incentiveleave pay, 13th month pay
and allowances, and for regularization of employment status with petitioner, they claiming to be
"performing duties for the benefit of [petitioner] since their job is directly connected with [its]
business x x x."5

Respondent Auxtero had initially filed a complaint against petitioner and Synergy and their
respective officials for regularization of his employment status. Later alleging that he was, without
valid ground, verbally dismissed, he filed a complaint against petitioner and Synergy and their
respective officials for illegal dismissal and reinstatement with full backwages.6

The complaints of respondents were consolidated.

By Decision7 of August 29, 1994, Labor Arbiter Dominador Almirante found Synergy an
independent contractor and dismissed respondents' complaint for regularization against
petitioner, but granted their money claims. The fallo of the decision reads:

WHEREFORE, foregoing premises considered, judgment is hereby rendered as follows:

(1) Ordering respondents PAL and Synergy jointly and severally to pay all the
complainants herein their 13th month pay and service incentive leave benefits;

xxxx

(3) Ordering respondent Synergy to pay complainant Benedicto Auxtero a financial

assistance in the amount of P5,000.00.
 The awards hereinabove enumerated in the aggregate total amount of THREE
HUNDRED TWENTY-TWO THOUSAND THREE HUNDRED FIFTY NINE PESOS AND
EIGHTY SEVEN CENTAVOS (P322,359.87) are computed in detail by our Fiscal
Examiner which computation is hereto attached to form part of this decision.

The rest of the claims are hereby ordered dismissed for lack of merit.8 (Underscoring
supplied)

On appeal by respondents, the NLRC, Fourth Division, Cebu City, vacated and set aside the
decision of the Labor Arbiter by Decision9 of January 5, 1996, the fallo of which reads:

WHEREFORE, the Decision of the Labor Arbiter Dominador A. Almirante, dated August
29, 1994, is hereby VACATED and SET ASIDE and judgment is hereby rendered:

1. Declaring respondent Synergy Services Corporation to be a 'labor-only' contractor;

2. Ordering respondent Philippine Airlines to accept, as its regular employees, all the
complainants, . . . and to give each of them the salaries, allowances and other
employment benefits and privileges of a regular employee under the Collective
Bargaining Agreement subsisting during the period of their employment;

xxxx

4. Declaring the dismissal of complainant Benedicto Auxtero to be illegal and ordering

his reinstatementas helper or utility man with respondent Philippine Airlines, with full
backwages, allowances and other benefits and privileges from the time of his dismissal
up to his actual reinstatement; and

5. Dismissing the appeal of respondent Synergy Services Corporation, for lack of

merit.10 (Emphasis and underscoring supplied)

Only petitioner assailed the NLRC decision via petition for certiorari before this Court.

By Resolution11 of January 25, 1999, this Court referred the case to the Court of Appeals for
appropriate action and disposition, conformably with St. Martin Funeral Homes v. National Labor
Relations Commission which was promulgated on September 16, 1998.

The appellate court, by Decision of September 29, 2000, affirmed the Decision of the
NLRC.12 Petitioner's motion for reconsideration having been denied by Resolution of December
21, 2000,13 the present petition was filed, faulting the appellate court

I.

. . . IN UPHOLDING THE NATIONAL LABOR RELATIONS COMMISSION DECISION

WHICH IMPOSED THE RELATIONSHIP OF EMPLOYER-EMPLOYEE BETWEEN
PETITIONER AND THE RESPONDENTS HEREIN.

II.

. . . IN AFFIRMING THE RULING OF THE NATIONAL LABOR RELATIONS

COMMISSION ORDERING THE REINSTATEMENT OF RESPONDENT AUXTERO
DESPITE THE ABSENCE [OF] ANY FACTUAL FINDING IN THE DECISION THAT
PETITIONER ILLEGALLY TERMINATED HIS EMPLOYMENT.

III.
 . . . [IN ANY EVENT IN] COMMITT[ING] A PATENT AND GRAVE ERROR IN
UPHOLDING THE DECISION OF THE NATIONAL LABOR RELATIONS COMMISSION
WHICH COMPELLED THE PETITIONER TO EMPLOY THE RESPONDENTS AS
REGULAR EMPLOYEES DESPITE THE FACT THAT THEIR SERVICES ARE IN
EXCESS OF PETITIONER COMPANY'S OPERATIONAL
REQUIREMENTS.14 (Underscoring supplied)

Petitioner argues that the law does not prohibit an employer from engaging an independent
contractor, like Synergy, which has substantial capital in carrying on an independent business of
contracting, to perform specific jobs.

Petitioner further argues that its contracting out to Synergy various services like janitorial, aircraft
cleaning, baggage-handling, etc., which are directly related to its business, does not make
respondents its employees.

Petitioner furthermore argues that none of the four (4) elements of an employer-employee
relationship between petitioner and respondents, viz: selection and engagement of an employee,
payment of wages, power of dismissal, and the power to control employee's conduct, is present
in the case.15

Finally, petitioner avers that reinstatement of respondents had been rendered impossible
because it had reduced its personnel due to heavy losses as it had in fact terminated its service
agreement with Synergy effective June 30, 199816 as a cost-saving measure.

The decision of the case hinges on a determination of whether Synergy is a mere job-only
contractor or a legitimate contractor. If Synergy is found to be a mere job-only contractor,
respondents could be considered as regular employees of petitioner as Synergy would then be a
mere agent of petitioner in which case respondents would be entitled to all the benefits granted
to petitioner's regular employees; otherwise, if Synergy is found to be a legitimate contractor,
respondents' claims against petitioner must fail as they would then be considered employees of
Synergy.

The statutory basis of legitimate contracting or subcontracting is provided in Article 106 of the
Labor Code which reads:

ART. 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 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. (Emphasis, capitalization and underscoring supplied)

Legitimate contracting and labor-only contracting are defined in Department Order (D.O.) No. 18-
02, Series of 2002 (Rules Implementing Articles 106 to 109 of the Labor Code, as amended) as
follows:

Section 3. Trilateral relationship in contracting arrangements. In legitimate contracting,

there exists a trilateral relationship under which there is a contract for a specific job, work
or service between the principal and the contractor or subcontractor, and a contract of
employment between the contractor or subcontractor and its workers. Hence, there are
three parties involved in these arrangements, the principal which decides to farm out a
job or service to a contractor or subcontractor, the contractor or subcontractor which has
the capacity to independently undertake the performance of the job, work or service,
and the contractual workers engaged by the contractor or subcontractor to accomplish
the job, work or service. (Emphasis and underscoring supplied)

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 [sic]
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. (Emphasis, underscoring and capitalization supplied)

"Substantial capital or investment" and the "right to control" are defined in the same Section 5 of
the Department Order as follows:

"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.

The "right to control" shall refer to the right reserved to the person for whom the
services of the contractual workers are performed, to determine not only the end to be
achieved, but also the manner and means to be used in reaching that end. (Emphasis
and underscoring supplied)

From the records of the case, it is gathered that the work performed by almost all of the
respondents - loading and unloading of baggage and cargo of passengers - is directly related to
the main business of petitioner. And the equipment used by respondents as station loaders, such
as trailers and conveyors, are owned by petitioner. 17

Petitioner asserts, however, that mere compliance with substantial capital requirement suffices
for Synergy to be considered a legitimate contractor, citing Neri v. National Labor Relations
Commission.18 Petitioner's reliance on said case is misplaced.
In Neri, the Labor Arbiter and the NLRC both determined that Building Care Corporation had a
capital stock of P1 million fully subscribed and paid for.19 The corporation's status as independent
contractor had in fact been previously confirmed in an earlier case 20 by this Court which found it
to be serving, among others, a university, an international bank, a big local bank, a hospital
center, government agencies, etc."

In stark contrast to the case at bar, while petitioner steadfastly asserted before the Labor Arbiter
and the NLRC that Synergy has a substantial capital to engage in legitimate contracting, it failed
to present evidence thereon. As the NLRC held:

The decision of the Labor Arbiter merely mentioned on page 5 of his decision that
respondent SYNERGY has substantial capital, but there is no showing in the records as
to how much is that capital. Neither had respondents shown that SYNERGY has such
substantial capital. x x x21 (Underscoring supplied)

It was only after the appellate court rendered its challenged Decision of September 29, 2002
when petitioner, in its Motion for Reconsideration of the decision, sought to prove, for the first
time, Synergy's substantial capitalization by attaching photocopies of Synergy's financial
statements, e.g., balance sheets, statements of income and retained earnings, marked as
"Annexes 'A' - 'A-4.'"22

More significantly, however, is that respondents worked alongside petitioner's regular employees
who were performing identical work.23 As San Miguel Corporation v. Aballa24 and Dole
Philippines, Inc. v. Esteva, et al.25teach, such is an indicium of labor-only contracting.

For labor-only contracting to exist, Section 5 of D.O. No. 18-02 which requires any of two
elements to be present is, for convenience, re-quoted:

(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. (Emphasis and CAPITALIZATION supplied)

Even if only one of the two elements is present then, there is labor-only contracting.

The control test element under the immediately-quoted paragraph (ii), which was not present in
the old Implementing Rules (Department Order No. 10, Series of 1997), 26 echoes the prevailing
jurisprudential trend27elevating such element as a primary determinant of employer-employee
relationship in job contracting agreements.

One who claims to be an independent contractor has to prove that he contracted to do the work
according to his own methods and without being subject to the employer's control except only as
to the results.28

While petitioner claimed that it was Synergy's supervisors who actually supervised respondents,
it failed to present evidence thereon. It did not even identify who were the Synergy supervisors
assigned at the workplace.

Even the parties' Agreement does not lend support to petitioner's claim, thus:

Section 6. Qualified and Experienced Worker: Owner's Right to Dismiss Workers.

 CONTRACTOR shall employ capable and experienced workers and foremen to carry out
the loading, unloading and delivery Work as well as provide all equipment, loading,
unloading and delivery equipment, materials, supplies and tools necessary for the
performance of the Work. CONTRACTOR shall upon OWNER'S request furnish the latter
with information regarding the qualifications of the former's workers, to prove their
capability and experience. Contractor shall require all its workers, employees,
suppliers and visitors to comply with OWNER'S rules, regulations, procedures and
directives relative to the safety and security of OWNER'S premises, properties and
operations. For this purpose, CONTRACTOR shall furnish its employees and
workers identification cards to be countersigned by OWNER and uniforms to be
approved by OWNER. OWNER may require CONTRACTOR to dismiss immediately
and prohibit entry into OWNER'S premises of any person employed therein by
CONTRACTOR who in OWNER'S opinion is incompetent or misconducts himself
or does not comply with OWNER'S reasonable instructions and requests regarding
security, safety and other matters and such person shall not again be employed to
perform the services hereunder without OWNER'S permission. 29 (Underscoring partly in
the original and partly supplied; emphasis supplied)

Petitioner in fact admitted that it fixes the work schedule of respondents as their work was
dependent on the frequency of plane arrivals.30 And as the NLRC found, petitioner's managers
and supervisors approved respondents' weekly work assignments and respondents and other
regular PAL employees were all referred to as "station attendants" of the cargo operation and
airfreight services of petitioner.31

Respondents having performed tasks which are usually necessary and desirable in the air
transportation business of petitioner, they should be deemed its regular employees and Synergy
as a labor-only contractor.32

The express provision in the Agreement that Synergy was an independent contractor and there
would be "no employer-employee relationship between [Synergy] and/or its employees on one
hand, and [petitioner] on the other hand" is not legally binding and conclusive as contractual
provisions are not valid determinants of the existence of such relationship. For it is the totality of
the facts and surrounding circumstances of the case33 which is determinative of the parties'
relationship.

Respecting the dismissal on November 15, 199234 of Auxtero, a regular employee of petitioner
who had been working as utility man/helper since November 1988, it is not legally justified for
want of just or authorized cause therefor and for non-compliance with procedural due process.
Petitioner's claim that he abandoned his work does not persuade.35 The elements of
abandonment being (1) the failure to report for work or absence without valid or justifiable
reason, and (2) a clear intention to sever the employer-employee relationship manifested by
some overt acts,36 the onus probandi lies with petitioner which, however, failed to discharge the
same.

Auxtero, having been declared to be a regular employee of petitioner, and found to be illegally
dismissed from employment, should be entitled to salary differential37 from the time he rendered
one year of service until his dismissal, reinstatement plus backwages until the finality of this
decision.38 In view, however, of the long period of time39 that had elapsed since his dismissal on
November 15, 1992, it would be appropriate to award separation pay of one (1) month salary for
each year of service, in lieu of reinstatement. 40

As regards the remaining respondents, the Court affirms the ruling of both the NLRC and the
appellate court, ordering petitioner to accept them as its regular employees and to give each of
them the salaries, allowances and other employment benefits and privileges of a regular
employee under the pertinent Collective Bargaining Agreement.
Petitioner claims, however, that it has become impossible for it to comply with the orders of the
NLRC and the Court of Appeals, for during the pendency of this case, it was forced to reduce its
personnel due to heavy losses caused by economic crisis and the pilots' strike of June 5,
1998.41 Hence, there are no available positions where respondents could be placed.

And petitioner informs that "the employment contracts of all if not most of the respondents . . .
were terminated by Synergy effective 30 June 1998 when petitioner terminated its contract with
Synergy."42

Other than its bare allegations, petitioner presented nothing to substantiate its impossibility of
compliance. In fact, petitioner waived this defense by failing to raise it in its Memorandum filed on
June 14, 1999 before the Court of Appeals. 43 Further, the notice of termination in 1998 was in
disregard of a subsisting temporary restraining order 44 to preserve the status quo, issued by this
Court in 1996 before it referred the case to the Court of Appeals in January 1999. So as to thwart
the attempt to subvert the implementation of the assailed decision, respondents are deemed to
be continuously employed by petitioner, for purposes of computing the wages and benefits due
respondents.

Finally, it must be stressed that respondents, having been declared to be regular employees of
petitioner, Synergy being a mere agent of the latter, had acquired security of tenure. As such,
they could only be dismissed by petitioner, the real employer, on the basis of just or authorized
cause, and with observance of procedural due process.

WHEREFORE, the Court of Appeals Decision of September 29, 2000

is AFFIRMED with MODIFICATION.

Petitioner PHILIPPINE AIRLINES, INC. is ordered to:

(a) accept respondents ENRIQUE LIGAN, EMELITO SOCO, ALLAN PANQUE, JOLITO
OLIVEROS, RICHARD GONCER, NONILON PILAPIL, AQUILINO YBANEZ, BERNABE
SANDOVAL, RUEL GONCER, VIRGILIO P. CAMPOS, JR., ARTHUR M. CAPIN, RAMEL
BERNARDES, LORENZO BUTANAS, BENSON CARESUSA, JEFFREY LLENOS, ROQUE
PILAPIL, ANTONIO M. PAREJA, CLEMENTE R. LUMAYNO, NELSON TAMPUS, ROLANDO
TUNACAO, CHERRIE ALEGRES, EDUARDO MAGDADARAUG, NELSON M. DULCE and
ALLAN BENTUZAL as its regular employees in their same or substantially equivalent positions,
and pay the wages and benefits due them as regular employees plus salary
differential corresponding to the difference between the wages and benefits given them and
those granted to petitioner's other regular employees of the same rank; and

(b) pay respondent BENEDICTO AUXTERO salary differential; backwages from the time of his
dismissal until the finality of this decision; and separation pay, in lieu of reinstatement,
equivalent to one (1) month pay for every year of service until the finality of this decision.

There being no data from which this Court may determine the monetary liabilities of petitioner,
the case is REMANDED to the Labor Arbiter solely for that purpose.

SO ORDERED.