THIRD DIVISION

[G.R. No. 179546. February 13, 2009.]

COCA-COLA BOTTLERS PHILS., INC. , petitioner, vs . ALAN M. AGITO,

REGOLO S. OCA III, ERNESTO G. ALARIAO, JR., ALFONSO PAA, JR.,
DEMPSTER P. ONG, URRIQUIA T. ARVIN, GIL H. FRANCISCO, and
EDWIN M. GOLEZ , respondents.

DECISION

CHICO-NAZARIO , J : p

This is a Petition for Review on Certiorari, under Rule 45 of the Rules of Court,
assailing the Decision 1 dated 19 February 2007, promulgated by the Court of Appeals
in CA-G.R. SP No. 85320, reversing the Resolution 2 rendered on 30 October 2003 by
the National Labor Relations Commission (NLRC) in NLRC NCR CA No. 036494-03. The
Court of Appeals, in its assailed Decision, declared that respondents Alan M. Agito,
Regolo S. Oca III, Ernesto G. Alariao, Jr., Alfonso Paa, Jr., Dempster P. Ong, Urriquia T.
Arvin, Gil H. Francisco, and Edwin M. Golez were regular employees of petitioner Coca-
Cola Bottlers Phils., Inc.; and that Interserve Management & Manpower Resources, Inc.
(Interserve) was a labor-only contractor, whose presence was intended merely to
preclude respondents from acquiring tenurial security. SECcAI

Petitioner is a domestic corporation duly registered with the Securities and

Exchange Commission (SEC) and engaged in manufacturing, bottling and distributing
soft drink beverages and other allied products.
On 15 April 2002, respondents led before the NLRC two complaints against
petitioner, Interserve, Peerless Integrated Services, Inc., Better Builders, Inc., and
Excellent Partners, Inc. for reinstatement with backwages, regularization, nonpayment
of 13th month pay, and damages. The two cases, docketed as NLRC NCR Case No. 04-
02345-2002 and NLRC NCR Case No. 05-03137-02, were consolidated.
Respondents alleged in their Position Paper that they were salesmen assigned at
the Lagro Sales O ce of petitioner. They had been in the employ of petitioner for years,
but were not regularized. Their employment was terminated on 8 April 2002 without
just cause and due process. However, they failed to state the reason/s for ling a
complaint against Interserve; Peerless Integrated Services, Inc.; Better Builders, Inc.;
and Excellent Partners, Inc. 3
Petitioner led its Position Paper (with Motion to Dismiss), 4 where it averred
that respondents were employees of Interserve who were tasked to perform
contracted services in accordance with the provisions of the Contract of Services 5
executed between petitioner and Interserve on 23 March 2002. Said Contract between
petitioner and Interserve, covering the period of 1 April 2002 to 30 September 2002,
constituted legitimate job contracting, given that the latter was a bona fide independent
contractor with substantial capital or investment in the form of tools, equipment, and
machinery necessary in the conduct of its business. AcTHCE

To prove the status of Interserve as an independent contractor, petitioner

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 presented the following pieces of evidence: (1) the Articles of Incorporation of
Interserve; 6 (2) the Certi cate of Registration of Interserve with the Bureau of Internal
Revenue; 7 (3) the Income Tax Return, with Audited Financial Statements, of Interserve
for 2001; 8 and (4) the Certi cate of Registration of Interserve as an independent job
contractor, issued by the Department of Labor and Employment (DOLE). 9
As a result, petitioner asserted that respondents were employees of Interserve,
since it was the latter which hired them, paid their wages, and supervised their work, as
proven by: (1) respondents' Personal Data Files in the records of Interserve; 1 0 (2)
respondents' Contract of Temporary Employment with Interserve; 1 1 and (3) the payroll
records of Interserve. 1 2
Petitioner, thus, sought the dismissal of respondents' complaint against it on the
ground that the Labor Arbiter did not acquire jurisdiction over the same in the absence
of an employer-employee relationship between petitioner and the respondents. 1 3
In a Decision dated 28 May 2003, the Labor Arbiter found that respondents were
employees of Interserve and not of petitioner. She reasoned that the standard put forth
in Article 280 of the Labor Code for determining regular employment (i.e., that the
employee is performing activities that are necessary and desirable in the usual
business of the employer) was not determinative of the issue of whether an employer-
employee relationship existed between petitioner and respondents. While respondents
performed activities that were necessary and desirable in the usual business or trade of
petitioner, the Labor Arbiter underscored that respondents' functions were not
indispensable to the principal business of petitioner, which was manufacturing and
bottling soft drink beverages and similar products.
The Labor Arbiter placed considerable weight on the fact that Interserve was
registered with the DOLE as an independent job contractor, with total assets amounting
to P1,439,785.00 as of 31 December 2001. It was Interserve that kept and maintained
respondents' employee records, including their Personal Data Sheets; Contracts of
Employment; and remittances to the Social Security System (SSS), Medicare and Pag-
ibig Fund, thus, further supporting the Labor Arbiter's nding that respondents were
employees of Interserve. She ruled that the circulars, rules and regulations which
petitioner issued from time to time to respondents were not indicative of control as to
make the latter its employees. ScHAIT

Nevertheless, the Labor Arbiter directed Interserve to pay respondents their pro-
rated 13th month benefits for the period of January 2002 until April 2002. 1 4
In the end, the Labor Arbiter decreed:
WHEREFORE, judgment is hereby rendered nding that [herein
respondents] are employees of [herein petitioner] INTERSERVE MANAGEMENT &
MANPOWER RESOURCES, INC. Concomitantly, respondent Interserve is further
ordered to pay [respondents] their pro-rated 13th month pay.

The complaints against COCA-COLA BOTTLERS PHILS., INC. is

DISMISSED for lack of merit.

In like manner the complaints against PEERLESS INTEGRATED SERVICES,

INC., BETTER BUILDING INC. and EXCELLENT PARTNERS COOPERATIVE are
DISMISSED for failure of complainants to pursue against them.

Other claims are dismissed for lack of merit.

The computation of the Computation and Examination Unit, this

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 Commission if (sic) made part of this Decision. 1 5

Unsatis ed with the foregoing Decision of the Labor Arbiter, respondents led an
appeal with the NLRC, docketed as NLRC NCR CA No. 036494-03.
In their Memorandum of Appeal, 1 6 respondents maintained that contrary to the
nding of the Labor Arbiter, their work was indispensable to the principal business of
petitioner. Respondents supported their claim with copies of the Delivery Agreement 1 7
between petitioner and TRMD Incorporated, stating that petitioner was "engaged in the
manufacture, distribution and sale of soft drinks and other related products with
various plants and sales o ces and warehouses located all over the Philippines."
Moreover, petitioner supplied the tools and equipment used by respondents in their
jobs such as forklifts, pallet, etc. Respondents were also required to work in the
warehouses, sales o ces, and plants of petitioner. Respondents pointed out that, in
contrast, Interserve did not own trucks, pallets cartillas, or any other equipment
necessary in the sale of Coca-Cola products. ASCTac

Respondents further averred in their Memorandum of Appeal that petitioner

exercised control over workers supplied by various contractors. Respondents cited as
an example the case of Raul Arenajo (Arenajo), who, just like them, worked for
petitioner, but was made to appear as an employee of the contractor Peerless
Integrated Services, Inc. As proof of control by petitioner, respondents submitted
copies of: (1) a Memorandum 1 8 dated 11 August 1998 issued by Vicente Dy (Dy), a
supervisor of petitioner, addressed to Arenajo, suspending the latter from work until he
explained his disrespectful acts toward the supervisor who caught him sleeping during
work hours; (2) a Memorandum 1 9 dated 12 August 1998 again issued by Dy to
Arenajo, informing the latter that the company had taken a more lenient and tolerant
position regarding his offense despite having found cause for his dismissal; (3)
Memorandum 2 0 issued by Dy to the personnel of Peerless Integrated Services, Inc.,
requiring the latter to present their timely request for leave or medical certi cates for
their absences; (4) Personnel Workers Schedules, 2 1 prepared by RB Chua, another
supervisor of petitioner; (5) Daily Sales Monitoring Report prepared by petitioner; 2 2
and (6) the Conventional Route System Proposed Set-up of petitioner. 2 3
The NLRC, in a Resolution dated 30 October 2003, a rmed the Labor Arbiter's
Decision dated 28 May 2003 and pronounced that no employer-employee relationship
existed between petitioner and respondents. It reiterated the ndings of the Labor
Arbiter that Interserve was an independent contractor as evidenced by its substantial
assets and registration with the DOLE. In addition, it was Interserve which hired and
paid respondents' wages, as well as paid and remitted their SSS, Medicare, and Pag-
ibig contributions. Respondents likewise failed to convince the NLRC that the
instructions issued and trainings conducted by petitioner proved that petitioner
exercised control over respondents as their employer. 2 4 The dispositive part of the
NLRC Resolution states: 2 5
WHEREFORE, the instant appeal is hereby DISMISSED for lack of merit.
However, respondent Interserve Management & Manpower Resources, Inc., is
hereby ordered to pay the [herein respondents] their pro-rated 13th month pay.

Aggrieved once more, respondents sought recourse with the Court of Appeals by
filing a Petition for Certiorari under Rule 65, docketed as CA-G.R. SP No. 85320. caDTSE

The Court of Appeals promulgated its Decision on 9 February 2007, reversing the
NLRC Resolution dated 30 October 2003. The appellate court ruled that Interserve was
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 a labor-only contractor, with insu cient capital and investments for the services which
it was contracted to perform. With only P510,000.00 invested in its service vehicles and
P200,000.00 in its machineries and equipment, Interserve would be hard-pressed to
meet the demands of daily soft drink deliveries of petitioner in the Lagro area. The
Court Appeals concluded that the respondents used the equipment, tools, and facilities
of petitioner in the day-to-day sales operations.
Additionally, the Court of Appeals determined that petitioner had effective
control over the means and method of respondents' work as evidenced by the Daily
Sales Monitoring Report, the Conventional Route System Proposed Set-up, and the
memoranda issued by the supervisor of petitioner addressed to workers, who, like
respondents, were supposedly supplied by contractors. The appellate court deemed
that the respondents, who were tasked to deliver, distribute, and sell Coca-Cola
products, carried out functions directly related and necessary to the main business of
petitioner. The appellate court nally noted that certain provisions of the Contract of
Service between petitioner and Interserve suggested that the latter's undertaking did
not involve a specific job, but rather the supply of manpower.
The decretal portion of the Decision of the Court of Appeals reads: 2 6
WHEREFORE , the petition is GRANTED . The assailed Resolutions of
public respondent NLRC are REVERSED and SET ASIDE . The case is remanded
to the NLRC for further proceedings.

Petitioner led a Motion for Reconsideration, which the Court of Appeals denied
in a Resolution, dated 31 August 2007. 2 7
Hence, the present Petition, in which the following issues are raised: 2 8
I

WHETHER OR NOT THE COURT OF APPEALS ACTED IN ACCORDANCE WITH

EVIDENCE ON RECORD, APPLICABLE LAWS AND ESTABLISHED
JURISPRUDENCE WHEN IT RULED THAT INTERSERVE IS A LABOR-ONLY
CONTRACTOR; IHEAcC

II
WHETHER OR NOT THE COURT OF APPEALS ACTED IN ACCORDANCE WITH
APPLICABLE LAWS AND ESTABLISHED JURISPRUDENCE WHEN IT CONCLUDED
THAT RESPONDENTS PERFORMED WORK NECESSARY AND DESIRABLE TO
THE BUSINESS OF [PETITIONER];

III
WHETHER OR NOT THE COURT OF APPEALS COMMITTED SERIOUS ERROR
WHEN IT DECLARED THAT RESPONDENTS WERE EMPLOYEES OF [PETITIONER],
EVEN ABSENT THE FOUR ELEMENTS INDICATIVE OF AN EMPLOYMENT
RELATIONSHIP; AND
IV
WHETHER OR NOT THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT
CONCLUDED THAT INTERSERVE WAS ENGAGED BY [PETITIONER] TO SUPPLY
MANPOWER ONLY.

The Court ascertains that the fundamental issue in this case is whether
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 Interserve is a legitimate job contractor. Only by resolving such issue will the Court be
able to determine whether an employer-employee relationship exists between
petitioner and the respondents. To settle the same issue, however, the Court must
necessarily review the factual ndings of the Court of Appeals and look into the
evidence presented by the parties on record.
As a general rule, factual ndings of the Court of Appeals are binding upon the
Supreme Court. One exception to this rule is when the factual ndings of the former are
contrary to those of the trial court, or the lower administrative body, as the case may
be. This Court is obliged to resolve an issue of fact herein due to the incongruent
findings of the Labor Arbiter and the NLRC and those of the Court of Appeals. 2 9
The relations which may arise in a situation, where there is an employer, a
contractor, and employees of the contractor, are identi ed and distinguished under
Article 106 of the Labor Code: cHESAD

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 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

employee 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 persons 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.

The afore-quoted provision recognizes two possible relations among the parties:
(1) the permitted legitimate job contract, or (2) the prohibited labor-only contracting.
A legitimate job contract, wherein an employer enters into a contract with a job
contractor for the performance of the former's work, is permitted by law. Thus, the
employer-employee relationship between the job contractor and his employees is
maintained. In legitimate job contracting, the law creates an employer-employee
relationship between the employer and the contractor's employees only for a limited
purpose, i.e., to ensure that the employees are paid their wages. The employer
becomes jointly and severally liable with the job contractor only for the payment of the
employees' wages whenever the contractor fails to pay the same. Other than that, the
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 employer is not responsible for any claim made by the contractor's employees. 3 0 TIHDAa

On the other hand, labor-only contracting is an arrangement wherein the

contractor merely acts as an agent in recruiting and supplying the principal employer
with workers for the purpose of circumventing labor law provisions setting down the
rights of employees. It is not condoned by law. A nding by the appropriate authorities
that a contractor is a "labor-only" contractor establishes an employer-employee
relationship between the principal employer and the contractor's employees and the
former becomes solidarily liable for all the rightful claims of the employees. 3 1
Section 5 of the Rules Implementing Articles 106-109 of the Labor Code, as
amended, provides the guidelines in determining whether labor-only contracting exists:
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 [is] 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 the
performance of the work of the contractual employee.
The foregoing provisions shall be without prejudice to the application of
Article 248(C) of the Labor Code, as amended.
"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. AIaSTE

The "right to control" shall refer to the right reversed * 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 supplied.)
When there is labor-only contracting, Section 7 of the same implementing rules
describes the consequences thereof:
Section 7. Existence of an employer-employee relationship. — The
contractor or subcontractor shall be considered the employer of the contractual
employee for purposes of enforcing the provisions of the Labor Code and other
social legislation. The principal, however, shall be solidarily liable with the
contractor in the event of any violation of any provision of the Labor Code,
including the failure to pay wages.
The principal shall be deemed the employer of the contractual employee in
any of the following case, as declared by a competent authority:
a. where there is labor-only contracting; or

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 b. where the contracting arrangement falls within the
prohibitions provided in Section 6 (Prohibitions) hereof.

According to the foregoing provision, labor-only contracting would give rise to:
(1) the creation of an employer-employee relationship between the principal and the
employees of the contractor or sub-contractor; and (2) the solidary liability of the
principal and the contractor to the employees in the event of any violation of the Labor
Code.
Petitioner argues that there could not have been labor-only contracting, since
respondents did not perform activities that were indispensable to petitioner's principal
business. And, even assuming that they did, such fact alone does not establish an
employer-employee relationship between petitioner and the respondents, since
respondents were unable to show that petitioner exercised the power to select and hire
them, pay their wages, dismiss them, and control their conduct. caIEAD

The argument of petitioner is untenable.

The law clearly establishes an employer-employee relationship between the
principal employer and the contractor's employee upon a nding that the contractor is
engaged in "labor-only" contracting. Article 106 of the Labor Code categorically states:
"There is 'labor-only' contracting where the person supplying workers to an employee
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 persons are performing activities which are directly related to the principal
business of such employer." Thus, performing activities directly related to the principal
business of the employer is only one of the two indicators that "labor-only" contracting
exists; the other is lack of substantial capital or investment. The Court nds that both
indicators exist in the case at bar.
Respondents worked for petitioner as salesmen, with the exception of
respondent Gil Francisco whose job was designated as leadman. In the Delivery
Agreement 3 2 between petitioner and TRMD Incorporated, it is stated that petitioner is
engaged in the manufacture, distribution and sale of softdrinks and other related
products. The work of respondents, constituting distribution and sale of Coca-Cola
products, is clearly indispensable to the principal business of petitioner. The repeated
re-hiring of some of the respondents supports this nding. 3 3 Petitioner also does not
contradict respondents' allegations that the former has Sales Departments and Sales
O ces in its various o ces, plants, and warehouses; and that petitioner hires Regional
Sales Supervisors and District Sales Supervisors who supervise and control the
salesmen and sales route helpers. 3 4
As to the supposed substantial capital and investment required of an
independent job contractor, petitioner calls the attention of the Court to the authorized
capital stock of Interserve amounting to P2,000,000.00. 3 5 It cites as authority Filipinas
Synthetic Fiber Corp. v. National Labor Relations Commission 3 6 and Frondozo v.
National Labor Relations Commission, 3 7 where the contractors' authorized capital
stock of P1,600,000.00 and P2,000,000.00, respectively, were considered substantial
for the purpose of concluding that they were legitimate job contractors. Petitioner also
refers to Neri v. National Labor Relations Commission 3 8 where it was held that a
contractor ceases to be a labor-only contractor by having substantial capital alone,
without investment in tools and equipment. ICDSca

This Court is unconvinced.

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 At the outset, the Court clari es that although Interserve has an authorized
capital stock amounting to P2,000,000.00, only P625,000.00 thereof was paid up as of
31 December 2001. The Court does not set an absolute gure for what it considers
substantial capital for an independent job contractor, but it measures the same against
the type of work which the contractor is obligated to perform for the principal.
However, this is rendered impossible in this case since the Contract between petitioner
and Interserve does not even specify the work or the project that needs to be
performed or completed by the latter's employees, and uses the dubious phrase "tasks
and activities that are considered contractible under existing laws and regulations".
Even in its pleadings, petitioner carefully sidesteps identifying or describing the exact
nature of the services that Interserve was obligated to render to petitioner. The
importance of identifying with particularity the work or task which Interserve was
supposed to accomplish for petitioner becomes even more evident, considering that
the Articles of Incorporation of Interserve states that its primary purpose is to operate,
conduct, and maintain the business of janitorial and allied services. 3 9 But respondents
were hired as salesmen and leadman for petitioner. The Court cannot, under such
ambiguous circumstances, make a reasonable determination if Interserve had
substantial capital or investment to undertake the job it was contracting with petitioner.
Petitioner cannot seek refuge in Neri v. National Labor Relations Commission .
Unlike in Neri, petitioner was unable to prove in the instant case that Interserve had
substantial capitalization to be an independent job contractor. In San Miguel
Corporation v. MAERC Integrated Services, Inc., 4 0 therein petitioner San Miguel
Corporation similarly invoked Neri, but was rebuffed by the Court based on the
following ratiocination: 4 1
Petitioner also ascribes as error the failure of the Court of Appeals to apply
the ruling in Neri v. NLRC. In that case, it was held that the law did not require one
to possess both substantial capital and investment in the form of tools,
equipment, machinery, work premises, among others, to be considered a job
contractor. The second condition to establish permissible job contracting was
sufficiently met if one possessed either attribute.
Accordingly, petitioner alleged that the appellate court and the NLRC erred
when they declared MAERC a labor-only contractor despite the nding that
MAERC had investments amounting to P4,608,080.00 consisting of buildings,
machinery and equipment. CDAEHS

However, in Vinoya v. NLRC, we clari ed that it was not enough to show

substantial capitalization or investment in the form of tools, equipment,
machinery and work premises, etc., to be considered an independent contractor. In
fact, jurisprudential holdings were to the effect that in determining the existence
of an independent contractor relationship, several factors may be considered,
such as, but not necessarily con ned to, whether the contractor was carrying on
an independent business; the nature and extent of the work; the skill required; the
term and duration of the relationship; the right to assign the performance of
speci ed pieces of work; the control and supervision of the workers; the power of
the employer with respect to the hiring, ring and payment of the workers of the
contractor; the control of the premises; the duty to supply premises, tools,
appliances, materials and labor; and the mode, manner and terms of payment.

In Neri, the Court considered not only the fact that respondent Building
Care Corporation (BCC) had substantial capitalization but noted that BBC carried
on an independent business and performed its contract according to its own
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 manner and method, free from the control and supervision of its principal in all
matters except as to the results thereof. The Court likewise mentioned that the
employees of BCC were engaged to perform speci c special services for their
principal. The status of BCC had also been passed upon by the Court in a
previous case where it was found to be a quali ed job contractor because it was
a "big rm which services among others, a university, an international bank, a big
local bank, a hospital center, government agencies, etc." Furthermore, there were
only two (2) complainants in that case who were not only selected and hired by
the contractor before being assigned to work in the Cagayan de Oro branch of
FEBTC but the Court also found that the contractor maintained effective
supervision and control over them.

Thus, in San Miguel Corporation, the investment of MAERC, the contractor

therein, in the form of buildings, tools, and equipment of more than P4,000,000.00 did
not impress the Court, which still declared MAERC to be a labor-only contractor. In
another case, Dole Philippines, Inc. v. Esteva, 4 2 the Court did not recognize the
contractor therein as a legitimate job contractor, despite its paid-up capital of over
P4,000,000.00, in the absence of substantial investment in tools and equipment used in
the services it was rendering. ATHCDa

Insisting that Interserve had substantial investment, petitioner assails, for being
purely speculative, the nding of the Court of Appeals that the service vehicles and
equipment of Interserve, with the values of P510,000.00 and P200,000.00, respectively,
could not have met the demands of the Coca-Cola deliveries in the Lagro area.
Yet again, petitioner fails to persuade.
The contractor, not the employee, has the burden of proof that it has the
substantial capital, investment, and tool to engage in job contracting. 4 3 Although not
the contractor itself (since Interserve no longer appealed the judgment against it by the
Labor Arbiter), said burden of proof herein falls upon petitioner who is invoking the
supposed status of Interserve as an independent job contractor. Noticeably, petitioner
failed to submit evidence to establish that the service vehicles and equipment of
Interserve, valued at P510,000.00 and P200,000.00, respectively, were su cient to
carry out its service contract with petitioner. Certainly, petitioner could have simply
provided the courts with records showing the deliveries that were undertaken by
Interserve for the Lagro area, the type and number of equipment necessary for such
task, and the valuation of such equipment. Absent evidence which a legally compliant
company could have easily provided, the Court will not presume that Interserve had
su cient investment in service vehicles and equipment, especially since respondents'
allegation — that they were using equipment, such as forklifts and pallets belonging to
petitioner, to carry out their jobs — was uncontroverted.
In sum, Interserve did not have substantial capital or investment in the form of
tools, equipment, machineries, and work premises; and respondents, its supposed
employees, performed work which was directly related to the principal business of
petitioner. It is, thus, evident that Interserve falls under the de nition of a "labor-only"
contractor, under Article 106 of the Labor Code; as well as Section 5 (i) of the Rules
Implementing Articles 106-109 of the Labor Code, as amended.
The Court, however, does not stop at this nding. It is also apparent that
Interserve is a labor-only contractor under Section 5 (ii) 4 4 of the Rules Implementing
Articles 106-109 of the Labor Code, as amended, since it did not exercise the right to
control the performance of the work of respondents.
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 The lack of control of Interserve over the respondents can be gleaned from the
Contract of Services between Interserve (as the CONTRACTOR) and petitioner (as the
CLIENT), pertinent portions of which are reproduced below:
WHEREAS, the CONTRACTOR is engaged in the business, among others, of
performing and/or undertaking, managing for consideration, varied projects, jobs
and other related management-oriented services; DEcTIS

WHEREAS, the CONTRACTOR warrants that it has the necessary capital,

expertise, technical know-how and a team of professional management group
and personnel to undertake and assume the responsibility to carry out the above
mentioned project and services;

WHEREAS, the CLIENT is desirous of utilizing the services and facilities of

the CONTRACTOR for emergency needs, rush jobs, peak product loads, temporary,
seasonal and other special project requirements the extent that the available work
of the CLIENT can properly be done by an independent CONTRACTOR permissible
under existing laws and regulations;

WHEREAS, the CONTRACTOR has offered to perform speci c jobs/works

at the CLIENT as stated heretofore, under the terms and conditions herein stated,
and the CLIENT has accepted the offer.
NOW THEREFORE, for and in consideration of the foregoing premises and
of the mutual covenants and stipulations hereinafter set forth, the parties have
hereto have stated and the CLIENT has accepted the offer:
1. The CONTRACTOR agrees and undertakes to perform and/or
provide for the CLIENT, on a non-exclusive basis for tasks or activities that
are considered contractible under existing laws and regulations, as may be
needed by the CLIENT from time to time.
2. To carry out the undertakings speci ed in the immediately
preceding paragraph, the CONTRACTOR shall employ the necessary
personnel like Route Helpers, Salesmen, Drivers, Clericals, Encoders & PD
who are at least Technical/Vocational courses graduates provided with
adequate uniforms and appropriate identification cards, who are warranted
by the CONTRACTOR to be so trained as to e ciently, fully and speedily
accomplish the work and services undertaken herein by the CONTRACTOR.
The CONTRACTOR represents that its personnel shall be in such number
as will be su cient to cope with the requirements of the services and work
herein undertaken and that such personnel shall be physically t, of good
moral character and has not been convicted of any crime. The CLIENT,
however, may request for the replacement of the CONTRACTOR'S
personnel if from its judgment, the jobs or the projects being done could
not be completed within the time speci ed or that the quality of the desired
result is not being achieved. DAHSaT

3. It is agreed and understood that the CONTRACTOR'S

personnel will comply with CLIENT, CLIENT'S policies, r ules and
regulations and will be subjected on-the-spot search by CLIENT, CLIENT'S
duly authorized guards or security men on duty every time the assigned
personnel enter and leave the premises during the entire duration of this
agreement.
4. The CONTRACTOR further warrants to make available at
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 times relievers and/or replacements to ensure continuous and
uninterrupted service as in the case of absences of any personnel above
mentioned, and to exercise the necessary and due supervision over the
work of its personnel. 4 5

Paragraph 3 of the Contract speci ed that the personnel of contractor

Interserve, which included the respondents, would comply with "CLIENT" as well as
"CLIENT's policies, rules and regulations". It even required Interserve personnel to
subject themselves to on-the-spot searches by petitioner or its duly authorized guards
or security men on duty every time the said personnel entered and left the premises of
petitioner. Said paragraph explicitly established the control of petitioner over the
conduct of respondents. Although under paragraph 4 of the same Contract, Interserve
warranted that it would exercise the necessary and due supervision of the work of its
personnel, there is a dearth of evidence to demonstrate the extent or degree of
supervision exercised by Interserve over respondents or the manner in which it was
actually exercised. There is even no showing that Interserve had representatives who
supervised respondents' work while they were in the premises of petitioner. ScaCEH

Also signi cant was the right of petitioner under paragraph 2 of the Contract to
"request the replacement of the CONTRACTOR'S personnel". True, this right was
conveniently quali ed by the phrase "if from its judgment, the jobs or the projects being
done could not be completed within the time speci ed or that the quality of the desired
result is not being achieved", but such quali cation was rendered meaningless by the
fact that the Contract did not stipulate what work or job the personnel needed to
complete, the time for its completion, or the results desired. The said provision left a
gap which could enable petitioner to demand the removal or replacement of any
employee in the guise of his or her inability to complete a project in time or to deliver
the desired result. The power to recommend penalties or dismiss workers is the
strongest indication of a company's right of control as direct employer. 4 6
Paragraph 4 of the same Contract, in which Interserve warranted to petitioner
that the former would provide relievers and replacements in case of absences of its
personnel, raises another red ag. An independent job contractor, who is answerable to
the principal only for the results of a certain work, job, or service need not guarantee to
said principal the daily attendance of the workers assigned to the latter. An
independent job contractor would surely have the discretion over the pace at which the
work is performed, the number of employees required to complete the same, and the
work schedule which its employees need to follow.
As the Court previously observed, the Contract of Services between Interserve
and petitioner did not identify the work needed to be performed and the nal result
required to be accomplished. Instead, the Contract speci ed the type of workers
Interserve must provide petitioner ("Route Helpers, Salesmen, Drivers, Clericals,
Encoders & PD") and their quali cations (technical/vocational course graduates,
physically t, of good moral character, and have not been convicted of any crime). The
Contract also states that, "to carry out the undertakings speci ed in the immediately
preceding paragraph, the CONTRACTOR shall employ the necessary personnel", thus,
acknowledging that Interserve did not yet have in its employ the personnel needed by
petitioner and would still pick out such personnel based on the criteria provided by
petitioner. In other words, Interserve did not obligate itself to perform an identi able
job, work, or service for petitioner, but merely bound itself to provide the latter with
speci c types of employees. These contractual provisions strongly indicated that
Interserve was merely a recruiting and manpower agency providing petitioner with
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 workers performing tasks directly related to the latter's principal business. aDACcH

The certi cation issued by the DOLE stating that Interserve is an independent job
contractor does not sway this Court to take it at face value, since the primary purpose
stated in the Articles of Incorporation 4 7 of Interserve is misleading. According to its
Articles of Incorporation, the principal business of Interserve is to provide janitorial and
allied services. The delivery and distribution of Coca-Cola products, the work for which
respondents were employed and assigned to petitioner, were in no way allied to
janitorial services. While the DOLE may have found that the capital and/or investments
in tools and equipment of Interserve were su cient for an independent contractor for
janitorial services, this does not mean that such capital and/or investments were
likewise su cient to maintain an independent contracting business for the delivery and
distribution of Coca-Cola products.
With the nding that Interserve was engaged in prohibited labor-only contracting,
petitioner shall be deemed the true employer of respondents. As regular employees of
petitioner, respondents cannot be dismissed except for just or authorized causes, none
of which were alleged or proven to exist in this case, the only defense of petitioner
against the charge of illegal dismissal being that respondents were not its employees.
Records also failed to show that petitioner afforded respondents the twin requirements
of procedural due process, i.e., notice and hearing, prior to their dismissal. Respondents
were not served notices informing them of the particular acts for which their dismissal
was sought. Nor were they required to give their side regarding the charges made
against them. Certainly, the respondents' dismissal was not carried out in accordance
with law and, therefore, illegal. 4 8
Given that respondents were illegally dismissed by petitioner, they are entitled to
reinstatement, full backwages, inclusive of allowances, and to their other bene ts or the
monetary equivalents thereof computed from the time their compensations were
withheld from them up to the time of their actual reinstatement, as mandated under
Article 279 of the Labor Code. CaHcET

IN VIEW OF THE FOREGOING, the instant Petition is DENIED. The Court AFFIRMS
WITH MODIFICATION the Decision dated 19 February 2007 of the Court of Appeals in
CA-G.R. SP No. 85320. The Court DECLARES that respondents were illegally dismissed
and, accordingly, ORDERS petitioner to reinstate them without loss of seniority rights,
and to pay them full back wages computed from the time their compensation was
withheld up to their actual reinstatement. Costs against the petitioner.
SO ORDERED.
Ynares-Santiago, Austria-Martinez, Nachura and Peralta, JJ., concur.

Footnotes
1. Penned by Associate Justice Rosalinda Asuncion-Vicente with Associate Justices Elvi
John S. Asuncion and Enrico M. Lanzanas, concurring. Rollo, pp. 57-69.
IAETDc

2. Rollo, pp. 152-157.

3. Id. at 236-242.
4. CA rollo, pp. 55-69.

5. Id. at 71-76.
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 6. Id. at 78-87.
7. Id. at 88.
8. Id. at 89-93.
9. Id. at 131.
10. Id. at 94, 97, 100, 103, 106, 109. Only six Personal Data Files were attached to the
Position Paper. Personal Data Files of two of the respondents, Alfonso Paa, Jr. and
Edwin Golez, were not submitted.
11. Id. at 95-96, 98-99, 101-102, 104-405, 107-108, 110-111. Only six Contracts of
Temporary Employment were attached to the Position Paper. The Contracts for
Temporary Employment of two of the respondents, Alfonso Paa, Jr. and Edwin Golez,
were not submitted.

12. Id. at 112-130.

13. Id. at 66-69.
14. Rollo, pp. 134-149.
15. Id. at 149-150.
16. CA rollo, pp. 150-170. ASETHC

17. Id. at 186.

18. Id. at 193.
19. Id. at 194.
20. Id. at 195.
21. Id. at 201-202.
22. Id. at 196.
23. Id. at 197.
24. Rollo, pp. 152-156.
25. Id. at 156.
26. Id. at 57-68.
27. CA rollo, pp. 456-457.
28. Rollo, p. 330.
29. Filipinas Pre-Fabricated Building Systems (Filsystems), Inc. v. Puente, G.R. No. 153832,
18 March 2005, 453 SCRA 820, 826.
30. San Miguel Corporation v. MAERC Integrated Services, Inc., 453 Phil. 543, 566-567
(2003). cDHAaT

31. Id. at 567.

32. Rollo, p. 199.
33. Based on respondents' Personal Data files, which were kept by Interserve, respondent
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 Regolo Oca worked in Coca-Cola in September 2000 as a salesman and his contract was
renewed three more times until he was dismissed in April 2002. Respondent Ernesto
Alario worked in Coca-Cola in October 2001, and his contract was renewed one more
time before his dismissal in April 2002. Respondent Gil Francisco worked in Coca-cola
as a Driver on August 1998 and later on as leadman in December 1998, and his contract
was renewed until he was dismissed in April 2002. Respondent Arvin Urquia worked as a
salesman in Coca-Cola in October 2001, and his contract was renewed in February 2002
until he was dismissed in April 2002. Lastly, respondent Alan Agito worked in Coca-Cola
as salesman in May 2002, and his contract was renewed until he was dismissed in April
2002. (CA rollo, pp. 94, 97, 100, 103, 106, and 109.)
34. Rollo, p. 283.
35. Id. at 331-338.
36. 327 Phil. 144 (1996).
37. CA-G.R. SP No. 102442, 30 May 2008.

38. G.R. Nos. 97008-09, 23 July 1993, 224 SCRA 717.

39. CA rollo, p. 78.

40. Supra note 30.

41. Id. at 564-566.
42. G.R. No. 161115, 30 November 2006, 509 SCRA 332, 353 and 377.

43. Aboitiz Haulers, Inc. v. Dimapatoi, G.R. No. 148619, 19 September 2006, 502 SCRA 271,
289; Guarin v. National Labor Relations Commission, G.R. No. 86010, 3 October 1989,
178 SCRA 267, 273. cdtai

44. According to Section 5 of the Rules Implementing Articles 106-109, as amended:

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 [is] 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 the performance of the work of
the contractual employee.
The use of the words "any" and "or" in the foregoing provision means that the elements
of labor-only contracting identified therein need not exist concurrently. The existence of
one element is sufficient to establish labor-only contracting.

45. Rollo, pp. 74-75.

46. Brotherhood Labor Unity Movement of the Philippines v. Zamora, G.R. No. L-48645, 7
January 1987, 147 SCRA 49, 59.

47. CA rollo, p. 78.

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 48. Abesco Construction and Development Corporation v. Ramirez, G.R. No. 141168, 10
April 2006, 487 SCRA 9, 15; Grandspan Development Corporation v. Bernardo, G.R. No.
141464, 21 September 2005, 470 SCRA 461, 470; Raycor Aircontrol Systems, Inc. v.
National Labor Relations Commission, 330 Phil. 306, 334 (1996).

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