Labor Law Review

2nd S, 2020-21

Bar Questions On
Contracting Out

Atty. PFFallar Jr
SSCRM-Co

1.Empire Brands (Empire) contracted the services of Style Corporation (Style) for the
marketing and promotion of its clothing line. Under the contract, Style provided Empire
with Trade Merchandising Representatives (TMRs) whose services began on
September 15, 2004 and ended on June 6, 2007, when Empire terminated the
promotions contract with Style.

Empire then entered into an agreement for manpower supply with Wave Human
Resources (Wave). Wave owns its condo office, owns equipment for the use by the
TMRs, and has assets amounting to Pl,000,000.00. Wave provided the supervisors who
supervised the TMRs, who, in tum, received orders from the Marketing Director of
Empire. In their agreement, the parties stipulated that Wave shall be liable for the
wages and salaries of its employees or workers, including benefits, and protection due
them, as well as remittance to the proper government entities of all withholding taxes,
Social Security Service, and Philhealth premiums, in accordance with relevant laws.

As the TMRs wanted to continue working at Empire, they submitted job applications as
TMRs with Wave. Consequently, Wave hired them for a term of five (5) months, or from
June 7, 2007 to November 6, 2007, specifically to promote Empire's products.

When the TMRs' 5-month contracts with Wave were about to expire, they sought
renewal thereof, but were refused. Their contracts with Wave were no longer renewed
as Empire hired another agency. This prompted them to file complaints for illegal
dismissal, regularization, non-payment of service incentive leave and 13th month pay
against Empire and Wave.

Are the TMRs employees of Empire?

ANSWER: Yes. From the time Empire contracted the services of Style, both engaged in
labor-only contracting. In BPI Employees Union-Davao City- FUBU v. BPI, (G.R. No.
174912, July 24, 2013), it was ruled that where any of the following elements is present,
there is laboronly contracting: (1) 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 (2) The contractor, does not exercise the right to control over the
performance of the work of the contractual employee. The first element is present
herein, as Style has no substantial capital or investment in engaging in the supply of
services contracted out by Empire which is directly related to the marketing and
promotion of its clothing line. The second element is present as it is inevitable for
Empire to direct the activities of the TMRs to properly market and promote its product
line. The subsequent contract of Empire with Wave did not affect the regular
employment of the TMRs with Empire as, through the Marketing Director of Empire, the
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TMRs were under the control of Empire. Thus, the five-month employment contract
entered into by the TMRs with Wave did not divest them of their regular employment
status with Empire. In addition, such scheme undermined the security of tenure of the
TMRs which is constitutionally guaranteed, hence, the contract of the TMRs with Wave
is void ad initio.

2.Star Crafts is a lantern maker based in Pampanga. It supplies Christmas lanterns to

stores in Luzon, Metro Manila, and parts of Visayas, with the months of August to
November being the busiest months. Its factory employs a workforce of 2,000 workers
who make different lanterns daily for the whole year. Because of increased demand,
Star Crafts entered into a contractual arrangement with People Plus, a service
contractor, to supply the former with I 00 workers for only 4 months, August to
November, at a rate different from what they pay their regular employees. The contract
with People Plus stipulates that all equipment and raw materials will be supplied by Star
Crafts with the express condition that the workers cannot take any of the designs home
and must complete their tasks within the premises of Star Crafts.

Is there an employer-employee relationship between Star Crafts and the 100 workers
from People Plus? Explain.

ANSWER: Yes. People Plus is a labor-only-contractor because it is not substantially

capitalized. Neither does it carry on an independent business in which it uses its own
investment in the form of tools, equipment, machineries or work premises. Hence, it is
just an agent or recruiter of workers who perform work directly related to the trade of
Star Crafts. Since both the essential element and the conforming element of labor-only
contracting are present, Star Crafts becomes the employer of the supplied worker. As
principal, Star Crafts will always be an employer in relation to the workers supplied by
its contractor. Its status as employer is either direct or indirect depending on whether
the contractor is legitimate or not. Thus even if People Plus were a legitimate job
contractor, still Star Crafts will be treated as a statutory employer for purposes of paying
the workers’ unpaid wages and benefits.

3. Constant Builders, an independent contractor, was charged with illegal dismissal and
non-payment of wages and benefits of ten dismissed employees. The complainants
impleaded as co-respondent Able Company, Constant Builder's principal in the
construction of Able's office building. The complaint demanded that Constant and Able
be held solidarily liable for the payment of their backwages, separation pay, and all their
unpaid wages and benefits.

If the Labor Arbiter rules in favor of the complainants, what are the extent of the
liabilities of Constant and Able?

ANSWER: Constant and Able should be held solidarily liable for the unpaid wages and
benefits, as well as backwages and separation pay, based on Article 109 of the Labor
Code which provides that "every employer or indirect employer shall be held
responsible with his contractor or subcontractor for any violation of any provision of this
Code.

4. Reach-All, a marketing firm with operating capital of P100,000, supplied sales

persons to pharmaceutical companies to promote their products in hospitals and
doctors' offices. Reach-All trained these sales persons in the art of selling but it is the

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client companies that taught them the pharmacological qualities of their products.
Reach-All’s roving supervisors monitored, assessed, and supervised their work
performance. Reach-All directly paid their salaries out of contractor's fees it received.
Under the circumstances, can the sales persons demand that they be absorbed as
employees of the pharmaceutical firms?

ANSWER: No, they are Reach-All‘s employees since it has control over their work
performance.

5. Tower Placement Agency supplies manpower to Lucas Candy Factory to do work

usually necessary for work done at its factory. After working there for more than two
years under the factory manager’s supervision, the workers demanded that Lucas
Candy extend to them the same employment benefits that their directly hired workers
enjoyed. Is their demand valid?

ANSWER: Yes, since it was Lucas that actually hired and supervised them to work at
its factory.

6.Jolli-Mac Restaurant Company (Jolli-Mac) owns and operates the largest food chain
in the country. It engaged Matiyaga Manpower Services, Inc. (MMSI), a job contractor
registered with the Department of Labor and Employment, to provide its restaurants the
necessary personnel, consisting of cashiers, motorcycle delivery boys and food servers,
in its operations. The Service Agreement warrants, among others, that MMSI has a
paid- up capital of P2,000,000.00; that it would train and determine the qualification and
fitness of all personnel to be assigned to Jolli- Mac; that it would provide these
personnel with proper Jolli-Mac uniforms; and that it is exclusively responsible to these
personnel for their respective salaries and all other mandatory statutory benefits.

After the contract was signed, it was revealed, based on research conducted, that MMSI
had no other clients except Jolli- Mac, and one of its major owners was a member of the
Board of Directors of Jolli-Mac.

a. Is the Service Agreement between Jolli-Mac and MMSI legal and valid? Why
or why not?

ANSWER: No, it is not legal and valid because MMSI is engaged in labor-
only contracting. For one, the workers supplied by MMSI to Jolli-Mac are
performing services which are directly related to the principal business of
JolliMac. This is so because the duties performed by the workers are integral
steps in or aspects of the essential operations of the principal. For another,
MMSI was organized by JolliMac itself to supply its personnel requirements

b If the cashiers, delivery boys and food servers are not paid their lawful salaries,
including overtime pay, holiday pay, 13th month pay, and service incentive leave pay,
against whom may these workers file their claims? Explain.

ANSWER: It may file the claim against MMSI because it is the contractor and according
to jurisprudence, the contractors and the employees are the ones who have an
employee-employer relationship and not the principal.

7.The Pizza Corporation (PizCorp) and Ready Supply Cooperative (RSC) entered into a
"service agreement" where RSC in consideration of service fees to be paid by PizCorp's

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will exclusively supply PizCorp with a group of RSC motorcycle-owning cooperative
members who will henceforth perform PizCorp's pizza delivery service. RSC assumes
under the agreement --- full obligation for the payment of the salaries and other
statutory monetary benefits of its members deployed to PizCorp. The parties also
stipulated that there shall be no employer-employee relationship between PizCorp and
the RSC members. However, if PizCorp is materially prejudiced by any act of the
delivery impose disciplinary sanctions on, including the power to dismiss, the erring
RSC member/s.

a. Is the contractual stipulation that there is no employer-employee relationship

binding on labor officials?

ANSWER: No because what is binding is not the designation on the contract but the
nature of the contract itself.

b. Based on the test/s for employer-employee relationship, determine the issue

of who is the employer of the RSC members?.

ANSWER: The employer of the RSC is PizCorp. The four-fold test in determining
employer-employee relationship is as follows: (1) The selection and engagement of the
employees; (2) The payment of wages; (3) The power of dismissal; and (4) The power
of control the employee‘s conduct. Of the above, the power of control over the
employees‘ conduct is the most

c. Assume that RSC has a paid-up capitalization of P5,000.000.00 is RSC

engaged in "labor only" contracting, permissible job contracting or simply,
recruitment?

ANSWER: It is a labor-only contracting entity because it assumed the obligation of

paying the benefits and salaries of the employees without considering perchance that
they are employees of PizCorp.

8. Asia Security & Investigation Agency (ASIA) executed a one-year contract with the
Baron Hotel (BARON) for the former to provide the latter with 20 security guards to
safeguard the persons and belongings of hotel guests, employees, and others . The
security guards filled up Baron application form and submitted the executed forms
directly to the Security Department of Baron. The pay slips of the security guards bore
Baron's logo and showed that Baron deducted therefrom the amounts for SSS
premiums, Philhelath contributions and withholding taxes. Assignments of security
guards, who should be on duty or on call, promotions, suspensions, dismissals and
award citations for meritorious services were all done upon approval by Baron􏰀s chief
Security officer.

After the expiration of the contract with Asia, Baron did not renew the same and instead
executed another contract for-security services with another agency. Asia placed the
affected security guards on floating status" on "no work no pay" basis. Having been
displaced from work, the Asia security guards filed a case [ with the Labor Arbiter's
Office] against the Baron Hotel for illegal dismissal, overtime pay, minimum wage
differentials, vacation leave and sick leave benefits, and 13th month pay.

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Baron Hotel denied liability alleging that Asia is the employer of the security guards and
therefore, their complaint for illegal dismissal and payment of money claims should be
directed against Asia. Nevertheless, Baron filed a Third Party Complaint against Asia.

a. Is there an employer-employee relationship between the Baron Hotel, on one

hand, and the Asia security guards, on the other hand? Explain briefly.

ANSWER: As a general rule, the security guards of a private security guard agency are
the employees of the latter and not of the establishment that has entered into a contract
with the private security guard agency for security services. But under the facts in the
question, Baron Hotel appear to have hired the security guards, to have paid their
wages, to have the power to promote, suspend or dismiss the security guards and the
power of control over them, namely, the security guards were under orders of Baron
Hotel as regard their employment. Because of the above-mentioned circumstances,
Baron Hotel is the employer of the security guards.

b. Assuming that ASIA is the employer, is the act of ASIA in placing the security
guards on "floating status" lawful? Why? (2%)

ANSWER: It is lawful for a private security guard agency to place its security guard on a
“floating status” if it has no assignment to give to said security guards. But if the security
guards are placed on a “floating status” for more than six (6) months, the security
guards may consider themselves as having been dismissed.

c. May the Labor Arbiter entertain the third party complaint?

ANSWER: Yes, the third party complaint of Baron may be entertained.