G.R. No.

78713             February 27, 1991

CAILO/HENRY DEFERIA, EDDIE NORICO, FLORENTINO DE PAULA, CARLOS PACHECO,

HERNANI DEFERIA, EDWIN NORICO, CRISTOBAL MORADAS, JOSE RABALA, LORETA
PADASAS, CELESTINA MASION, ELISA BAYOT, CIRIACA NICOR, NENITA MORADAS,
ANTONIA MIRASOL, ROSARIO CAMARITE, LEOPOLDO SUALA, DELIA VALENTE, VENUS
GUARRA, MERCEDES GUARRA and MARY-ANN AGATO, petitioners,
vs.
NATIONAL LABOR RELATIONS COMMISSION and ERMA INDUSTRIES, INC. ERNESTO
MARCELO, respondents.

G.R. No. 82718             February 27, 1991

CAILO/EDDIE NORICO, FLORENTINO DE PAULA, CARLOS PACHECO, HERNANI DEFERIA,

EDWIN NORICO, CRISTOBAL MORADAS, JOSE RABALA, LORETA PADASAS, CELESTINA
MASION, ELISA BAYOT, CIRIACA NICOR, NENITA MORADAS, ANTONIA MIRASOL, ROSARIO
CAMARITE, LEOPOLDO SUALA, DELIA VALENTE, VENUS GUARRA, MERCEDES GUARRA,
and MARY-ANN AGATO, petitioners,
vs.
NATIONAL LABOR RELATIONS COMMISSION, ERMA INDUSTRIES, INC., ERNESTO
MARCELO, President and CIRILO UNDAN, Manager, respondents

Artemio A. Treyes for petitioners.

Torres, Valencia, Ciocon, Dabao, Valencia & De la Paz Law
Offices for Erma Industries, Inc.

SARMIENTO, J.:

The existence of an employer-employee relationship and the determination of the liability of an

indirect employer are the common issues of these two consolidated petitions for certiorari.

In G.R. No. 78713, a petition involving the alleged violation of labor standard laws, the National
Labor Relations Commission (NLRC), affirming the Decision of the Labor Arbiter, ruled in its assailed
Resolution  dated January 8, 1987 that no employer-employee relationship existed between the
1

petitioners and the private respondents.

In G.R. No. 82718, a petition involving charges of unfair labor practices against the private
respondents, the laid Commission in a Resolution  dated August 31, 1987 reiterated the lack of
2

employer-employee relationship between the said parties. The motions for reconsideration filed by
the petitioners in both cases were denied by the respondent Commission.

The facts, as gathered from the records of both petitions, are as follows:

On May 3, 1979, the private respondent Erma Industries, Inc. (hereinafter referred as ERMA), as
private corporation engaged in exporting shrimps, prawns, squids and other marine products and as
represented by its Vice-President Sergio Oritz Luis, Jr., entered into a contract with the private co-
respondent Cirilo Undan for the latter to supply the former with marine products in Bacolod City. 3
Under the said contract, ERMA would provide both the financing and the equipment to Undan while
the latter would be responsible for hiring the workers.

Subsequently, Undan engaged the services of the nineteen (19) individual petitioners to clean,
behead, sort, prepare, and pack the marine products for their shipment and delivery to ERMA.

Since the employment of the petitioners in 1982 up to June 30, 1984, they worked continuously for
Undan who paid them on a piece-work basis or pakiao. The female employees who took charge of
the cleaning, beheading, and sorting phases of the work were allgedly paid at the rate of P0.16 per
kilo or an average weekly earning of P8.00 to P22.00. The male employees, on the other hand, who
were engaged in the preparation and packing phases of the work were paid at the rate of P0.25 per
kilo or an earning of P60.00 to P100.00 a week. All the said employees claimed to work everyday,
including Sundays and legal holidays from 8:00 o'clock AM to 6:00 o'clock PM. 4

Sometimes in April, 1984, the petitioners constituting a majority of the employees of Undan, joined
and became members of the co-petitioner Commercial and Agro-Industrial Labor Organization
(CAILO), a duly registered and existing labor union.
5

On May 9, 1984, the petitioners filed a petition for certification election as the sole and exclusive
bargaining representative of the workers of ERMA with then Ministry (now Department) of Labor and
Employment, Regional Office No. VI, which case was docketed as LRD Case No. 0638-84. At the
same time, the petitioners filed a complaint against the private respondents for non-payment of wage
differentials, emergency and cost allowances, 13th month pay, night shift differentials and service
incentive pay with the National Labor Relations Commission, Regional Arbitration Branch No. VI,
which case was designated as RAB 0230-84. A letter complaint was likewise filed with the Social
Security System for the failure of the private respondents to register the petitioners as their
employees. 6

However, on June 30, 1984, while the petitioners were about to report for work in the morning, they
were surprised to see the entrance to their working place closed with Undan informing them of the
shutdown of the said business.

Consequently, the petitioners filed another case designated as RAB Case No. 0313-84 with the
National Labor Relations Commission, Regional Arbitration Branch No. VI, Bacolod City for unfair
labor practice committed by the private respondents through the alleged pretended closure of the
said business. The petitioners contended that the same business continued to operate at another
place which was at the residence of Undan's relative and that the purported closure was made
without prior notice to the then Ministry (now Department) of Labor and Employment. 7

On October 9, 1984, the Med-Arbiter Rodolfo G. Lagoc dismissed the petition for certification
election filed by the petitioners against ERMA on the ground that there was no existing employer-
employee relationship between them and suggested that the petitioners' employer appeared to be
Undan. 8

On March 27, 1985, Labor Arbiter Ricardo T. Octavio likewise dismissed RAB Case No. 0236-84
which was the complaint for the violation of labor standard laws on the same ground that there was
no employer-employee relationship between the said parties. On appeal, the National Labor
Relations Commission in a Resolution dated January 8, 1987, affirmed the said decision of the
Labor and denied a subsequent motion for reconsideration.

Meanwhile, on October 30, 1985, Labor Arbiter Jose Aguirre dismissed RAB Case No. 0313-84
which was the complaint for unfair labor practice on the same finding that there was no employer-
employee relationship between the said parties. On appeal, the National Labor Relations
Commission in a Resolution dated August 31, 1987, affirmed the said decision of the Labor Arbiter
and denied a subsequent motion for reconsideration.

Hence, these twin petitions.

Upon the manifestation and motion of the Solicitor General, the said petitions for certiorari were
ordered consolidated by the Court in a Resolution dated December 14, 1988.  On March 26, 1990,
9

the Court resolved in G.R. No. 82718, to dispense with the comment of the private respondents, due
to their failure up to that late date to comply with the resolutions of the Court of July 11, 1988 and
September 19, 1988, requiring them to file comment on the petition in that case, and thus
considered these cases submitted for decision.

The common issues raised by the said petitions as adverted to at the outset are as follows:

1. Whether or not an employer-employee relationship exists between ERMA and the

petitioners, and

2. Whether or not ERMA is the indirect employer of petitioners so as to make it jointly and
severally liable with Cirilo Undan for the petitioners' claims. 10

With regard to the first issue, we affirm the challenged ruling of the National Labor Relations
Commission that, indeed, there is no employer-employee relationship between ERMA and the
petitioners. Settled jurisprudence enumerates four (4) elements necessary to establish the existence
of an employer-employee relationship, to wit: (1) the selection and engagement of the employee; (2)
the payment of wages; (3) the power of dismissal; and (4) the power to control employees' conduct. 11

Nowhere in the record of the case is there a showing by the petitioners of any evidence as to
substantiate the presence of the said four (4) elements. On the contrary, various exhibits  of the
12

petitioners, such as the alleged authorization signed by Cirilo Undan as Officer-in-Charge of ERMA,
sales and charge invoices, and collector's and delivery receipts purported showing the active
involvement of ERMA in the said business, only demonstrates more convincingly that it was Undan
who was the direct and actual employer who had engaged the petitioners, paid their wages,
controlled their conduct, and ultimately, dismissed them. In short, we conclude rather that the
employer-employee relationship had existed between Undan and the petitioners.

Be that as it may, notwithstanding the lack of employer-employee relationship between ERMA and
the petitioners, we however can not hold ERMA free from any liability to the petitioners for the
payment of emergency cost of living allowance, 13th moth pay, and minimum wages due the latter
under applicable laws.

Addressing the second issue, we agree with the Solicitor-General in his strong support of the
submission on this score of the petitioners that ERMA is their indirect employer and therefore
solidarily liable with Undan. He profers:

x x x           x x x          x x x

It is evident from the foregoing that ERMA contracted with Undan only for the purpose of
securing the services necessary to prepare and pack the marine products it procured from
Bacolod with ERMA providing everything else. Thus, when Undan hired the petitioners to
 provide the services needed by ERMA, the latter became an indirect employer of the
petitioners and hence, liable for their monetary claims . . . . 13

The conclusion is easily borne out by the provisions in the contract between ERMA and Undan
which, in part, states:

2. . . . .

Realizing, as per your request, that you are not in a position to finance the buying, we will put
in a representative from the Manila office to take care of cashiering.

x x x           x x x          x x x

3. Erma Industries expect[s] that it did not enter into a complicated arrangement. Suffice it to
say that you are our supplier who [sic] we finance. . . .

4. . . . .

Upon termination of the agreement, all the equipment we have loaned out to you shall be
turned over to US. 14

The joint and several liability of ERMA with Carlos Undan, the "labor-only" contractor, arises not only
from their contract but finds firm statutory basis in Articles 106, 107, and 109 of the Labor Code
which state:

Art. 106. Contractor or sub-contractor. — 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 sub-contractor, 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.

x x x           x x x          x x x

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 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.

x x x           x x x          x x x

Art. 107. Indirect employer. — The provisions of the immediately preceding Article shall
likewise apply to any person, partnership, association or corporation which, not being an
 employer, contracts with an independent contractor for the performance of any work, task,
job or project.

x x x           x x x          x x x

Art. 109. Solidary liability. — The provisions of existing laws to the contrary notwithstanding,
every employer or indirect employer shall be held responsible with his contractor or
subcontractor for any violation of any provision of this Code. For purposes of determining the
extent of their civil liability under this Chapter, they shall be considered as direct employers.

Corollarily, the joint and several liability imposed on ERMA is without prejudice to a claim for
reimbursement by it against Cirilo Undan of such sums which ERMA may have to pay the
petitioners.
15

Anent the charge against private respondent Carlos Undan of unfair labor practice in illegally
dismissing the petitioners through the sham closure are of the said business, we find the same
meritorious. The said act constitutes an interference and restraint on the petitioners in the exercise
of their right to self-organization  as the latter were then pursuing their union affiliation and
16

membership with CAILO.

In an earlier case, we struck down a similar attempt by the employer to avoid responsibility for the
valid claims of its employees, to wit:

x x x           x x x          x x x

Aggravating RANSOM's clear evasion of payment of its financial obligations is the

organization of a "run-away corporation," ROSARIO, in 1969 at the time the unfair labor
practice case was pending before the CIR by the same persons who were the officers and
stockholders of RANSOM, engaged in the same line of business as RANSOM, producing the
same line of products, occupying the same compound, using the same machineries,
buildings, laboratory, bodega and sales accounts departments used by RANSOM, and which
is still in existence. Both corporations were closed corporations owned and managed by
members of the same family. Its organization proved to be a convenient instrument to avoid
payment of backwages and the reinstatement of the 22 workers. This is another instance
where the fiction of separate and distinct corporate entities should be disregarded. 17

In sum, we hold that Undan as direct employer and ERMA as indirect employer are jointly and
severally liable to the petitioners for the violation of labor standard laws and unfair labor practice
which the private respondents, have failed to deny.

WHEREFORE, the petitions are GRANTED and all the challenged Resolutions of the National Labor
Relations Commission are hereby ANNULLED and SET ASIDE. Private respondent Carlos Undan is
ordered to REINSTATE the petitioners to their same or substantially equivalent positions at the time
of their termination, with three years backwages and without loss of seniority lights and benefits
appurtenant thereto.

Should the said reinstatement be rendered impossible by the supervention of circumstances, Undan
is further ordered to PAY the petitioners separation pay equivalent to one (1) month's salary for
every year of service rendered, computed at the minimum daily wage level at the time of their
termination.
In addition, we FIND that each of the petitioners is entitled to moral damages in the amount of Five
Thousand Pesos (P5,000.00) for the evident bad faith shown by Undan in illegally dismissing the
former.

In all instances, Undan and ERMA are jointly and severally liable for all the aforementioned
monetary awards. Costs against the private respondents.

SO ORDERED.

Melencio-Herrera, Paras, Padilla and Regalado, JJ., concur.