SECOND DIVISION

[G.R. Nos. 79004-08. October 4, 1991.]

FRANKLIN BAGUIO AND 15 OTHERS, BONIFACIO IGOT AND 6

OTHERS, ROY MAGALLANES AND 4 OTHERS, CLAUDIO
BONGO, EDUARDO ANDALES and 4 OTHERS, petitioners, vs.
NATIONAL LABOR RELATIONS COMMISSION (3rd DIVISION),
GENERAL MILLING CORPORATION and/or FELICIANO LUPO,
respondents.

Public Attorney's Office for petitioners.

Joseph M. Baduel & Steve R. Siclot for private respondents.

SYLLABUS

1. LABOR LAW; INDIRECT EMPLOYER; RESPONDENT COMPANY IN

CASE AT BAR CANNOT BE DEEMED AS SUCH. — It is strongly urged by the
majority that the phrase "not being an employer" found in said Article 107
be given a circumspect appraisal. To my mind, there is no other
interpretation of this provision of the Code than that an indirect employer, to
be categorized as such, must not be an EMPLOYER as this term is defined
under the Code. Article 97 of the same Title of the Labor Code defines an
EMPLOYER as — "ART. 97. Definition. — As used in this Title: "a) . . . "b)
'Employer' includes any person acting directly or indirectly in the interest of
an employer in relation to an employee and shall include the Government
and all its branches, subdivision and instrumentalities, all government-owned
or controlled corporations and institutions, as well as non-profit private
institutions, or organizations." From the foregoing basic premises, it is my
submission that the company (General Milling Corporation) is an employer in
every sense of the word. It engages in the primary enterprise of
manufacturing flour and feeds, it definitely employs employees and workers
in its plant and outlets to work in various capacities. Therefore, the company
cannot, in any way, be considered an indirect employer, as the term is
defined, for purposes of the petitioner's cause of action against it.
2. ID.; ID.; PURPOSE OF THE QUALIFICATION CONTAINED IN ARTICLE
107 OF THE LABOR CODE. — To hold as the majority does, that Article 107
does apply in this case, would, in my view, render useless the phrase "not
being an employer" contained therein. Evidently, the framers of the Labor
Code had a purpose in mind in providing for such qualification. Such a
qualification, as I see it, gives protection to those workers hired or recruited
by a contractor to work on some job for a person who is not himself engaged
in any enterprise. An example easily comes to mind: a person who wishes to
have a residential house built. He engages an architect or engineer to
undertake the project who, in turn, hires laborers, masons and carpenters.
Should the architect or engineer renege on his obligations to the workers he
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 shall have recruited, to whom will the latter seek relief? By mandate of
Article 107, above-quoted, the owner of the house, who is not himself an
employer as defined by law, shall be held accountable. This is where, in my
view, Article 107 properly applies.
3. ID.; CONTRACTOR OF SUBCONTRACTOR; SOLIDARY LIABILITY OF
COMPANY MUST BE PREDICATED ON THE EXPRESS DECLARATION OF PAR. 2,
ART. 106, OF THE LABOR CODE. — In the present case, however, the
company's liability to the petitioners properly comes under Article 106,
Chapter III, Title II, Book III of the Code, which, in its entirety, provides: "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.

DECISION

MELENCIO-HERRERA, J : p

The liability of an employer in job contracting, vis-a-vis his contractor's

employees, is the sole issue brought to the fore in this labor dispute.
This Petition for Certiorari seeks to set aside the Resolution, dated 27
February 1987, of public respondent National Labor Relations Commission
(NLRC), Third Division, which reversed the Resolution of its First Division,
dated 27 December 1985, and absolved private respondent General Milling
Corporation (GMC) from any and all liability to petitioners. Cdpr

Sometime in 1983, private respondent Feliciano LUPO, a building

contractor, entered into a contract with GMC, a domestic corporation
engaged in flour and feeds manufacturing, for the construction of an annex
building inside the latter's plant in Cebu City. In connection with the
aforesaid contract, LUPO hired herein petitioners either as carpenters,
masons or laborers.
Subsequently, LUPO terminated petitioners' services, on different
dates. As a result, petitioners filed Complaints against LUPO and GMC before
the NLRC Regional Arbitration Branch No. VII, Cebu City, for unpaid wages,
COLA differentials, bonus and overtime pay.
In a Decision, dated 21 November 1984, the Executive Labor Arbiter,
Branch VII, found LUPO and GMC jointly and severally liable to petitioners,
premised on Article 109 of the Labor Code, infra, and ordered them to pay
the aggregate amount of P95,382.92. Elevated on appeal on 14 December
1984, the NLRC (First Division) denied the same for lack of merit in a
Resolution, dated 27 December 1985.
Upon Motion for Reconsideration, filed on 27 February 1986, the case
was reassigned to the Third Division. In a Resolution of 27 February 1987,
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 that Division absolved GMC from any liability. It opined that petitioners were
only hired by LUPO as workers in his construction contract with GMC and
were never meant to be employed by the latter.
Petitioners now assail that judgment in this Petition for Certiorari.
Petitioners contend that GMC is jointly and severally liable with LUPO
for the latter's obligations to them. They seek recovery from GMC based on
Article 106 of the Labor Code, infra, which holds the employer jointly and
severally liable with his contractor for unpaid wages of employees of the
latter.
In his "Manifestation in lieu of Comment," the Solicitor General
recognizes the solidary liability of GMC and LUPO but bases recovery on
Article 108 of the Labor Code, infra, contending that inasmuch as GMC failed
to require LUPO a bond to answer for the latter's obligations to his
employees, as required by said provision, GMC should, correspondingly, be
deemed solidarily liable.
In their respective Comments, both GMC and the NLRC maintain that
Article 106 finds no application in the instant case because it is limited to
situations where the work being performed by the contractor's employees
are directly related to the principal business of the employer. The NLRC
further opines that Article 109 on "Solidary Liability" finds no application
either because GMC was neither petitioners' employer nor indirect employer.
Upon the facts and circumstances, we uphold the solidary liability of
GMC and LUPO for the latter's liabilities in favor of employees whom he had
earlier employed and dismissed. LLphil

Recovery, however, should not be based on Article 106 of the Labor

Code. This provision treats specifically of "labor-only" contracting, which is
not the set-up between GMC and LUPO.
Article 106 provides:
"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.
xxx xxx xxx
"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
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 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".

In other words, a person is deemed to be engaged in "labor-only"

contracting where (1) 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 (2) the workers recruited
and placed by such person are performing activities which are directly
related to the principal business of such employer (See Section 9, Rule VIII,
Book III of the Omnibus Rules Implementing the Labor Code; emphasis ours).
Since the construction of an annex building inside the company plant
has no relation whatsoever with the employer's business of flour and feeds
manufacturing, "labor-only" contracting does not exist. Article 106 is thus
inapplicable.
Instead, it is "job contracting," covered by Article 107, which is
involved, reading:
"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." (Emphasis supplied).

Specifically, there is "job contracting" where (1) the contractor carries

on an independent business and undertakes the contract work on his own
account under his own responsibility according to his own manner and
method, free from the control and direction of his employer or principal in all
matters connected with the performance of the work except as to the results
thereof; and (2) the contractor has substantial capital or investment in the
form of tools, equipment, machineries, work premises, and other materials
which are necessary in the conduct of his business. It may be that LUPO
subsequently ran out of capital and was unable to satisfy the award to
petitioners. That was an after-the-fact development, however, and does not
detract from his status as an independent contractor.
Based on the foregoing, GMC qualifies as an "indirect employer." It
entered into a contract with an independent contractor, LUPO, for the
construction of an annex building, a work, task, job or project not directly
related to GMC's business of flour and feeds manufacturing. Being an
"indirect employer," GMC is solidarily liable with LUPO for any violation of the
Labor Code pursuant to Article 109 thereof, reading:
"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."

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 The provision of existing law referred to is Article 1728 of the Civil
Code, which states, among others, that "the contractor is liable for all the
claims of laborers and others employed by him . . ."
The foregoing interpretation finds a precedent in the case ofDeferia v.
NLRC (G.R. No. 78713, 27 February 1991) per Sarmiento, J., where Articles
107 and 109 were applied as the statutory basis for the joint and several
liability of the employer with his contractor, in addition to Article 106, since
the situation in that case was clearly one of "labor-only" contracting.
The NLRC submission that Article 107 is not applicable in the instant
case for the reason that the coverage thereof is limited to one "not an
employer" whereas GMC is such an employer as defined in Article 97 (b) of
the Labor Code, 1 is not well-taken. Under the peculiar set-up herein, GMC is,
in fact, "not an employer" (in the sense of not being a direct employer) as
understood in Article 106 of the Labor Code, but qualifies as an "indirect
employer" under Article 107 of said Code.
The distinction between Articles 106 and 107 lies in the fact that
Article 106 deals with "labor-only" contracting. Here, by operation of law, the
contractor is merely considered as an agent of the employer, who is deemed
"responsible to the workers to the same extent as if the latter were directly
employed by him." On the other hand, Article 107 deals with " job
contracting." In the latter situation, while the contractor himself is the direct
employer of the employees, the employer is deemed, by operation of law, as
an indirect employer.
In other words, the phrase "not an employer" found in Article 107 must
be read in conjunction with Article 106. A contrary interpretation would
render the provisions of Article 107 meaningless considering that everytime
an employer engages a contractor, the latter is always acting in the interest
of the former, whether directly or indirectly, in relation to his employees.
It should be recalled that a finding that a contractor is a "labor-only"
contractor is equivalent to declaring that there is an employer-employee
relationship between the owner of the project and the employees of the
"labor-only" contractor ( Associated Anglo-American Tobacco Corp. v. Clave,
G.R. No. 50915, 30 August 1990, 189 SCRA 127; Industrial Timber Corp. v.
NLRC, G.R. No. 83616, 20 January 1989, 169 SCRA 341). This is evidently
because, as heretofore stated, the "labor-only" contractor is considered as a
mere agent of an employer. In contrast, in "job contracting," no employer-
employee relationship exists between the owner and the employees of his
contractor. The owner of the project is not the direct employer but merely an
indirect employer, by operation of law, of his contractor's employees. prcd

As an indirect employer, and for purposes of determining the extent of

its civil liability, GMC is deemed a "direct employer" of his contractor's
employees pursuant to the last sentence of Article 109 of the Labor Code. As
a consequence, GMC can not escape its joint and solidary liability to
petitioners.
Further, Article 108 of the Labor Code requires the posting of a bond to
answer for wages that a contractor fails to pay, thus:
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 "Article 108. Posting of Bond . — An employer or indirect employer
may require the contractor or subcontractor to furnish a bond equal to
the cost of labor under contract, on condition that the bond will answer
for the wages due the employees should the contractor or
subcontractor, as the case may be, fails to pay the same."

Having failed to require LUPO to post such a bond, GMC must answer for
whatever liabilities LUPO may have incurred to his employees. This is without
prejudice to its seeking reimbursement from LUPO for whatever amount it
will have to pay petitioners.
WHEREFORE, the Petition for Certiorari is GRANTED. The Resolution of
respondent NLRC, Third Division, dated 27 February 1987, is hereby SET
ASIDE, and the Decision of the Labor Arbiter, dated 21 November 1984, is
hereby REINSTATED.
SO ORDERED.
Paras, Sarmiento and Regalado, JJ., concur.

Separate Opinion
PADILLA, J., concurring and dissenting:

The present petition seeks to have General Milling Corporation (the

Company) held liable for the unpaid wages of the petitioners in solidum with
the contractor (Lupo) who recruited the petitioners' services. This majority
finds for the petitioners in the total adjudged sum of P95,382.92, a
conclusion with which I am in complete accord. But I am not quite
comfortable, and therefore disagree, with the legal basis on which the
company's liability is determined.
As determined by the majority, such liability of the company is called
for by Article 107, Chapter III, Title II, Book III of the Labor Code, which is as
follows:
"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." (emphasis supplied)

It is strongly urged by the majority that the phrase "not being an

employer" found in said Article 107 be given a circumspect appraisal. To my
mind, there is no other interpretation of this provision of the Code than that
an indirect employer, to be categorized as such, must not be an EMPLOYER
as this term is defined under the Code. Article 97 of the same Title of the
Labor Code defines an EMPLOYER as —
"ART. 97. Definition. — As used in this Title:
"a) ...

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 "b) 'Employer' includes any person acting directly or indirectly in
the interest of an employer in relation to an employee and shall include
the Government and all its branches, subdivision and instrumentalities,
all government-owned or controlled corporations and institutions, as
well as non-profit private institutions, or organizations."
. . ." (emphasis supplied)

From the foregoing basic premises, it is my submission that the

company (General Milling Corporation) is an employer in every sense of the
word. It engages in the primary enterprise of manufacturing flour and feeds,
it definitely employs employees and workers in its plant and outlets to work
in various capacities. Therefore, the company cannot, in any way, be
considered an indirect employer, as the term is defined, for purposes of the
petitioner's cause of action against it.
To hold as the majority does, that Article 107 does apply in this case,
would, in my view, render useless the phrase "not being an employer"
contained therein. Evidently, the framers of the Labor Code had a purpose in
mind in providing for such qualification. Such a qualification, as I see it, gives
protection to those workers hired or recruited by a contractor to work on
some job for a person who is not himself engaged in any enterprise. An
example easily comes to mind: a person who wishes to have a residential
house built. He engages an architect or engineer to undertake the project
who, in turn, hires laborers, masons and carpenters. Should the architect or
engineer renege on his obligations to the workers he shall have recruited, to
whom will the latter seek relief? By mandate of Article 107, above-quoted,
the owner of the house, who is not himself an employer as defined by law,
shall be held accountable. This is where, in my view, Article 107 properly
applies.
In the present case, however, the company's liability to the petitioners
properly comes under Article 106, Chapter III, Title II, Book III of the Code,
which, in its entirety, provides:
"ART. 106. Contractor or subcontractor. — Whenever am 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
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 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 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."

It appears abundantly clear that the juridical relationship envisioned in

Article 106 involves an employer, as defined by the Code. It thus applies to
the juridical situation involved in this case, where the actors are General
Milling Corporation (as the employer), Lupo (as the contractor) and the
petitioners (as the employees or workers). Article 106, upon careful
examination, deals with three (3) situations in the juridical relationship
between employer-contractor-employee. It does not deal solely with "labor-
only" contracting.
The first situation in Article 106 is where the employer (project owner)
enters into a contract with a contractor for the performance of some job or
work; the employees recruited by such contractor shall be paid, according to
Article 106, first paragraph, in accordance with the requirements of the
Labor Code. Stated in another way, the first paragraph of Article 106,
provides the manner by which such employees shall be paid their wages and
that is, in compliance with the provisions of the Labor Code. This, therefore,
would include the rules on manner of payment, minimum wage, place of
payment, etc.
In an employer-contractor-employee relationship, it is clear that the
contractor is the real employer and, therefore, responsible to his workers for
their wages. However, should such contractor fail or renege on his said
obligation, to whom will the unpaid worker have recourse? The second
paragraph of Article 106 resolves the seeming dilemma of the workers by
providing that the EMPLOYER, (i.e., the project owner) shall be solidarily
liable to such workers to the extent of the work performed by them, meaning
that the EMPLOYER shall solidarily answer for the payment of wages
corresponding to the amount of work undertaken by the contractor's
employees in the project. This is the second situation contemplated by
Article 106.
The third and final situation treated in Article 106 is contained in the
fourth paragraph thereof. It pertains to what the majority perceives
(erroneously, in my view) as the sole coverage of Article 106 — that of a
"labor-only" contracting and the extent of the rights and liabilities of the
parties involved in such a relationship. As explained in the ponencia, for this
scheme or situation to exist, two (2) circumstances must concur: one, the
contractor who recruits the workers must have 'no substantial capital or
investment in the form of tools, equipment, machineries and work premises,'
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 and two, 'such workers are so engaged to perform activities directly related
to the employer's principal business.' Should there be a finding of 'labor-
only' contracting, the law expressly provides that the EMPLOYER (or project
owner) shall be considered the direct employer of such workers. Such
juridical relationship would then spawn a whole gamut of employer's
obligations, including obligations under the workmen's compensation, social
security, medicare, minimum wage, termination pay and unionism. 1
From the facts of this case as presented, the second paragraph of
Article 106 finds clear application. Because of contractor Lupo's default in
the payment of petitioners' wages, owing to his insolvency, the employer
(company) must comply with its joint and several obligation to answer for
Lupo's accountability to his employees for their unpaid wages. Thereafter,
should the company be inclined to do so, it may seek reimbursement from
Lupo.
In sum, it is my submission that the company's solidary liability to the
petitioners ought to be predicated on the basis, not of Article 107 of the
Labor Code (which applies only to non-employers while the company in this
case is an employer) but rather, upon the express declaration of paragraph
2, Article 106 of the Labor Code, which covers employers (not non-
employers) as the company in the case at bar.

Footnotes
1. Art. 97. Definitions. — . . . (b) "Employer" includes any person acting directly
or indirectly in the interest of an employer in relation to an employee and
shall include the Government and all its branches, subdivisions and
instrumentalities, all government-owned or controlled corporations and
institutions, as well as non-profit private institutions, or organizations.
PADILLA, J., concurring and dissenting:

1. Mafinco Trading Corporation vs. Ople, G.R. No. L-37790, 25 March 1976, 70
SCRA 139.

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