[1] MANDAUE GALLEON TRADE v.
ANDALES
FACTS:
Petitioners Mandaue Galleon Trade, Inc. (MGTI) and Gamallosons Traders, Inc. (GTI) are
business entities engaged in rattan furniture manufacturing for export, with principal place of
business at Cabangcalan, Mandaue City.
Respondent Vicente Andales (Andales) led a complaint with the Labor Arbiter (LA) against both
petitioners for illegal dismissal and non-payment of 13th month pay and service incentive leave
pay. His other co-workers numbering 260 led a similar complaint against petitioner MGTI only.
The complainants alleged that MGTI hired them on various dates as weavers, grinders, sanders
and nishers; sometime in August 1998, workers in the Finishing Department were told that they
would be transferred to a contractor and they were given Visitor Identification Cards (IDs), while
workers in the Weaving Department were told to look for work elsewhere as the company had no
work for them; sometime in September 1998, workers in the Grinding Department were not
allowed to enter the company premises, while workers in the Sanding Department were told that
they could no longer work since there was no work available; workers who were issued IDs were
allowed to go inside the premises; and they were dismissed without notice and just cause.
They further alleged that they are regular employees of MGTI because: (a) they performed their
work inside the company premises in Cabangcalan, Mandaue City; (b) they were issued uniforms
by MGTI and were told to strictly follow company rules and regulations; (c) they were under the
supervision of MGTI's foremen, quality control personnel and checkers; (d) MGTI supplied the
materials, designs, tools and equipment in the production of furniture; (e) MGTI conducts
orientations on how the work was to be done and the safe and ecient use of tools and equipment;
(f) MGTI issues memoranda regarding absences and waste of materials; and (g) MGTI exercises
the power to discipline them.
On the other hand, MGTI denied the existence of employer-employee relationship with
complainants, claiming that they are workers of independent contractors whose services were
engaged temporarily and seasonally when the demands for its products are high and could not
be met by its regular workforce; the independent contractors recruited and hired the complainants,
prepared the payroll and paid their wages, supervised and directed their work, and had authority
to dismiss them. It averred that due to the economic crisis and internal squabble in the company,
the volume of orders from foreign buyers dived; as a survival measure, management decided to
retrench its employees; and the substantial separation pay paid to retrenched employees caught
the jealous eyes of complainants who caused the ling of the complaint for illegal dismissal.
LA rendered a Decision holding that 183 complainants are regular piece-rate employees of MGTI
since they were made to perform functions which are necessary to MGTI's rattan furniture
manufacturing business; the independent contractors were not properly identified; the absence of
proof that the independent contractors have work premises of their own, substantial capital or
investment in the form of tools, equipment and machineries make them only labor contractors;
and there was no dismissal but only a claim for separation pay. NLRC affirmed.
CA likewise affirmed. It held that MGTI is liable to the respondents because the alleged
contractors are not independent contractors but labor-only contractors; that respondents were
constructively dismissed when they were unilaterally transferred to another contractor; and that
the allegation of retrenchment was not proven.
ISSUE: Whether or not the petitioners' claim that their contractors are independent contractors,
and, therefore, a case of permissible job contracting, is correct. (NO)
RULING:
Based on Article 106 of the Labor Code and Sections 5 and 7 of the Implementing Rules, "labor-
only" contracting exists when the following criteria are present: (1) where the contractor or
subcontractor supplying workers to an employer does not have substantial capital or investment
in the form of tools, equipment, machineries, work premises, among other things; and the workers
recruited and placed by the contractor or subcontractor are performing activities which are directly
related to the principal business of such employer; or (2) where the contractor does not exercise
the right to control the performance of the work of the contractual employee.
In the present case, petitioners' claim that their contractors are independent contractors, and,
therefore, this case is one of permissible job contracting, is without basis.
First, respondents' work as weavers, grinders, sanders and finishers is directly related to MGTI's
principal business of rattan furniture manufacturing. Where the employees are tasked to
undertake activities usually desirable or necessary in the usual business of the employer, the
contractor is considered as a "labor-only" contractor and such employees are considered as
regular employees of the employer.
Second, MGTI was unable to present any proof that its contractors had substantial capital. There
was no evidence pertaining to the contractors' capitalization; nor to their investment in tools,
equipment or implements actually used in the performance or completion of the job, work, or
service that they were contracted to render. The law casts the burden on the contractor to prove
that it has substantial capital, investment, tools, etc. Employees, on the other hand, need not
prove that the contractor does not have substantial capital, investment, and tools to engage in job
contracting.
Thus, the contractors are "labor-only" contractors since they do not have substantial capital or
investment which relates to the service performed and respondents performed activities which
were directly related to MGTI's main business. MGTI, the principal employer, is solidarily liable
with the labor-only contractors, for the rightful claims of the employees. Under this set-up, "labor-
only" contractors are deemed agents of the principal, MGTI, and the law makes the principal
responsible to the employees of the "labor-only" contractor as if the principal itself directly hired
or employed the employees. In prohibiting "labor-only" contracting and creating an employer-
employee relationship between the principal and the supposed contractor's employees, the law
intends to prevent employers from circumventing labor laws intended to protect employees.
