THIRD DIVISION

 
COCA-COLA BOTTLERS   G.R. No. 179546
PHILS., INC.,  
Petitioner, Present:
   
- versus - YNARES-SANTIAGO, J.,
Chairperson,
 
AUSTRIA-MARTINEZ, ,
ALAN M. AGITO, REGOLO
CHICO-NAZARIO,
S. OCA III, ERNESTO G.
ALARIAO, JR., ALFONSO NACHURA, and
PAA, JR., DEMPSTER P. PERALTA, JJ.
ONG, URRIQUIA T.  
ARVIN, GIL H.  
FRANCISCO, and EDWIN Promulgated:
M. GOLEZ,
 
Respondents.
February 13, 2009
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D E C I S I O N 

CHICO-NAZARIO, J.: 

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. 
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 filed 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 Office 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 filing a complaint against Interserve; Peerless Integrated
Services, Inc.; Better Builders, Inc.; and Excellent Partners, Inc.[3] 
Petitioner filed 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. 
To prove the status of Interserve as an independent contractor, petitioner
presented the following pieces of evidence: (1) the Articles of Incorporation of
Interserve;[6] (2) the Certificate 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 Certificate 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;[10] (2) respondents Contract of Temporary Employment
with Interserve;[11] and (3) the payroll records of Interserve.[12] 
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.[13]
 
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
Securities System (SSS), Medicare and Pag-ibig Fund, thus, further supporting
the Labor Arbiters finding 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. 
Nevertheless, the Labor Arbiter directed Interserve to pay respondents
their pro-rated 13th month benefits for the period of January 2002 until April
2002.[14] 
In the end, the Labor Arbiter decreed: 
WHEREFORE, judgment is hereby rendered finding 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
DISMISMMED 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
Commission if (sic) made part of this Decision. [15] 
 Unsatisfied with the foregoing Decision of the Labor Arbiter, respondents
filed an appeal with the NLRC, docketed as NLRC NCR CA No. 036494-03. 
In their Memorandum of Appeal,[16] respondents maintained that contrary
to the finding of the Labor Arbiter, their work was indispensable to the principal
business of petitioner. Respondents supported their claim with copies of the
Delivery Agreement[17] 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 offices 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 offices, 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. 
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[18] 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[19] 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[20] issued by Dy to the personnel of Peerless
Integrated Services, Inc., requiring the latter to present their timely request for
leave or medical certificates for their absences; (4) Personnel Workers
Schedules, [21]prepared by RB Chua, another supervisor of petitioner; (5) Daily
Sales Monitoring Report prepared by petitioner;[22] and (6) the Conventional
Route System Proposed Set-up of petitioner. [23]
The NLRC, in a Resolution dated 30 October 2003, affirmed the Labor
Arbiters Decision dated 28 May 2003 and pronounced that no employer-
employee relationship existed between petitioner and respondents. It reiterated
the findings 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.[24] The dispositive part of the NLRC Resolution
states:[25] 
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. 
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 a labor-only contractor, with insufficient 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 finally noted that certain provisions of the Contract of Service
between petitioner and Interserve suggested that the latters 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:[26] 
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 filed a Motion for Reconsideration, which the Court of Appeals
denied in a Resolution, dated 31 August 2007.[27]
 
Hence, the present Petition, in which the following issues are raised[28]: 
 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; 
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
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 findings of the Court of Appeals and
look into the evidence presented by the parties on record. 
As a general rule, factual findings of the Court of Appeals are binding
upon the Supreme Court. One exception to this rule is when the factual findings
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. [29] 
 The relations which may arise in a situation, where there is an employer,
a contractor, and employees of the contractor, are identified and distinguished
under Article 106 of the Labor Code: 
Article 106. Contractor or subcontractor. - Whenever an
employer enters into a contract with another person for the performance
of the formers work, the employees of the contractor and of the latters
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 restriction, 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 formers 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 contractors
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 employer is not responsible
for any claim made by the contractors employees.[30] 
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 finding by
the appropriate authorities that a contractor is a labor-only contractor establishes
an employer-employee relationship between the principal employer and the
contractors employees and the former becomes solidarily liable for all the
rightful claims of the employees. [31] 
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. 
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
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 petitioners
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. 
The argument of petitioner is untenable. 
The law clearly establishes an employer-employee relationship between the
principal employer and the contractors employee upon a finding 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 finds 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[32] 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 finding.[33] Petitioner also does not contradict respondents
allegations that the former has Sales Departments and Sales Offices in its
various offices, plants, and warehouses; and that petitioner hires Regional Sales
Supervisors and District Sales Supervisors who supervise and control the
salesmen and sales route helpers.[34] 
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.[35] It cites as
authority Filipinas Synthetic Fiber Corp. v. National Labor Relations
Commission[36] and Frondozo v. National Labor Relations Commission,[37] where
the contractors authorized capital stock ofP1,600,000.00 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[38] 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. 
This Court is unconvinced. 
At the outset, the Court clarifies 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 figure
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 latters
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.
[39]
 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.,
[40]
 therein petitioner San Miguel Corporation similarly invoked Neri, but was
rebuffed by the Court based on the following ratiocination[41]: 
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 finding that MAERC had investments amounting
to P4,608,080.00 consisting of buildings, machinery and equipment. 
However, in Vinoya v. NLRC, we clarified 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 confined 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 specified pieces of work; the control and
supervision of the workers; the power of the employer with respect to
the hiring, firing 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 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 specific 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 qualified job contractor because it was
a big firm 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,
[42]
 the Court did not recognize the contractor therein as a legitimate job
contractor, despite its paid-up capital of overP4,000,000.00, in the absence of
substantial investment in tools and equipment used in the services it was
rendering. 
Insisting that Interserve had substantial investment, petitioner assails, for
being purely speculative, the finding 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.
[43]
 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 sufficient 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 sufficient 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
definition 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 finding. It is also apparent that
Interserve is a labor-only contractor under Section 5(ii)[44] 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. 
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; 
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
specific 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 specified 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
efficiently, 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
sufficient to cope with the requirements of the services and work herein
undertaken and that such personnel shall be physically fit, of good
moral character and has not been convicted of any crime. The CLIENT,
however, may request for the replacement of the CONTRACTORS
personnel if from its judgment, the jobs or the projects being done
could not be completed within the time specified or that the quality of
the desired result is not being achieved. 
3. It is agreed and understood that the CONTRACTORS
personnel will comply with CLIENT, CLIENTS policies, rules and
regulations and will be subjected on-the-spot search by CLIENT,
CLIENTS 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
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.[45] 
Paragraph 3 of the Contract specified that the personnel of contractor
Interserve, which included the respondents, would comply with CLIENT as
well as CLIENTs 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. 
Also significant was the right of petitioner under paragraph 2 of the
Contract to request the replacement of the CONTRACTORS personnel.True,
this right was conveniently qualified by the phrase if from its judgment, the jobs
or the projects being done could not be completed within the time specified or
that the quality of the desired result is not being achieved, but such qualification
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
companys right of control as direct employer.[46] 
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 flag. 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 final result required to be accomplished. Instead, the Contract specified the
type of workers Interserve must provide petitioner (Route Helpers, Salesmen,
Drivers, Clericals, Encoders & PD) and their qualifications
(technical/vocational course graduates, physically fit, of good moral character,
and have not been convicted of any crime). The Contract also states that, to
carry out the undertakings specified 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
identifiable job, work, or service for petitioner, but merely bound itself to
provide the latter with specific types of employees. These contractual provisions
strongly indicated that Interserve was merely a recruiting and manpower agency
providing petitioner with workers performing tasks directly related to the latters
principal business. 
The certification 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[47] 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 sufficient for an independent
contractor for janitorial services, this does not mean that such capital and/or
investments were likewise sufficient to maintain an independent contracting
business for the delivery and distribution of Coca-Cola products.
With the finding 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.[48] 
Given that respondents were illegally dismissed by petitioner, they are
entitled to reinstatement, full backwages, inclusive of allowances, and to their
other benefits 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,.
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.