Lingnam Restaurant vs. Skills & Talents Employment Pool Inc.

(STEP)
GR No. 214667 December 3, 2018

Topic: Legitimate Contracting and Labor Only Contracting

Facts:

Respondent STEP is a domestic corporation engaged in manpower management and technical

services, and one of its clients is petitioner Lingnam Restaurant.. In a contract of employment,
private respondent Jessie Colaste is a project employee of respondent STEP assigned to work
with petitioner Lingnam Restaurant as assistant cook.

Private respondent alleged that he started working at Lingnam Restaurant as an assistant

cook/general utility with a salary ofP350.00 a day. He worked six days a week, eight hours a
day on two shifts.

On March 5, 2008, at about 10:00 a.m., Colaste reported to the main office of STEP at Ortigas
Center, Pasig City. He was informed that his contract with Lingnam Restaurant had expired. He
was given a clearance form to be signed by his supervisor at Lingnam Restaurant. However, he
reported for work as usual at Lingnam Restaurant from 2:00 p.m. to 10:00 p.m.

On March 6, 2008, he was on day-off. On March 7, 2008, he reported for work at Lingnam
Restaurant at Greenhills, San Juan City, Metro Manila. However, the Chief Cook told him not to
punch in his time card because he was already terminated from work. After a few minutes, the
Chief Cook handed him the telephone, and Supervisor Philipp Prado of the main office of
Lingnam Restaurant was on the line that his contract with them is terminated. Hence, Jessie
Colaste filed this case for illegal dismissal against Lingnam Restaurant and STEP.

Lingnam Restaurant denied that it is the employer of complainant Jessie Colaste and alleged
that STEP is Colaste's real employer. It was at the said business establishment that Jessie
Colaste rendered services through STEP. Thus, it is not liable for any claims or causes of action
of Jessie Colaste.

STEP alleged that it is an independent contractor. It averred that Colaste's employment was co-
terminus and dependent upon its contract with Lingnam Restaurant, and STEP has the right to
transfer Colaste to another assignment. STEP and Lingnam Restaurant entered into an
agreement wherein the former would provide the latter with manpower to perform activities
related to the operation of its restaurant business. However, in 2007, Lingnam Restaurant
reneged in paying the agreed contract salary of the manpower staff detailed at its business
establishment or areas of operation. STEP was compelled to use its funds to pay the manpower
staff. Hence, in February 2008, STEP ceased its manpower services to Lingnam Restaurant.
Aside from assailing the lack of service of summons, STEP also argued that the complaint for
illegal dismissal has no cause of action, since Jessie Colaste is still on floating status and has
yet to be enlisted to its other business clients within a period of six months. STEP alleged that it
did not terminate complainant's services. Hence, it prayed that the complaint be dismissed for
lack of merit.
 The Labor Arbiter held that Lingnam Restaurant is guilty of illegal dismissal. It ruled that
complainant Jessie Colaste's job as assistant cook is necessary and desirable to the
restaurant business of Lingnam Restaurant; thus, he is considered as a regular employee of
Lingnam Restaurant.

 The NLRC held that STEP is an independent contractor providing manpower services
toLingnam Restaurant. An employer-employee relationship existed between STEP and
Jessie Colaste, who was assigned to one of STEP's clients, Lingnam Restaurant. As Colaste
had been employed with STEP for more than a year and performing duties necessary and
desirable to its trade and business, he is considered a regular employee of STEP.

 The Court of Appeals held that Colaste's employer is Lingnam Restaurant, which illegally
dismissed Colaste; hence, Colaste is entitled to reinstatement, payment of full backwages
and other monetary benefits. STEP merely acted as a placement agency providing
manpower to Lingnam Restaurant. The so-called project was under the management and
supervision of Lingnam Restaurant and it was the latter which exercised control over Colaste.
The Court of Appeals found that STEP is a labor-only contractor; hence, the workers it
supplied to Lingnam Restaurant, including Jessie Colaste, should be considered employees
of Lingnam Restaurant.

Issues and Ruling:

(1) Whether respondent STEP is engaged in labor-only contracting – YES. Colas

Article 106 of the Labor Code describes labor-only contracting, thus:

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 person 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 applicable implementing rules contained in Rule VIII-A,[23] Book III of theAmended Rules
To Implement The Labor Code define contracting or subcontracting andlabor-only contracting
as follows:

SECTION 4. Definition of Basic Terms. - The following terms as used in theseRules

shall mean:
(a) "Contracting" or "subcontracting" refers to an arrangement whereby a principal
agrees to put out or farm out with a contractor or subcontractor the performance or
completion of a specific job, work or service within a definite or predetermined
period, regardless of whether such job, work or service is to be performed or
completed within or outside the premises of the principal.

xxxx

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 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 over 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 reserved 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 ma nr and means to be used in reaching that end.

xxxx

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 cases, as declared by a competent authority:

(a) where there is labor-only contracting; or

 (b) where the contracting arrangement falls within.

The Court notes that respondent STEP, in its Cautionary Pleading filed before the Labor Arbiter,
stated that it entered into an agreement with petitioner Lingnam Restaurant in 2002, wherein it
agreed to provide Lingnam Restaurant with manpower to perform activities related to the
operation of its restaurant business. Thus, as stated by the Court of Appeals, respondent STEP
merely acted as a placement agency providing manpower to petitioner Lingnam Restaurant.
The service rendered by STEP in favor of Lingnam Restaurant was not the performance of a
specific job, but the supply of personnel to work at Lingnam Restaurant. In this case, STEP
provided petitioner with an assistant cook in the person of Jessie Colaste.

In the Employment Contract between Jessie Colaste and STEP from January 4, 2006up to June
3, 2007, Colaste was assigned as kitchen helper at petitioner Lingnam Restaurant, while in the
subsequent employment contracts from November 5, 2007 up to January 5, 2008; and from
January 5, 2008 up to March 5, 2008, he was assigned as assistant cook at petitioner Lingnam
Restaurant. The three employment contracts state that Jessie Colaste's "work result
performance shall be under the Strict Supervision, Control and make sure that the end result is
in accordance with the standard specified byclient to STEP Inc."

Hence, the Court agrees with the Court of Appeals that the work performance of Colaste is
under the strict supervision and control of the client (petitioner Lingnam Restaurant) as well as
the end result thereof. As assistant cook of petitioner Lingnam Restaurant, respondent Colaste's
work is directly related to the restaurant business of petitioner. He works in petitioner's
restaurant and presumably under the supervision of its Chief Cook. This falls under the
definition of labor-only contracting under Section 5 of Rule VIII-A, Book III of the Amended
Rules To Implement The Labor Code, since the contractor, STEP, merely supplied Jessie
Colaste as assistant cook to the principal, Lingnam Restaurant; the job of Colaste as assistant
cook is directly related to the main business of Lingnam Restaurant, and STEP does not
exercise the right to control the performance of the work of Colaste, the contractual employee.

As respondent STEP is engaged in labor-only contracting, the principal, petitioner Lingnam

Restaurant, shall be deemed the employer of respondent Jessie Colaste, in accordance with
Section 7, Rule VIII-A, Book III of the Amended Rules To Implement The Labor Code. Colaste
started working with petitioner since 2006 and he should be considered a regular employee of
petitioner.

(2) Whether Colaste was illegally dismissed – YES.