Case Digest: Babas, et al. v. Lorenzo Shipping Corporation

G.R. No. 186091 : December 15, 2010




Respondent Lorenzo Shipping Corporation (LSC) is a duly organized domestic corporation engaged in the shipping industry; it owns several equipments necessary for its business. LSC entered into a General Equipment Maintenance Repair and Management Services Agreement(Agreement) with Best Manpower Services, Inc. (BMSI).Simultaneous with the execution of the Agreement, LSC leased its equipment, tools, and tractors to BMSI. The period of lease was coterminous with the Agreement.BMSI then hired petitioners on various dates to work at LSC as checkers, welders, utility men, clerks, forklift operators, motor pool and machine shop workers, technicians, trailer drivers, and mechanics.Six years later, or on May 1, 2003, LSC entered into another contract with BMSI, this time, a service contract. Petitioners filed with the Labor Arbiter a complaint for regularization against LSC and BMSI. LSC terminated the Agreement,consequently, petitioners lost their employment. BMSI asserted that it is an independent contractor.It averred that it was willing to regularize petitioners; however, some of them lacked the requisite qualifications for the job.BMSI was willing to reassign petitioners who were willing to accept reassignment.LSC, on the other hand, averred that petitioners were employees of BMSI and were assigned to LSC by virtue of the Agreement.BMSI is an independent job contractor with substantial capital or investment in the form of tools, equipment, and machinery necessary in the conduct of its business. The Agreement between LSC and BMSI constituted legitimate job contracting.Thus, petitioners were employees of BMSI and not of LSC. After due proceedings, the LA rendered a decision dismissing petitioners complaint. The NLRC reversed the LA The CA in turn reversed the NLRC.
ISSUE: Whether or not petitioners are employees of LSC.


Labor-only contracting, a prohibited act, is an arrangement where the contractor or subcontractor merely recruits, supplies, or places workers to perform a job, work, or service for a principal. In labor-only contracting, the following elements are present:(a) the contractor or subcontractor does not have substantial capital or investment to actually perform the job, work, or service under its own account and responsibility;and (b) the employees recruited, supplied, or placed by such contractor or subcontractor perform activities which are directly related to the main business of the principal. On the other hand, permissible job contracting or subcontracting refers to an arrangement whereby a principal agrees to put out or farm out with the 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.

A person is considered engaged in legitimate job contracting or subcontracting if the following conditions concur: (a) The contractorcarries on a distinct and independent business and undertakes the contract work on his 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 his work except as to the results thereof; (b) The contractorhas substantial capital or investment; and (c) The agreement between the principal and the contractoror subcontractor assures the contractual employees' entitlement to all laborand occupational safety and health standards, free exercise of the right to self-organization, security of tenure, and social welfare benefits.

Given the above standards, BMSI is engaged in labor-only contracting. First, petitioners worked at LSCs premises, and nowhere else. Other than the provisions of the Agreement, there was no showing that it was BMSI which established petitioners working procedure and methods, which supervised petitioners in their work, or which evaluated the same. There was absolute lack of evidence that BMSI exercised control over them or their work, except for the fact that petitioners were hired by BMSI. Second, LSC was unable to present proof that BMSI had substantial capital.The record before us is bereft of any proof pertaining to the contractors capitalization, nor to its investment in tools, equipment, or implements actually used in the performance or completion of the job, work, or service that it was contracted to render.What is clear was that the equipment used by BMSI were owned by, and merely rented from, LSC.Third, petitioners performed activities which were directly related to the main business of LSC. The work of petitioners as checkers, welders, utility men, drivers, and mechanics could only be characterized as part of, or at least clearly related to, and in the pursuit of, LSCs business. Logically, when petitioners were assigned by BMSI to LSC, BMSI acted merely as a labor-only contractor. Lastly, as found by the NLRC, BMSI had no other client except for LSC, and neither BMSI nor LSC refuted this finding, thereby bolstering the NLRC finding that BMSI is a labor-only contractor.

Indubitably, BMSI can only be classified as a labor-only contractor. Consequently, the workers that BMSI supplied to LSC became regular employees of the latter. Having gained regular status, petitioners were entitled to security of tenure and could only be dismissed for just or authorized causes and after they had been accorded due process. Petitioners lost their employment when LSC terminated its Agreement with BMSI.However, the termination of LSCs Agreement With BMSI cannot be considered a just or an authorized cause for petitioners dismissal.


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