In Marvin O. Daguinod v. Southgate Foods, Inc., the Supreme Court held that Generation One was engaged in labor-only contracting, making Daguinod a regular employee of Southgate. Because Southgate failed to comply with due process requirements when it terminated Daguinod’s employment, the Court found that Daguinod was illegally dismissed and entitled to backwages, separation pay, and damages. This ruling clarifies the criteria for determining labor-only contracting and reinforces the importance of due process in employment termination, protecting workers’ rights to security of tenure and fair labor practices.

From Counter Crew to Regular Employee: Unmasking Labor-Only Contracting in Fast Food

Marvin O. Daguinod, initially a counter crew/cashier at a Jollibee franchise operated by Southgate Foods, Inc., found himself at the center of a legal battle that reached the Supreme Court. His employment hinged on a Service Agreement between Southgate and Generation One Resource Service and Multi-Purpose Cooperative. Daguinod’s legal journey began when he was accused of theft after a minor cash register discrepancy, leading to his arrest and subsequent termination. He filed a complaint for illegal dismissal, arguing that Generation One was merely a labor-only contractor, thereby making him a regular employee of Southgate. The Supreme Court grappled with determining whether Generation One was a legitimate independent contractor or a mere conduit for supplying labor, and whether Daguinod’s termination was lawful.

The legal framework for distinguishing between legitimate contracting and prohibited labor-only contracting is rooted in Article 106 of the Labor Code and further elaborated in DOLE Order No. 18, Series of 2002 (DO 18-02). The key lies in assessing the contractor’s role and the nature of the work performed by the employees. According to Section 5 of DO 18-02, labor-only contracting exists when the contractor merely recruits, supplies, or places workers for a principal, and lacks substantial capital or investment related to the job or fails to exercise control over the workers’ performance. The consequences of labor-only contracting are significant, as Section 7 of DO 18-02 stipulates that the principal is deemed the employer of the contractual employee.

To determine the legitimacy of a contracting arrangement, courts consider several factors, as summarized in Garden of Memories Park and Life Plan, Inc., v. National Labor Relations Commission. These include whether the contractor carries on an independent business, the skill required, the term and duration of the relationship, and the control and supervision of the work. Critically, the Court assesses whether the contractor possesses substantial capital and whether the workers perform activities directly related to the principal’s business. The Supreme Court has consistently emphasized that the nature of the employee’s job is a crucial factor, specifically whether the work performed is necessary and desirable to the principal’s business.

In Daguinod’s case, the Supreme Court scrutinized the tasks he performed as a counter crew/cashier at Jollibee Alphaland. The Court noted that the Service Contract between Daguinod and Generation One did not specify his responsibilities. To ascertain the true nature of his work, the Court referred to the Service Agreement between Generation One and Southgate. This agreement listed “non-core” functions contracted out by Southgate, including assistance in cash control activities, gathering orders, and assembling food. The Court emphasized that these tasks are integral to the operations of a fast-food restaurant like Jollibee and cannot be dismissed as merely non-core or peripheral. The Supreme Court unequivocally stated that serving food to customers is the main line of business of any restaurant.

The Court also found that Generation One failed to demonstrate that it possessed substantial capital to be considered a legitimate labor contractor. The cooperative submitted only one Income Tax Return (ITR) for the year ended December 2010, showing a gross income of P9,564,065.00, which the Court deemed insufficient evidence. Moreover, Generation One did not submit any Audited Financial Statements (AFS) to show its assets, liabilities, and equity. The Court also emphasized that registration with DOLE as an independent contractor is not conclusive evidence of legitimate status. As the Court held in San Miguel Corporation v. Semillano, “The fact of registration simply prevents the legal presumption of being a mere labor-only contractor from arising… the totality of the facts and the surrounding circumstances of the case are to be considered.”

Building on this principle, the Supreme Court further examined the element of control. The Court observed that the administrative investigation on April 10, 2011, was conducted by Jollibee Alphaland’s manager-on-duty, Geling, with security guard Rivero present. The handwritten Notices to Explain (NTEs), although bearing the header of Generation One, were served upon Daguinod by Southgate manager Geling. This demonstrated that Southgate took it upon itself to discipline Daguinod for an alleged violation of its company rules, regulations, and policies, thereby exercising control over him. The Court noted that the specific work responsibilities were unspecified in Daguinod’s Service Contract, suggesting that the right to determine the manner and means to achieve the desired end was reposed in Southgate.

With the finding that Generation One was engaged in labor-only contracting, Daguinod was deemed a regular employee of Southgate. Consequently, the Court turned to the issue of whether Daguinod was illegally dismissed. The requirements for lawful dismissal are well-established in Philippine labor law, requiring compliance with both substantive and procedural due process. Procedural due process entails providing the employee with two written notices: one informing the employee of the grounds for dismissal and another informing the employee of the employer’s decision to dismiss him. The employer must also provide the employee with an opportunity to be heard.

In Daguinod’s case, the Supreme Court found that Southgate failed to comply with procedural due process. The NTEs did not contain the specific information required under the law, and Daguinod was not given a reasonable opportunity to submit his written explanation. Moreover, the Court found it reasonable for Daguinod to believe that he had been dismissed from service, considering the events of April 10, 2011, including his arrest and imprisonment. In a similar case, Robinsons Galleria/Robinsons Supermarket Corp. v. Ranchez, the Court held that an employee was illegally dismissed when the employer prejudged the employee’s guilt without proper investigation, resulting in the employee’s incarceration.

Given that Daguinod was illegally dismissed, the Supreme Court awarded him full backwages, separation pay, moral and exemplary damages, and attorney’s fees. Article 294 of the Labor Code provides that an employee who is unjustly dismissed is entitled to reinstatement without loss of seniority rights and other privileges, full backwages, and other benefits. However, when reinstatement is no longer viable due to strained relations, separation pay may be awarded as an alternative. The Court also awarded Daguinod moral and exemplary damages, finding that Southgate and Generation One acted in bad faith by creating a subterfuge of legitimate labor contracting and haphazardly accusing Daguinod of theft. Attorney’s fees were also awarded, as Daguinod was compelled to litigate to enforce his rights.

FAQs

What was the key issue in this case?	The key issue was whether Generation One was a legitimate independent contractor or a labor-only contractor, and whether Daguinod was illegally dismissed.
What is labor-only contracting?	Labor-only contracting is an arrangement where the contractor merely supplies workers to a principal without substantial capital or control over the workers.
How did the Court determine that Generation One was a labor-only contractor?	The Court found that Daguinod’s tasks were integral to Southgate’s business, Generation One lacked substantial capital, and Southgate exercised control over Daguinod’s work.
What is required for a lawful dismissal?	A lawful dismissal requires compliance with both substantive due process (just cause) and procedural due process (notice and opportunity to be heard).
What procedural due process was lacking in this case?	Daguinod was not given a reasonable opportunity to submit his written explanation, and the NTEs did not contain the specific information required under the law.
What were the monetary awards granted to Daguinod?	Daguinod was awarded full backwages, separation pay, moral damages of P200,000.00, exemplary damages of P100,000.00, and attorney’s fees of 10% of the monetary award.
What is the significance of DOLE registration for contractors?	DOLE registration is not conclusive evidence of legitimate status, but merely prevents the legal presumption of being a mere labor-only contractor from arising.
Why was Daguinod entitled to moral and exemplary damages?	The Court found that Southgate and Generation One acted in bad faith by creating a subterfuge of legitimate labor contracting and haphazardly accusing Daguinod of theft.

This case underscores the importance of adhering to labor laws and respecting workers’ rights. It serves as a reminder to employers to ensure that contracting arrangements are legitimate and that due process is followed in termination proceedings. The Supreme Court’s decision protects employees from unfair labor practices and reaffirms the principle of security of tenure.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Daguinod v. Southgate Foods, Inc., G.R. No. 227795, February 20, 2019