G.R. No. 78713 and G.R. No. 82718 ; February 27, 1991
CAILO/HENRY DEFERIA, ET AL., petitioners, vs. NATIONAL LABOR RELATIONS COMMISSION and ERMA INDUSTRIES, INC., ET AL., respondents.

FACTS

Petitioners were workers engaged by Cirilo Undan to clean, prepare, and pack marine products. Undan operated under a contract with respondent Erma Industries, Inc. (ERMA), whereby ERMA provided financing and equipment, while Undan was responsible for hiring and paying the workers. The petitioners worked continuously from 1982 to June 30, 1984, receiving piece-rate wages.
In 1984, the petitioners organized under a labor union and filed a petition for certification election and complaints against ERMA and Undan for labor standards violations and unfair labor practice. On June 30, 1984, Undan informed the petitioners of a business shutdown. The petitioners alleged this was a pretended closure to discourage union activity, as operations continued elsewhere. The Labor Arbiter and the NLRC dismissed all complaints, ruling that no employer-employee relationship existed between the petitioners and ERMA.

ISSUE

Whether an employer-employee relationship existed between the petitioners and the private respondents, making ERMA jointly liable with Undan for labor violations.

RULING

Yes. The Supreme Court granted the petitions, annulling the NLRC resolutions. The Court applied the four-fold test to determine the existence of an employer-employee relationship: the selection and engagement of the employee, payment of wages, power of dismissal, and power of control. The evidence established that ERMA, as the principal, exercised control over the petitioners’ work. The contract between ERMA and Undan stipulated that ERMA would provide not just financing but also the equipment, and the workers were performing activities directly related to ERMA’s main business of exporting marine products.
The Court ruled that Undan was a labor-only contractor, acting merely as an agent of ERMA. A labor-only contractor is defined as one who does not have substantial capital or investment and whose workers perform activities directly related to the principal’s main business. Since Undan merely supplied workers to ERMA, which was engaged in the same line of work, ERMA was deemed the indirect employer. Consequently, ERMA and Undan are considered jointly and severally liable for all labor standard violations and for the unfair labor practice arising from the illegal dismissal of the petitioners, which was motivated by their union activities. The Court ordered reinstatement with three years backwages or separation pay, and awarded moral damages.