The Supreme Court ruled that while CEPALCO engaged in labor-only contracting with CESCO, it did not constitute unfair labor practice (ULP) because there was no evidence that it violated the employees’ right to self-organization. However, the Court clarified that the employees of CESCO cannot be directly declared as regular employees of CEPALCO in this specific ULP case because they were not parties to the case. This decision emphasizes the importance of demonstrating a direct link between contracting arrangements and the infringement of workers’ rights to self-organization when claiming ULP. This means CEPALCO’s employees cannot be tagged as regular due to the case being lodged for ULP.

Outsourcing and Union Rights: Did CEPALCO’s Contracts Violate Labor Laws?

This case revolves around complaints filed by CEPALCO Employee’s Labor Union-Associated Labor Unions-Trade Union Congress of the Philippines (respondent) against Cagayan Electric Power & Light Company, Inc. (CEPALCO) and CEPALCO Energy Services Corporation (CESCO). The union alleged that CEPALCO committed unfair labor practice (ULP) by contracting out services to CESCO. They argue that this action aimed to undermine the union’s membership and circumvent the collective bargaining agreement (CBA). The core issue is whether CEPALCO’s contracting of meter-reading and warehousing activities through CESCO constituted ULP and whether CESCO was a labor-only contractor.

The respondent contended that CEPALCO’s actions violated Article 259 (c) of the Labor Code, which prohibits employers from contracting out services performed by union members when it interferes with their right to self-organization. They argued that CESCO was merely a labor-only contractor, and therefore, its employees should be deemed regular employees of CEPALCO. In contrast, the petitioners (CEPALCO and CESCO) maintained that CESCO was an independent contractor, and the contracting out of services did not infringe on the rights of CEPALCO’s regular workers to self-organize. They further argued that the union was not the proper party to raise the issue of CESCO employees’ status.

The Labor Arbiter (LA) initially dismissed the complaint, finding that CESCO carried on an independent business and had sufficient capital and equipment. The LA concluded that there was no factual basis to support the ULP claim. The National Labor Relations Commission (NLRC) affirmed the LA’s decision, stating that the evidence presented by the respondent was inadequate to establish interference with the union members’ right to self-organization and collective bargaining. However, the Court of Appeals (CA) partially granted the respondent’s petition, finding that CESCO was indeed engaged in labor-only contracting.

The CA reasoned that CESCO did not exercise control over its workers, lacked substantial capitalization, and its workers performed activities directly related to CEPALCO’s main business. Despite this finding, the CA also concluded that CEPALCO did not commit ULP, as there was no evidence of ill will or an intent to interfere with the employees’ right to self-organize. The Supreme Court, in analyzing the case, referred to Article 106 of the Labor Code, which defines labor-only contracting. It also cited Section 5 of Department Order No. 18-02 (DO 18-02), which provides criteria for determining whether an arrangement constitutes labor-only contracting. These criteria include whether the contractor has substantial capital or investment and whether the contractor exercises control over the performance of the work.

The Court emphasized that labor-only contracting becomes a form of ULP when it is used by the employer to interfere with employees’ rights to self-organization. This is rooted in Article 259 of the Labor Code. The need to link the contracting out of services to the workers’ right to self-organization stems from the concept of ULP, as stated in Article 258 of the Labor Code, which protects the constitutional right of workers to self-organization and collective bargaining. Citing Great Pacific Employees Union v. Great Pacific Life Assurance Corporation, the Court reiterated that all prohibited acts constituting ULP relate to workers’ right to self-organization. Similarly, in Bankard, Inc. v. NLRC, the Court stated that acts, even if unfair, are not ULP without the element of violating the workers’ right to organize.

Building on this principle, the Supreme Court agreed with the CA that CEPALCO had engaged in labor-only contracting. The Court found that CESCO lacked substantial capital and investment at the time of contracting out CEPALCO’s meter-reading activities, and that CESCO did not exercise control over the work performed. The work was directly related to CEPALCO’s main business. Although CESCO’s authorized capital stock increased later, there was no proof of sufficient capital at the initial contract date. Similarly, while CESCO might have had substantial capital when CEPALCO contracted out its warehousing works, it lacked the necessary equipment and tools to perform these activities independently.

Despite finding labor-only contracting, the Court affirmed that CEPALCO’s arrangements with CESCO did not amount to ULP. The respondent failed to provide evidence that these arrangements violated CEPALCO’s workers’ right to self-organization. As such, the complaints filed by the respondent were dismissed with finality. While the issue of labor-only contracting was considered, it was only in relation to the charges of ULP. Since the respondent failed to link the arrangement to the violation of workers’ rights to self-organization, the matter of labor-only contracting did not become moot, as it was actively argued to prove the ULP charges.

Furthermore, the Court addressed the respondent’s request for the nullification of the contracts and the declaration of CESCO’s employees as CEPALCO’s employees. It held that the respondent was not a real party-in-interest and lacked legal standing on these matters. Quoting Joya v. Presidential Commission on Good Government, the Court explained that legal standing requires a personal and substantial interest in the case, with direct injury resulting from the challenged act. As the employees of CESCO were the ones who would directly benefit from such a declaration, and they were not parties to the case, the Court set aside the portions of the CA decisions declaring CESCO’s workers as regular employees of CEPALCO.

FAQs

What was the key issue in this case?	The key issue was whether CEPALCO engaged in unfair labor practice (ULP) by contracting out services to CESCO and whether CESCO was a labor-only contractor. The union argued this undermined union membership and circumvented the collective bargaining agreement.
What is labor-only contracting?	Labor-only contracting occurs when a contractor lacks substantial capital or control over workers, who perform activities directly related to the principal business. In such cases, the contractor is considered an agent of the employer.
What is unfair labor practice (ULP)?	ULP refers to actions by employers that violate employees’ rights to self-organization and collective bargaining. It includes contracting out services to undermine union membership.
Did the Supreme Court find CEPALCO guilty of ULP?	No, the Supreme Court found that while CEPALCO engaged in labor-only contracting, it did not constitute ULP. This is because there was no evidence that it violated the employees’ right to self-organization.
Why was the union’s claim of ULP rejected?	The union’s claim was rejected because it failed to provide evidence linking the contracting arrangements to a violation of the employees’ right to self-organization. This link is crucial to proving ULP.
Can CESCO employees be declared regular employees of CEPALCO in this case?	No, the employees of CESCO cannot be directly declared as regular employees of CEPALCO in this specific ULP case. This is because they were not parties to the case, and the union lacked the standing to represent them on this particular issue.
What is required to prove unfair labor practice related to contracting?	To prove ULP related to contracting, it must be shown that the employer’s actions interfere with, restrain, or coerce employees in the exercise of their rights to self-organization. A direct link must exist.
What is the significance of legal standing in this case?	Legal standing requires a party to have a personal and substantial interest in the case. In this case, the union lacked standing to seek a declaration of CESCO employees as regular employees of CEPALCO, as the union did not provide sufficient reasoning or support to that claim.

In conclusion, while the Supreme Court acknowledged that CEPALCO engaged in labor-only contracting, it emphasized the importance of proving a direct link between such arrangements and the violation of employees’ rights to self-organization in order to establish unfair labor practice. The Court also clarified the requirements for legal standing, ensuring that only parties with a direct and substantial interest in the outcome can seek specific remedies.

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: CAGAYAN ELECTRIC POWER & LIGHT COMPANY, INC. (CEPALCO) AND CEPALCO ENERGY SERVICES CORPORATION (CESCO) VS. CEPALCO EMPLOYEE’S LABOR UNION-ASSOCIATED LABOR UNIONS-TRADE UNION CONGRESS OF THE PHILIPPINES (TUCP), G.R. No. 211015, June 20, 2016