Republic of the Philippines

Supreme Court
Manila
SECOND DIVISION
 

MANILA WATER COMPANY, G.R. No. 175501

INC.,  
Petitioner, Present:
   

- versus - VELASCO, JR., J.,*

  NACHURA,**

JOSE J. DALUMPINES, Acting Chairperson,

EMMANUEL CAPIT, ROMEO PERALTA,
B. CASTOLONE, MELITANTE
CASTRO, NONITO MENDOZA, and
FERNANDEZ, ARNULFO SERENO,*** JJ.
JAMISON, ARTHUR LAVISTE,
ESTEBAN LEGARTO, SUSANO  
MIRANDA, RAMON C. REYES,  
JOSE SIERRA, BENJAMIN
 
TALAVERA, MOISES
ZAPATERO, EDGAR  
PAMORAGA, BERNARDO S.
 
MEDINA, MELENCIO M.
BAONGUIS, JR., JOSE  
AGUILAR, ANGEL C. GARCIA,
 
JOSE TEODY P. VELASCO,
AUGUSTUS J. TANDOC,  
ROBERTO DAGDAG, MIGUEL
 LOPEZ, GEORGE CABRERA,  
ARMAN BORROMEO,
 
RONITO R. FRIAS, ANTONIO
VERGARA, RANDY  
CORTIGUERRA, and FIRST
 
CLASSIC COURIER
SERVICES, INC.,  

Respondents.  

   
Promulgated:
 
October 4, 2010
 
x------------------------------------------------------------------------------------x 
 

DECISION 
NACHURA, J.: 
Before the Court is a petition for review on certiorari under Rule 45
of the Rules of Court, assailing the Decision[1] dated September 12,
2006 and the Resolution[2] dated November 17, 2006 of the Court of
Appeals (CA) in CA-G.R. SP No. 94909. 
The facts of the case are as follows: 
By virtue of Republic Act No. 8041, otherwise known as the National
Water Crisis Act of 1995, the Metropolitan Waterworks and
Sewerage System (MWSS) was given the authority to enter into
concession agreements allowing the private sector in its operations.
Petitioner Manila Water Company, Inc. (Manila Water) was one of
two private concessionaires contracted by the MWSS to manage the
water distribution system in the east zone of Metro Manila. The east
service area included the following towns and cities: Mandaluyong,
Marikina, Pasig, Pateros, San Juan, Taguig, Makati, parts of Quezon
City and Manila, Angono, Antipolo, Baras, Binangonan, Cainta,
Cardona, Jala-Jala, Morong, Pililla, Rodriguez, Tanay, Taytay,
Teresa, and San Mateo.[3] 
Under the concession agreement, Manila Water undertook to absorb
the regular employees of MWSS listed by the latter effective August
1, 1997. Individual respondents, with the exception of Moises
Zapatero (Zapatero) and Edgar Pamoraga (Pamoraga), were among
the one hundred twenty-one (121) employees not included in the list
of employees to be absorbed by Manila Water. Nevertheless, Manila
Water engaged their services without written contract from August 1,
1997 to August 31, 1997.[4] 
On September 1, 1997, individual respondents signed a three (3)-
month contract to perform collection services on commission basis for
Manila Waters branches in the east zone.[5] 
On November 21, 1997, before the expiration of the contract of
services, the 121 bill collectors formed a corporation duly registered
with the Securities and Exchange Commission (SEC) as the
Association Collectors Group, Inc. (ACGI). ACGI was one of the
entities engaged by Manila Water for its courier service. However,
Manila Water contracted ACGI for collection services only in its
Balara Branch.[6] 
In December 1997, Manila Water entered into a service agreement
with respondent First Classic Courier Services, Inc. (FCCSI) also for
its courier needs. The service agreements between Manila Water and
FCCSI covered the periods 1997 to 1999 and 2000 to 2002. [7] Earlier,
in a memorandum dated November 28, 1997, FCCSI gave a deadline
for the bill collectors who were members of ACGI to submit
applications and letters of intent to transfer to FCCSI. The individual
respondents in this case were among the bill collectors who joined
FCCSI and were hired effective December 1, 1997.[8]
 
On various dates between May and October 2002, individual
respondents were terminated from employment. Manila Water no
longer renewed its contract with FCCSI because it decided to
implement a collectorless scheme whereby Manila Water customers
would instead remit payments through Bayad Centers. [9] The
aggrieved bill collectors individually filed complaints for illegal
dismissal, unfair labor practice, damages, and attorneys fees, with
prayer for reinstatement and backwages against petitioner Manila
Water and respondent FCCSI. The complaints were consolidated and
jointly heard.[10] 
Respondent bill collectors alleged that their employment under
Manila Water had four (4) stages: (a) from August 1, 1997 to August
31, 1997; (b) from September 1, 1997 to November 30, 1997; (c) in
November 1997 when FCCSI was incorporated; and (d) after
November 1977 when FCCSI came in. While in MWSS, and
thereafter in Manila Water and FCCSI, respondent bill collectors were
made to perform the following functions: (1) delivery of bills to
customers; (2) collection of payments from customers; and (3)
delivery of disconnection notice to customers. They were also
allowed to effect disconnection and were given tools for this purpose.
[11]
 
Respondent bill collectors averred that when Manila Water issued
their individual contracts of service for three months in September
1997, there was already an attempt to make it appear that respondent
bill collectors were not its employees but independent contractors.
Respondent bill collectors stressed that they could not qualify as
independent contractors because they did not have an independent
business of their own, tools, equipment, and capitalization, but were
purely dependent on the wages they earned from Manila Water, which
was termed as commission.[12] 
Respondent bill collectors alleged that Manila Water had complete
supervision over their work and their collections, which they had to
remit daily to the former. They also maintained that the incorporation
of ACGI did not mean that they were not employees of Manila Water.
Furthermore, they alleged that they suffered injustice when Manila
Water imposed upon them the work set-up that caused them to be
emotionally depressed because those who were not assigned to the
Balara Branch under Manila Waters contract with ACGI were forced
to join FCCSI to retain their employment. They argued that the entry
of FCCSI did not change the employer-employee relationship of
respondent bill collectors with Manila Water.[13] 
Respondent bill collectors insisted that they remained employees of
Manila Water even after the entry of FCCSI. The latter did not qualify
as a legitimate labor contractor since it had no substantial capital.
FCCSI only had a paid-up capital of one hundred thousand pesos
(P100,000.00), out of the four hundred thousand pesos (P400,000.00)
authorized capital. FCCSI relied mainly on what Manila Water would
pay, from which it deducted an agency fee, and it had no other clients
on collection. They were forced to transfer to FCCSI when their
service contracts with Manila Water was about to expire on
November 30, 1997. FCCSI was engaged in labor-only contracting
which is prohibited by law.[14] 
Respondent bill collectors averred that even under the four-fold test of
employer-employee relationship, it appeared that Manila Water was
their true employer based on the following circumstances: (1) it was
Manila Water who engaged their services as bill collectors when it
took over the operations of the east zone from MWSS on August 1,
1997; (2) it was Manila Water which paid their wages in the form of
commissions every fifteenth (15th) and thirtieth (30th) day of each
month; (3) Manila Water exercised the power of dismissal over them
as bill collectors as evidenced by the instances surrounding their
termination as set forth in their respective affidavits, and by the
individual clearances issued to them not by FCCSI but by Manila
Water, stating that the same was issued in connection with his
termination of contract as Contract Collector of Manila Water
Company; and (4) their work as bill collectors was clearly related to
the principal business of Manila Water.[15] 
Respondent FCCSI, on the other hand, claimed that it is an
independent contractor engaged in the business of providing
messengerial or courier services, and it fulfills the criteria set forth
under Department Order No. 10, Series of 1997.[16] It was issued a
certificate of registration by the Department of Labor and
Employment (DOLE) as an independent contractor. It was
incorporated and registered with the SEC in November 1995. It was
duly registered with the Department of Transportation and
Communication (DOTC) and the Office of the Mayor of Makati City
for authority to operate. It has sufficient capital in the form of tools,
equipment, and machinery as attested to by the Postal Regulation
Committee of the DOTC after conducting an ocular inspection. It
provides similar services to Philippine Long Distance Telephone
Company, Smart Telecommunications, Inc., and Home Cable, Inc.
Under the terms and conditions of its service agreement with Manila
Water, FCCSI has the power to hire, assign, discipline, or dismiss its
own employees, as well as control the means and methods of
accomplishing the assigned tasks, and it pays the wages of the
employees.[17] 
The termination of employment of respondent bill collectors upon the
expiration of FCCSIs contract with Manila Water did not mean the
automatic termination or suspension of the employer-employee
relationship between FCCSI and respondent bill collectors. Their
termination after their six (6) month floating status, which was
allowed by law, was due to the non-renewal of FCCSIs agreement
with Manila Water and its inability to enter into a similar contract
requiring the skills of respondent bill collectors.[18] 
Petitioner Manila Water, for its part, denied that there was an
employer-employee relationship between its company and respondent
bill collectors. Based on the agreement between FCCSI and Manila
Water, respondent bill collectors are the employees of the former, as it
is the former that has the right to select/hire, discipline, supervise, and
control. FCCSI has a separate and distinct legal personality from
Manila Water, and it was duly registered as an independent contractor
before the DOLE.[19] 
Petitioner further claimed that individual service contracts signed by
respondent bill collectors for a 3-month period with Manila Water
were valid and legal. The fact that the duration of the engagement was
stated on the face of the contract dispels any bad faith on the part of
the company. Fixed term contracts are allowed by law. Furthermore,
respondent bill collectors allegation that the incorporation of ACGI
was made as a condition of their continued employment was
unfounded. They transferred to FCCSI on their own volition.[20] 
Petitioner Manila Water also averred that, under its organizational
structure, there was no regular plantilla position of bill collector,
which was the main reason why respondent bill collectors were not
included in the list of MWSS employees absorbed by the company.
The companys out-sourcing of courier needs to an independent
contractor was valid and legal. 
On September 27, 2004, the Labor Arbiter (LA) rendered a decision,
[21]
 the dispositive portion of which reads: 
WHEREFORE, premises considered, the complaints against
respondent Manila Water Company, Inc. is dismissed for lack of
jurisdiction due to want of employer-employee relationship.
Respondent First Classic Courier Services is hereby ordered to
pay complainants separation pay equivalent to one (1) month pay
for every year of service, to wit:

 
1. JOSE P. DALUMPINES - - - - - - - - P36,400.00
2. SUSANO MIRANDA - - - - - - - - - P36,400.00
3. EDGAR PAMORAGA - - - - - - - - - P29,120.00
4. ARTHUR G. LAVISTI - - - - - - - - - P36,400.00
5. BENJAMIN TALAVERA, JR. - - - - P36,400.00
6. JOSE S.A. SIERRA - - - - - - - - - - - P36,400.00
7. MELITANTE D. CASTRO - - - - - - P36,400.00
8. BERNARDO S. MEDINA - - - - - - - P36,400.00
9. MELENCIO BAONGUIS - - - - - - - P36,400.00
10. NONITO V. FERNANDEZ - - - - - - P36,400.00
11. LEGARTO ESTEBAN - - - - - - - - - P36,400.00
12. ROMEO B. CASTALONE - - - - - - P36,400.00
13. RAMON C. REYES - - - - - - - - - - - P36,400.00
14. MOISES L. ZAPATERO - - - - - - - - P29,120.00
15. JOSE T. AGUILAR - - - - - - - - - - - P36,400.00
16. ARNULFO T. JAMISON - - - - - - - P36,400.00
17. ANGEL C. GARCIA - - - - - - - - - - - P36,400.00
18. JOSE TEODY P. VELASCO - - - - - P36,400.00
 19. AUGUSTUS J. TANDOC - - - - - - - P36,400.00
20. EMMANUEL L. CAPIT - - - - - - - - P36,400.00
21. WILLIAM AGANON - - - - - - - - - - P87,360.00
22. ROBERTO S. DAGDAG - - - - - - - - P36,400.00
23 MIGUEL J. LOPEZ - - - - - - - - - - - - P36,400.00
24. GEORGE CABRERA - - - - - - - - - - P36,400.00
25. BORROMEO ARMAN - - - - - - - - - P36,400.00
26. RONITO R. FRIAS - - - - - - - - - - - - P36,400.00
27. ANTONIO A. VERGARA - - - - - - - P36,400.00
28. RANDY T. CORTIGUERRA - - - - - P36,400.00
TOTAL - - - - - - - P1,055,600.00
 
SO ORDERED.[22]
  

Respondent bill collectors and FCCSI filed their separate appeals with
the National Labor Relations Commission (NLRC). On March 15,
2006, the NLRC rendered a decision [23] affirming in toto the decision
of the LA. Respondent bill collectors filed a motion for
reconsideration, but the same was denied in a resolution [24] dated April
28, 2006. 
Disgruntled, respondent bill collectors filed a petition
for certiorari under Rule 65 of the Rules of Court before the CA. On
September 12, 2006, the CA rendered a Decision, the dispositive
portion of which reads: 
WHEREFORE, premises considered, the present petition is hereby
GIVEN DUE COURSE and the writ prayed for accordingly
GRANTED. Consequently, the assailed Decision dated March 15,
2006 and Resolution dated April 28, 2006 of the National Labor
Relations Commission are hereby ANNULED and SET ASIDE. A
new judgment is hereby entered (a) declaring the petitioners as
employees of private respondent Manila Water Company, Inc., and
their termination as bill collectors as illegal; and (b) ordering
private respondent Manila Water Company, Inc. to pay the
petitioners separation pay equivalent to one (1) month for every
year of service. In addition, private respondent Manila Water
 Company, Inc. is liable to pay ten percent (10%) of the total
amount awarded as attorneys fees. 

No pronouncement as to costs. 

SO ORDERED.[25] 

Petitioner Manila Water and respondent bill collectors filed a motion

for reconsideration. However, the CA denied their respective motions
for reconsideration in a Resolution dated November 17, 2006. 
Hence, this petition. 
Petitioner Manila Water presented the following issues for resolution,
whether the CA erred (1) in ruling that an employment relationship
exists between respondent bill collectors and petitioner Manila Water;
(2) in its application of Manila Water Company, Inc. v. Pea[26] to the
instant case; and (3) in ruling that respondent FCCSI is not a bona
fide independent contractor.[27]
The petition is bereft of merit. 
In this case, the LA, the NLRC, and the CA reached different
conclusions of law albeit agreeing on the same set of facts. It was in
their interpretation and appreciation of the evidence that they differed.
The CA ruled that respondent FCCSI was a labor-only contractor and
that respondent bill collectors are employees of petitioner Manila
Water, while the LA and the NLRC ruled otherwise. 
"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.[28] 
Contracting and subcontracting arrangements are expressly allowed
by law but are subject to regulation for the promotion of employment
and the observance of the rights of workers to just and humane
conditions of work, security of tenure, self-organization, and
collective bargaining.[29] In legitimate contracting, the trilateral
relationship between the parties in these arrangements involves the
principal which decides to farm out a job or service to a contractor or
subcontractor, which has the capacity to independently undertake the
performance of the job, work, or service, and the contractual workers
engaged by the contractor or subcontractor to accomplish the job,
work, or service.[30]
Job contracting is permissible only if the following conditions are
met: 1) the contractor carries on an independent business and
undertakes the contract work on his own 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 the work except as to the results
thereof; and 2) the contractor has substantial capital or investment in
the form of tools, equipment, machineries, work premises, and other
materials which are necessary in the conduct of the business. [31] 
On the other hand, the Labor Code expressly prohibits labor-only
contracting. Article 106 of the Code provides that 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 the 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 to the same extent as if the latter were directly
employed by him.[32] 
Department Order No. 18-02, Series of 2002, enunciates that labor-
only contracting refers 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 the performance
of the work of the contractual employee.[33]
 
"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" refers 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 manner and means to be used
in reaching that end.[34] 
In the instant case, the CA found that FCCSI is a labor-only
contractor. Based on the factual findings of the CA, FCCSI does not
have substantial capital or investment to qualify as an independent
contractor, viz.: 
FCCSI was incorporated on November 14, 1995, with an
authorized capital stock of P400,000.00, of which
only P100,000.00 is actually paid-in. Going by the pronouncement
in Pea, such capitalization can hardly be considered substantial.
FCCSI and Manila Water make much of the 17 April 1997 letter of
Postal Regulation Committee Chairman Francisco V. Ontalan, Jr.
to DOTC Secretary Arturo T. Enrile recommending the renewal
and/or extension of authority to FCCSI to operate private
messengerial delivery services, which states in part:

Ocular inspection conducted on its office premises and

evaluation of the documents submitted, the firm
during the six (6) months operation has generated
employment to thirty six (36) messengers, and four (4)
office personnel.

The office equipt [sic] with modern facilities such as

computers, printers, electric typewriter, working table,
telephone lines, airconditioning unit, pigeon holes,
working tables and delivery vehicles such as a Suzuki
 van and three (3) motorcycles. The firms audited
financial statement for the period ending 31 December
1996 [shows] that it earned a net income
of P253,000.00. x x x. 

The above document only proves that FCCSI has no

sufficient investment in the form of tools, equipment and
machinery to undertake contract services for Manila Water
involving a fleet of around 100 collectors assigned to several
branches and covering the service area of Manila Water customers
spread out in several cities/towns of the East Zone. The only
rational conclusion is that it is Manila Water that provides most if
not all the logistics and equipment including service vehicles in the
performance of the contracted service, notwithstanding that the
contract between FCCSI and Manila Water states that it is the
Contractor which shall furnish at its own expense all materials,
tools and equipment needed to perform the tasks of collectors.
Moreover, it must be emphasized that petitioners who are trained
collectors performed tasks that cannot be simply categorized as
messengerial. In fact, these are the very functions they were
already discharging even before they joined FCCSI which invited
or solicited their placement just about the expiration of their three
(3)-month contract with Manila Water on November 28, 1997. The
Agreement between FCCSI and Manila Water provides that FCCSI
shall field the required number of trained collectors to the
following Customer Relations Branch Office: Cubao, Espaa, San
Juan-Mandaluyong, Marikina, Pasig, Taguig-Pateros and Makati.
[35]
 

As correctly ruled by the CA, FCCSIs capitalization may not be

considered substantial considering that it had close to a hundred
collectors covering the east zone service area of Manila Water
customers. The allegation in the position paper of FCCSI that it serves
other companies courier needs does not cure the fact that it has
insufficient capitalization to qualify as independent contractor.
Neither did FCCSI prove its allegation by substantial evidence other
than by their self-serving declarations. What is evident is that it was
Manila Water that provided the equipment and service vehicles
needed in the performance of the contracted service, even if the
contract between FCCSI and Manila Water stated that it was the
Contractor which shall furnish at its own expense all materials, tools,
and equipment needed to perform the tasks of collectors. 
Based on the four-fold test of employer-employee relationship,
Manila Water emerges as the employer of respondent collectors. The
elements to determine the existence of an employment relationship
are: (a) the selection and engagement of the employee; (b) the
payment of wages; (c) the power of dismissal; and (d) the employer's
power to control the employee's conduct. The most important of these
elements is the employer's control of the employee's conduct, not only
as to the result of the work to be done, but also as to the means and
methods to accomplish it.[36] 
The factual circumstances in the instant case are essentially the same
as those cited in Manila Water Company, Inc. v. Hermio Pea.[37] In
that case, 121 bill collectors, headed by Pea, filed a complaint for
illegal dismissal against Manila Water. The bill collectors formed
ACGI which was registered with the SEC. Manila Water, in opposing
the claim of the bill collectors, claimed that there was no employer-
employee relationship with the latter. It averred that the bill collectors
were employees of ACGI, a separate entity engaged in collection
services, an independent contractor which entered into a service
contract for the collection of Manila Waters accounts. The Court ruled
that ACGI was not an independent contractor but was engaged in
labor-only contracting, and as such, is considered merely an agent of
Manila Water.[38] 
The Court ratiocinated that: First, ACGI does not have substantial
capitalization or investment in the form of tools, equipment,
machineries, work premises, and other materials to qualify as an
independent contractor. Second, the work of the bill collectors was
directly related to the principal business or operation of Manila Water.
Being in the business of providing water to the consumers in the east
zone, the collection of the charges by the bill collectors for the
company can only be categorized as related to, and in the pursuit of,
the latter's business. Lastly, ACGI did not carry on an independent
business or undertake the performance of its service contract in its
own manner and using its own methods, free from the control and
supervision of its principal, Manila Water. Since ACGI is obviously a
labor-only contractor, the workers it supplied are considered
employees of the principal. Furthermore, the activities performed by
the bill collectors were necessary or desirable to Manila Water's
principal trade or business; thus, they are regular employees of the
latter. Since Manila Water failed to comply with the requirements of
termination under the Labor Code, the dismissal of the bill collectors
was tainted with illegality.[39] 
The similarity between the instant case and Pea is very evident. First,
the work set-up between the respondent contractor FCCSI and
respondent bill collectors is the same as in Pea. Respondent bill
collectors were individually hired by the contractor, but were under
the direct control and supervision of the concessionaire. Second, they
performed the same function of courier and bill collection services.
Third, the element of control exercised by Manila Water over
respondent bill collectors is essentially the same as in Pea, manifested
in the following circumstances, viz.: (a) respondent bill collectors
reported daily to the branch offices of Manila Water to remit their
collections with the specified monthly targets and comply with the
collection reporting procedures prescribed by the latter; (b)
respondent bill collectors, except for Pamoraga and Zapatero, were
among the 121 collectors who incorporated ACGI; (c) Manila Water
continued to pay their wages in the form of commissions even after
the employees alleged transfer to FCCSI. Manila Water paid the
respondent bill collectors their individual commissions, and the lump
sum paid by Manila Water to FCCSI merely represented the agency
fee; and (d) the certification or individual clearances issued by Manila
Water to respondent bill collectors upon the termination of the service
contract with FCCSI. The certification stated that respondents were
contract collectors of Manila Water and not of FCCSI. Thus, this
Court agrees with the findings of the CA that if, indeed, FCCSI was
the true employer of the bill collectors, it should have been the one to
issue the certification or individual clearances.
 
It should be remembered that the control test merely calls for the
existence of the right to control, and not necessarily the exercise
thereof. It is not essential that the employer actually supervises the
performance of duties of the employee. It is enough that the former
has a right to wield the power.[40] 
Respondent bill collectors are, therefore, employees of petitioner
Manila Water. It cannot be denied that the tasks performed by
respondent bill collectors are directly related to the principal business
or trade of Manila Water. Payments made by the subscribers are the
lifeblood of the company, and the respondent bill collectors are the
ones who collect these payments. 
The primary standard of determining regular employment is the
reasonable connection between the particular activity performed by
the employee in relation to the usual business or trade of the
employer. In this case, the connection is obvious when we consider
the nature of the work performed and its relation to the scheme of the
particular business or trade in its entirety. Finally, the repeated and
continuing need for the performance of the job is sufficient evidence
of the necessity, if not indispensability of the activity to the business.
[41]
 
WHEREFORE, in view of the foregoing, the Decision dated
September 12, 2006 and the Resolution dated November 17, 2006 of
the Court of Appeals in CA-G.R. SP No. 94909 are
hereby AFFIRMED.
 
Costs against petitioner.
 
SO ORDERED.