**Facts:**
1. **Background and Transition:**
– Republic Act No. 8041 (National Water Crisis Act of 1995) led to MWSS engaging private sector concessionaires.
– Manila Water Company, Inc. (Manila Water) was contracted to manage the water distribution in Metro Manila’s east zone.
2. **Initial Employment and Contract Changes:**
– August 1, 1997: Several MWSS employees were not absorbed by Manila Water but were given temporary services without a written contract for a month.
– September 1, 1997: Respondents signed 3-month contracts for collection services on a commission basis.
3. **Formation of ACGI and Association with FCCSI:**
– November 21, 1997: The 121 bill collectors formed the Association Collector’s Group, Inc. (ACGI) to offer courier services and were contracted by Manila Water’s Balara Branch.
– December 1997: Manila Water also contracted First Classic Courier Services, Inc. (FCCSI) for courier services, requiring bill collectors to transfer to FCCSI effective December 1, 1997.
4. **Termination and Filing of Complaints:**
– Between May and October 2002, individual respondents were terminated due to the switch to a “collectorless” payment system via “Bayad Centers.”
– Respondents filed complaints for illegal dismissal, citing an employer-employee relationship with Manila Water.
5. **Labor Arbiter and NLRC Decisions:**
– Labor Arbiter dismissed the complaints against Manila Water, awarded separation pay from FCCSI.
– NLRC affirmed the Labor Arbiter’s decision.
– Respondents filed certiorari with the CA after a denied motion for reconsideration.
6. **Court of Appeals Decision:**
– CA ruled Manila Water was the true employer and that FCCSI was a labor-only contractor, ordering separation pay from Manila Water.
**Issues:**
1. **Existence of Employer-Employee Relationship:**
– Was there an employer-employee relationship between the respondents and Manila Water?
2. **Application of Manila Water Company, Inc. v. Peña:**
– Did the CA err in applying the case ruling to the circumstances of the present case?
3. **Independent Contracting Status of FCCSI:**
– Was FCCSI a legitimate independent contractor?
**Court’s Decision:**
– **Employer-Employee Relationship:**
– The Court affirmed that respondents were employees of Manila Water. The “control test” was satisfied, with evidence showing Manila Water managed respondents’ daily tasks and remuneration.
– **Application of Peña Case:**
– The Court upheld that the case was analogous to Manila Water Company, Inc. v. Peña, reiterating that entities like ACGI (and FCCSI in this case) were labor-only contractors.
– **FCCSI’s Contractor Status:**
– FCCSI was deemed a labor-only contractor due to insufficient capitalization and reliance on Manila Water for logistics and equipment.
**Doctrine:**
– **Control Test for Employer-Employee Relationship:**
– The existence of a right to control, not necessarily exercised, suffices to establish an employer-employee relationship.
– Activities closely related to the principal business of the company signify regular employment if performed repeatedly and continuously.
**Class Notes:**
– **Four-Fold Test:** (a) Selection and Engagement, (b) Payment of Wages, (c) Power of Dismissal, (d) Employer Control.
– **Labor-Only Contracting:** The contractor lacks substantial capital, operates dependent on the principal, and the supplied workforce performs the principal’s business activities.
– **Relevant Statutes:**
– Labor Code, Article 106
– Department Order No. 18-02, Series of 2002
**Historical Background:**
– **National Water Crisis:** Driven by the need to manage a national water crisis effectively, the government authorized privatization of water services, leading to legal challenges on employment contracts and relationships in the newly structured water distribution companies.
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