MANILA WATER COMPANY, INC., PETITIONER, VS. HERMINIO D. PENA, ESTEBAN B. BALDOZA, JORGE D. CANONIGO, JR., IKE S. DELFIN, RIZALINO M. INTAL, REY T. MANLEGRO, JOHN L. MARTEJA, MAR…

Manila Water versus Peña

The Case

This is a labor case about the true employer of a group of water-bill collectors. Manila Water Company, the private concessionaire that took over the East Zone of Metro Manila under the National Water Crisis Act of 1995, is pitted against Herminio Peña and his fellow collectors, who claim they were its regular employees and were illegally dismissed. The collectors had been made to sign short fixed-term contracts and were later made to work under a corporation they themselves were asked to organize. The case matters because it is the Court's clean statement of how to test a contractor's status — independent contractor or labor-only contractor — and of how the four-fold test and Article 280 of the Labor Code defeat schemes that use paper arrangements to strip workers of security of tenure.

Procedural History

The collectors filed a complaint for illegal dismissal and money claims before the Labor Arbiter. Labor Arbiter Eduardo Carpio ruled in their favor, finding them regular employees of Manila Water who had been illegally dismissed, and ordered separation pay totaling 222,500 pesos plus attorney's fees of 22,250 pesos. Both sides appealed to the National Labor Relations Commission, which reversed the Labor Arbiter and held that no employer-employee relationship existed, since the memoranda and letters merely identified erring collectors and left discipline to the corporation. The collectors then went to the Court of Appeals on a petition for certiorari, charging grave abuse of discretion. The Court of Appeals reversed the Commission and reinstated the Labor Arbiter's decision with modification, and it denied Manila Water's motion for reconsideration. Manila Water came to the Supreme Court by petition for review.

Facts

Under its Concession Agreement with the Metropolitan Waterworks and Sewerage System, Manila Water undertook to absorb only those former employees whose names appeared in a list furnished by the system. The collectors here were among 121 contractual collectors not on that list, so their employment with the system ended when Manila Water took over the East Zone on the first of August 1997. Even so, Manila Water engaged their services without a written contract from the first of August to the thirty-first of August 1997. On the first of September 1997 they signed a three-month contract to perform collection services for eight branches.

Before that three-month contract ended, the 121 collectors incorporated the Association Collectors Group, Incorporated, which Manila Water then contracted to collect charges for the Balara Branch. Most of the collectors were later asked to transfer to a newly registered corporation, First Classic Courier Services; only the private respondents remained with the association. Manila Water continued to transact with the association until the eighth of February 1999, when it terminated their contract.

The collectors then sued, insisting they were Manila Water's employees because it controlled all the methods and procedures of their collections. Manila Water answered that they were employees of the association, an independent contractor, and that it controlled only the results of the work, not the manner of doing it.

Issues

• Whether or not an employer-employee relationship existed between Manila Water and the private respondents.
• Whether or not the private respondents were illegally dismissed by Manila Water.
• Whether or not the awards of moral and exemplary damages, and of attorney's fees, were proper.

Applicable Provisions

Article 280 of the Labor Code, on regular employment, provides:

The provisions of written agreement to the contrary notwithstanding and regardless of the oral agreement of the parties, an employment shall be deemed to be regular where the employee has been engaged to perform activities which are usually necessary or desirable in the usual business or trade of the employer, except where the employment has been fixed for a specific project or undertaking the completion or termination of which has been determined at the time of the engagement of the employee or where the work or services to be performed is seasonal in nature and the employment is for the duration of the season.

This is the provision that made the collectors regular employees, because collecting water charges is necessary and desirable to Manila Water's business, and it is the provision that condemned the fixed-term contracts as a device to defeat tenure.

Article 279 of the Labor Code, on security of tenure, provides:

In cases of regular employment, the employer shall not terminate the services of an employee except for a just cause or when authorized by this Title. An employee who is unjustly dismissed from work shall be entitled to reinstatement without loss of seniority rights and other privileges and to his full backwages, inclusive of allowances, and to his other benefits or their monetary equivalent computed from the time his compensation was withheld from him up to the time of his actual reinstatement.

This is the measure of the relief granted once the dismissal was found illegal.

Section 5 of Department Order Number 18-02, the rules implementing Articles 106 to 109 of the Labor Code, defines labor-only contracting, and the Court quoted it:

Labor-only contracting refers to an arrangement where the contractor or subcontractor merely recruits, supplies or places workers to perform job, work or service for a principal, and any of the following elements is present: 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 The contractor does not exercise the right to control over the performance of the work of the contractual employee.

This definition supplied the test by which the association's true status was measured.

Ruling

On the first issue, the Court held that an employer-employee relationship existed. The Court first had to fix the association's status, because the claim that the collectors were its employees could not stand unless it were truly an independent contractor. Job contracting is permissible only if the contractor carries on an independent business and undertakes the work on its own account, free from the control of the principal except as to results, and if it has substantial capital or investment in tools, equipment, machineries, work premises, and other materials. The association failed both. Its authorized capital stock was one million pesos but only 62,500 pesos was paid in, and each collector subscribed four shares and paid only 625 pesos; it had no office, its corporate address being the residence of its president, Herminio Peña; and the collectors used Manila Water's receipts and identification cards. Their work was directly related to Manila Water's principal business of supplying water. And the association did not carry on a distinct business free from control: Manila Water issued memoranda on billing methods and distribution of books, required daily reporting and same-day remittance or deposit with the Bank of the Philippine Islands, strictly monitored attendance, and dictated the penalties imposed on erring collectors. The association was therefore a labor-only contractor, a mere agent of Manila Water, and the workers it supplied were Manila Water's employees.

The four-fold test led to the same result — selection and engagement, payment of wages, power of dismissal, and the power to control the employee's conduct, the most important being control not only of the result but of the means and methods. Manila Water exercised that control across all three stages of the collectors' service. Having engaged them, paid them commissions, subjected them to its rules, and imposed punishment for breach, it became their employer. Because they performed activities necessary or desirable to its business, they were regular employees under Article 280, and the fixed term in the later contract was struck down as an attempt to defeat the tenure they already enjoyed.

On the second issue, the Court held the dismissal illegal. As employer, Manila Water bore the burden of proving a lawful cause and compliance with due process, and it failed, having staked everything on the defense that it was not the employer. The dismissal was tainted with illegality, and the collectors were entitled to reinstatement, or to separation pay in lieu of reinstatement where reinstatement is no longer possible.

On the third issue, the Court deleted the awards of moral and exemplary damages. Such awards cannot rest solely on the premise that an employee was dismissed without just cause or due process; additional facts must be pleaded and proved, showing bad faith, fraud, oppression, or a wanton and malevolent manner of dismissal, and that social humiliation, wounded feelings, or grave anxiety resulted. Those circumstances were not adequately established. The attorney's fees of 22,250 pesos were sustained, as the collectors were compelled to litigate to protect their interests.

Doctrine

A contractor's status is not taken from its papers but measured by the statutory criteria. It is an independent contractor only if it carries on an independent business, free from the principal's control except as to results, and has substantial capital or investment in tools, equipment, machineries, work premises, and other materials. Failing either, it is a labor-only contractor, a mere agent of the principal, and the law creates an employer-employee relationship between the principal and the supplied workers to prevent circumvention of labor laws. Under the four-fold test, the decisive element is the employer's control of the employee's conduct, not only as to the result but as to the means and methods. Under Article 280, one engaged to perform activities usually necessary or desirable in the employer's business is a regular employee, and a fixed term imposed to preclude the acquisition of tenurial security is struck down as contrary to public policy. Finally, moral and exemplary damages are not awarded on the mere fact of an illegal dismissal; bad faith, oppression, or a wanton manner must be pleaded and proved.

Disposition

The Court denied the petition and affirmed the Court of Appeals, with the modification that the awards of 10,000 pesos as moral damages and 5,000 pesos as exemplary damages were deleted for lack of evidentiary basis, leaving the collectors the winners on the core claims.

Remember This

Memorize this line: a labor-only contractor is a mere agent of the principal, and the law itself creates the employer-employee relationship to prevent circumvention of labor laws. Examiners use this case for contractor-status problems, for the four-fold test, and for fixed-term contracts that are really devices to defeat security of tenure.