INVESTMENT PLANNING CORPO­RATION OF THE PHILIPPINES, PETITIONER-APPELLANT, VS. SOCIAL SECURITY SYSTEM, RESPONDENT-APPELLEE.

Petitioner is a domestic corporation
engaged in business management and the sale of securities.  It has two classes of agents who sell its investment plans:  (1) salaried employees who keep definite
hours and work under the control and supervision of the company; and (2)
registered representatives who work on commission basis.

On August 27, 1960
petitioner, through counsel, applied to respondent Social Security Commission
for exemption of its so-called registered representatives from the compulsory
coverage of the Social Security Act.  The
application was denied in a letter signed by the Secretary to the Commission on January 16, 1961.  A motion to reconsider was filed and also
denied, after hearing, by the Commission itself in its resolution dated September 8, 1961.  The matter was thereafter elevated to this
Court for review.

The issue submitted for decision here is whether petitioner’s
registered representatives are employees within the meaning of the Social
Security Act (R.A. No. 1161 as amended). 
Section 8 (d) thereof
defines the term “employee” – for purposes of the Act – as “any
person who performs services for an ’employer’ in which either or both mental
and physical efforts are used and who receives compensation for such services,
where there is an
employer-employee relationship.” (As amended by Sec. 4, R.A. No. 2658) These representatives are in
reality commission agents.  The uncontradicted testimony of petitioner’s lone witness, who
was its assistant sales director, is that
these agents are recruited and trained by him particularly for the job of
selling “Filipinas Mutual Fund” shares, made to undergo a test after
such training and, if success­ful, are given license to practice by the
Securities and Exchange Commission.  They
then execute an agreement with petitioner with respect to the sale of FMF shares to the general public.  Among the features of said agreement which
respondent Commission considered pertinent to the issue are:  (a) an agent is paid compensation for
services in the form of
commission; (b) in the event of
death or resignation he or his legal representative shall be paid the balance
of the commission corresponding to him; (c) he is subject to a set of rules and regulations governing the
performance of his duties under the agreement; (d) he is required to put up a performance bond; and (e) his services
may be terminated for certain causes.  At
the same time the Commission found from the evidence and so stated in its
resolution that the agents “are not required to report (for work) at any
time; they do not have to devote their time exclusively to or work solely for petitioner; the time and the effort they
spend in their work depend entirely upon their own will and initiative; they
are not required to account for their time nor submit a record of their
activities; they shoulder their own selling expenses as well as
transportation; and they are paid their commission based on a certain
percentage of their sales.” The
record also reveals that the commission earned by an agent on his sales is
directly deducted by him from the amount he receives from the
investor and turns over to the
company the amount invested after such deduction is made.  The majority of the agents are regularly
employed elsewhere – either in the government or in private enterprises.

Of the three requirements under Section 8 (d) of the Social Security Act it is admitted that the first
is present in respect of the agents whose status is in question.  They exert both mental and physical efforts
in the performance of their services. 
The compensation they receive, however, is not necessarily for those
efforts but rather for the results thereof, that is, for actual sales that they
make.  This point is relevant in the determination of whether or not the third requisite is also present, namely, the existence of
employer-employee relationship. Petitioner points out that in effect such
compensation is paid not by it
but by the investor, as shown by the basis on which the amount of the
commission is fixed and the
manner in which it is collected.

Petitioner submits that
its commission agents, engaged under the terms and conditions already enumerated, are not employees but independent contractors,
as defined in Article 1713 of the Civil Code, which provides:

“ART. 1713.  By the
contract for a piece of work the contractor binds him­self to execute a piece
of work for the employer, in consideration of a certain price or
compensation.  The contractor may either
employ only his labor or skill, or also furnish the material.”

We are convinced from the
facts that the work of petitioner’s agents or registered representatives more
nearly approximates that of an independent contractor than that of an
employee.  The latter is paid for the
labor he performs, that is, for the acts of which such labor consists; the
former is paid for the result thereof. 
This Court has recognized the distinction in Chartered Bank et al.
vs. Constantino,
56 Phil. 717, where it said:

“On this point, the distinguished commentator Manresa in referring to Article
1588 of the (Spanish) Civil Code has the following to say.  x x x

“‘The code does not begin by giving a general idea of the subject
matter, but by fixing its two dis­tinguishing characteristics.

“‘But such an idea was not absolutely necessary because the dif­ference
between the lease of work by contract or for a fixed price and the lease of services of hired servants or
laborers is sufficiently clear.  In the
latter, the direct object of the contract is the lessor’s labor; the acts in which such labor consists, performed for the benefit
of the lessee, are taken into account immediately.  In work done by contract or for a fixed
price, the lessor’s labor is indeed an important, a most important factor; but it is
not the direct object of the contract, nor is it immediately taken into
account.  The object which the parties
consider, which they bear in mind in order to determine the cause of the
contract, and upon which they really give their consent, is not the labor but
its result, the complete and finished work, the aggregate of the lessor’s acts embodied in something material, which is the
useful object of the contract.  x x x’ (Manresa
Commentarios al Codigo
Civil, Vol. X, 3d ed., pp. 774-775.)”

Even if an agent of
petitioner should devote all of his time and effort trying to sell its
investment plans he would not
necessarily be entitled to compensation therefor.  His right to compensation depends upon and is
measured by the tangible results he produces.

The specific question of
when there is “employer?employee
relationship” for purposes of the Social Security Act has not yet been
settled in this jurisdiction by any decision of this Court.  But in other connections wherein the
term is used the test that has been generally applied is the so-called control
test, that is, whether the “employer” controls or has reserved the
right to control the “employee” not only as to the result of the work
to be done but also as to the means and methods by which the same is to be
accomplished.

Thus in Philippine
Manufacturing Company vs. Geronimo et al., L-6968, November 29, 1954, involving the Workmen’s Compensation Act,
we read:

“. . . Garcia, a painting contractor, had a contract undertaken to paint a water
tank belonging to the Company ‘in accordance with specifications and price stipulated,’
and with ‘the actual supervision of the work (being) taken care of by’
himself.  Clearly, this made Garcia an
independent contractor, for while the company prescribed what should be done,
the doing of it and the supervision thereof was left entirely to him, all of
which meant that he was free to do the job according to his own method without
being subject to the control of the company except as to the result.”

Cruz et al. vs. The
Manila Hotel Company, L-9110, April 30, 1957, presented the issue of who were to be
considered employees of the defendant firm for purposes of separation
gratuity.  LVN Pictures, Inc. vs. Phil.
Musicians Guild et al., L-12582, January 28, 1961, involved the status of certain musicians for purposes of determining the
appropriate bargaining representative of the employees.  In both instances the “control” test was followed.  (See also Mensal vs. P.P. Gocheco
Lumber Co., L-8017, 
April 30, 1955; and Viana vs. Alagadan, et al., L-8967, May 31, 1956.)

In the United States, the Federal Social Security Act of 935 set
forth no definition of the term ’employee’ other than that ‘it includes an
officer of a corporation.’ Under that Act the U.S. Supreme Court adopted for a
time and in several cases the so-called “economic reality” test instead
of the “control” test.  (U.S. vs. Silk and Harrison, 91 Law Ed. 1757; Bartels vs.
Birmingham Ibid, 1947, both decided in June 1947).  In the Bartels case the Court said:

“In United States v. Silk, No. 312, 331 US 704, ante, 1957, 67
S Ct 1463, supra, we held that the relationship of employer-employee, which
determines the liability for employment taxes under the Social Security Act was
not to be deter­mines solely by the idea of control which an alleged employer
may or could exercise over the details of the service rendered to his business
by the worker or workers.  Obviously
control is character­istically associated with the employer-employee
relationship, but in the application of social legislation employees are those
who as a matter
of economic reality are dependent upon the business to which they render
service.  In Silk, we pointed out that
permanency of the relation, the skill required, the investment in the
facilities for work and opportunities for profit or less from the activities
were also factors that should enter into judicial determination as to the
coverage of the Social Security Act.  It
is the total situation that controls. 
These standards are as important in the entertainment field as we have
just said, in Silk, that they were in that of distribution and
transportation.” (91 Law, Ed. 1947, 1953;)

However, the
“economic-reality” test was subsequently abandoned as not reflective
of the intention of Congress in the enactment of the original Security Act of
1935.  The change was accomplished by
means of an amendatory Act passed in 1948, which was construed and applied in
later cases.  In Benson
vs. Social Security Board, 172 F. 2d. 682, the U.S. Supreme Court said:

“After the decision by the Supreme Court in the Silk case, the
Treasury Department revamped its Regulation, 12 Fed. Reg. 7966, using the test
set out in the Silk case for determining the existence of an employer-employee
relationship.  Apparently this was not the concept of such a
relationship that Congress had in mind in the passage of such remedial acts as
the one involved here because thereafter on June 14, 1948, Congress enacted
Public Law 642, 42 U.S. C.A. Sec. 1301(a) (6). 
Section 1101(a) (6) of the Social Security Act was amended to read as
follows:

“‘The term ‘employee’
includes an officer of a corpora­tion, but such term does not include (1) any
individual who, under the usual common-law rules applicable in determining the
employer-employee relationship, has the status of an independent contractor
or (2) any individual (except an officer of a corporation) who is not an
employee under such common-law rules.’

“While it is not
necessary to explore the full effect of this enactment in the determination of
the existence of employer-employee relationships arising in the future, we think
it can fairly be said that the intent of Congress was to say that in deter­mining
in a given case whether under the Social Security Act such a relationship
exists, the common-law elements of such a relationship, as recognized and
applied by the courts generally at the time of the passage of the Act, were the
standard to be used . . . .”

The common-law principles expressly adopted by the United States
Congress are summarized in Corpus Juris Secundum as follows:

“Under the common-law principles as to tests of the
independent contractor relationship, discussed in Master and Servant, and
applicable in determining coverage under the Social Security Act and related
taxing provisions, the significant factor in determining the
relationship of the parties is the presence or absence of a supervisory power to control the
method and detail of performance of the service, and the degree to which the
principal may intervene to exercise such control, the presence of such power of control being indicative
of an employment relationship and the absence of such power being in­dicative
of the relationship of independ­ent contractor. 
In other words, the test of existence of the relationship of independent
contractor, which relationship is not taxable under the Social Security Act and
related provisions, is whether
the one who is claimed to be an
independent contractor has contracted to do the work according to his own
methods and without being subject to the control of the employer except as to
the result of the work.” (81 C.J.S. Sec. 5, pp. 24-25;)
See also Millard’s Inc. vs. United States,
146 F. Supp. 385; Schmidt vs. Ewing, 108 F. Supp. 505; Rambin
vs. Ewing, 106 F. Supp. 268.

In the case last cited (Rambin v. Ewing) the
question presented was whether the plaintiff there, who was a sales
representative of a cosmetics firm working on a commission basis, was to be considered an employee.  Said the Court:

“Plaintiff’s only remuneration was her commission of 40% plus
$5 extra for every $250 of sales. 
Plaintiff was not guaranteed any
minimum compensation and she was not
allowed a drawing account or advance of any kind against unearned commissions. 
Plaintiff paid all of her traveling expenses and she even had to
pay the postage for sending orders to Avon.

“The only office
which Avon maintained in Shreveport
was an office for the city manager. 
Plaintiff worked from her own home and she was never furnished any
leads.  The relationship between
plaintiff and Avon was terminable at will x x x

“x        x       
x

“x x x A long
line of decisions holds that commissions sales representatives are not
employees within the coverage of the Social Security Act.  The under­lying circumstances of the relationship between the sales representatives and company
often vary widely from case to case, but commission sales representa­tives have
uniformly been held to be out­side the Social Security Act.”

Considering the similarity between the
definition of “employee”
in the Federal Social Security Act (U.S.) as amended and its definitions in our
own Social Security Act, and considering further that the local statute is
admittedly patterned after that of the United States, the decisions of
American courts on the matter before us may
well be accorded persuasive force.  The logic of the situation indeed dictates that where the element of control is absent; where a person
who works for another does so more or less at his own pleasure and is not
subject to definite hours or conditions of work, and in turn is compensated
according to the result of his efforts and not the amount thereof, we should
not find that the relationship of employer and employee exists.

We have examined the contract form between peti­tioner and its
registered representatives and found nothing therein which would indicate that
the latter are under the control of the former in respect of the means and
methods they employ in the performance of their work.  The fact that for certain specified causes
the relationship may be terminated (e.g. failure to meet the annual quota of
sales, inability to make any sales produc­tion during a six-month period,
conduct detrimental to petitioner, etc.) does not mean that such control
exists, for the causes of termination thus specified have no relation to the
means and methods of work that are ordinarily required of or imposed upon
employees.

In view of the foregoing considerations, the resolution of
respondent Social Security Commission sub­ject of this appeal is reversed and
set aside, without pronouncement as to costs.

Reyes, Dizon, Bengzon,
Zaldivar, Sanchez, Ruiz Castro, Angeles, and Fernando, JJ., concur.

Concepcion, C.J., did not
take part.