FIRSTDIVISION

[G.R.No.158255.July8,2004]

MANILAWATERCOMPANY,INC.,petitioner,vs.HERMINIOD.PENA,ESTEBANB.
BALDOZA,JORGED.CANONIGO,JR.,IKES.DELFIN,RIZALINOM.INTAL,
REY T. MANLEGRO, JOHN L. MARTEJA, MARLON B. MORADA,ALLAN D.
ESPINA, EDUARDO ONG, AGNESIO D. QUEBRAL, EDMUNDO B. VICTA,
VICTOR C. ZAFARALLA, EDILBERTO C. PINGUL and FEDERICO M.
RIVERA,respondents.

DECISION
YNARESSANTIAGO,J.:

[1]
Thispetitionassailsthedecision oftheCourtofAppealsdatedNovember29,2002,inCAG.R.
SP No. 67134, which reversed the decision of the National Labor Relations Commission and
reinstatedthedecisionoftheLaborArbiterwithmodification.
PetitionerManilaWaterCompany,Inc.isoneofthetwoprivateconcessionairescontractedbythe
MetropolitanWaterworksandSewerageSystem(MWSS)tomanagethewaterdistributionsystemin
theEastZoneofMetroManila,pursuanttoRepublicActNo.8041,otherwiseknownastheNational
Water Crisis Act of 1995. Under the Concession Agreement, petitioner undertook to absorb former
employeesoftheMWSSwhosenamesandpositionswereinthelistfurnishedbythelatter,whilethe
employmentofthosenotinthelistwasterminatedonthedaypetitionertookovertheoperationofthe
East Zone, which was on August 1, 1997. Private respondents, being contractual collectors of the
MWSS,wereamongthe121employeesnotincludedinthelistnevertheless,petitionerengagedtheir
serviceswithoutwrittencontractfromAugust1,1997toAugust31,1997.Thereafter,onSeptember
1, 1997, they signed a threemonth contract to perform collection services for eight branches of
[2]
petitionerintheEastZone.
Before the end of the threemonth contract, the 121 collectors incorporated the Association
[3]
CollectorsGroup,Inc.(ACGI), whichwascontractedbypetitionertocollectchargesfortheBalara
Branch.Subsequently,mostofthe121collectorswereaskedbythepetitionertotransfertotheFirst
Classic Courier Services, a newly registered corporation.Only private respondents herein remained
withACGI.PetitionercontinuedtotransactwithACGItodoitscollectionneedsuntilFebruary8,1999,
[4]
whenpetitionerterminateditscontractwithACGI.
Private respondents filed a complaint for illegal dismissal and money claims against petitioner,
contending that they were petitioners employees as all the methods and procedures of their
collectionswerecontrolledbythelatter.
On the other hand, petitioner asserts that private respondents were employees of ACGI, an
independentcontractor.Itmaintainedthatithadnocontrolandsupervisionoverprivaterespondents
mannerofperformingtheirworkexceptastotheresults.Thus,petitionerdidnothaveanemployer
employee relationship with the private respondents, but only a service contractorclient relationship
withACGI.
OnMay31,2000, Labor Arbiter Eduardo J. Carpio rendered a decision finding the dismissal of
privaterespondentsillegal.Heheldthatprivaterespondentswereregularemployeesofpetitionernot
only because the tasks performed by them were controlled by it but, also, the tasks were obviously
necessary and desirable to petitioners principal business. The dispositive portion of the decision
reads:

WHEREFORE,premisesconsidered,judgmentisherebyrendered,findingthatcomplainantswereemployeesof
respondent[petitionerherein],thattheywereillegallydismissed,andrespondent[petitionerherein]ishereby
orderedtopaytheirseparationpaybasedonthefollowingcomputedamounts:

HERMINIOD.PENAP15,000.00
ESTEBANBALDOZAP12,000.00
JORGED.CANONIGO,JR.P16,000.00
IKES.DELFINP12,000.00
RIZALINOM.INTALP16,000.00
REYT.MANLEGROP16,000.00
JOHNL.MARTEJAP12,000.00
MARLONB.MORADAP16,000.00
ALLAND.ESPINAP14,000.00
EDUARDOONGP15,000.00
AGNESIOD.QUEBRALP16,000.00
EDMUNDOB.VICTAP13,000.00
VICTORP.ZAFARALLAP15,000.00
EDILBERTOC.PINGULP19,500.00
FEDERICOM.RIVERAP15,000.00

TOTALP222,500.00

Respondent[petitionerherein]isfurtherdirectedtopayten(10%)percentofthetotalawardasattorneysfeeor
thesumofP22,250.00.
[5]
SOORDERED.

Both parties appealed to the NLRC, which reversed the decision of the Labor Arbiter and ruled
thatthedocumentaryevidence,e.g.,lettersandmemorandabythepetitionertoACGIregardingthe
poorperformanceofthecollectors,didnotconstituteproofofcontrolsincethesedocumentsmerely
identified the erring collectors the appropriate disciplinary actions were left to the corporation to
[6]
impose. Further,therewasnoevidenceshowingthattheincorporationofACGIwasirregular.
Private respondents filed a petition for certiorari with the Court of Appeals, contending that the
NLRC acted with grave abuse of discretion amounting to lack or excess of jurisdiction when it
reversedthedecisionoftheLaborArbiter.
The Court of Appeals reversed the decision of the NLRC and reinstated with modification the
[7]
decision of the Labor Arbiter. It held that petitioner deliberately prevented the creation of an
employment relationship with the private respondents and that ACGI was not an independent
[8]
contractor.Itlikewisedeniedpetitionersmotionforreconsideration.
Hence,thispetitionforreviewraisingthefollowingerrors:

THEHONORABLECOURTOFAPPEALSINRENDERINGTHEASSAILEDDECISIONAND
RESOLUTIONCOMMITTEDGRAVEREVERSIBLEERRORS:

A. IN GOING BEYOND ITS JURISDICTION AND PROCEEDING TO GIVE DUE COURSE TO

RESPONDENTSPETITIONFORCERTIORARIUNDERRULE65OFTHERULESOFCOURT,
NOTWITHSTANDING THE ABSENCE OFANY PROOF OF GRAVE ABUSE OF DISCRETION
 ONTHEPARTOFTHENATIONALLABORRELATIONSCOMMISSIONWHENITRENDERED
THEDECISIONASSAILEDBYHEREINRESPONDENTS.
B.WHEN IT MANIFESTLY OVERLOOKED THE EVIDENCE PRESENTED BY THE PETITIONER
COMPANY AND RULING THAT THE PETITIONERS DEFENSE OF LACK OF EMPLOYER
EMPLOYEERELATIONSISWITHOUTMERIT.
C. IN CONCLUDING THAT PETITIONER COMPANY REQUIRED RESPONDENTS TO
INCORPORATETHEASSOCIATEDCOLLECTORSGROUP,INC.[ACGI]NOTWITHSTANDING
ABSENCEOFANYSPECIFICEVIDENCEINSUPPORTOFTHESAME.
D.INFINDINGPETITIONERCOMPANYGUILTYOFBADFAITHNOTWITHSTANDINGABSENCE
OF ANY SPECIFIC EVIDENCE IN SUPPORT OF THE SAME, AND AWARDING MORAL AND
[9]
EXEMPLARYDAMAGESTOHEREINRESPONDENTS.
The pivotal issue to be resolved in this petition is whether or not there exists an employer
employee relationship between petitioner and private respondents. Corollary thereto is the issue of
whetherornotprivaterespondentswereillegallydismissedbypetitioner.
The issue of whether or not an employeremployee relationship exists in a given case is
[10]
essentiallyaquestionoffact. Asarule,theSupremeCourtisnotatrieroffacts,andthisapplies
with greater force in labor cases. Hence, factual findings of quasijudicial bodies like the NLRC,
particularly when they coincide with those of the Labor Arbiter and if supported by substantial
[11]
evidence,areaccordedrespectandevenfinalitybythisCourt. However,adisharmonybetweenthe
factualfindingsoftheLaborArbiterandtheNationalLaborRelationsCommissionopensthedoortoa
reviewthereofbythisCourt.Factualfindingsofadministrativeagenciesarenotinfallibleandwillbe
set aside when they fail the test of arbitrariness.Moreover, when the findings of the National Labor
RelationsCommissioncontradictwiththoseofthelaborarbiter,thisCourt,intheexerciseofitsequity
[12]
jurisdiction,maylookintotherecordsofthecaseandreexaminethequestionedfindings.
Theresolutionoftheforegoingissuesinitiallyboilsdowntoadeterminationofthetruestatusof
ACGI,i.e.,whetheritisanindependentcontractororalaboronlycontractor.
Petitioner asserts that ACGI, a duly organized corporation primarily engaged in collection
services, is an independent contractor which entered into a service contract for the collection of
petitionersaccountsstartingNovember30,1997untiltheearlypartofFebruary1999.Thus,ithasno
employmentrelationshipwithprivaterespondents,beingemployeesofACGI.
Theexistenceofanemploymentrelationshipbetweenpetitionerandprivaterespondentscannot
benegatedbysimplyallegingthatthelatterareemployeesofACGIasanindependentcontractor,it
being crucial that ACGIs status, whether as laboronly contractor or independent contractor, be
measuredintermsofanddeterminedbythecriteriasetbystatute.
[13]
ThecaseofDelosSantosv.NLRC succinctlyenunciatesthisstatutorycriteria

Jobcontractingispermissibleonlyifthefollowingconditionsaremet:1)thecontractorcarriesonan
independentbusinessandundertakesthecontractworkonhisownaccountunderhisownresponsibility
accordingtohisownmannerandmethod,freefromthecontrolanddirectionofhisemployerorprincipalinall
mattersconnectedwiththeperformanceoftheworkexceptastotheresultsthereofand2)thecontractorhas
substantialcapitalorinvestmentintheformoftools,equipment,machineries,workpremises,andother
materialswhicharenecessaryintheconductofthebusiness.

LaboronlycontractingasdefinedinSection5,DepartmentOrderNo.1802,RulesImplementing
[14]
Articles106109oftheLaborCode referstoanarrangementwherethecontractororsubcontractor
merelyrecruits,suppliesorplacesworkerstoperformjob,workorserviceforaprincipal,andanyof
thefollowingelementsispresent:
 (i)Thecontractororsubcontractordoesnothavesubstantialcapitalorinvestmentwhichrelatestothe
job, work or service to be performed and the employees recruited, supplied or placed by such
contractororsubcontractorareperformingactivitieswhicharedirectlyrelatedtothemainbusinessof
theprincipalor
(ii) The contractor does not exercise the right to control over the performance of the work of the
contractualemployee.
Given the above criteria, we agree with the Labor Arbiter that ACGI was not an independent
contractor.
First,ACGIdoesnothavesubstantialcapitalizationorinvestmentintheformoftools,equipment,
machineries,workpremises,andothermaterials,toqualifyasanindependentcontractor.Whileithas
an authorized capital stock of P1,000,000.00, only P62,500.00 is actually paidin, which cannot be
consideredsubstantialcapitalization.The121collectorssubscribedtofourshareseachandpaidonly
[15]
the amount of P625.00 in order to comply with the incorporation requirements. Further, private
respondentsreporteddailytothebranchofficeofthepetitionerbecauseACGIhasnoofficeorwork
premises.Infact,thecorporateaddressofACGIwastheresidenceofitspresident,Mr.HerminioD.
[16]
Pea. Moreover, in dealing with the consumers, private respondents used the receipts and
[17]
identificationcardsissuedbypetitioner.
Second, the work of the private respondents was directly related to the principal business or
operation of the petitioner. Being in the business of providing water to the consumers in the East
Zone, the collection of the charges therefor by private respondents for the petitioner can only be
categorizedasclearlyrelatedto,andinthepursuitofthelattersbusiness.
Lastly, ACGI did not carry on an independent business or undertake the performance of its
servicecontractaccordingtoitsownmannerandmethod,freefromthecontrolandsupervisionofits
principal, petitioner. Prior to private respondents alleged employment with ACGI, they were already
working for petitioner, subject to its rules and regulations in regard to the manner and method of
performing their tasks. This form of control and supervision never changed although they were
already under the seeming employ of ACGI. Petitioner issued memoranda regarding the billing
[18]
methodsanddistributionofbookstothecollectors itrequiredprivaterespondentstoreportdaily
andtoremittheircollectionsonthesamedaytothebranchofficeortodepositthemwithBankofthe
PhilippineIslandsitmonitoredstrictlytheirattendanceaswhenacollectorcannotperformhisdaily
collection, he must notify petitioner or the branch office in the morning of the day that he will be
absentandalthoughitwasACGIwhichultimatelydisciplinedprivaterespondents,thepenaltytobe
imposedwasdictatedbypetitionerasshowninthelettersitsenttoACGIspecifyingthepenaltiesto
[19]
bemetedontheerringprivaterespondents. TheseareindicationsthatACGIwasnotleftalonein
the supervision and control of its alleged employees. Consequently, it can be concluded that ACGI
wasnotanindependentcontractorsinceitdidnotcarryadistinctbusinessfreefromthecontroland
supervisionofpetitioner.
Underthisfactualmilieu,thereisnodoubtthatACGIwasengagedinlaboronlycontracting,and
assuch,isconsideredmerelyanagentofthepetitioner.Inlaboronlycontracting,thestatutecreates
anemployeremployeerelationshipforacomprehensivepurpose:topreventacircumventionoflabor
laws. The contractor is considered merely an agent of the principal employer and the latter is
responsible to the employees of the laboronly contractor as if such employees had been directly
[20]
employed by the principal employer. Since ACGI is only a laboronly contractor, the workers it
suppliedshouldbeconsideredasemployeesofthepetitioner.
Even the fourfold test will show that petitioner is the employer of private respondents. 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
employers power to control the employees conduct. The most important element is the employers
controloftheemployeesconduct,notonlyastotheresultoftheworktobedone,butalsoastothe
[21]
meansandmethodstoaccomplishit.
WeagreewiththeLaborArbiterthatinthethreestagesofprivaterespondentsserviceswiththe
petitioner,i.e.,(1)fromAugust1,1997toAugust31,1997(2)fromSeptember1,1997toNovember
30, 1997 and (3) from December 1, 1997 to February 8, 1999, the latter exercised control and
supervisionovertheformersconduct.
Petitioner contends that the employment of private respondents from August 1, 1997 to August
30,1997wasonlytemporaryanddonetoaccommodatetheirrequesttobeabsorbedsincepetitioner
wasstillundergoingatransitionperiod.Itwasonlywhenitsbusinessbecamesettledthatpetitioner
employedprivaterespondentsforafixedtermofthreemonths.
Althoughpetitionerwasnotobligedtoabsorbtheprivaterespondents,byengagingtheirservices,
payingtheirwagesintheformofcommission,subjectingthemtoitsrulesandimposingpunishmentin
caseofbreachthereof,andcontrollingnotonlytheendresultbutthemannerofachievingthesame
aswell,anemploymentrelationshipexistedbetweenthem.
Notably, private respondents performed activities which were necessary or desirable to its
principaltradeorbusiness.Thus,theywereregularemployeesofpetitioner,regardlessofwhetherthe
engagement was merely an accommodation of their request, pursuant to Article 280 of the Labor
Codewhichreads:

Theprovisionsofwrittenagreementtothecontrarynotwithstandingandregardlessoftheoralagreement
oftheparties,anemploymentshallbedeemedtoberegularwheretheemployeehasbeenengagedtoperform
activitieswhichareusuallynecessaryordesirableintheusualbusinessortradeoftheemployer,exceptwhere
theemploymenthasbeenfixedforaspecificprojectorundertakingthecompletionorterminationofwhichhas
beendeterminedatthetimeoftheengagementoftheemployeeorwheretheworkorservicestobeperformedis
seasonalinnatureandtheemploymentisforthedurationoftheseason.

Assuchregularemployees,privaterespondentsareentitledtosecurityoftenurewhichmaynot
be circumvented by mere stipulation in a subsequent contract that their employment is one with a
fixed period. While this Court has upheld the legality of fixedterm employment, where from the
circumstances it is apparent that the periods have been imposed to preclude acquisition of tenurial
securitybytheemployee,theyshouldbestruckdownordisregardedascontrarytopublicpolicyand
[22]
morals.
Inthecaseatbar,wefindthatthetermfixedinthesubsequentcontractwasusedtodefeatthe
tenurialsecuritywhichprivaterespondentsalreadyenjoy.Thus,weconcurwiththeLaborArbiter,as
affirmedbytheCourtofAppeals,whenitheldthat:

Thenextquestionifwhether,withrespecttotheperiod,theindividualcontractsarevalid.Notallcontractsof
employmentfixingaperiodareinvalid.UnderArticle280,theevilsoughttobepreventedissingledout:
agreementsenteredintopreciselytocircumventsecurityoftenure.Ithasnoapplicationwhereafixedperiodof
employmentwasagreeduponknowinglyandvoluntarilybytheparties,withoutanyforce,duressorimproper
pressurebeingbroughtupontheemployeeandabsentanycircumstancesvitiatinghisconsent,orwhereit
satisfactorilyappearsthattheemployerandemployeedealtwitheachotheronmoreorlesstermswithnomoral
dominancewhateverbeingexercisedbytheformeroverthelatter.ThatisthedoctrineinBrentSchool,Inc.v.
Zamora,181SCRA702.TheindividualcontractsinquestionwerepreparedbyMWCintheformoftheletter
addressedtocomplainants.ThelettercontractisdatedSeptember1,1997,whencomplainantswerealready
workingforMWCascollectors.Withtheiremploymentastheirmeansofsurvival,therewasnoroomthenfor
complainantstodisagreewiththepresentedlettercontracts.Theirchoicethenwasnottonegotiatefortheterms
ofthecontractbuttoloseornottolosetheiremploymentemploymentwhichtheyalreadyhadatthattime.The
choiceisobvious,aswhattheydid,tosignthereadymadelettercontracttoretaintheiremployment,and
survive.ItisadefianceoftheteachinginBrentSchool,Inc.v.ZamoraifthisOfficerulesthattheindividual
[23]
contractsinquestionarevalid,so,indeferencetoBrentSchoolruling,thisOfficerulestheyarenullandvoid.
 Inviewoftheforegoing,weholdthatanemploymentrelationshipexistsbetweenpetitionerand
private respondents. We now proceed to ascertain whether private respondents were dismissed in
accordancewithlaw.
Asprivaterespondentsemployer,petitionerhastheburdenofprovingthatthedismissalwasfora
[24]
causeallowedunderthelawandthattheywereaffordedproceduraldueprocess. Petitionerfailed
to discharge this burden by substantial evidence as it maintained the defense that it was not the
employerofprivaterespondents.Having established that the schemes employed by petitioner were
deviousattemptstodefeatthetenurialrightsofprivaterespondentsandthatitfailedtocomplywith
the requirements of termination under the Labor Code, the dismissal of the private respondent is
taintedwithillegality.
UnderArticle279oftheLaborCode,anemployeewhoisunjustlydismissedfromworkisentitled
to reinstatement without loss of seniority rights and other privileges, and to his full backwages,
inclusiveofallowances,andtohisotherbenefitsortheirmonetaryequivalentcomputedfromthetime
his compensation was withheld from him up to the time of his actual reinstatement. However, if
reinstatement is no longer possible, the employer has the alternative of paying the employee his
[25]
separationpayinlieuofreinstatement.
ThisCourthowevercannotsustaintheawardofmoralandexemplarydamagesinfavorofprivate
respondents.Suchanawardcannotbejustifiedsolelyuponthepremisethattheemployerdismissed
his employee without just cause or due process. Additional facts must be pleaded and proved to
warrantthegrantofmoraldamagesundertheCivilCode.Theactofdismissalmustbeattendedwith
badfaith,orfraud,orwasoppressivetolaborordoneinamannercontrarytomorals,goodcustoms
or public policy and, of course, that social humiliation, wounded feelings, or grave anxiety resulted
therefrom.Similarly,exemplarydamagesarerecoverableonlywhenthedismissalwaseffectedina
[26]
wanton, oppressive or malevolent manner. Those circumstances have not been adequately
established.
However,privaterespondentsareentitledtoattorneysfeesastheywerecompelledtolitigatewith
[27]
petitioners and incur expenses to enforce and protect their interests. The award by the Labor
ArbiterofP22,250.00asattorneysfeestoprivaterespondents,beingreasonable,issustained.
WHEREFORE,inviewoftheforegoing,thedecisionoftheCourtofAppealsdatedNovember29,
2002,inCAG.R.SPNo.67134,reversingthedecisionoftheNationalLaborRelationsCommission
and reinstating the decision of the Labor Arbiter is AFFIRMED with the MODIFICATION that the
awards of P10,000.00 as moral damages and P5,000.00 as exemplary damages are DELETED for
lackofevidentiarybasis.
SOORDERED.
Davide,Jr.,C.J.,(Chairman),Panganiban,Carpio,andAzcuna,JJ.,concur.

[1]
Penned by Associate Justice Renato C. Dacudao and concurred in by Associate Justices Eugenio S. Labitoria and
DaniloB.Pine.
[2]
Rollo,pp.58.
[3]
IncorporatedonNovember21,1997.
[4]
Rollo,pp.8788.
[5]
Id.,p.189.
[6]
Id.,p.247.
[7]
Id.,pp.4950.
[8]
Id.,p.53.
[9]
Id.,p.9.
[10]
FleischerCompany,Inc.v.NLRC,G.R.No.121608,26March2001,355SCRA105,111.
[11]
TresReyesv.MaximsTeaHouse,G.R.No.140853,27February2003.
[12]
DiamondMotorsCorporationv.CourtofAppeals,G.R.No.151981,1December2003.
[13]
423Phil.1020,1032[2001],citingTiuv.NLRC,324Phil.202[1996].
[14]
SupersededRuleVIIIA,BookIIIoftheRulesImplementingtheLaborCode.
[15]
Rollo,pp.266271.
[16]
Id.,pp.61,92.
[17]
Id.,p.93.
[18]
Id.,pp.277278.
[19]
Id.,pp.102113.
[20]
SanMiguelCorporationv.MAERCIntegratedServices,Inc.,G.R.No.144672,10July2003.
[21]
Syv.CourtofAppeals,G.R.No.142293,27February2003.
[22]
Magsalinv.NationalOrganizationofWorkingMen,G.R.No.148492,9May2003.
[23]
Rollo,pp.183184,3738.
[24]
SolidbankCorporation(nowMetrobank)v.CourtofAppeals,G.R.No.151026,25August2003.
[25]
DeLeonv.NLRC,G.R.No.112661,30May2001,358SCRA274,283.
[26]
PSBAManilav.NLRC,329Phil.932,940[1996].
[27]
NationalBookstore,Inc.v.CourtofAppeals,G.R.No.146741,27February2002,378SCRA194,204.