CMS Estate, Inc. vs. Social Security System

Compulsory coverage under the Social Security Act attaches to the employer as a juridical person, not to each separate business venture, so that once an employer is covered in one line of business, any subsequently established business is automatically covered — and all doubts in construing the Act must favor coverage rather than exemption, given its broad social purpose.

CMS Estate, Inc. is a domestic corporation originally organized for the purpose of engaging in the real estate business, having commenced operations on December 1, 1952 with six employees. On June 4, 1956, its Articles of Incorporation were amended to enable it to engage in the logging business, and the Securities and Exchange Commission issued the certificate of filing of the amended articles on June 18, 1956. Petitioner likewise obtained an ordinary license from the Bureau of Forestry to operate a forest concession of 13,000 hectares in Baganga, Davao. The Social Security System and the Social Security Commission are the statutory bodies charged with administering Republic Act No. 1161, as amended, otherwise known as the Social Security Act of 1954, which provides for the compulsory coverage of employers and employees under a system of social insurance against the hazards of disability, sickness, old age, and death.

CMS Estate, Inc. is a domestic corporation organized primarily for the purpose of engaging in the real estate business. It commenced operations on December 1, 1952 with only six employees. On June 4, 1956, petitioner amended its Articles of Incorporation to enable it to engage in the logging business, and the Securities and Exchange Commission issued the certificate of filing of the amended articles on June 18, 1956. Petitioner likewise obtained an ordinary license from the Bureau of Forestry to operate a forest concession of 13,000 hectares situated in the municipality of Baganga, Province of Davao.

On January 28, 1957, petitioner entered into a contract of management with one Eufracio D. Rojas for the operation and exploitation of the forest concession. Under this contract, Rojas was appointed as operations manager of the logging concession; he had no power to appoint or hire employees, only managed the employees furnished by petitioner, and was provided the necessary equipment by petitioner for use in the logging business. He was not free from the control and direction of petitioner in matters connected with the performance of his work. The logging operation actually started on April 1, 1957 with four monthly salaried employees. As of September 1, 1957, petitioner had 89 employees and laborers in the logging operation. On December 26, 1957, petitioner revoked its contract of management with Rojas.

On August 1, 1958, petitioner became a member of the Social Security System with respect to its real estate business. On September 6, 1958, petitioner remitted to the System the sum of ₱203.13 representing the initial premium on the monthly salaries of the employees in its logging business. However, on October 9, 1958, petitioner demanded the refund of the said amount, claiming that it was not yet subject to compulsory coverage with respect to its logging business. The request was denied by respondent System on the ground that the logging business was a mere expansion of petitioner's activities and that, for purposes of the Social Security Act, petitioner should be considered a member of the System since December 1, 1952 when it commenced its real estate business.

On November 10, 1958, petitioner filed a petition with the Social Security Commission praying for the determination of the effectivity date of the compulsory coverage of its logging business. After both parties submitted their respective memoranda, the Commission issued Resolution No. 91 on January 14, 1960, denying the petition and declaring petitioner subject to compulsory coverage as of September 1, 1957, directing the SSS to effect coverage of petitioner's employees in both its logging and real estate business. Petitioner's motion for reconsideration was denied in Resolution No. 609. These two resolutions became the subject of the appeal, which was certified to the Supreme Court by the Court of Appeals as involving purely questions of law.

• Nature of Contributions: Petitioner argued that the contributions required of employers and employees under the Social Security Act are in the nature of excise taxes, implying that the Act was enacted in the exercise of the taxing power rather than police power.
• Independent Contractor Relationship: Petitioner maintained that Eufracio D. Rojas was an independent contractor engaged in an independent business of his own consisting of the operation of the timber concession, such that the logging operation was not petitioner's own business for purposes of SSS coverage.
• Immediate Coverage of New Business: Petitioner contended that a corporation which has been in operation for more than two years in one business is not immediately covered with respect to any new and independent business it may subsequently engage in, particularly where the new business has not yet been in operation for at least two years.
• Single Employing Unit: Petitioner argued that a corporation should not be treated as a single employing unit for purposes of coverage under the Social Security Act, where it maintains separate, unrelated, and independent businesses established and operated at different places and on different dates.
• Liberal Interpretation: Petitioner submitted that Section 9 of the Social Security Act on the question of compulsory membership of employers should not be given a liberal interpretation, and that the Commission cannot indiscriminately combine two distinct and separate businesses for purposes of coverage, which would render nugatory the two-year stabilization period fixed by the Act.

• Coverage of Employers, Not Businesses: Respondent argued that the Social Security Act speaks of compulsory coverage of employers and not of business, such that once an employer is initially covered, any other business undertaken by the same employer is likewise subject to coverage even if the latter has not been in operation for at least two years.
• Same Management: Respondent countered that petitioner's logging business, while actually of a different, distinct, separate, and independent nature from its real estate business, should be considered as an operation under the same management.
• Unaltered Juridical Personality: Respondent maintained that the amendment of petitioner's articles of incorporation to enable it to engage in the logging business did not alter the juridical personality of petitioner.
• Mere Expansion: Respondent argued that petitioner's logging operation is a mere expansion of its business activities.

• Nature of Contributions: Whether the contributions required under the Social Security Act are in the nature of excise taxes, such that the Act was enacted in the exercise of the taxing power rather than police power.
• Independent Contractor: Whether Eufracio D. Rojas was an independent contractor, such that the logging operation was not petitioner's business for purposes of SSS coverage.
• Coverage of New Business: Whether a corporation already covered in one business is automatically covered with respect to a new and independent business it subsequently establishes.
• Single Employing Unit: Whether a corporation should be treated as a single employing unit for SSS coverage purposes, irrespective of separate, unrelated, and independent businesses established at different places and on different dates.
• Liberal Interpretation: Whether Section 9 of the Social Security Act on compulsory membership of employers should be given a liberal interpretation favoring coverage.

• Nature of Contributions: No. The contributions are not in the nature of excise taxes; the Social Security Act was enacted in the exercise of the police power of the State, not its taxing power, the emphasis being on the promotion of general welfare rather than revenue generation.
• Independent Contractor: No. Rojas was not an independent contractor but merely an employee of petitioner, he having no power to appoint or hire employees, being furnished equipment by petitioner, and not being free from petitioner's control and direction in the performance of his work.
• Coverage of New Business: Yes. Once an employer is covered in a particular kind of business, the employer is automatically covered with respect to any new business, the Act attaching compulsory coverage to the employer as a juridical person and not to each separate business venture.
• Single Employing Unit: Yes. A corporation is treated as a single employing unit for purposes of coverage under the Social Security Act, irrespective of separate businesses established at different places and on different dates, in the absence of any express statutory provision requiring separate coverage for each kind of business.
• Liberal Interpretation: Yes. All doubts in construing the Social Security Act should favor coverage rather than exemption, given its broad social purpose; moreover, the two-year stabilization period was eliminated by Republic Act No. 2658, making employers automatically covered immediately upon the start of the business.

• Nature of Contributions: The Social Security Law was enacted pursuant to the government's policy to develop and perfect a social security system providing protection against the hazards of disability, sickness, old age, and death, implementing the general welfare mandate of the Constitution and constituting a legitimate exercise of police power. The taxing power of the State is exercised for the purpose of raising revenues, whereas under the Social Security Law the emphasis is on the promotion of general welfare. The Act is not part of the Internal Revenue Code, nor are the contributions collectible by the Bureau of Internal Revenue. The funds contributed belong to the members who receive benefits as a matter of right. The contributions, together with those imposed upon employees and the Government, are intended for the protection of employees against the enumerated hazards, in line with the constitutional mandate to promote social justice. The principle of non-impairment of the obligation of contract is not a proper defense against a lawful exercise of police power.
• Independent Contractor: Petitioner contended that Rojas was an independent contractor who engaged in an independent business of his own consisting of the operation of the timber concession. The records showed otherwise: Rojas was appointed as operations manager of the logging concession; he had no power to appoint or hire employees; he only managed the employees furnished by petitioner; petitioner furnished him the necessary equipment for use in the logging business; and he was not free from the control and direction of petitioner in matters connected with the performance of his work. These factors clearly indicated that Rojas was not an independent contractor but merely an employee of petitioner, and thus entitled to compulsory coverage under the Act.
• Coverage of New Business: It is the employer — whether a natural or juridical person — who is subject to compulsory coverage, not the business. If the legislature had intended every venture of the employer to be the basis of a separate coverage, an express provision to that effect could have been made; none appeared in the law. If each business venture were treated separately, an employer with more than one line of business but with fewer than six employees in each would never be covered, even if the total number of employees exceeded six — a result that would frustrate rather than foster the policy of the Act. In the absence of an express provision for separate coverage per business, the reasonable interpretation is that once an employer is covered in a particular kind of business, the employer is automatically covered with respect to any new business. Any interpretation which would defeat rather than promote the ends of the Social Security Act must be eschewed.
• Single Employing Unit: The rationale is the same as for coverage of new business: the law covers the employer as a juridical person, and the amendment of petitioner's articles of incorporation to engage in logging did not alter its juridical personality. The logging operation was a mere expansion of petitioner's business activities. Treating the corporation as a single employing unit ensures that the legislative intent to cover as many persons as possible is fulfilled, consistent with the constitutional objective of social justice.
• Liberal Interpretation: Because of the broad social purpose of the Social Security Act, all doubts in construing the Act should favor coverage rather than exemption. Petitioner's contention that combining two distinct businesses for coverage rendered nugatory the two-year stabilization period lacked merit, because the amendatory law, Republic Act No. 2658, approved on June 18, 1960, eliminated the two-year stabilization period entirely. Section 10 (formerly Section 9) of Republic Act No. 1161, as amended by Republic Act No. 2658, now provides that compulsory coverage of the employer takes effect on the first day of his operation. It is axiomatic that a later law prevails over a prior statute, and the legislative intent must be given effect. Applying Section 10, petitioner is subject to compulsory coverage as of December 1, 1952 with respect to the real estate business and as of April 1, 1957 with respect to its logging operation.

• Compulsory Coverage Attaches to the Employer, Not the Business — Under the Social Security Act, it is the employer — whether a natural or juridical person — who is subject to compulsory coverage, not each individual business venture. Once an employer is covered in one line of business, any subsequently established business is automatically covered. The absence of any express statutory provision requiring separate coverage for each kind of business supports this interpretation, as treating each venture separately would allow an employer with multiple businesses but fewer than six employees in each to evade coverage entirely, frustrating the Act's social purpose.
• Social Security Contributions Are Not Taxes — The contributions required under the Social Security Act are not in the nature of excise taxes or taxes on employment. The Act was enacted in the exercise of police power, not taxing power; the emphasis is on the promotion of general welfare rather than revenue generation. The Act is not part of the Internal Revenue Code, the contributions are not collectible by the Bureau of Internal Revenue, and the funds belong to the members who receive benefits as a matter of right.
• Liberal Construction in Favor of Coverage — Because of the broad social purpose of the Social Security Act, all doubts in construing the Act should favor coverage rather than exemption. Any interpretation which would defeat rather than promote the ends for which the Act was enacted must be eschewed.
• Test for Independent Contractor Status — A person is not an independent contractor where he has no power to appoint or hire employees, is furnished the necessary equipment by the employer, and is not free from the control and direction of the employer in matters connected with the performance of his work. Such a person is merely an employee entitled to compulsory coverage under the Act.

• "Membership in the SSS is not a result of bilateral, concensual agreement where the rights and obligations of the parties are defined by and subject to their will, RA 1161 requires compulsory coverage of employees and employers under the System." — This passage, quoted from Philippine Blooming Mills Co., Inc. vs. SSS, establishes that SSS membership is a legal imposition under police power, not a consensual arrangement, and that non-impairment of contracts is not a valid defense.
• "Because of the broad social purpose of the Social Security Act, all doubts in construing the Act should favor coverage rather than exemption." — This articulates the canon of liberal construction governing the Social Security Act, frequently relied upon in subsequent coverage disputes.
• "In the absence of an express provision for a separate coverage for each kind of business, the reasonable interpretation is that once an employer is covered in a particular kind of business, he should be automatically covered with respect to any new name." — This states the ratio decidendi on the single-employing-unit doctrine, the central holding of the case.

• Philippine Blooming Mills Co., Inc. vs. SSS, 17 SCRA 1077 — Controlling precedent followed. Established that SSS membership is a legal imposition under police power, not a consensual agreement, and that non-impairment of contracts is not a proper defense. The Court quoted extensively from this case to support its holding on the nature of SSS contributions and the exercise of police power.
• Roman Catholic Archbishop of Manila vs. Social Security Commission, 1 SCRA 16 — Cited as supporting authority for the proposition that SSS contributions are not taxes on employment but are intended for the protection of employees against the hazards of disability, sickness, old age, and death.
• Franklin Baker of the Phil. vs. SSS, 7 SCRA 840 — Cited as supporting authority for the proposition that any interpretation which would defeat rather than promote the ends of the Social Security Act should be eschewed.
• Lopez vs. Commissioner of Customs, 37 SCRA 327 — Cited for the axiom that a later law prevails over a prior statute and that legislative intent must be given effect, supporting the application of Republic Act No. 2658 which eliminated the two-year stabilization period.

• Section 2, Republic Act No. 1161, as amended (Social Security Act of 1954) — Declares the policy of the government to develop, establish gradually, and perfect a social security system providing protection against the hazards of disability, sickness, old age, and death. Applied to establish that the Act implements the general welfare mandate of the Constitution and constitutes a legitimate exercise of police power.
• Section 10 (formerly Section 9), Republic Act No. 1161, as amended by Republic Act No. 2658 — Provides that compulsory coverage of the employer takes effect on the first day of his operation, and that of the employee on the date of his employment. Applied to fix the coverage dates of petitioner at December 1, 1952 for the real estate business and April 1, 1957 for the logging operation, the amendatory law having eliminated the prior two-year stabilization period.

Makasiar (Chairman), Aquino, Abad Santos, and Escolin, JJ., concurred. Concepcion, Jr. and Guerrero, JJ., were on leave.