Investment Planning Corporation of the Philippines vs. Social Security System

A person compensated on a commission basis, who works at his own pleasure without definite hours, is not subject to control as to the means and methods of performing his work, and is paid for the results of his efforts rather than the labor itself, is an independent contractor and not an employee within the meaning of the Social Security Act.

Petitioner Investment Planning Corporation of the Philippines is a domestic corporation engaged in business management and the sale of securities. It maintains two classes of agents who sell its investment plans: salaried employees who keep definite hours and work under the company's control and supervision, and registered representatives who work on a commission basis. The registered representatives are recruited and trained to sell "Filipinos Mutual Fund" shares, must pass a test and obtain a license from the Securities and Exchange Commission, and then execute an agreement with petitioner governing the sale of FMF shares to the general public. The Social Security Act (R.A. No. 1161, as amended) provides for compulsory coverage of employees, and Section 8(d) thereof defines "employee" as any person who performs services for an employer using mental or physical efforts, receives compensation, and where an employer-employee relationship exists.

Petitioner Investment Planning Corporation of the Philippines is a domestic corporation engaged in business management and the sale of securities. It maintains two classes of agents for selling its investment plans: salaried employees who keep definite hours and work under company control and supervision, and registered representatives who work on a commission basis. The registered representatives are recruited and trained by petitioner's assistant sales director specifically to sell "Filipinos Mutual Fund" shares. After training, they undergo a test and, if successful, obtain a license from the Securities and Exchange Commission. They then execute an agreement with petitioner governing the sale of FMF shares to the general public.

The agreement between petitioner and its registered representatives contains several salient features. An agent is paid compensation in the form of commission; in the event of death or resignation, the agent or his legal representative is paid the balance of commission corresponding to him; the agent is subject to rules and regulations governing the performance of his duties; he is required to put up a performance bond; and his services may be terminated for certain specified causes, such as failure to meet the annual quota of sales, inability to make any sales production during a six-month period, or conduct detrimental to petitioner. The commission earned by an agent on his sales is directly deducted by him from the amount he receives from the investor, and he turns over to the company the amount invested after such deduction.

The Social Security Commission itself found, 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 effort they spend depend entirely upon their own will and initiative; they are not required to account for their time or submit a record of activities; they shoulder their own selling and transportation expenses; and they are paid commission based on a certain percentage of their sales. The majority of the agents are regularly employed elsewhere, either in government or in private enterprises.

On August 27, 1960, petitioner applied to the Social Security Commission for exemption of its registered representatives from compulsory coverage under the Social Security Act. The application was denied by letter dated January 16, 1961, and a motion for reconsideration was likewise denied by the Commission in its resolution dated September 8, 1961. The matter was then elevated to the Supreme Court for review.

• Independent Contractor Status: Petitioner submitted that its commission agents, engaged under the enumerated terms and conditions, are not employees but independent contractors as defined in Article 1713 of the Civil Code, which governs contracts for a piece of work where the contractor binds himself to execute a piece of work for a price or compensation.
• Source of Compensation: Petitioner pointed out that compensation is effectively paid not by it but by the investor, as shown by the basis on which the commission is fixed and the manner in which it is collected — the agent directly deducts his commission from the amount received from the investor and turns over the remainder to the company.
• Absence of Control: Petitioner maintained that nothing in the contract form between it and its registered representatives indicates that the latter are under the company's control in respect of the means and methods they employ in performing their work.

• Employer-Employee Relationship: Whether petitioner's registered representatives, who sell investment plans on a commission basis, are employees within the meaning of Section 8(d) of the Social Security Act (R.A. No. 1161, as amended), such that they are subject to compulsory SSS coverage.
• Applicable Test: Whether the control test or the economic-reality test should be applied in determining the existence of an employer-employee relationship for purposes of the Social Security Act.

• Employer-Employee Relationship: No. The registered representatives are independent contractors, not employees, because the element of control over the means and methods of work is absent; they are paid for the results of their efforts rather than the labor itself.
• Applicable Test: The control test applies. Where the principal does not control or reserve the right to control the worker not only as to the result of the work but also as to the means and methods by which it is accomplished, no employer-employee relationship exists.

• Employer-Employee Relationship: Section 8(d) of the Social Security Act defines "employee" as any person who performs services for an employer in which mental or physical efforts are used, who receives compensation for such services, and where an employer-employee relationship exists. Three requisites must concur: (1) the performance of services involving mental or physical effort, (2) receipt of compensation, and (3) the existence of an employer-employee relationship. While the first requisite was admitted to be present, the Court found that the compensation received by the agents is not for their labor but for the results thereof — actual sales made. The agents are not required to report for work, do not devote their time exclusively to petitioner, determine their own time and effort, shoulder their own expenses, and the majority are regularly employed elsewhere. These circumstances place them squarely within the concept of an independent contractor under Article 1713 of the Civil Code, where the contractor is paid for the finished work or result, not for the labor performed. The Court distinguished this from an employment relationship, where the employee is paid for the labor itself.

• Applicable Test: The specific question of when an employer-employee relationship exists for purposes of the Social Security Act had not been previously settled in this jurisdiction. However, in other contexts — the Workmen's Compensation Act, separation gratuity, and bargaining representation — the Court had consistently applied the control test: whether the employer controls or has reserved the right to control the employee not only as to the result of the work but also as to the means and methods by which it is accomplished. The Court examined the U.S. experience, noting that the Federal Social Security Act initially led the U.S. Supreme Court to adopt the "economic-reality" test (as in U.S. vs. Silk and Bartels vs. Birmingham), but that Congress subsequently abandoned this approach through a 1948 amendment reverting to common-law principles, under which the significant factor is the presence or absence of a supervisory power to control the method and detail of performance. Given that the Philippine Social Security Act is admittedly patterned after the U.S. statute, American decisions applying the control test were accorded persuasive force. The Court found nothing in the contract between petitioner and its registered representatives indicating control over the means and methods of work. The specified causes for termination (failure to meet sales quotas, inability to make sales, conduct detrimental to the company) relate to results, not to the means and methods ordinarily required of employees. Accordingly, the control test was satisfied in favor of independent contractor status.

• Control Test — The existence of an employer-employee relationship is determined by 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. The presence of such power of control indicates an employment relationship; its absence indicates an independent contractor relationship. The Court applied this test to hold that petitioner's registered representatives, who worked at their own pleasure without definite hours, were not subject to control as to the means and methods of their work, and were compensated for results rather than labor, were independent contractors outside compulsory SSS coverage.

• Independent Contractor vs. Employee Distinction — An employee is paid for the labor he performs — the acts of which such labor consists — while an independent contractor is paid for the result of his work. The object of the contract in the latter case is not the labor itself but its result: the complete and finished work. This distinction, drawn from Manresa's commentary on the Spanish Civil Code and recognized in Chartered Bank vs. Constantino, was applied to classify petitioner's commission agents as independent contractors.

• "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 passage articulates the fundamental distinction between an employee and an independent contractor, serving as the analytical foundation for the Court's classification of the registered representatives.

• "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." — This is the operative formulation of the control test as applied to the Social Security Act, synthesizing the factual indicia of independent contractor status into a single rule of decision.

• "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." — This passage clarifies that termination provisions keyed to sales results do not constitute the kind of control over means and methods that would establish an employment relationship.

• Chartered Bank vs. Constantino, 56 Phil. 717 — Recognized the distinction between a lease of work by contract for a fixed price and a lease of services, drawing on Manresa's commentary that in the former the object is the result of labor, not the labor itself. The Court relied on this distinction to classify the registered representatives as independent contractors.
• Philippine Manufacturing Company vs. Geronimo, L-6968, November 29, 1954 — Applied the control test under the Workmen's Compensation Act, holding that a painting contractor who supervised the work himself and was free to do the job according to his own method was an independent contractor. Cited as authority for the control test's consistent application across different statutory contexts.
• Cruz vs. The Manila Hotel Company, L-9110, April 30, 1957 — Involved the determination of who were employees for purposes of separation gratuity; the control test was followed.
• LVN Pictures, Inc. vs. Phil. Musicians Guild, L-12582, January 28, 1961 — Involved the status of certain musicians for purposes of determining the appropriate bargaining representative; the control test was followed.
• U.S. vs. Silk and Bartels vs. Birmingham, 91 Law Ed. 1757 (1947) — U.S. Supreme Court cases adopting the "economic-reality" test for employer-employee relationships under the Federal Social Security Act. The Court discussed these as an approach subsequently abandoned by U.S. Congress.
• Benson vs. Social Security Board, 172 F. 2d 682 — Discussed the 1948 U.S. congressional amendment reverting to common-law principles for determining employer-employee relationships under the Social Security Act, which the Philippine Court found persuasive given the local statute's provenance.

• Section 8(d), Republic Act No. 1161 (Social Security Act), as amended by Section 4, Republic Act No. 2658 — Defines "employee" for purposes of the Social Security Act as any person who performs services for an employer in which mental or physical efforts are used, who receives compensation, and where an employer-employee relationship exists. The Court applied this provision by testing whether all three requisites — performance of services, receipt of compensation, and existence of employer-employee relationship — were present, finding the third requisite absent.
• Article 1713, Civil Code of the Philippines — Defines the contract for a piece of work, whereby the contractor binds himself to execute a piece of work for the employer in consideration of a certain price or compensation. The Court invoked this provision to classify the registered representatives as independent contractors.

Reyes, J.B.L., Dizon, Bengzon, J.P., Zaldivar, Sanchez, Castro, Angeles, and Fernando, JJ., concurred. Chief Justice Concepcion took no part.