Published — September 29, 2017
The following post does not create a lawyer-client relationship between Alburo Alburo and Associates Law Offices (or any of its lawyers) and the reader. It is still best for you to engage the services of your own lawyer to address your legal concerns, if any.
Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.
Related Topic: Frequently Asked Questions on Contracting and Subcontracting
When it comes to the operational aspects of business, hiring of employees to do certain tasks becomes inevitable for many enterprises. However, some businesses would instead choose to engage the services of job contractors instead of hiring their own personnel. Considering that job contracting activities are being regulated by the government, there is a need for employers to make sure that the arrangements they enter into are legitimate.
There is job contracting when the principal (the enterprise) agrees to farm out to a contractor the performance or completion of a specific job or work within a definite or predetermined period, regardless of whether such job or work is to be performed or completed within or outside the premises of the principal [Sec. 3(c), D.O. No. 174]. In such arrangement, the principal does not engage the services of the contractor as an employee. But in undertaking the work for the principal, the contractor may hire and employ its own employees.
No employer-employee relationship
There are three parties involved in a job contracting arrangement; the principal who decides to farm out a job, work or service to a contractor; the contractor who has the capacity to independently undertake the performance of the job, work or service; and the contractual workers engaged by the contractor to accomplish the job, work or service. There is no employer-employee relationship between the principal and the workers who do the work, as the latter are the employees of the contractor.
Registration of contractors
To ensure the legitimacy of the job contracting arrangement, any business owner who plans to engage the services of a contractor should check whether the contractor it intends to engage is registered, as may be shown by its Certificate of Registration. Under DOLE D.O. No. 174, it is mandatory for every person or entity acting as contractor to register with the Regional Office of the Department of Labor and Employment (DOLE) of the place where it principally operates [See: Sec. 14].
Prohibition against labor-only contracting
As a measure to regulate job contracting activities, it is important for every principal to ensure that the contractor was engaged to render services, and not merely to supply workers. If workers are merely supplied, then it is labor-only contracting which the law prohibits. Under Section 5 of D.O. No. 174, there is labor-only contracting when the following elements are present:
- The contractor does not have substantial capital, which should be at least P5,000,000.00 [See: Sec. 3(l), D.O. No. 174].
- The contractor does not have investments in the form of tools, equipment, machineries, supervision, work premises, among others; and
- The contractor’s employees recruited and placed are performing activities which are directly related to the main business operation of the principal.
There is likewise labor-only contracting if the contractor does not exercise the right to control over the performance of the employee.
Other illicit forms of employment arrangements
Aside from engaging in labor-only contracting, D.O. No. 174 also prohibits certain arrangements for being contrary to law or public policy. Thus, every business owner should avoid doing any of the following:
- Farming out work to a “cabo”. A cabo is a person or group of persons or to a labor group which, under the guise of a labor organization, cooperative or any entity, supplies workers to an employer, with or without any monetary or other consideration, whether in the capacity of an agent of the employer or as an ostensible independent contractor [See: Sec. 3(b)].
- Contracting out of a job or work through an in-house agency.
- Contracting out of a job or work through an in-house cooperative which merely supplies workers to the principal.
- Contracting out of a job or work by reason of a strike or lockout, whether actual or imminent.
- Contracting out of a job or work being performed by union members and such will interfere with, restrain or coerce employees in the exercise of their rights to self-organization.
- Requiring the contractor’s employees to perform functions which are currently being performed by the regular employees of the principal.
- Requiring the contractor’s employees to sign, as a precondition to employment or continued employment, an antedated resignation letter; a blank payroll; a waiver of labor standards including minimum wages and social or welfare benefits; or a quitclaim releasing the principal, contractor or from any liability as to payment of future claims; or require the employee to become a member of the cooperative.
- Repeated hiring of employees under an employment contract of short duration (this is more commonly known as the “5-5-5 hiring practice”).
- Requiring employees under a subcontracting arrangement to sign a contract fixing the period of employment to a term shorter than the term of the Service Agreement between the principal and contractor. The only exception here is when the contract is divisible into phases for which substantially different skills are required, and this is made known to the employee at the time of engagement.
- Such other practices, schemes or employment arrangements designed to circumvent the right of workers to security of tenure [See: Sec. 6].
Effect of engaging in prohibited arrangements
For engaging in labor-only contracting, or in any kind of prohibited employment arrangement mentioned above, the principal shall be deemed to be the direct employer of the contractor’s employees [See: Sec. 7], and the contractor shall be treated as a mere middleman that serves as a conduit between the workers and the principal.
Solidary liability in all contracting arrangements
It is also important to note that in the event of any violation of the provisions of the Labor Code, including non-payment or underpayment of wages, the principal and the contractor shall be solidarily liable to the extent of the work performed under the employment contract [See: Sec. 9, D.O. No. 174].
Because of this, even in legitimate job contracting arrangements, there is a need for principals to be very careful and strict in ensuring that their contractors are paying their employees what is due to them. Because solidary liability of the principal and the contractor is mandated by law, such principals cannot limit their liability by setting up as a defense that the unpaid/underpaid workers are not their employees.
Considering that legal safeguards as discussed above have been established to regulate job contracting, it is a must for principals to be aware of how to avoid possible liability as an employer by always making sure that their contractors are legitimate and duly registered, and that their arrangements with their contractors are for the supply of services and not merely of workers. This is the only way for any business owner to ensure peace of mind whenever they farm out the completion of a specific job or work to a contractor.
Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries regarding job contracting and subcontracting, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.
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