The law does not prohibit all forms of contracting or subcontracting. Legitimate contracting or subcontracting is allowed under the Labor Code, as implemented under Department Order No. 174, series of 2017, issued by the Department of Labor and Employment (DOLE). What the law prohibits is labor-only contracting and other illicit employment arrangements. [See Contracting and subcontracting allowed in the Philippines]
WHAT IS LABOR-ONLY CONTRACTING
Labor-only contracting refers to arrangement where the contractor or subcontractor merely recruits, supplies or places workers to perform a job or work for a principal. There are two variants of labor-only contracting:
- 1. When the contractor or subcontractor does not exercise the right to control over the performance of the work of the employees.
- 2. When: (i) the contractor or subcontractor does not have substantial capital, or does not have investments in the form of tools, equipment, machineries, supervision, work premises, among others; and (ii) the contractor’s or subcontractor’s employees recruited and placed are performing activities which are directly related to the main business operation of the principal.
PROHIBITED EMPLOYMENT ARRANGEMENTS
The Labor Code and its regulations also prohibit certain contracting arrangements, including the following:
- 1. When the principal farms out work to a cabo.
- 2. Contracting out of job or work through an in-house agency.
- 3. Contracting out of job or work through an in-house cooperative which merely supplies workers to the principal.
- 5. 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 as provided in Article 259 of the Labor Code, as amended.
- 6. Requiring the contractor’s/subcontractor’s employees to perform functions which are currently being performed by the regular employees of the principal.
- 7. Requiring the contractor’s/subcontractor’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 or contractor from liability as to payment of future claims; or require the employee to become member of a cooperative;
- 8. Repeated hiring by the contractor/subcontractor of employees under an employment contract of short duration.
- 9. Requiring employees under contracting/subcontracting arrangements to sign a contract fixing the period of employment to a term shorter than the term of the Service Agreement, unless 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.
- 10. Such other practices, schemes or employment arrangements designed to circumvent the right of workers to security of tenure.
LIABILITY OF PRINCIPAL
In instances where there is a finding of labor-only contracting or illegal employment arrangements, the principal shall be deemed the direct employer of the contractor’s or subcontractor’s employees.
In labor-only contracting, the statute creates an employer-employee relationship for a comprehensive purpose: to prevent a circumvention of labor laws. The contractor is considered merely an agent of the principal employer and the latter is responsible to the employees of the labor-only contractor as if such employees had been directly employed by the principal employer. A finding of a “labor-only” contractor is equivalent to a finding that an employer-employee relationship exists between the company and the labor contractor’s employee, the relationship being such as provided by the law itself. (In technical terms, the principal employer is solidarily liable with the labor-only contractor for all the rightful claims of the employees).
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