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DOLE PRIMER ON CONTRACTING AND SUBCONTRACTING

1. WHAT IS CONTRACTING AND SUBCONTRACTING?


There is contracting or subcontracting when an employer, referred to
as the principal, farms out the performance of a part of its business to
another, referred to as the contractor or subcontractor. For the
purpose of undertaking the principal's business that is farmed out, the
contractor or subcontractor then employs its own employees.

Contracting and subcontracting are synonymous under Philippine


labor law. The term that is more commonly used is subcontracting.

2. IN THE EMPLOYMENT OF WORKERS, IS THERE A DIFFERENCE


BETWEEN AN ORDINARY EMPLOYER-EMPLOYEE RELATIONSHIP AND
SUBCONTRACTING?

Yes.

In an ordinary employer-employee relationship, there are only two


parties involved - the employer and the employee. This relationship is
established through a four-fold test, under which the employer: chanroblesvirtu allawlibrar y

a. Directly exercises control and supervision over the employee not


only as to the results of the work but also as to the means employed
to attain this result;

b. Has the power to select and hire the employee;

c. Has the obligation to pay the employees his or her wages and other
benefits.

d. Has the power to dismiss the employees.

The power of control is the most important factor in determining the


existence of an employer-employee relationship. The employer need
not actually exercise this power. It is enough that the employer
retains the right to exercise this power. It is enough that the employer
retains the right to exercise it as it may deem necessary or
appropriate.

In subcontracting, there are three parties involved: chanrobles virtual lawlibrary


a. The principal which decides to farm out a job or service to a
subcontractor;

b. The subcontractor which has the capacity to independently


undertake the performance of the job or service; and

c. The employees engaged by the subcontractor to accomplish the job


or service.

In subcontracting, the four-fold test of employer-employee


relationship should be satisfied by the subcontractor in relation to the
employees it engages to accomplish the subcontracted job or service.
In such cases, the subcontractor is also referred to as independent
contractor.

If the four-fold test is satisfied not by the subcontractor but by the


principal, the principal then becomes the employer of the employees
engaged to accomplish the job or service. What exists is not
subcontracting but a direct employer-employee relationship between
the principal and the employees.

3. IS THERE A DIFFERENCE BETWEEN A SUBCONTRACTOR AND A


PRIVATE RECRUITMENT AND PLACEMENT AGENCY (PRPA)?
Yes.

A subcontractor directly undertakes a specific job or service for a


principal, and for this purpose, employs its own workers. A PRPA
cannot be a subcontractor. Int simply recruits workers for the purpose
of placing them with another employer so that the workers recruited
will not become the PRPA's employees.

A subcontractor is governed by the laws and rules enumerated under


Question # 4 below. A PRPA is governed by Articles 25 to 39 of the
Labor Code and the rules implementing these articles.

A subcontractor does not need authority from the Department of


Labor and Employment (DOLE) to undertake a subcontracted job or
service. A PRPA needs an authority or license from DOLE to legally
undertake a recruitment and placement activities.

4. WHAT LAW OR RULES GOVERN SUBCONTRACTING?


The basic law governing subcontracting is the Labor Code, particularly
Articles 106 to 109. These provisions prescribe the conditions for
regulating subcontracting and the rights and obligations of parties to
this arrangement. There was also a set of rules implementing Articles
106 to 109, known as Department Order No. 174, issued by DOLE in
2017.

With the revocation of D. O. No. 10, the following laws and rules will
apply in addition to Articles 106 to 109 of the Labor Code: chanroblesvirtu allawlibrar y

a. Article 248 (c) which disallows contracting out of services or


functions being performed by union members when such will interfere
with, restrain or coerce employees in the exercise of their rights to
self-organization;

b. Article 280. which classifies employees into regular, project or


seasonal employees;

c. Article 2180 of the Civil Code, under which the principal, in a civil
suit for damages instituted by an injured person, can be held liable for
any negligent acts of the employees of a labor-only contractor;

d. Republic Act No. 5487 and its implementing rules, which regulate
the operation of security agencies;

e. Jurisprudence interpreting the foregoing laws;

f. D. O. No. 3;

g. D. O. No. 19, Series of 1993, for subcontracting arrangements in


the construction industry; and

h. Contractual stipulations provided these are not in conflict with


Labor Code provisions, jurisprudence, and D. O. Nos. 3 and 19.

5. WHAT IS LEGITIMATE SUBCONTRACTING?

Contracting shall be legitimate if the following conditions concur: chanroblesvirtuall awlibrar y

a. the contractor or subcontractor carries on a distinct and


independent business and undertakes to perform the job, work or
service on its own account and under its own responsibility, according
to its own manner and method, and free from the control and direction
of the principal in all matters connected with the performance of the
work except as to the results thereof;
b. the contractor or subcontractor has substantial capital or
investment;

c. The agreement between the principal and the contractor or


subcontractor assures the contractual employees entitlement to all
occupational safety and health standards, free exercise of the right to
self organization, security of tenure, and social and welfare benefits.

6. WHAT IS SUBSTANTIAL CAPITAL? IS SUBSTANTIAL CAPITAL


SUFFICIENT TO ESTABLISH LEGITIMATE SUBCONTRACTING?
Substantial capital refers to paid-up capital stocks/shares of at least
FIVE MILLION PESOS (P5,000,000.00) in the case of corporations,
partnerships and cooperatives; in the case of single proprietorship, a
net worth of at least FIVE MILLION PESOS (P5,000,000.00).

Where a subcontractor is highly capitalized, the Supreme Court has


held that it need not show evidence that it has investment in the form
of tools, equipment, machineries, work premises, among others, to be
considered legitimate. However, it is still necessary for it to show that
it has the capacity to be an independent contractor, That is, it can
undertake the performance of the contract according to its own
manner and method, free from the supervision of the principal in all
matters except as to the results of the work. (OLD RULING)

7. IS LEGITIMATE SUBCONTRACTING DIFFERENT FROM LABOR-ONLY


CONTRACTING? HOW IS LABOR-ONLY CONTRACTING DEFINED?
Yes, legitimate subcontracting is different from labor-only contracting
because the former is allowed and the latter is illegal and prohibited.

Section 3 of D. O. No. 174 states that there is labor-only contracting


where the contractor or subcontractor merely recruits, supplies or
places workers to perform a job, work or service for a principal, and
the following elements under D.O. No. 174 are present: y

a. The contractor or subcontractor does not have substantial capital

b. The contractor does not have investments in the form of tools,


equipment, machineries, supervision, work premises, among others;

c. The employees recruited, supplied or placed by such contractor or


subcontractors are performing activities directly related to the main
business of the principal.
8. WHAT IS THE BASIS OF THE STATE IN PROHIBITING LABOR-ONLY
CONTRACTING? WHAT IS THE OBJECTIVE OF THE PROHIBITION?
The bases of the State in prohibiting labor-only contracting are: chanroblesvirtuallawlibr ary

a. The Constitution, which mandates that the State shall protect labor
and promote its welfare, and shall guarantee basic labor rights
including just and humane terms and conditions of employment and
the right to self-organization.

b. Article 106 of the Labor Code, which allows the Secretary of Labor
to distinguish between labor-only contracting and job contracting to
prevent any violation or circumvention of the Labor Code.

The objective of the State in prohibiting labor-only contracting is to


ensure that labor laws are followed and to prevent exploitation of
workers. A labor-only contractor is one which presents itself as an
employer even if it does not have capital to run a business or capacity
to ensure that its workers are paid their wages and other benefits as
prescribed by law. As such, it ca
nnot independently undertake to perform a subcontracted job or
service. To allow a labor-only contractor to operate is to give it an
opportunity to circumvent the law and to exploit workers.

9. ARE THERE STILL ANY PROHIBITED SUBCONTRACTING


ARRANGEMENTS?
Yes. Expressly prohibited are (a) labor-only contracting as defined in
D.O. 174; (b) Section 6 of D.O. 174 and (c) contracting out of services
being performed by union members when such will interfere with,
restrain or coerce employees in the exercise of their right to self-
organization under Article 248 (c) of the Labor Code.

10. WHAT WILL BE THE EFFECT OF A LABOR-ONLY CONTRACTING


ARRANGEMENT?
The following are the effects:chanroblesvirtu allawlibrary

a. The subcontractor will be treated as the agent of the principal. Since


the act of an agent is the act of the principal, representations made
by the subcontractor to the employees will bind the principal.

b. The principal will become the employer as if it directly employed


the workers engaged to undertake the subcontracted job or service.
It will be responsible to them for all their entitlements and benefits
under the labor laws.
c. The principal and the subcontractor will be solidarily treated as the
employer.

d. The employees will become employees of the principal, subject to


the classifications of employees under Article 28 of the Labor Code.

If the labor-only contracting activity is undertaken by a legitimate


labor organization, a petition for cancellation of union registration
may be filed against it, pursuant to Article 239(e).
11. IF A LEGITIMATE SUBCONTRACTOR CANNOT PAY THE WAGES OF
THE EMPLOYEES IT ENGAGED TO PERFORM THE JOB OR SERVICE,
WILL THE PRINCIPAL AUTOMATICALLY BECOME THE EMPLOYER OF
SUCH EMPLOYEES?

No.

Under Article 106, a principal has two types of liability in relation to


the employees of the subcontractor. The first type of liability is
limited, and is governed by the first two paragraphs of Article 106.
Thus, mere inability of the subcontractor to pay wages will not
automatically make the principal the direct employer. It will only
make the principal jointly and severally liable with the subcontractor
for payment of the employees' wages to the extent of the work
performed under the contract.

The second type of liability, which arises from the third and fourth
paragraphs of Article 106, is absolute and direct. This liability arises
when there is labor-only contracting. In such cases, the principal shall
be responsible to the workers in the same manner and extent as if it
directly employed these workers.