Published 24 February 2020, The Daily Tribune
Job contracting has significantly changed the landscape of employer-employee relations. While an employment relationship is bilateral in nature, legitimate job contracting involves a trilateral relationship involving the principal, the contractor and the contractor’s workers.
Under the Labor Code, the State may restrict or prohibit the contracting out of labor to protect the rights of workers. Job contracting is not absolutely prohibited. The Department of Labor and Employment’s (DOLE) latest issuance, Department Order (DO) 174, s. 2017, sets out parameters for permissible contracting arrangements. The concurrence of the following is essential for a contractor to be considered as a legitimate job contractor:
a) The contractor or subcontractor is engaged in a distinct and independent business and undertakes to perform the job or work on its own responsibility, according to its own manner and method;
b) The contractor or subcontractor has substantial capital to carry out the job farmed out by the principal on his account, manner and method, investment in the form of tools, equipment, machinery and supervision;
c) In performing the work farmed out, the contractor or subcontractor is free from the control and/or direction of the principal in all matters connected with the performance of the work except as to the result thereto; and
d) The Service Agreement ensures compliance with all the rights and benefits for all the employees of the contractor or subcontractor under the labor laws.
In Consolidated Building Maintenance Inc. vs Asprec Jr. (GR 217301, 6 June 2018), “job contracting is deemed legitimate and permissible when the contractor has substantial capital or investment and runs a business that is independent and free from the control of the principal.” This “substantial capital” requirement refers to paid-up capital stock/shares of at least P5 million in the case of corporations and partnerships, and a net worth of at least P5 million for single proprietorships.
Aside from these requirements, all persons or entities acting as contractors must register with the Regional Office of the DOLE where it principally operates; otherwise, it shall be presumed engaged in labor only contracting.
In this prohibited form of contracting, the contractor does not have substantial capital or investment in the form of tools, equipment, machineries and work premises, and the workers recruited and placed by such person are performing activities which are directly related to the principal business of such employer.
DO 174, s 2017 explicitly states that a contractor is engaged in labor only contracting when such entity does not have the right of control over the performance of the work of the employee. Right of control includes the right to decide how work is done, to prescribe procedures, to supervise and correct performance and to control the means and manner of achieving results or outcomes. The party that may exercise this right is the true employer of the worker.
The effects of these job contracting arrangements are vastly different. Under the Labor Code, in labor only contracting, the person or intermediary acting as the contractor is considered merely an agent of the principal. The principal remains responsible to the workers in the same manner and extent as if the latter were directly employed by him. Consequently, the principal pays all the wages, benefits and other claims that are a result of the employer-employee relationship. However, in legitimate job contracting, the solidary liability of the contractor and the principal is only for the limited purpose of paying the wages of the contractor’s employees assigned to the principal under a service agreement. Even though recourse to the principal is available to the contractor’s employees in case of non-payment, there is no employer-employee relationship between the workers and the principal. There is limited liability because the contractor remains the employer, and the principal is not responsible for any other claims made by the contractor’s employees.
With these in mind, businesses must be very careful in entering into job contracting arrangements, making sure that the contractors they deal with comply with the law on contracting and are registered with the DOLE.
For comments and questions, please send an email to cabdo@divinalaw.com.
