Contracting and sub-contracting arrangements are commonplace in most business transactions. Instead of hiring their own messengers, janitors and security guards, among others, entrepreneurs have learned the value of outsourcing these services to contractors. Truth be told, contracting out these jobs is actually more cost-efficient in terms of time and money for the usual businessman. However, contracting arrangements are regulated by Philippine labor laws to ensure that these arrangements do not result in the exploitation of contractual employees.

Last 14 November 2011, the Department of Labor & Employment (“DOLE”) issued Department Order No. 18-A, Series of 2011 (“DO 18-A”). Section 4 of DO 18-A states that contracting or subcontracting shall be legitimate if all the following circumstances concur:

  • The contractor is registered with DOLE and carries a distinct and independent business and undertakes to perform the job, work or service on its own responsibility, according to its own manner and method, and free from control and direction of the principal in all matters connected with the performance of the work except as to the results thereof;
  • The contractor has substantial capital and/or investment; and
  • The Service Agreement ensures compliance with all the rights and benefits under Labor Laws.

Furthermore, the contractor’s employees shall be entitled to all the rights and privileges as provided for in the Labor Code to include the following:

  • Safe and healthful working conditions;
  • Labor standards such as but not limited to service incentive leave, rest days, overtime pay, holiday pay, 13th month pay, and separation pay as may be provided in the Service Agreement or under the Labor Code;
  • Retirement benefits under the SSS or retirement plans of the contractor, if there is any;
  • Social security and welfare benefits;
  • Self-organization, collective bargaining and peaceful concerted activities; and
  • Security of tenure.

In fact, it is required that the Employment Contract between the Contractor and Employee include the following terms and conditions:

  • The specific description of the job, work or service to be performed by the employee;
  • The place of work and terms and conditions of employment, including a statement of the wage rate applicable to the individual employee; and
  • The term or duration of employment that must be co-extensive with the Service Agreement or with the specific phase of work for which the employee is engaged.

A salient feature of DO 18-A is the mandatory registration of all contractors with the DOLE. A Certificate of Registration is good for 3 years. Failure to register shall give rise to the presumption that the contractor is engaged in labor-only contracting, which is prohibited. Hence, it is strongly advised that contractors register with DOLE, not only in compliance with DO 18-A but also as a preventive measure to avoid problems in the future concerning labor claims and cases filed by employees.

Definition of labor-only contracting (LOC)?

Contractor/ subcontractor merely recruits, supplies or places workers to perform a job, work or service for a principal, and the following elements are present:

  • contractor or subcontractor does not have substantial capital or investment to actually perform the job, work or service under its own account and responsibility; and
  • employees recruited, supplied or placed are performing activities directly related to the main business of the principal; or
  • contractor does not exercise the right to control over the performance of the work of the employees.

Effect of labor-only-contracting?

  • The subcontractor will be treated as the agent of the principal, and representations by the subcontractor to the employees will bind the principal.
  • The principal will become the employer as if it directly employed the workers, and will be responsible for all their entitlements and benefits under the labor laws.
  • The principal and the subcontractor will be solidarily treated as the employer.
  • The employees will become employees of the principal, subject to the classifications of employees under Article 280 of the Labor Code.

Difference between a subcontractor and a private recruitment and placement agency(PRPA)?

PRPA merely recruits workers for placing them with an employer or company. It is not the employer of the workers it recruited and placed.

A subcontractor directly undertakes a specific job or service for a principal, and employs its own workers. The four-fold test of E-E relationship should be satisfied by the subcontractor in relation to the employees it engages. The subcontractor is also referred to as independent contractor.

Is there a difference between an ordinary employer-employee relationship and subcontracting?

In an ordinary ER-EE relationship, two parties involved are the employer (directly hires the employee), and the employee.

In subcontracting, three parties are involved: the principal, the subcontractor, and the employees.

What If the legitimate Subcontractor cannot pay the wages of its employees?

A principal has two types of liability in relation to the employees of the subcontractor.

  1. limited liability: The mere inability of the subcontractor to pay wages 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.
  2. absolute & direct liability: Arises when there is labor-only contracting. The principal shall be responsible to the workers in the same manner and extent as if it directly employed these workers.

What is the hiring practice of repeated "5-5-5" or "endo" workers that are prohibited by DO 18-A, S. 2011?

It is the hiring practice deliberately resorted to prevent workers from acquiring regular status done through repeated short- term arrangements (e.g., "5 months, 5 months", "5-5-5", or less)

  1. by one principal through the same contractor, or under different contractors, or
  2. through a Service Agreement of short duration under the same contractor, or different contractors

Repeated hiring of the same workers shows that he/she is performing functions that is usual and necessary to the trade or business of the employer.

On the other hand, the 5-5-5 working arrangement that is not repeated has been declared as a violation of public policy as it has been shown to have been resorted to prevent regular employment.

What are the rights of an employee of the contractor?

A contractor's employees, whether deployed or assigned as reliever, seasonal, week-ender, temporary, or promo jobbers, are entitled to all

  • safe and healthful working conditions;
  • labor standards such as service incentive leave, rest days, overtime pay, holiday pay, 13th month pay, and separation pay as may be provided in the Service Agreement or under the Labor Code;
  • retirement benefits under the SSS or retirement plans of the contractor, if there are any;
  • social security and welfare benefits;
  • self-organization, collective bargaining and peaceful concerted activities; and
  • security of tenure.

Remedy of worker against a subcontractor or principal who violates the provisions of DO 18-A?

They can file a complaint for cancellation of the contractor's registration before the DOLE Regional Office. DO18-A provides for grounds for cancellation of contractor's certificate of registration, and the procedure.

How will DO18-A eliminate the practice of contractors of "race to the bottom" when bidding for service contracts?

It sets a standard administrative fee of at least ten percent (10%) to prevent the "race to the bottom" competition to the detriment of workers' wages and benefits.

The standard administrative cost is based on the total contract cost, and not the total contract price. It is is derived by first computing the amount required for the payment of wage- and wage-related benefits including employees; social welfare benefits. Next, the standard administrative cost is obtained by computing 10% of total contract cost. The resulting summary of the total contract cost PLUS the standard administrative fee of 10% accounts for the total contract price. VAT and other taxes are NOT included in total contract price.

If the Regional Wage Board issues a Wage Order at any time of a subsisting Service Agreement, who is responsible for the resulting wage differentials?

The principal /client shall bear the cost of any required wage increases plus the standard 10% administrative cost. But if the principal/client fails, the contractor is deemed jointly and severally liable.

Show me full Details of "Department Order No. 18-A" or "DO 18-A"?

You may visit DOLE Website or view the Department Order No. 18-A, Series of 2011 - DOLE by clicking here

This document was last updated on December 20, 2015