PRIMER ON CONTRACTING AND SUBCONTRACTING ARRANGEMENT - CHAN ROBLES VIRTUAL LAW LIBRARY

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. This web page features the full text of the DOLE Primer on Contracting and Subcontracting Under Articles 106 to 109 of the Labor Code.

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IN THE EMPLOYMENT OF WORKERS.com/dolecontractingsubcontractingprimer. there are only two parties involved . the contractor or subcontractor then employs its own employees. under which the employer: http://www. In an ordinary employer-employee relationship. WHAT IS CONTRACTING AND SUBCONTRACTING? There is contracting or subcontracting when an employer. Series of 2001 1. 10 (Series of 1997) [Amending the Rules Implementing Books III and VI of the Labor Code.PRIMER ON CONTRACTING AND SUBCONTRACTING ARRANGEMENT . For the purpose of undertaking the principal's business that is farmed out.html[12/12/2011 12:56:36 PM] .CHAN ROBLES VIRTUAL LAW LIBRARY Read Full Text of the Rules on Contracting and Subcontracting Arrangement: Department Order No. 3. 18-02 (Series of 2002) [Rules Implementing Articles 106 to 109 of the Labor Code. referred to as the principal. Series of 1997. as Amended] Department Order No. The term that is more commonly used is subcontracting.QUICK GLANCE Philippines | Worldwide | The Business Page Main Indices the Library ---> Main Indices ofof the Library ---> Go! DOLE PRIMER ON CONTRACTING AND SUBCONTRACTING Effects of Department Order No. referred to as the contractor or subcontractor. This relationship is established through a four-fold test.chanrobles. 03 (Series of 2001) [Revoking Department Order No.the employer and the employee. farms out the performance of a part of its business to another. IS THERE A DIFFERENCE BETWEEN AN ORDINARY EMPLOYER-EMPLOYEE RELATIONSHIP AND SUBCONTRACTING? Yes. 2. and Continuing to Prohibit Labor-Only Contracting] DOLE Primer on Contracting and Subcontracting Under Articles 106 to 109 of the Labor Code Department Order No. 10. as Amended] THE CHAN ROBLES VIRTUAL LAW LIBRARY . Contracting and subcontracting are synonymous under Philippine labor law.

Has the power to select and hire the employee. c. The power of control is the most important factor in determining the existence of an employer-employee relationship. 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.CHAN ROBLES VIRTUAL LAW LIBRARY a. If the four-fold test is satisfied not by the subcontractor but by the principal.PRIMER ON CONTRACTING AND SUBCONTRACTING ARRANGEMENT . In subcontracting. b. The employees engaged by the subcontractor to accomplish the job or service. A PRPA is governed by Articles 25 to 39 of the Labor Code and the rules implementing these articles. the principal then becomes the employer of the employees engaged to accomplish the job or service. The employer need not actually exercise this power. It is enough that the employer retains the right to exercise this power.html[12/12/2011 12:56:36 PM] . In subcontracting. A PRPA needs an SUBCONTRACTOR AND A PRIVATE http://www. A subcontractor directly undertakes a specific job or service for a principal. The principal which decides to farm out a job or service to a subcontractor. A subcontractor does not need authority from the Department of Labor and Employment (DOLE) to undertake a subcontracted job or service.chanrobles. and c. 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. employs its own workers. b. It simply recruits workers for the purpose of placing them with another employer so that the workers recruited will not become the PRPA's employees. the subcontractor is also referred to as independent contractor.com/dolecontractingsubcontractingprimer. It is enough that the employer retains the right to exercise it as it may deem necessary or appropriate. A subcontractor is governed by the laws and rules enumerated under Question # 4 below. and for this purpose. 3. there are three parties involved: a. A PRPA cannot be a subcontractor. What exists is not subcontracting but a direct employer-employee relationship between the principal and the employees. The subcontractor which has the capacity to independently undertake the performance of the job or service. IS THERE A DIFFERENCE BETWEEN A RECRUITMENT AND PLACEMENT AGENCY (PRPA)? Yes. Has the obligation to pay the employees his or her wages and other benefits.

which regulate the operation of security agencies. 3. D. Article 280. O. the following laws and rules will apply in addition to Articles 106 to 109 of the Labor Code: a. a. under which the principal. O. These provisions prescribe the conditions for regulating subcontracting and the rights and obligations of parties to this arrangement. No. With the revocation of D. ASIDE FROM REVOKING D. No. 10. restrain or coerce employees in the exercise of their rights to selforganization. It is a temporary measure.chanrobles. It recognizes the continuing validity of contracts entered into when D. WHAT LAW OR RULES GOVERN SUBCONTRACTING? The basic law governing subcontracting is the Labor Code. 10. and h. and D. No. No. 3. O. 3. 3? The following are the important features of D. 5. O. Republic Act No. However.PRIMER ON CONTRACTING AND SUBCONTRACTING ARRANGEMENT . Article 2180 of the Civil Code. in a civil suit for damages instituted by an injured person. WHAT ARE THE IMPORTANT FEATURES OF D. 19. 10 was revoked by DOLE on 08 May 2001 through another order.CHAN ROBLES VIRTUAL LAW LIBRARY authority or license from DOLE to legally undertake a recruitment and placement activities. There was also a set of rules implementing Articles 106 to 109. e. 3 took effect on 29 May 2001. for subcontracting arrangements in the construction industry. http://www. 10. issued by DOLE in 1997. O. NO. Nos. can be held liable for any negligent acts of the employees of a labor-only contractor.com/dolecontractingsubcontractingprimer. O. O. No. O. b. which classifies employees into regular. No. Article 248 (c) which disallows contracting out of services or functions being performed by union members when such will interfere with. particularly Articles 106 to 109. project or seasonal employees. Series of 2001. 10 was still in force. f. jurisprudence. NO. c. b. No.html[12/12/2011 12:56:36 PM] . O. O. 4. known as Department Order No. g. Jurisprudence interpreting the foregoing laws. d. Series of 1993. D. D. 3 and 19. 5487 and its implementing rules. D. O. Contractual stipulations provided these are not in conflict with Labor Code provisions. D. No. It prohibits labor-only contracting. c.

PRIMER ON CONTRACTING AND SUBCONTRACTING ARRANGEMENT . No. c. tools. existing jurisprudence still provides definitive guidance. security of tenure. No. 10 ineffective. It sets the process and mechanism. 8. National Labor Relations Commission. 126586. 7. equipment. according to its own manner and method.R. O.com/dolecontractingsubcontractingprimer. to be considered legitimate.chanrobles. O. equipment. 3 rendered D. it can undertake the performance of the contract according to http://www. b. work premises. 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. 19 February 1999). by which a new set of rules shall be formulated. No. while D. among others. and Lim v. whether in the form of money. WHAT IS LEGITIMATE SUBCONTRACTING? Neither the Labor Code nor D. 3 RENDER SUBCONTRACTING ILLEGAL? No. work premises. Where a subcontractor is highly capitalized. 3 has a definition of legitimate subcontracting. the contractor or subcontractor has substantial capital or investment. G. For example. NO. DOES D. G. facilities. However. or subscribed capital stock that would indicate the subcontractor's capacity to undertake the subcontracted work or service independently. O. free exercise of the right to self organization. 02 February 2000. the contractor or subcontractor carries on a distinct and independent business and undertakes to perform the job. No. However. O. 10 is favorably cited as follows: Contracting shall be legitimate if the following conditions concur: a. it is still necessary for it to show that it has the capacity to be an independent contractor. provided the requirements for legitimate subcontracting are satisfied and the prohibition against labor-only subcontracting is observed. WHAT IS SUBSTANTIAL CAPITAL? IS SUBSTANTIAL CAPITAL SUFFICIENT TO ESTABLISH LEGITIMATE SUBCONTRACTING? Substantial capital refers to such investment.CHAN ROBLES VIRTUAL LAW LIBRARY d. 124630.html[12/12/2011 12:56:36 PM] . That is. O. 6. In two recent cases decided by the Supreme Court (Vinoy v. machineries. work or service on its own account and under its own responsibility. National Labor Relations Commission. and social and welfare benefits. which is through consultations through the Tripartite Industrial Peace Council. the definition of legitimate subcontracting in D. The agreement between the principal and the contractor or subcontractor assures the contractual employees entitlement to all occupational safety and health standards. No. the Supreme Court has held that it need not show evidence that it has investment in the form of tools. machineries.R. No. a subcontractor with a capital stock of P1 Million which is fully subscribed and paid for has been deemed by the Supreme Court to be a highly capitalized venture which satisfies the requirement of substantial capital.

free from the supervision of the principal in all matters except as to the results of the work. 3 states that there is labor-only contracting where the contractor or subcontractor merely recruits. Section 2 of D. and shall guarantee basic labor rights including just and humane terms and conditions of employment and the right to self-organization. D. NOW THAT IT HAS BEEN REVOKED. 10 ENUMERATED ACTIVITIES PERMITTED FOR SUBCONTRACTING. b. and the following elements are present: a. 9. The employees recruited.com/dolecontractingsubcontractingprimer. D. No. The objective of the State in prohibiting labor-only contracting is to ensure that labor laws are followed and to prevent exploitation of workers.PRIMER ON CONTRACTING AND SUBCONTRACTING ARRANGEMENT . 10. work or service under its own account and responsibility. D. The contractor or subcontractor does not have substantial capital or investment to actually perform the job. supplied or placed by such contractor or subcontractors are performing activities directly related to the main business of the principal. NO. 10 also contained a similar prohibition. which mandates that the State shall protect labor and promote its welfare. The Constitution. IS LEGITIMATE SUBCONTRACTING DIFFERENT FROM LABOR-ONLY CONTRACTING? HOW IS LABOR-ONLY CONTRACTING DEFINED? Yes. 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: a. As such. legitimate subcontracting is different from labor-only contracting because the former is allowed and the latter is illegal and prohibited. No. Article 106 of the Labor Code.html[12/12/2011 12:56:36 PM] . No.CHAN ROBLES VIRTUAL LAW LIBRARY its own manner and method. O. O. 11. To allow a labor-only contractor to operate is to give it an opportunity to circumvent the law and to exploit workers. D. it cannot independently undertake to perform a subcontracted job or service. 3 is not the first regulation to prohibit labor-only contracting. O. The prohibition was embodied in the original rules implementing Articles 106 to 109 issued right after the Labor Code took effect in 1974. 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. supplies or places workers to perform a job. 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. O. work or service for a principal. O.chanrobles. 3 merely reiterates the prohibition. and b. No. DOES THIS MEAN THAT SUCH ACTIVITIES MAY NO LONGER BE SUBCONTRACTED? http://www.

which arises from the third and fourth paragraphs of Article 106. Thus.html[12/12/2011 12:56:36 PM] .com/dolecontractingsubcontractingprimer. 13. 3. Since the act of an agent is the act of the principal. 3. In such cases. restrain or coerce employees in the exercise of their right to self-organization under Article 248 (c) of the Labor Code.chanrobles. ARE THERE STILL ANY PROHIBITED SUBCONTRACTING ARRANGEMENTS? Yes. It will be responsible to them for all their entitlements and benefits under the labor laws. Under Article 106. NO. is absolute and direct. The subcontractor will be treated as the agent of the principal. Expressly prohibited are (a) labor-only contracting as defined in D. IF A LEGITIMATE SUBCONTRACTOR CANNOT PAY THE WAGES OF THE EMPLOYEES IT ENGAGED TO PERFORM THE JOB OR SERVICE. WHAT WILL BE THE EFFECT OF A LABOR-ONLY CONTRACTING ARRANGEMENT? The following are the effects: a. No. mere inability of the subcontractor to pay wages will not automatically make the principal the direct employer. The second type of liability. This liability arises when there is labor-only contracting as defined in D.CHAN ROBLES VIRTUAL LAW LIBRARY Not necessarily. 12. 14. These activities may still be subcontracted provided (a) the laws and rules under Question # 4 are observed. subject to the classifications of employees under Article 28 of the Labor Code. NOW THAT IT HAS BEEN REVOKED. the principal shall be http://www. WILL THE PRINCIPAL AUTOMATICALLY BECOME THE EMPLOYER OF SUCH EMPLOYEES? No. O. a petition for cancellation of union registration may be filed against it. and is governed by the first two paragraphs of Article 106. b. The principal and the subcontractor will be solidarily treated as the employer. 10 ENUMERATED PROHIBITED ACTIVITIES.PRIMER ON CONTRACTING AND SUBCONTRACTING ARRANGEMENT . 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. No. O. a principal has two types of liability in relation to the employees of the subcontractor. D. The employees will become employees of the principal. d. The first type of liability is limited. c. O. and (b) the conditions for legitimate contracting under Question # 7 and the prohibition against labor-only contracting under Question # 9 are met. The principal will become the employer as if it directly employed the workers engaged to undertake the subcontracted job or service. representations made by the subcontractor to the employees will bind the principal. and (b) contracting out of services being performed by union members when such will interfere with. If the labor-only contracting activity is undertaken by a legitimate labor organization. pursuant to Article 239(e).

No. The non-impairment provision in D. D. O. O. series of 1997. No. 3 is derived from the Constitutional principle against non-impairment of contracts. O. The burden of proving that it is an illegitimate or an illegal subcontractor will then be on the person claiming it. therefore. 16. 3 shall not be impaired.html[12/12/2011 12:56:36 PM] . 3 shall not be diminished. With the revocation. D. O. O. and. No. No. O. the abolition of the DOLE registry does not exempt a subcontractor from the licensing or permit requirements administered by relevant regulatory agencies. No. NO. does not mean that a subcontractor will no longer register at all. For example. No. O. 10 CONTAINED PROVISIONS ON SECURITY OF TENURE AND PROCEDURES FOR DISMISSAL. NO.PRIMER ON CONTRACTING AND SUBCONTRACTING ARRANGEMENT . there is no more requirement for subcontractors to register in DOLE. O. Accordingly. 10 was revoked in its entirety by D. rights and benefits or parties to any subcontracting arrangement prior to the effectivity of D. 10. O. the provisions of D. 10 itself can no longer be cited as an implementing guideline of the Labor Code provisions on security of tenure and dismissal of employees. however. O. as the case may be. http://www. However. The contracts referred to are those contracts executed and already being implemented before D. it enjoys the presumption that it is engaged in legitimate subcontracting. The purpose of the DOLE registry of subcontractors is specific. HAVE THESE BEEN REVOKED BY D. subject to Articles 106 to 109 of the Labor Code. the obligations. and jurisprudence. NO. O. WHAT IS THE EFFECT OF REVOCATION ON THIS REGISTRY? D. Abolition of the DOLE registry. 9 are not affected by D. Likewise. No. 15. UNDER D. 3? D. Thus. No. there is no more difference between DOLE-registered subcontractors and those that are not. a corporation or cooperative which seeks to operate as a subcontractor should still register with the Securities and Exchange Commission or the Cooperative Development Authority. O. 3 took effect on 29 May 2001. No. O No. If a subcontractor enrolls in this registry. 10 on security of tenure and dismissal are identical with the provisions of Rule XXIII.com/dolecontractingsubcontractingprimer. O. O. THERE WAS A REGISTRY OF SUBCONTRACTORS ESTABLISHED IN DOLE. 3 states that rights or benefits enjoyed by parties in contracts executed prior to D. O. D. 9. 17. 3. 3.CHAN ROBLES VIRTUAL LAW LIBRARY responsible to the workers in the same manner and extent as if it directly employed these workers. No. 18. 3 abolished the DOLE registry of subcontractors. A subcontractor must still follow the registration or licensing procedures required in other applicable laws. 10. WHAT DOES NON-IMPAIRMENT OF EXISTING CONTRACTS MEAN AND WHY IS THIS NECESSARY? Section 3 of D. NO. No. Thus. O. No. ARE THERE PLANS FOR THE FORMULATION OF NEW GUIDELINES TO IMPLEMENT ARTICLES 106 TO 109? Yes. These provisions of D. AFTER THE REVOCATION OF D. remain in force relative to security of tenure and employee dismissal.chanrobles.

chanrobles. Section 4 of D. 10 was revoked to give government. particularly the Tripartite Industrial Peace Council (TIPC) established under Executive Order No. 49.com Designed & Maintained by: Harvard Computer Systems.CHAN ROBLES VIRTUAL LAW LIBRARY D. workers and employers an opportunity to formulate a new set of rules that is more responsive to current employment arrangements and more acceptable to all concerned.com/dolecontractingsubcontractingprimer.com or jgc@chanrobles. Copyright ©1998-2006 by ChanRobles Publishing Company All Rights Reserved A production of The ChanRobles Group Questions and comments mailto: cralaw@chanrobles. series of 1998.html[12/12/2011 12:56:36 PM] . Accordingly. Back to Top - Back to Home - Back to Philippine Labor Circular Index .PRIMER ON CONTRACTING AND SUBCONTRACTING ARRANGEMENT . 3 mandates that new guidelines shall be formulated by DOLE upon prior consultations with all sectors concerned. No. O. Inc. http://www. O. No.

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