PRIMER ON CONTRACTING AND SUBCONTRACTING

ARRANGEMENT - CHAN ROBLES VIRTUAL LAW LIBRARY

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

Read Full Text of the Rules on
Contracting and Subcontracting
Arrangement: chanroblesvirtuallawlibrary

 Department Order No. 18-02 (Series of

2002) [ Rules Implementing Articles 106 to 109 of

the Labor Code, as Amended]
 Department Order No. 03 (Series
of 2001) [Revoking Department Order
No. 10, Series of 1997, 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 (Series of 1997)

[ Amending the Rules Implementing Books III and

VI of the Labor Code, as Amended]

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DOLE PRIMER ON CONTRACTING AND SUBCONTRACTING
Effects of Department Order No. 3, Series of 2001

What exists is not subcontracting but a direct employer-employee relationship between the principal and the employees. In subcontracting. The power of control is the most important factor in determining the existence of an employer-employee relationship. Has the power to select and hire the employee. For the purpose of undertaking the principal's business that is farmed out. referred to as the contractor or subcontractor. The principal which decides to farm out a job or service to a subcontractor. The subcontractor which has the capacity to independently undertake the performance of the job or service. . IS THERE A DIFFERENCE BETWEEN AN ORDINARY EMPLOYER-EMPLOYEE RELATIONSHIP AND SUBCONTRACTING? Yes. the contractor or subcontractor then employs its own employees. the principal then becomes the employer of the employees engaged to accomplish the job or service. 2. there are three parties involved: chanroblesvirtuallawlibrary a. referred to as the principal. In subcontracting. b. IN THE EMPLOYMENT OF WORKERS. farms out the performance of a part of its business to another. The employer need not actually exercise this power. Has the obligation to pay the employees his or her wages and other benefits. Contracting and subcontracting are synonymous under Philippine labor law. In an ordinary employer-employee relationship. If the four-fold test is satisfied not by the subcontractor but by the principal. 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.the employer and the employee. It is enough that the employer retains the right to exercise this power. c. and c. The term that is more commonly used is subcontracting. WHAT IS CONTRACTING AND SUBCONTRACTING? There is contracting or subcontracting when an employer.1. there are only two parties involved . b. the subcontractor is also referred to as independent contractor. under which the employer: chanroblesvirtuallawlibrary 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. The employees engaged by the subcontractor to accomplish the job or service. It is enough that the employer retains the right to exercise it as it may deem necessary or appropriate. This relationship is established through a four-fold test. In such cases.

3. c. A PRPA needs an authority or license from DOLE to legally undertake a recruitment and placement activities. particularly Articles 106 to 109. D. Republic Act No. O. No. and for this purpose. 3 and 19. Series of 2001. 10. g. No. A subcontractor does not need authority from the Department of Labor and Employment (DOLE) to undertake a subcontracted job or service. There was also a set of rules implementing Articles 106 to 109. O. can be held liable for any negligent acts of the employees of a labor-only contractor. No. 5487 and its implementing rules. D. 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. restrain or coerce employees in the exercise of their rights to self-organization. jurisprudence. D. No. These provisions prescribe the conditions for regulating subcontracting and the rights and obligations of parties to this arrangement. d. and D. 10. Article 248 (c) which disallows contracting out of services or functions being performed by union members when such will interfere with. No. O. 19. Series of 1993. O. 3. With the revocation of D. However. Jurisprudence interpreting the foregoing laws. project or seasonal employees. D. WHAT LAW OR RULES GOVERN SUBCONTRACTING? The basic law governing subcontracting is the Labor Code. which classifies employees into regular. 4. O. which regulate the operation of security agencies. A subcontractor directly undertakes a specific job or service for a principal. O. the following laws and rules will apply in addition to Articles 106 to 109 of the Labor Code: chanroblesvirtualla wlibrary a. A PRPA is governed by Articles 25 to 39 of theLabor Code and the rules implementing these articles. under which the principal. and h. b. 10 was revoked by DOLE on 08 May 2001 through another order. 3 took effect on 29 May 2001. IS THERE A DIFFERENCE BETWEEN A SUBCONTRACTOR AND A PRIVATE RECRUITMENT AND PLACEMENT AGENCY (PRPA)? Yes. in a civil suit for damages instituted by an injured person. Contractual stipulations provided these are not in conflict with Labor Code provisions. D. Article 280. A PRPA cannot be a subcontractor. Article 2180 of the Civil Code.3. issued by DOLE in 1997. No. A subcontractor is governed by the laws and rules enumerated under Question # 4 below. for subcontracting arrangements in the construction industry. Nos. . e. employs its own workers. f. O. known as Department Order No.

R. It prohibits labor-only contracting. However. according to its own manner and method. In two recent cases decided by the Supreme Court (Vinoy v. WHAT IS LEGITIMATE SUBCONTRACTING? Neither the Labor Code nor D. 6. No. NO. 10. which is through consultations through the Tripartite Industrial Peace Council. 7. 3? The following are the important features of D. No. tools. O. It sets the process and mechanism. NO. 3 has a definition of legitimate subcontracting. ASIDE FROM REVOKING D. 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. 3 rendered D. while D. O. NO. No. O. No. b. and social and welfare benefits. a. 8. G. and Lim v. equipment. 3 RENDER SUBCONTRACTING ILLEGAL? No. WHAT ARE THE IMPORTANT FEATURES OF D. the contractor or subcontractor carries on a distinct and independent business and undertakes to perform the job. 19 February 1999). existing jurisprudence still provides definitive guidance. work or service on its own account and under its own responsibility.5. free exercise of the right to self organization. No. 3. The agreement between the principal and the contractor or subcontractor assures the contractual employees entitlement to all occupational safety and health standards. O. It is a temporary measure. by which a new set of rules shall be formulated. 10 is favorably cited as follows:chanroblesvirtualla wlibrary Contracting shall be legitimate if the following conditions concur:chanroblesvirtuallawlibrary a. work premises. c. 126586. WHAT IS SUBSTANTIAL CAPITAL? IS SUBSTANTIAL CAPITAL SUFFICIENT TO ESTABLISH LEGITIMATE SUBCONTRACTING? Substantial capital refers to such investment. 10 ineffective. whether in the form of money. O. National Labor Relations Commission. O. the definition of legitimate subcontracting in D. G. O. provided the requirements for legitimate subcontracting are satisfied and the prohibition against labor-only subcontracting is observed. O. 124630. or subscribed capital stock that would indicate the subcontractor's capacity to undertake the subcontracted work or service . 02 February 2000. No. the contractor or subcontractor has substantial capital or investment. National Labor Relations Commission. c. b.R. 10 was still in force. machineries. No. d. O. facilities. It recognizes the continuing validity of contracts entered into whenD. DOES D. security of tenure. No.

To allow a labor-only . which mandates that the State shall protect labor and promote its welfare. work or service for a principal. As such. The Constitution. 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: chanroblesvirtuallawlibrary a. 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. supplied or placed by such contractor or subcontractors are performing activities directly related to the main business of the principal. O. supplies or places workers to perform a job. machineries. The employees recruited. legitimate subcontracting is different from labor-only contracting because the former is allowed and the latter is illegal and prohibited. it is still necessary for it to show that it has the capacity to be an independent contractor. free from the supervision of the principal in all matters except as to the results of the work. Section 2 of D. 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. 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 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. 3 states that there is labor-only contracting where the contractor or subcontractor merely recruits. and the following elements are present: chanroblesvirtuallawlibrary a.independently. work premises. and b. Article 106 of the Labor Code. b. 10. it can undertake the performance of the contract according to its own manner and method. 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. to be considered legitimate. No. For example. However. IS LEGITIMATE SUBCONTRACTING DIFFERENT FROM LABOR-ONLY CONTRACTING? HOW IS LABOR-ONLY CONTRACTING DEFINED? Yes. it cannot independently undertake to perform a subcontracted job or service. work or service under its own account and responsibility. equipment. among others. and shall guarantee basic labor rights including just and humane terms and conditions of employment and the right to self-organization. That is. The contractor or subcontractor does not have substantial capital or investment to actually perform the job. 9.

11. The principal will become the employer as if it directly employed the workers engaged to undertake the subcontracted job or service. D. No. IF A LEGITIMATE SUBCONTRACTOR CANNOT PAY THE WAGES OF THE EMPLOYEES IT ENGAGED TO PERFORM THE JOB OR SERVICE. 3 is not the first regulation to prohibit labor-only contracting. D. and (b) the conditions for legitimate contracting under Question # 7 and the prohibition against labor-only contracting under Question # 9 are met. WILL THE PRINCIPAL AUTOMATICALLY BECOME THE EMPLOYER OF SUCH EMPLOYEES? . These activities may still be subcontracted provided (a) the laws and rules under Question # 4 are observed. NOW THAT IT HAS BEEN REVOKED. 14. b. a petition for cancellation of union registration may be filed against it. The prohibition was embodied in the original rules implementing Articles 106 to 109 issued right after the Labor Code took effect in 1974. 10 also contained a similar prohibition. No. O. and (b) contracting out of services being performed by union members when such will interfere with. NOW THAT IT HAS BEEN REVOKED. No. D. WHAT WILL BE THE EFFECT OF A LABOR-ONLY CONTRACTING ARRANGEMENT? The following are the effects:chanroblesvirtualla wlibrary a. representations made by the subcontractor to the employees will bind the principal. D. 12. O. Expressly prohibited are (a) labor-only contracting as defined in D. O. 3. Since the act of an agent is the act of the principal. 13. O. It will be responsible to them for all their entitlements and benefits under the labor laws. O. NO. c. d. pursuant to Article 239(e). If the labor-only contracting activity is undertaken by a legitimate labor organization. The subcontractor will be treated as the agent of the principal. NO. 10 ENUMERATED PROHIBITED ACTIVITIES. 10 ENUMERATED ACTIVITIES PERMITTED FOR SUBCONTRACTING. O. The employees will become employees of the principal. DOES THIS MEAN THAT SUCH ACTIVITIES MAY NO LONGER BE SUBCONTRACTED? Not necessarily. The principal and the subcontractor will be solidarily treated as the employer. subject to the classifications of employees under Article 28 of the Labor Code. No. D. restrain or coerce employees in the exercise of their right to self-organization under Article 248 (c) of the Labor Code.contractor to operate is to give it an opportunity to circumvent the law and to exploit workers. ARE THERE STILL ANY PROHIBITED SUBCONTRACTING ARRANGEMENTS? Yes. 3merely reiterates the prohibition.

Under Article 106. a principal has two types of liability in relation to the employees of the subcontractor. 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. and is governed by the first two paragraphs of Article 106. O. there is no more difference between DOLE-registered subcontractors and those that are not. O. and jurisprudence. The second type of liability. O. 3 abolished the DOLE registry of subcontractors. UNDER D. subject to Articles 106 to 109 of the Labor Code. 16. The non-impairment provision in D. The burden of proving that it is an illegitimate or an illegal subcontractor will then be on the person claiming it. however. NO. 3 is derived from the Constitutional principle against non-impairment of contracts. Accordingly. is absolute and direct. 15. 3 states that rights or benefits enjoyed by parties in contracts executed prior to D. Thus. rights and benefits or parties to any subcontracting arrangement prior to the effectivity of D. Abolition of the DOLE registry. there is no more requirement for subcontractors to register in DOLE. If a subcontractor enrolls in this registry. 10.No. 3 shall not be impaired. O. does not mean that a subcontractor will no longer register at all. which arises from the third and fourth paragraphs of Article 106. THERE WAS A REGISTRY OF SUBCONTRACTORS ESTABLISHED IN DOLE. WHAT DOES NON-IMPAIRMENT OF EXISTING CONTRACTS MEAN AND WHY IS THIS NECESSARY? Section 3 of D. In such cases. O. The contracts referred to are those contracts executed and already being implemented before D. Thus. 3 took effect on 29 May 2001. No. No. No. it enjoys the presumption that it is engaged in legitimate subcontracting. 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. A subcontractor must still follow the registration or licensing procedures required in other applicable laws. For example. No. The first type of liability is limited. No. O. No. WHAT IS THE EFFECT OF REVOCATION ON THIS REGISTRY? D. O. 3. The purpose of the DOLE registry of subcontractors is specific. 3 shall not be diminished. as the case may be. Likewise. the abolition of the DOLE registry does . mere inability of the subcontractor to pay wages will not automatically make the principal the direct employer. This liability arises when there is labor-only contracting as defined in D. the principal shall be responsible to the workers in the same manner and extent as if it directly employed these workers. No. With the revocation. the obligations.

No. O. NO. 9 are not affected by D. 10 was revoked in its entirety by D. HAVE THESE BEEN REVOKED BY D. 10 itself can no longer be cited as an implementing guideline of theLabor Code provisions on security of tenure and dismissal of employees. 10. No. Section 4 of D. No. NO. 10 was revoked to give government. O. 10 on security of tenure and dismissal are identical with the provisions of Rule XXIII. . Accordingly. 3. series of 1998. remain in force relative to security of tenure and employee dismissal.not exempt a subcontractor from the licensing or permit requirements administered by relevant regulatory agencies. 3? D. D. O. O. the provisions of D. O. series of 1997. 9. O. ARE THERE PLANS FOR THE FORMULATION OF NEW GUIDELINES TO IMPLEMENT ARTICLES 106 TO 109? Yes. 18. D. No. No. O No. 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. However. O. 49. 10 CONTAINED PROVISIONS ON SECURITY OF TENURE AND PROCEDURES FOR DISMISSAL. No. O. D. and. No. NO. 17. D. O. AFTER THE REVOCATION OF D. O. No. 3 mandates that new guidelines shall be formulated by DOLE upon prior consultations with all sectors concerned. Thus. O. particularly the Tripartite Industrial Peace Council (TIPC) established under Executive Order No. therefore. 3. These provisions of D.