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Sayson, Karl Benedict N.

Legal Writing
EH 409 Friday (6:30-8:30PM)

Contractualization in the Philippines


Contractualization is the act of an employer in replacing their employees

every after the expiration of a certain period of time, it is the substitution of
regular workers with temporary workers who receive comparably lower wages,
along with less or no employment benefits at all.

Contractualization, otherwise known as Endo, has been existing in the

Philippines and it is only at this epoch that the administration is vocal about its
eradication right from the outset. This essay recognizes the presence of
Contractualization, thus settling the issue as to whether or not such labor practice
exists in the country. What is essential therefore in this discussion are the
prevalance of contractualization, the pros and cons of contractualization from
both the perspective of the employee and employer and finally, a critique as to
how the present administration is doing so far in its promise to end endo.

The pivotal part of this essay, which is the discussion of the pros and cons
of contractualization shall be sub-divided into the different arguments which we
shall bore out of the topic, such as but not limited to the local labor landscape in
the country, the dilemma between employees and employers, and the market
competition that contractualization is able to sway to businesses. At the end of
the paper, we shall learn, after having weighed all the arguments, that
contractualization should either be retained or terminated, and whether or not the
government is on the right track in retaining or terminating such labor practice.


Contractualization in the Philippines

Contractualization is considered to be legal in the Philippines through

Department Order 18-02 of the Department of Labor and Employment:

Guiding principles. Contracting and subcontracting arrangements are

expressly allowed by law and are subject to regulation for the promotion of
employment and the observance of the rights of workers to just and humane
conditions of work, security of tenure, self-organization, and collective
bargaining. Labor-only contracting as defined herein shall be prohibited.

Among the critics of Contractactualization is the 5-5-5 scheme wherein a

contractual worker is hired and fired every five months, preventing
employees from becoming regulars. The reason for the 5-months rule is that it is
intended to evade the automatic regularization of an employee, which is written
in Article 281 o the Labor Code that says: " Probationary employment shall not
exceed six months from the date the employee started working, unless it is
covered by an apprenticeship agreement stipulating a longer period." Therefore,
if employers do not terminate the contracts of their employees on the fifth month,
then the employees should now be regularized.

This is considered to be a huge problem since the absence of

regularization of the employee would deny him his right to have work incentives,
an increased salary, and certain work benefits such as bonuses and leaves.

Contractualization is evident in the Philippines and is still a continued type

of employment, which is legal under the law. However with the 5-5-5 scheme,
which is also a type of contractual scheme, makes Contractualization a ground
for employers to take advantage of employees. The main author of the Labor
Code, former Senator Ernesto Herrera, is even of the view that the legalization of
Contractualization may have opened the floodgates for the replacement and
retrenchment of regular workers with casual and contractual workers.1,2

Although Contractualization is expressly allowed under DO 18-02, it is still

subject to regulation for the promotion of employment. It is in this sense that we
see the opportunity to become a regular employee as an incentive to achieve
security of tenure. Thus, goal-setting on the part of the employee.


Security of Tenure

It is fitting to include in a discussion of Security of Tenure since the law

says that this should be guaranteed to each and every employee. However, with
the validity of contractualization, a question now arises as to whether or not
security of tenure and contractualization could actually co-exist with one another.

As stated in Article 279 of the Labor Code of the Philippines, Security of

Tenure: In cases of regular employment, the employer shall not terminate the
services of an employee except for a just cause or when authorized by this Title.
An employee who is unjustly dismissed from work shall be entitled to
reinstatement without loss of seniority rights and other privileges and to his full
backwages, inclusive of allowances, and to his other benefits or their monetary
equivalent computed from the time his compensation was withheld from him up
to the time of his actual reinstatement.

The provision in the immediately preceding paragraph has been further

strengthened in the case of De Guzman v. Comelec3, wherein the Supreme Court
discussed that the guarantee of security of tenure under the Constitution means
that an employee cannot be dismissed from the service for causes other than
those provided by law and only after due process is accorded the employee.
Security of Tenure does not only apply to regular employees, but also to all kinds
of employments.

3 G.R. No. 129118. July 19, 2000

We learned in the De Guzman case that security of tenure applies to all kinds of
employments. To provide proof and consistency, we have the case of Agoy v.
NLRC4 which discussed that probationary employees, notwithstanding their
limited tenure, are also entitled to security of tenure. there is also security of
tenure to probationary employees. This means they may only be terminated for
just cause or when they otherwise fail to qualify as regular employees in
accordance with reasonable standards made known to them by the employer at
the time of their engagement.

Employees vs. Employers

From the perspective of employers, the legality of contractual employment is

attractive to business since it does not only provide more options for the
employers as to what type of employment they should engage with their
employees, but it also attracts foreign investors to the country, which would
eventually provide people with jobs. Simply stated, employers favor contractual
employment since it provides a low-cost workforce.

In the contrary, although employees are only given a job, they nonetheless
are still given the opportunity to earn for a living even for a limited time. Here lies
the problem simply providing people with a temporary job versus guaranteeing
people with security of tenure. In the Philippine context, it is evident that there is
the scarcity of job opportunities, the lack of expertise on the part of our work
force, and even the inadequacy of the salary and benefits being offered by
companies. With the aforementioned existing labor conditions and realities,
individuals would treat it as a blessing or an opportunity that they are lucky

4 G.R. No. 112096. January 30, 1996

enough to have jobs, even when only for a temporary period, than to have no job
or opportunity at all.

It is because of this desperation that companies tend to capitalize. For

example, in the case of Dusit Hotel Nikko vs. Gatbonton5, the Supreme Court
ruled that employee Gatbonton was evaluated after serving his probationary
period, leading to having his probationary period extended. Because of the
foregoing reason, the Court ordered that the status of the employee is already
regular for the reason that employer dismissed the employee without any just or
authorized cause that the employer Dusit Hotel Nikko failed to present proof or
evidence that they evaluated Gatbonton as the ground for his acceptance as a
regular employee or termination from the company.

In the Dusit Hotel case, the employer capitalized on its employee's desperation to
have a job and earn a living by creating certain standards that employees should
satisfy in order for them to become regular employees, yet thereafter deliberately
failing them from attaining that certain requirement for regularization. This should
not be the case. The employer is benefited at the expense of the employee's
security of tenure.

Market Competition: An Attraction for Business Investors

Endo is primarily a loophole exploited by employers looking for a low-cost

workforce. This is a part of why the Philippines is such an attractive job market.
According to estimates, about 30% of the Philippine workforce subscribes to

5 GR No. 161654, May 5, 2006

contract labor, and this will be affected adversely. When the country falls out of
favor in terms of its labor force, the economy will take a hit and this will strike
right back at the businesses who have lost the ability for short-term hiring.

This said, most of the major industry segments will remain unaffected by
the proposed endo law. The most heavily impacted will be the Construction
segment, 71% of which are contractual workers.

Current Administration's Performance Against Contractualization

In an interview with the Philippine Star, Labor Secretary Silvestre Bello III
said that What we are envisioning is that assuming that we proceed with the
contractual operations as provided by law, regular workers will continue to
become regulars and those being outsourced by service provider will also attain
the status of a regular employee. To ensure only legitimate contractors can
engage in permissible contracting arrangements, DOLE has set higher capital
requirements for such enterprises, from P3 million to P5 million. A contractor shall
also maintain a working capital requirement equivalent to 50 percent of the total
salary of all employees to ensure workers shall be paid even if there are
collection difficulties. Contractors must also provide financial assistance to
employees waiting for new assignment, for a maximum of three months. If the
three-month period lapses without the worker getting new employment, the
contractor should give him or her separation pay.

Violators of the new DO face cancellation of registration as well as fines

ranging from P10,000 to P50,000. Bello said a copy of the new DO has been
submitted to President Duterte for his guidance and approval.
He stressed that DOLE cannot repeal existing laws or totally prohibit all
forms of contractualization. The present legal framework allows contracting
activities for business flexibility, but business prerogatives must be balanced by
providing adequate protection to the workers rights, he explained.

He said the new DO ensures that workers in legitimate contracting

arrangement can enjoy their right to security of tenure as well as just and
humane working conditions.6

Even with the new Department Order, labor groups still held several protests to
express their opposition. Alan Tanjusay, spokesman for the Associated Labor
Union (ALU), said the new policy is worse than the existing DO No. 18-A, which
legitimizes contractualization. He said they would seek a meeting with the
President regarding the implementation of DO 168. We feel that the President
will reject the current DO and certify as urgent a measure banning and
criminalizing contractualization."7

Tanjusay said the new DO would allow illegal endo scheme to take a new form
through seasonal and project-based employment.


7 ibid.
The problem with seasonal workers is that remittances to social protection
benefits such as SSS, PhilHealth and Pag-IBIG will be forced to move from one
principal employer to another, Tanjusay explained.8

As early as January 2017, the Department of Labor and Employment has

successfully drafted DO 168 and submitted to the president the new order,
superseding the DO 18-A. However, the clamor now made by labor groups is that
the new DO fell short of Duterte's promise to completely eradicate