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Contractualization: The Employers’ Perspectives

The term “Contractualization” is a termof current notoriety, emblazoned

on the headlines of various newspapers and shouted with derision at political
sorties, to arouse the anger of the general public. The origin of this term can
be traced to trade union leaders who seek to demonize all forms of
outsourcing orcontracting out of workby employers to independent job
contractors, and, by extension,any short term or temporary employment. Over
the years, thesetrade union leaders have ingeneouslyand unfairly linked
contractualization to the catchphrase “security of tenure” and succeeded in
depicting employers and service providers as mercenaries sacrificing their
employeesto the altar of profit, in violation of labor laws.This vilifying
propaganda campaignhas transformed a purely socio-economic issue into a
political one. A closer look at the underpinnings of this term is necessary, to
relieveundue anxiety and uneasiness in the business community, if not soothe
ruffled political feathers.

Under the law, all employees are entitled to security of tenure, which
simply means that they cannot be dismissed without just or authorized cause,
and after strict observance of procedural due process. That constitutional
guaranty applies to contractual, temporary, seasonal or project employees
whose tenurial right is protected under the terms of their contract of
employment. During the effectivity of their contracts, these employeescan be
assured that their employment will not be terminated without just or
authorized cause and that they will be afforded the benefits of procedural due
process. Under Art. 295 of the Labor Code, such employees hired for a
particular position on a casual, seasonal, or project basis automatically
becomes regular employees after one (1) year of service in thesame position.
Such is the essence of the phrase “security of tenure”. It does not guarantee
permanent or lifetime employment, a practice once adopted in Japan in the
60’s, but which iteventually scrapped for various reasons.

Contractualization, or in proper language, outsourcing, is an

employment strategy is explicitly recognized by Art. 106 of the Labor Code
and established jurisprudence as a valid exercise of management prerogative
and business judgment. That prerogative is founded on the constitutional
rights of employers i.e., the right and freedom to contract and the right to
property. Jurisprudence aboundswherean employer is allowed to use its best
business judgment to determine whether a portion of its operationscan
beoutsourced. This discretion is upheld for as long as the employer is
motivated by good faith, i.e. to ensure the financial viability of the company
and preserve livelihood. The lines are drawn where circumvention the law or
malicious or arbitrary action begins.1It is subject to the state’s exercise of its
paramount police power but it “may not, under the guise of protecting the
public interest, arbitrarily interfere with private business, or impose unusual
and unnecessary restrictions upon lawful occupations (U.S. v. Toribio, 15 Phil.
85 [1910]). Hence, it is clear that due process, while protecting the
employees,recognizes that the employer must also be protected from the
oppressive use of state power.

Thedelicate balancing act of state power is clearly evident in the Labor

Code which,while confirming the right of the employer to engage a
contractorto perform work, holds the employer liable to pay the wages of a
contractor’s employees if the contractor fails to do so. The Secretary of Labor
and Employment is further given the authority to restrict or prohibit the
contracting out of labor to protect the rights of workers, to make appropriate
distinctions between labor-only and job contracting and to determine who is
the true employer under the law.

These rules have been written in stone since the effectivity of the Labor
Code in 1974, and has withstood the issuance of ImplementingRules and a
successive series of amendments,the latest of which was Department of Labor
and Employment Department Order No. 18-A (D.O. No. 18-A). The various
amendments were all made in response to the incessant demand of Unions for
the review,amendment ortotal repeal of the laws recognizing outsourcing.

DO 18-A which was issued by former Labor Secretary R. Baldoz on

November 14, 2011 and its precursor, DO 10, issued by former Labor
Secretary, Leonardo Quisimbing on May 30, 1997, are perhaps the most
restrictive rules implementing Art. 106-109 of the Labor Code. Each
DOwasthe result of almost one (1) year of tedious tripartite meetingsmarked
by stormy debates and blistering arguments. The workers were ably
represented by the Trade Union Congress of the Philippines (TUCP) and
various progressive labor unions whilethe management group was

See Temic Automotive Philippines, Inc. vs. Temic Automotive Philippines, Inc. Employees Union-FFW, G.R. No.
186965, December 23, 2009.
represented by a small contingent from the Employers Confederation of the
Philippines (ECOP).

The existing laws, supplemented bythe rules borne of fierce tripartite

deliberations, are more than adequate to address every conceivable concern,
imagined or real,of the employees,the employers or contractors. DO18-A, in
particular, stays true to current business trends while mandating, among
others, the presentation by a contractor of proof of its legitimacy to the
Department of Labor. A contractor is now required to show a minimum paid-
up capitalization of at least Php 3Million, pay corresponding registration
fees,present copies of its employment contracts and file quarterly reports.
Equally important, DO18-A explicitly prohibits labor-only contracting in
whatever form and the repeated hiring of employees under an employment
contract of short duration or Service Agreements of short duration with the
same or different contractors;or what is commonly known as “Endo” or “5-5-

Endo, not unlike the term contractualization, elicits the same, if not
more, contempt. Yet outsourcing or contractualization should not be equated
or confused with endo, for the latterpractice deserves the scorn heaped upon
it. Endo is unconditionally prohibited while contractualization is
conditionally allowed. In fact, contractualization owes its tainted reputation to
endo and other similar labor only contracting arrangements.What is needed,
to maintain the balance between management and employee interests is not
the termination or abrogation of contractualization but the stricter
enforcement of the provisions of DO18-A prohibiting Endo and other forms of
labor only contracting arrangements.

It should be emphasized that service contracting has been a mainstay in

the Philippine employment scene. Since the early ‘60s when the first
manpower agency, Manpower Philippines, Inc. (an affiliate of Manpower, Inc.,
U.S.A.) was established, more than a thousand service contracting agencies
have been established all over the country. These agencies have been
providing contractual employees not only to private enterprises but to
government agencies as well. Throughout the years, they have serviced the
needs of various industries, from manufacturing, pharmaceuticals, food and
drugs, construction, garments, to hotels, banking, electronics and logistics.
The advantages of a service contractor are as follows: 1) greater
flexibility in scheduling; 2) work gets done immediately; 3) more effective
results; 4) eliminates workplace politics; 5) provides for an immediate
response to urgent requirements which cannot be accomplished by in-house
recruitment; 6) continuity in operations despite temporary absences of
regular employees; 7) personnel administration and supervision are
streamlined; 8) manpower readiness in emergency situations; 9)
improvement in productivity; 10) less advertising costs, and 11) dispenses
with the need for hiring full time employees for short term or variable and
sporadic assignments. For export-oriented companies, in particular, one study
showed that outsourcing enables them to adjust more quickly to fluctuations
in demand. In other words, outsourcing cushions the adverse effect of sudden
changes in market conditions.

But the benefts of a service contractor is not one-sided. The reported

benefits extend to the workforce. Service contracting providesinterim
employment to laid off workers, ensuring them of food on the table. For
others, it is a training ground for future advancement,where an
apprenticeship program long proven inadequate was scrapped by Executive
Order No. 11. There are also those who regard their interim employment as
vehicles for learning and enhancing their skills, not to mention a stepping
stone towards integration in the regular workforce or as permanent
replacement for resigned, terminated or retired employees.These benefits
have all contributed towards creating a favourable business climate resulting
in additional jobs. Indeed, the service contracting industry has, in no small
way, contributed to the job-creation efforts of the government. In this regard,
Prof. Gerardo P. Sicat, a renowned economist, in his article “Endo, wages,
poverty and employment-labor market issues,” which appeared in the October
12, 2016 issue, has this to say:

“The marching order to end the contractualization is not an easy

task to undertake x x x

Philippine labor costs have become relatively high. Thus,

Philippine labor has become less competitive compared to some
developing countries in the ASEAN region.

Many labor intensive operations that used to be located in

the country have move to other countries out of the volition of
wrong labor policies: in the 1980-90s, to China; before to Vietnam,
and now to Cambodia. In the early 1980s, the movement of labor-
intensive operations from investment operations went to
Thailand and Indonesia.


However, such high cost is not commensurate with the fact

that there is an enormous supply of labor seeking jobs at low
wages. Poverty and lack of skills of many such workers also
implies that their productivity often cannot match the high cost of
mandated minimum wages. Factor in thevarious forms of benefits
that employers are required for regular employees, then the gap
in wage and productivity got even wider x x x

A termination of endo(contractualization) will raise the cost

of labor per unit since many of those affected are likely to be non-
regular employees x x x

Definitely, a fall in employment arising from the termination

of endo will come about. Some companies will reduce their
operations due to higher costs. Also, some workers will no longer
be hired. The negative impact will be severe for those losing their
jobs x x x

Let’s promote more domestic investments, more foreign

direct investments and more infrastructure investments in the
country. With these activities, more jobs will be created and
eventually, we eradicate unemployment and underemployment.”