Labor-Only Contracting

Here’s a concrete example of the labor-only contracting scheme:

A businessman (called “principal”) would like to put up a commercial building on his lot. He contacts a
contractor and creates an agreement regarding the construction. In the agreement, the principal asks the
contractor to recruit workers who’ll work with the construction, with the principal supervising the work
and paying for their salaries. The recruited workers perform a job or service for the principal himself. Here
are elements present in a labor-only contracting scheme according to the labor code:

The contractor or subcontractor does not have substantial capital or investment in the form of tools,
equipment, machineries, work premises, among others, and the workers recruited and placed by such
person performing activities which are directly related to the principal business of such employer. In such
cases, the person or intermediary shall be considered merely as an agent of the employer who shall be
responsible to the workers in the same manner and extent as if the latter were directly employed by him;
or

The contractor does not exercise the right of control over the performance of the work of the employee.

Job Contracting

On the other hand, the legitimate scheme is called job contracting or what is also known as outsourcing.
Here, a principal farms out to a contractor a service or project within a definite or predetermined period,
regardless of whether they are to be performed or completed within or outside the premises of the
principal. It is a legitimate arrangement when these circumstances occur:

The contractor or subcontractor is engaged in a distinct and independent business and undertakes to
perform the job or work on its own responsibility, according to its own manner and methods;

The contractor or subcontractor as substantial capital to carry out the job farmed out by the principal
on his account, manner and method, investment in the form of tools, equipment, machinery and
supervision;

In performing the work farmed out, the contractor or subcontractor is free from the control and/or
direction of the principal in all matters connected with the performance of the work except as to the result
thereto; and

The Service Agreement ensures compliance with all the rights and benefits for all the employees of the
contractor or subcontractor under the labor laws.

To fully understand these labor schemes, learn from Atty. Dominador R. Say, Undersecretary –
Employment and Policy Support of the Department of Labor and Employment (DOLE) as he joins the 10th
Philippine HR Summit. This will happen on August 3-4, 2017 at the Crowne Plaza Galleria.