The Department of Labor and Employment (DOLE) has issued that it is not engaged in labor-only contracting or other

Department Order No. 174, series of 2017 (DO 174), providing prohibited forms of employment arrangements.
a new set of guidelines to govern contracting and
subcontracting. A. Type of employees

DO 174 identifies two arrangements that constitute labor-only 1. Regular

contracting, which is prohibited under the law. The first type is
when (a) the contractor does not have substantial capital or it Typically, regular employees are those who are entitled to
does not have investments in the form of tools, equipment, benefits provided by law, such as:
machineries, supervision, work premises, among others; and (b)
the contractor's employees are performing activities which are a. Social security (SSS);
directly related to the main business of the principal. The
second type is when the contractor does not exercise the right b. Pag-IBIG;
of control over the performance of the work of its employees.
c. PhilHealth;
While many provisions of the previous guidelines governing
contracting and subcontracting were maintained, the most
d. 13th month pay;
significant changes introduced by DO 174 include:
e. Holiday pay;
 The registration fee of contractors has been increased
to 100,000 and the effectivity of the certificate of f. Overtime pay;
registration has been decreased to two years. The
capitalization requirement of contractors has also g. Vacation leave;
been increased to 5,000,000.
h. Maternal or paternity leave; and
 Contracting out work through an in-house
cooperative, which merely supplies workers to the
i. Parental leave for solo parents.
principal, is a prohibited form of employment
arrangement.
It is commonly believed that all employees must serve at least
 Prohibition on requiring the contractor's employees to six months before they become regular. This is untrue. Under
perform functions that are currently being performed the Labor Code, so long as an employee performs any function
by regular employees of the principal. that is necessary and desirable in the ordinary course of
business, then such employee is deemed regular regardless of
 The mandatory provisions in a service agreement
between a principal and contractor has been reduced the term of his service. The only way to prevent such an
and it is no longer required to include provisions on: employee from becoming regular on his first day would be to
(a) Net Financial Contracting Capacity; (b) ensuring hire him on a probationary basis (more details below).
compliance with all the rights and benefits of the
employees under the Labor Code; and (c) the Regular employees enjoy security of tenure. Hence, their
obligation of the contractor to directly remit the employment may only be terminated for just causes or
relevant contributions to the Social Security System, authorized causes set out in the law. In addition, regular
Employees Compensation Commission, Philippine
employees enjoy procedural due process, where the employee
Health Insurance Corporation, and the Home Mutual
must be informed of the grounds for termination and be given
Development Fund.
the opportunity to present his defense or evidence. Thereafter,
 The termination of a service agreement between a the employee must be notified of the employer’s decision to
principal and a contractor does not automatically terminate his services. This is also referred to as the “two-notice
result in the termination of the employment of the
rule” where the employer must send a first notice to the erring
contractor's employees.
employee composed of the formal charge and the opportunity
With the issuance of DO 174 and the Government's recent to defend himself. The second notice is the notice of
pronouncements on its campaign against contractualization termination.
and "end of term" arrangements, we encourage companies
that engage the services of contractors to review DO 174, 2. Probationary
ensure that its service contractors are compliant with the new
guidelines, and review its contracting arrangements to ensure

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Probationary employees are those hired for a trial (or
probationary) period during which the employee must
demonstrate the ability to perform the job for which he has
been hired. Upon doing so, at the end of the probationary
period, the employee becomes a regular employee. Under the
law, a probationary period must not exceed six (6) months and
at the start of the this period, the employer must inform the
employee of the standard by which his performance will be
evaluated. If any of these requirements are not met, then the
probationary employment is void and the employee is deemed
regular from day one. It is advisable therefore to properly
document the probationary employment to ensure that all
legal requirements have been met.
It is important to remember that probationary employees also
enjoy security of tenure during the probationary period and the
employment may not be terminated without a substantive
reason and compliance with the aforementioned two-notice
rule.
3. Contractual Employees
On the other hand, contractual employees are employees
whose period and condition of employment are dependent on
the provisions of their contract. The Labor Code does not
explicitly permit contractual or fixed-term employment but the
courts have ruled that so long as the term in the contract is not
used to pre-emptively end the employment and deny the
employee’s security of tenure, then it is valid. Despite the
rulings, however, it is advisable to use fixed-term employment
for employees other than rank-and- file. Finally, it should be
noted that fixed-term employees enjoy the right to security of
tenure while the contract is in effect.
4. Seasonal and Project Employees
Seasonal employees are employed for seasonal work. Project
employees are called to work only for the accomplishment of a
particular project. The period of employment is co-terminus
with the season or the project, as the case may be. In both
cases, the employment is for a temporary (although not
necessarily fixed) period at the end of which, the employee
ceases to work for the employer. For open-ended
engagements related to a particular project, a project
employment might be appropriate rather than a fixed-term
contract simply because projects may be pre-terminated or
extended beyond the period originally contemplated. Finally,
during the seasonal or project employment, the employee
enjoys security of tenure and may not be terminated without
cause.
B. Subcontractor or Independent Contractor
Hiring a subcontractor is an easy way to add manpower
resources for any business. However, the Labor Code provides
that those subcontractors who do not comply with the
requirements of the law may create unwanted employer-
employee relationships. Hence, the employees of the non-
conforming subcontractor will be deemed the employees of
the client. This creates a risk whereby a company hiring a
subcontractor will become liable as a direct employer of the
subcontractor’s employees. Such liability extends to the
payment of wages, observance of all labor standards, and
payment of government-mandated benefits like SSS and Pag-
Ibig.
To avoid this risk, a start-up should only hire independent
contractors who conform to the following requirements:
1. The subcontractor carries on a business which is distinct and
independent from its client;
2. The subcontractor undertakes to perform the tasks or service
on its own account and under its own responsibility;
3. The service is rendered according to the subcontractor’s
manner and method – free from the control and direction of
the client (e.g., the start-up) in all matters connected with the
performance of the work except as to the results;
4. The subcontractor has substantial capital or investment; and,
5. The agreement between the parties assures the contractual
employees of entitlement to all safety and health standards,
the right to self-organize, the right to security or tenure and
social and welfare benefits.
It should be noted that in many instances, body shopping does
not conform to the above requirements and therefore the
resources deployed to your workplace might be deemed
regular employees who are legally entitled to be treated in the
same way.
On 4 April 2018, the Department of Labor and Employment
of the Philippines (“DOLE”) ordered a Philippine
multinational fast food chain, to regularize more than 6,000 of
its workers who were deployed by two contractors. DOLE has
also issued a compliance order to a franchise holder of an
international fast-food chain in the Philippines, directing it to
regularize more than 700 of its workers deployed by three
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contractors. Aside from these orders, DOLE has also announced the employer or as an ostensible independent
that it will conduct inspections on other fast-food chains. contractor;
2. Contracting out of job or work through an in-house
In light of these recent developments, there is a need to revisit agency;
the salient features of DOLE Department Order No. 174-17 3. Contracting out of job or work through an in-house
(“DO 174”), which is the governing rule for labor contracting cooperative which merely supplies workers to the
and subcontracting arrangements in the Philippines. principal;
4. Contracting out of a job or work by reason of a strike
Prohibition on “Labor-Only” Contracting
or lockout whether actual or imminent;
5. Contracting out of a job or work being performed by
union members and such will interfere with, restrain or
DO 174 reiterates the absolute prohibition under the Philippine coerce employees in the exercise of their rights to
Labor Code and jurisprudence against labor-only contracting. self-organization;
6. Requiring the contractor’s/subcontractor’s employees
to perform functions which are currently being
performed by the regular employees of the principal;
Under DO 174, labor-only contracting refers to the following
7. Requiring the contractor’s/subcontractor’s employees
arrangements:
to sign, as a precondition to employment or
1. the contractor or sub-contractor does not have continued employment, an antedated resignation
substantial capital. DO 174-17 increased the amount letter; a blank payroll; a waiver of payroll standards
of substantial capital, from at least PHP3 million to at including minimum wages and social or welfare
least PHP5 million in case of corporations, benefits; or a quitclaim releasing the principal or
partnerships, and cooperatives. As for a single contractor from liability as to payment of future
proprietorship, the owner must have a net worth of at claims; or require the employee to become a member
least PHP5 million. of a cooperative;
2. the contractor or subcontractor does not have 8. Repeated hiring by the contractor or subcontractor of
investments in the form of tools, equipment, employees under an employment contract or short
machineries, supervision work premises, among duration;
others. 9. Requiring employees under a contracting or
3. the contractor’s or subcontractor’s employees subcontracting arrangement to sign a contract fixing
recruited and placed are performing activities which the period of employment to a term shorter than the
are directly related to the main business operation of term of the Service Agreement, unless the Contract is
the principal. divisible into phases for which substantially different
4. the contractor or subcontractor does not exercise the skills are required and this is made known to the
right to control over the performance of the work of employee at the time of engagement; and
the employee, then it is also considered labor-only 10. Other practices, schemes or employment
contracting under DO 173-14. arrangements designed to circumvent the right of
workers to security of tenure.
Other Illicit Forms of Employment Arrangements
Mandatory Service Agreement
DO 147-17 also prohibits the following employment
arrangements for being contrary to law or public policy: DO 174 requires a service agreement between the principal
and contractor or sub-contractor. It must include provisions on
1. When the principal farms out work to a CABO, which the specific description of the job or work being subcontracted,
is a person or group of persons or a labor group its duration as well as the agreed amount of the contracted job
which under the guise of a labor organization, or work.
cooperative or any entity, supplies workers to an
employer, with or without any monetary or other Mandatory Registration of Contractors and Sub-contractors
consideration, whether in the capacity of an agent of

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All contractors and sub-contractors are required to be
registered with DOLE. Failure to register gives rise to the
presumption that the contractor or sub-contractor is engaged
in labor-only contracting.
If there is a finding by the DOLE that the contractor or
subcontractor is engaged in labor-only contracting or other
illicit forms of employment arrangements, the principal shall be
deemed the direct employer of the contractor’s
subcontractor’s employees. To that end, DOLE will require the
principal to regularize these workers.
With DOLE’s continuing campaign against contractualization,
companies that engage the services of contractors or sub-
contractors must make sure that their arrangements are
compliant with DO 174.
Types of Employees
1. Regular Employees-these employees refer to those who are
hired for the business activities deemed necessary in the
employer's usual business. They are the ones who enjoy tenure
security as it is guaranteed by the Constitution. A regular
employee cannot simply be terminated unless due to Just and
Authorized causes according to the law.
2. Probationary Employee-workers will not be automatically
regularized once hired as they will be placed on probationary
status for 6 months. After the probationary period, the
employee's performance will be evaluated if they are qualified
for regularization.
3. Term Employees-this type of employee also refers to fixed-
term employee because their services are needed for a specific
period only.
4. Project Employees-an employee hired for a specific project
is considered as a project employee. Before an employee can
be hired as a project employee, the company must specify the
length and scope of the work.
5. Seasonal Employees-workers who are hired for business
activities which require additional manpower and
temporarily laid off during off season are called casual
employees.
6. Casual Employees-this type of employee is hired for
business activities which are deemed incidental to the business.
ART. 280. Regular and Casual Employment.— The provisions of
written agreement to the contrary notwithstanding and
regardless of the oral agreement of the parties, an employment
shall be deemed to be regular where the employee has been
engaged to perform activities which are usually necessary or
desirable in the usual business or trade of the employer, except
where the employment has been fixed for a specific project or
undertaking the completion or termination of which has been
determined at the time of the engagement of the employee or
where the work or service to be performed is seasonal in nature
or and the employment is for the duration of the season.
An employment shall be deemed to be casual if it is not
covered by the preceding paragraph: Provided, That, any
employee who has rendered at least one year of service,
whether such service is continuous or broken, shall be
considered a regular employee with respect to the activity in
which he is employed and his employment shall continue while
such actually exists.
The foregoing contemplates four (4) kinds of employees: (a)
regular employees or those who have been “engaged to
perform activities which are usually necessary or desirable in
the usual business or trade of the employer”; (b) project
employees or those “whose employment has been fixed for a
specific project or undertaking[,] the completion or termination
of which has been determined at the time of the engagement
of the employee”; (c) seasonal employees or those who work
or perform services which are seasonal in nature, and the
employment is for the duration of the season; and (d) casual
employees or those who are not regular, project, or seasonal
employees. Jurisprudence has added a fifth kind— a fixed-term
employee.
Employer Employee Relationship
The agreement binding both the employer and the employee is
known as an employment contract. However, the absence of an
employment contract does not indicate an absence of an
employer employee relationship. When the existence of the
employer employee relationship is in question, the court has
generally applied the four fold test.
are If the employer employee relationship can be established, the
employer may not terminate the service of the employee
without a just or authorized cause.
4 Elements Of Employer Employee Relationship
Therefore, to determine the existence of an employer-
employee relationship, the four fold test is usually applied:
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 1. the selection and engagement of the employee; It is the employer’s duty to ensure that terms and conditions of
2. the payment of wages; employment are in compliance with the Labor Code of the
3. the power of dismissal; and, Philippines. Employment terms and conditions that are in
4. the employer’s power to control the employee on the violation of the Labor Code shall be unlawful and deemed null
means and methods by which the work is and void even when both the employer and employee mutually
accomplished. consented to it. Moreover, any doubts, uncertainties,
ambiguities and insufficiencies shall be resolved in favor of
And in the case of Victor Meteoro et. al. vs Creative Creatures, labor.
Inc., the court stated that to establish the 4 elements of
employer employee relationship, any competent and relevant
evidence may be considered including but not limited to:

 Identification Cards;
 Cash Vouchers;
 Social Security Registration;
 Appointment Letters;
 Employment Contracts;
 Payrolls;
 Organization Charts; and
 Personnel List.

Control Test Labor Law

Of the 4 elements of employer employee relationship, the

control test is generally regarded as the most crucial and
determinative indicator of the presence or absence of an
employer-employee relationship. Under this test, an employer-
employee relationship is said to exist where the person for
whom the services are performed reserves the right to control
not only the end result but also the manner and means utilized
to achieve the same.

However, as seen in the case of Royale Homes Marketing

Corporation vs. Fidel P. Alcantara, not every form of control
is indicative of an employer-employee relationship. The
subjection of the service provider to the client’s rules,
regulations, and code of ethics does not make the service
provider an employee when the level of control does not
dictate the methodology in performing the tasks. The client has
the right to establish guidelines towards the achievement of a
mutually desired result.

Employment Contract Philippines

An employment contract is not just a legally binding

agreement between the employer and employee. It is also one
that is imbued with public interest and therefore is subject to
the police power of the state.