Egalla, Frederick C.

Labor Review
Sat 1-4pm
Dean Porfirio Panganiban

INDEPENDENT CONTRACTING

Labor Contracting – refers to an arrangement whereby a principal agrees to farm out to a contractor the
performance or completion of a specific job or work within a definite or pre-determined period,
regardless of whether such job or work is to be performed or completed within or outside the premises
of the principal.

What are applicable laws affecting labor contracting:

1. Labor Code as amended, articles 106, 107,108 and 109.

2. DOLE Department order no. 18-A
3. DOLE Department Circular 01-12 (prescribing the applicability and non-applicability of DOLE
Department Order no. 18-A)
4. DOLE Department Order no. 174
5. DOLE Department Circular no. 1-17 (prescribing the applicability and Non-Applicability of DOLE
Department order no. 174)

ARTICLE 106. Contractor or subcontractor. – Whenever an employer enters into a contract with another
person for the performance of the formers work, the employees of the contractor and of the latters
subcontractor, if any, shall be paid in accordance with the provisions of this Code.
In the event that the contractor or subcontractor fails to pay the wages of his employees in accordance
with this Code, the employer shall be jointly and severally liable with his contractor or subcontractor
to such employees to the extent of the work performed under the contract, in the same manner and
extent that he is liable to employees directly employed by him.
The Secretary of Labor and Employment may, by appropriate regulations, restrict or prohibit the
contracting-out of labor to protect the rights of workers established under this Code. In so prohibiting or
restricting, he may make appropriate distinctions between labor-only contracting and job contracting as
well as differentiations within these types of contracting and determine who among the parties involved
shall be considered the employer for purposes of this Code, to prevent any violation or circumvention of
any provision of this Code.
There is “labor-only” contracting where the person supplying workers to an employer 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 are 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.
ARTICLE 107. Indirect employer. – The provisions of the immediately preceding article shall likewise
apply to any person, partnership, association or corporation which, not being an employer, contracts
with an independent contractor for the performance of any work, task, job or project.

ARTICLE 108. Posting of bond. – An employer or indirect employer may require the contractor or
subcontractor to furnish a bond equal to the cost of labor under contract, on condition that the bond
will answer for the wages due the employees should the contractor or subcontractor, as the case may
be, fail to pay the same.

ARTICLE 109. Solidary liability. – The provisions of existing laws to the contrary notwithstanding, every
employer or indirect employer shall be held responsible with his contractor or subcontractor for any
violation of any provision of this Code. For purposes of determining the extent of their civil liability
under this Chapter, they shall be considered as direct employers.

DOLE Department Order no. 18-A series of 2011 – rules implementing article 106-109. ( as
amended/supplemented by DOLE Department Order no. 174 series of 2017)

DOLE Department Order no. 174 series of 2017

Notable changes as compared to DOLE DO no. 18-A

1. In- House Cooperative – Refers to a cooperative which is managed, or controlled directly or

indirectly by the principal or one where the principal or any of its officers owns/represents any
equity or interest, and which operates solely or mainly for the principal.
2. Sec; 8. Permissible Contracting or subcontracting agreements. Contracting or subcontracting
shall only be allowed if all the following circumstances concur:
a. The contractor or subcontractor is engaged in a distinct and independent business and
undertakes to perform the job or work in its own responsibility, according to its own manner
and method;
b. The contractor subcontractor has 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;
c. 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
d. The service agreement ensures compliance with all the rights and benefits for all the
employees of the contractor or subcontractor under the labor laws.
DOLE Department Circular 01-17
Non-Applicability of DO no.174-17
- Business Process Outsourcing BPO/
- Legal Process Outsourcing LPO/
- Knowledge Process Outsourcing KPO
- IT infrastructure Outsourcing
- Application Development
 - Hardware/Software Support
- Medical Transcription
- Animation Services
- Bank Office Operations/support
- Contracting or Subcontracting arrangements in the Construction Industry- under Phil
Construction Accreditation Board (PCAB)
- Contracting and Subcontracting arrangements of Private Security Industry – Department
Order no. 150 series of 2016 (Revised Guidelines Governing the Employment and working
Conditions of Security Guards and other private Security Personnel in the Private Security
Agency)
- Contracting out of job or work to a professional, or individual with unique skills and talents
who himself or herself performs the job or work for the principal

Labor Only Contracting

refers to an arrangement where the contractor or subcontractor merely recruits, supplies or places
workers to perform a job or work for a principal, and the elements thereof are present.
- Labor-Only Contractor is an agent in the recruitment of the principal.
- Elements
o Contractor or Subcontractor does not have substantial capital; does not have
investment in the form of tools, equipment, machineries, supervision and work
premises among others and employees recruited and placed are performing
activities which are directly related to the main business operation of the principal
OR
o The contractor or subcontractor does not exercise the right to control over the
performance of the work of the employees.
- The Law presumes labor-only contracting except when a contractor or subcontractor has
DOLE Certificate of Registration and License as private recruitment and placement agency
from the DOLE.
- Effects of Labor-Only Contracting Agreement:
o The labor-only contractor/subcontractor will be treated as the agent or
intermediary of the principal
o Principal will be the direct employer of the supplied workers of the labor-only
contractor. EE relationship is created by law b/w Principal and the employed
worker.
o Principal and Labor-Only Contractor will be solidarily treated as the employer.
o Employees supplied by the labor-Only Contractor will become the regular
employees of the principal, subject to the classifications of employees.

Trilateral Relationship
Refers to the relationship in a contracting or subcontracting arrangement where there is a
Service Agreement for a specific job, work or service between the 1. Principal, 2. Contractor, 3.
Contractor’s employee
- Principal – refers to any natural or juridical entity, whether an employer or not, who puts
out or farms out a job or work to a contractor.
 o Also an indirect employer/statutory employer.
- Contractor/Subcontractor – refers to any person or entity engaged in a legitimate
contracting or subcontracting arrangement providing services for a specific job or
undertaking farmed out by principal under a Service Agreement.
- Contractor’s Employee- refers to an employee of the contractor hired to perform or
complete a job or work farmed out by the principal pursuant to a service Agreement with
the latter.
- Contracts involve/required in Permissible Job Contracting
o Employment Contract – between the contractor/subcontractor and its employees.
 Governed by Labor Code
o Service Agreement – between the Principal and the contractor/subcontractor.
 Governed by Civil Code
*there is an absence of privity of contract between principal and Contractor’s
employee.

MARVIN O. DAGUINOD v. SOUTHGATE FOODS

[ GR No. 227795, Feb 20, 2019 ]

ISSUE: Whether or not Generation One Coop is an independent Contractor?

RULING: No it is not. Southgate is a labor only contractor.

There is labor-only contracting where: (a) the person supplying workers to an employer does not have
substantial capital or investment in the form of tools, equipment, machineries, work premises, among
others; and (b) the workers recruited and placed by such person are performing activities which are
directly related to the principal business of the employer.

Applying the two test in the present case, Generation One has no substantial capital. The finding of the
Labor arbiter and the NLRC that the same is an independent contractor stating that it has substantial
capital is erroneous. It was alleged that Southgate has 9million capital as evidenced by their ITR for that
fiscal year is not sufficient to support such claim since it was only an ITR for one year and that there is no
showing that the same was submitted to the BIR. The work of the petitioner is this case is a cashier who
receives money from customers and fixes their orders, which the court stated that is directly related in
the food business. The claim that there is no EE relationship between the parties is belied by the fact
that the employment agreement executed by the Petitioner and Generation one has no detailed work
description, hence it can only be presumed that the former is indeed an employee on Southgate.

All facts support that indeed Generation One is labor only contractor, which in fact and law establish the
presence of EE relationship between Petitioner Daguinod and Southgate Food. Such established fact
supports the claim indeed Daguinod was illegally dismissed.

ALLIED BANKING CORPORATION as merged with PNB vs. REYNOLD CALUMPANG

Gr NO. 219435
ISSUE: Whether Race Cleaners Incorporated (RCI), the employer of the respondent is an independent
contractor?

RULING:
No. RCI is not an independent Contractor.

Permissible job contracting or subcontracting has been distinguished from labor-only contracting such
that permissible job contracting or subcontracting refers to an arrangement whereby a principal agrees
to put out or farm out to a contractor the performance or completion of a specific job, work or service
within a definite or predetermined period, regardless of whether such job, work or service is to be
performed or completed within or outside the premises of the principal, while labor-only contracting, on
the other hand, pertains to an arrangement where the contractor or subcontractor merely recruits,
supplies or places workers to perform a job, work or service for a principal.

As a general rule, a contractor is presumed to be a labor-only contractor, unless such contractor

overcomes the burden of proving that it has the substantial capital, investment, tools and the like.

In the present case, petitioner failed to establish that RCI is a legitimate labor contractor as
contemplated under the Labor Code. Except for the bare allegation of petitioner that RCI had substantial
capitalization, it presented no supporting evidence to show the same. Aside from this, petitioner’s claim
that RCI exercised control and supervision over respondent is belied by the fact that petitioner admitted
that its own Branch Manager had informed respondent that his services would no longer be required at
the Branch. Moreover, respondent’s work is related to petitioner’s business and is characterized as part
of or in pursuit of its banking operations.

A finding that a contractor is a labor-only contractor, as opposed to permissible job contracting, is

equivalent to declaring that there is an employer-employee relationship between the principal and the
employees of the supposed contractor, and the labor-only contractor is considered as a mere agent of
the principal, the real employer.