Labor Law 1

Atty. Ronic Treptor

Contracting and Subcontracting
Module 7
Art. 106
• Article 106. Contractor or sub-contractor. Whenever an employer enters into a contract with
another person for the performance of the former’s work, the employees of the contractor and of
the latter’s sub-contractor, if any, shall be paid in accordance with the provisions of this Code. In
the event that the contractor or sub-contractor 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
sub-contractor 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 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.
Art. 107
• 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.
Art. 108
• Article 108. Posting of bond. An employer or indirect employer may
require the contractor or sub-contractor 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
sub-contractor, as the case may be, fail to pay the same.
Art. 109
• 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.
Art. 106-109
• What is Job Contracting or Subcontracting?
• This refers to an arrangement whereby a principal agrees to put out or farm
out to a contractor or subcontractor 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.

• Is job contracting or subcontracting allowed under the Labor Code?

• Yes. But this is regulated under Arts. 106-109 and under DO-174-17*

• *https://www.dole.gov.ph/php_assets/uploads/2017/07/DO-174-17-Rules-
Implementing-Articles-106-to-109-of-the-Labor-Code-As-Amended1.pdf
Art. 106-109
• What is the so-called Trilateral Relationship in Contracting and
Subcontracting?
• In legitimate contracting, there exists a trilateral relationship under which
there is a contract for a specific job, work or service between the principal
and the contractor or subcontractor, and a contract of employment between
the contractor or subcontractor and its workers.
Art. 106-109
• There are three parties involved in these arrangements:
• 1. Principal – any employer who decides to farm out a job or service to a
contractor or subcontractor;
• 2. Contractor or subcontractor – has the capacity to independently undertake
the performance of the job, work or service; and,
• 3. Contractual workers –engaged by the contractor or subcontractor to
accomplish the job, work or service pursuant to the agreement between the
latter and the principal.

• (Aliviado et. al., v. Procter & Gamble Phils., Inc., and Promm-Gem, Inc., G.R.
No. 160506, June 6, 2011)
Art. 106-109
• Elements of Legitimate Job Contracting or Subcontracting:
• 1. The contractor or subcontractor carries on a distinct and independent
business and undertakes to perform the job, work or service on its own
account and under its own responsibility according to its own manner and
method;
• 2. The contractor or subcontractor has substantial capital or investment;
• 3. In performing the work farmed out, the contractor or subcontractor is free
from the control and direction of the principal in all matters connected with
the performance of the work except as to the result thereto; and
• 4. The Service Agreement ensures compliance with all the rights and benefits
for all the employees of the contractor or subcontractor under the labor laws
Art. 106-109
• 1st element: The contractor or subcontractor carries on a distinct and
independent business and undertakes to perform the job, work or
service on its own account and under its own responsibility according
to its own manner and method

• This means that the contractor must have a legitimate business of its
own. If the contractor has no legitimate business or if it is controlled
by the principal, then there is no legitimate contracting or
subcontracting.
Art. 106-109
• 2nd element: The contractor or subcontractor has substantial capital
or investment;

• Substantial Capital refers to paid-up capital stocks/shares of at least

PHP 5 Million in the case of corporations, partnerships and
cooperatives. PHP 5 Million net worth in the case of a single
proprietorship (Sec. 3, [L], DOLE D.O. No. 174 S. 2017).
Art. 106-109
• The law does not require both substantial capital and investments, it
is sufficient that either of the two is complied with (Neri v. NLRC, G.R.
Nos. 97008-09, July 23,1993).

• Burden of proof to prove that the contractor or subcontractor has

substantial capital or investment rests on the contractor himself
(Guarin v. NLRC, G.R. No. 86010, October 3, 1989).
Art. 106-109
• 3rd element: In performing the work farmed out, the contractor or
subcontractor is free from the control and direction of the principal in
all matters connected with the performance of the work except as to
the result thereto

• This is because the contractor must have a business of its own. The
contractor should not be run by the principal. Note however that the
control of the principal must be substantial in order to be considered
“control” that will negate the legitimacy of the contractor.
Art. 106-109
• 4th element: The Service Agreement ensures compliance with all the
rights and benefits for all the employees of the contractor or
subcontractor under the labor laws.

• Note that under Art. 106, the principal is jointly and severally liable
for the payment of unpaid wages in relation to the work performed
by the contractual workers for the principal. Moreover, the principal
can be held liable for violations of the Labor Code under Art. 109
(note however, that the liability of the principal under Art. 109 has
been qualified by the court.)
Art. 106-109
• Limited liability under Art. 109:
• Other Liability – such as an award for backwages and separation pay because
of an illegal dismissal of the contractor’s employee, the liability should be
solely that of the contractor, in the absence of proof that the principal
conspired with the contractor in the commission of the illegal dismissal.
Art. 106-109
• Rights of Contractor’s Employees
• 1. Safe and healthful working conditions;
• 2. Labor standards such as but not limited to service incentive leave, rest
days, overtime pay, holiday pay, 13th month pay, and separation pay as may
be provided in the Service Agreement or under the Labor Code;
• 3. Retirement benefits under the SSS or retirement plans of the contractor, if
there is any;
• 4. Social security and welfare benefits;
• 5. Self-organization, collective bargaining and peaceful concerted activities;
and
• 6. Security of tenure.
Art. 106-109
• NOTE: Between the principal and the contractor’s employees, no
employer-employee relationship exists; the contractor, being himself a
businessman, is the employer.

• PRINCIPAL – contract of service – CONTRACTOR – contract of employment – WORKERS

• Note: Employer-employee relationship may be declared to exist between the

principal and the contractor’s workers where the contracting arrangement is not
legitimate. The DOLE is empowered under Art. 106 to prohibit or restrict contracting
or subcontracting. Under the regulations issued by the DOLE, some form of
contracting are declared prohibited (prohibited = not legitimate)
Art. 106-109
• Forms of prohibited contracting or subcontracting:
• Labor-only Contracting
• When the principal farms our work to a “Cabo”
• Contracting out of job or work through an in-house agency
• Contracting out of job or work through an in-house cooperative which merely
supplies workers to the principal
• Contracting out of job or work by reason of a strike or lockout whether actual or
imminent
• Contracting out of job or work being performed by union members and such will
interfere with, restrain or coerce employees in the exercise of their rights to self-
organization as provided in Article 259 or the Labor Code, as amended
• Requiring the contractor’s employees to perform functions which are currently being
performed by the regular employees of the principal
Art. 106-109
• Forms of prohibited contracting or subcontracting:
• Requiring the contractor’s employees to sign, as a precondition to employment or
continued employment, an antedated resignation letter; a blank payroll; a waiver of
labor standards including minimum wages and social or welfare benefits; or a
quitclaim releasing the principal or contractor from liability as to payment of future
claims; or require the employee to become a member of a cooperative
• Repeated hiring by the contractor of employees under an employment contract of
short duration
• Requiring employees under a contacting agreement to sign a contract fixing the
period of employment to a term shorter than the term of the Service Agreement,
unless the contract is divisible into phases for which substantially different skills are
required and this is made known to the employee at the time of engagement
• Such other practices, schemes or employment arrangements designed to circumvent
the right of workers to security of tenure
Art. 106-109
• What is Labor-only contracting?
• an arrangement where:
• The contractor does not have substantial capital
• The contractor does not have investments in the form of tools, equipment, machineries,
supervision, work premises, among others, and
• The contractor’s employees recruited and placed are performing activities which are
directly related to the main business operation of the principal; OR

• The contractor does not exercise the right to control over the performance of the work
of the employee.
Art. 106-109
• What is Labor-only contracting?
• In this scenario, the contractor or subcontractor merely recruits, supplies or
places workers to perform a job, work or service for a principal.

• This is prohibited under DO-147-17.

Art. 106-109
• What is a “Cabo”?
• This refers to a person or group of persons or to a labor group which, under
the guise of a labor organization, cooperative or any entity, supplies workers
to an employer, with or without any monetary or other consideration,
whether in the capacity of an agent of the employer or as an ostensible
independent contractor.
Art. 106-109
• What is an in-house agency?
• This refers to a contractor which is owned, managed, or controlled directly or
indirectly by the principal or one where the principal owns or represents any
share of stock, and which operates solely or mainly for the principal

• What is an 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 or
represents any equity or interest, and which operates solely or mainly for the
principal
Art. 106-109
• What is the consequence if the contracting or subcontracting is
declared as not legitimate?
• The contractor is deemed as an agent of the principal; thus the contractual
employees are deemed the employee of the principal.
• This means that the liability of the principal as to the contractual employees
will be that of a full employer.
Art. 106-109
• What is the consequence if the contracting or subcontracting is declared as
not legitimate?
• Notwithstanding the absence of a direct employer-employee relationship between
the employer in whose favor work had been contracted out by a Labor-Only
Contractor, and the employees, the former has the responsibility, together with the
LOC for any valid labor claims, by operation of law. The reason is that the LOC is
considered merely an agent of the employer, and liability must be shouldered by
either one or shared by both (Tabas, et al., v. California Manufacturing Company, Inc.
et al., G.R. No. 80680, January 26, 1989).

• A finding that a contractor is a “labor-only” contractor is equivalent to declaring that

there is an ER-EE relationship between the principal and the employees of the
“labor-only” contractor (San Miguel Corp. vs. MAERC Integrated Systems. G.R. No.
144672; July 10, 2003).
Art. 106-109
Legitimate Job Contracting
The principal is merely an indirect employer, by
operation of law, of his contractor’s employees.
the law creates an er-ee relationship for a limited
purpose.
The principal becomes solidarily liable. The liability
however does not extend to the payment of
backwages or separation pay of employees who are
illegally dismissed.
Allowed by law
Presence of substantial capital or investment.
Labor-only Contracting/Prohibited Job Contracting
The principal is treated as direct employer of the
contractor’s employees in all instances. (contractor =
agent of the employer)
the statute creates an er-ee relationship for a
comprehensive purpose.
The principal becomes solidarily liable with the
contractor not only for unpaid wages but also for all
the rightful claims of the employees under the Labor
Code and ancillary laws.
Prohibited by law
Absence of substantial capital or investment.
Art. 106-109
• Mandatory Registration of Legitimate Contractors(Sec. 14; DO-174-
17)
• It shall be mandatory for all persons or entities acting as contractors to
register with the Regional Office of the DOLE where it principally operates.
Art. 106-109
• What is the effect of failure to register by the independent contractor
with DOLE?
• Failure to register shall give rise to the presumption that the contractor is
engaged in labor-only contracting.

• Note that the failure to register creates a disputable presumption and can be
overturned by evidence. This means that if a legitimate contractor fails to
register, it does not automatically mean that such contractor is engaged in
labor-only contracting.
Art. 106-109
• Note also that just because a contractor is registered with the DOLE, it
does not automatically mean that it is a legitimate contractor. There is
only a disputable presumption that it is legitimate.

• The validity of the Certificate of Registration is for two years, unless

cancelled after due process. The Certificate of Registration is valid
within the Region where the contractor is registered.
Art. 106-109
• Can the Certificate of Registration be cancelled by the DOLE?
• Yes. The cancellation must comply with the procedure indicated under
Section 24 of DO-174-17.

• What are the grounds for cancellation of the Registration?

• See Sec. 23 of DO-174-17
Art. 106-109
• What is the effect of cancellation of the registration?
• A final order of cancellation shall divest the contractor of its legitimate status
to engage in contracting or subcontracting. It is also a ground to deny
subsequent application for registration, even if the registration is made under
a new name.

• Note however that the cancellation of the registration shall not affect valid
and existing service agreements the contractor may have entered into prior to
the cancellation of the registration.
Art. 106-109
• Contractor Or Subcontractor To Furnish A 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
the 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.