• P.D. 442, otherwise known as the Labor Code, DOLE Regulations, and Supreme Court Decisions, are the legal bases.
• Job contracting is an arrangement whereby a principal outsources a job, work, or service to the contractor who performs these through its deployed personnel, otherwise known as the contractor’s workers.
• While DOLE Regulations have referred to the arrangement as legitimate job contracting and now permissible job contracting, they refer to the same concept.
• Legitimate/permissible job contracting is valid and recognized by law.
• A contractor is presumed a labor-only contractor unless proven otherwise.
• Without DOLE Registration, there arises a presumption of labor-only contracting.
• DOLE Certification by itself is not sufficient to remove presumption of labor-only contracting.
• Violation of laws and rules on contracting and subcontracting results in solidary liability against the principal and the contractor.
• The DOLE Secretary has the power to regulate contracting and subcontracting.
• In labor-only contracting, the contractor is a mere agent of the principal.
• The totality of circumstances is evaluated to determine whether a contractor is engaged in labor-only contracting or legitimate job contracting.
• Indirect employers may be held similarly with principals in contracting and subcontracting.
• A bond may be required in a contracting and subcontracting arrangement.
• The contractor has the burden of proof to show that it is engaged in legitimate/permissible job contracting.
• Where the principal is the one claiming that the contractor is a legitimate contractor, the burden of proving the supposed status of the contractor rests on the principal.
• Judicial notice has been made by the Supreme Court on contracting and subcontracting.

Legal basis

The following are the legal bases:

• P.D. 442, otherwise known as the Labor Code;
• DOLE Regulations on Contracting and Subcontracting; and
• Supreme Court Decisions.

Concept

Contracting or subcontracting 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 predetermined period, regardless of whether such job or work is to be performed or completed within or outside the premises of the principal.” (Section 3(c), DO-174)

Otherwise stated, job contracting is an arrangement whereby a principal outsources a job, work, or service to the contractor who performs these through its deployed personnel, otherwise known as the contractor’s workers.

Job contracting arrangement is allowed and recognized via Article 106 of the Labor Code and which have been implemented through various DOLE Regulations. The earlier regulations called this arrangement legitimate job contracting in contrast to labor-only contracting.

As of this writing, the current applicable regulation is Department Order No. 174, Series of 2017 which calls the arrangement as permissible job contracting.

Whether legitimate or permissible job contracting, they refer to the same arrangement found in Article 106 of the Labor Code. Accordingly, the following discussions uses the two phrases interchangeably as the terms/phrases refer to the same concept.

List of DOLE Regulations on Contracting and Subcontracting

These were the earlier regulations:

• Omnibus Rules Implementing the Labor Code
• DOLE Department Order No. 10, series of 1997;
• DOLE Department Order No. 3, series of 2001;
• DOLE Department Order No. 18, series of 2002;
• DOLE Department Order No. 18-A, series of 2011; and
• DOLE Department Order No. 174, series of 2017.

Legitimate or permissible job contracting

“In legitimate job contracting, an independent contractor undertakes to perform work on its own account, under its own responsibility and according to its own manner and method, free from the control and direction of the principal. No employment relationship arises between its employees and the principal. Consequently, the said employees can claim separation pay only from the independent contractor, and not from the principal.” (Philippine Airlines, Inc. v. NLRC, G.R. No. 125792, 09 November 1998)

“Permissible job contracting or subcontracting refers to an arrangement whereby a principal agrees to farm out with a contractor or subcontractor the performance 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. Under this arrangement, the following conditions must be met: (a) the contractor carries on a distinct and independent business and undertakes the contract work on his account under his own responsibility according to his own manner and method, free from the control and direction of his employer or principal in all matters connected with the performance of his work except as to the results thereof; (b) the contractor has substantial capital or investment; and (c) the agreement between the principal and contractor or subcontractor assures the contractual employees’ entitlement to all labor and occupational safety and health standards, free exercise of the right to self-organization, security of tenure, and social welfare benefits.” (Alilin v. Petron Corporation, G.R. No. 177592, 09 June 2014)

“In legitimate job contracting, no employer-employee relation exists between the principal and the job contractor’s employees. The principal is responsible to the job contractor’s employees only for the proper payment of wages. But in labor-only contracting, an employer-employee relation is created by law between the principal and the labor-only contractor’s employees, such that the former is responsible to such employees, as if he or she had directly employed them.” (Philippine Airlines, Inc. v. NLRC, G.R. No. 125792, 09 November 1998)

Labor-only contracting, presumption against employer

“Generally, the 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. However, where the principal is the one claiming that the contractor is a legitimate contractor, as in the present case, said principal has the burden of proving that supposed status. It is thus incumbent upon Petron, and not upon petitioners as Petron insists,48 to prove that RDG is an independent contractor.” (Alilin v. Petron Corporation, G.R. No. 177592, 09 June 2014)

DOLE registration required, consequences

“For failing to register as a contractor, a presumption arises that one is engaged in labor-only contracting unless the contractor overcomes the burden of proving that it has substantial capital, investment, tools and the like.” (Manila Memorial Park Cemetery, Inc. v. Lluz, G.R. No. 208451, 03 February 2016)

DOLE Certification

“The certification issued by the DOLE stating that Interserve is an independent job contractor does not sway this Court to take it at face value, since the primary purpose stated in the Articles of Incorporation of Interserve is misleading. According to its Articles of Incorporation, the principal business of Interserve is to provide janitorial and allied services. The delivery and distribution of Coca-Cola products, the work for which respondents were employed and assigned to petitioner, were in no way allied to janitorial services. While the DOLE may have found that the capital and/ or investments in tools and equipment of Interserve were sufficient for an independent contractor for janitorial services, this does not mean that such capital and/ or investments were likewise sufficient to maintain an independent contracting business for the delivery and distribution of Coca-Cola products.” (Coca-Cola Bottlers Phils. Inc. v. Agito, G.R. No. 179546, 13 February 2009)

Solidary liability

“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.” (Article 106, Labor Code)

Authority of DOLE Secretary to regulate

“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.” (Article 106, Labor Code)

Labor-only contracting

“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 106, Labor Code)

“Labor-only contracting, on the other hand, is a prohibited act, defined as ‘supplying workers to an employer who 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.’” (Alilin v. Petron Corporation, G.R. No. 177592, 09 June 2014)

“'(I)n distinguishing between prohibited labor-only contracting and permissible job contracting, the totality of the facts and the surrounding circumstances of the case shall be considered.” (Alilin v. Petron Corporation, G.R. No. 177592, 09 June 2014)

Totality of circumstances

“To determine whether a contractor is engaged in labor-only contracting or permissible job contracting, ‘the totality of the facts and the surrounding circumstances of the case are to be considered.’” (Petron Corporation v. Caberte, G.R. No. 182255, 15 June 2015)

Indirect employer of independent contractor

If 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, the former may be held liable as an indirect employer if the provisions on labor-only contracting are met. (Article 107, Labor Code)

Independent contractor

An independent contractor is an individual (not an entity) who offers his/her talent or expertise in the form of services for and in consideration of professional fee, without entering into an employment contract with the one hiring, who is not an employer.

“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.” (Article 109, Labor Code)

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 108, Labor Code)

“Neither does the performance bond taken out by (the contractor) ABC serve as significant evidence of its substantial capital. As aptly explained by the (Court of Appeals):

‘The performance bond posted by ABC Contracting Services likewise fails to convince us that the former has substantial capital or investment inasmuch as it was not shown that the performance bond in the amount of ₱596,799.51 was enough to cover not only payrolls, rentals and equipment but also possible damages to the equipment and to third parties and other contingent liabilities. Moreover, this Court takes judicial notice that bonds of this nature are issued upon payment of a small percentage as premium without necessarily requiring any guarantee.’

If at all, the bond was a convenient smoke screen to disguise the real nature of ABC’s employment as an agent of Petron.” (Petron Corporation v. Caberte, G.R. No. 182255, 15 June 2015)

Burden of proof

The contractor has the burden of proof to show that it is engaged in legitimate/permissible job contracting as the law itself presumes by default that it is a labor-only contractor unless proven otherwise.

When on the principal

“Where the principal is the one claiming that the contractor is a legitimate contractor, the burden of proving the supposed status of the contractor rests on the principal.” (Alilin v. Petron Corporation, G.R. No. 177592, 09 June 2014)

“The law presumes a contractor to be a labor-only contractor and the employees are not expected to prove the negative fact that the contractor is a labor-only contractor. Thus, it is not (the complainants) but (the principal) Petron which bears the burden of establishing that (the contractor) ABC is not a labor-only contractor but a legitimate independent contractor.” (Petron Corporation v. Caberte, G.R. No. 182255, 15 June 2015)

Judicial notice on contracting and subcontracting

“Besides, the Court has already taken judicial notice of the general practice adopted in several government and private institutions of securing janitorial services on an independent contractor basis.” (Philippine Airlines, Inc. v. NLRC, G.R. No. 125792, 09 November 1998)

References

• Presidential Decree No. 442, a.k.a. Labor Code
• DOLE Department Order No. 174, Series of 2017
• Jurisprudence or Supreme Court Decisions

About the author

Atty. Jake is a business lawyer and law mentor. He practices on labor and employment, corporate and regulatory compliance, data privacy, intellectual property, negotiations and contracts, as well as handles litigation and arbitration cases.