(The following post does not create a lawyer-client relationship between Alburo Alburo and Associates Law Offices (or any of its lawyers) and the reader. It is still best for you to engage the services of your own lawyer to address your legal concerns, if any.
Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.)
Q: What is job contracting (and subcontracting)?
There is job contracting when the employer (the principal) agrees to put out or farm out with another (the 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 completed within or outside the premises of the principal. In such arrangement, the principal does not engage the services of the contractor as an employee. In undertaking the work for the principal, the contractor may hire and employ his own employees.
Q: How do you determine if a person’s services are engaged by another as a job contractor or as an employee?
There are several tests used to determine the existence of an employer-employee relationship. It is not necessary that all of them should be used, though, in determining whether there exists such relationship. Among such tests are the following:
- The four-fold test
- Economic reality test
- Multi-factor test
Q: What is the four-fold test?
The four-fold test comes with the following elements:
(1) Right to hire or to the selection and engagement of the employee.
(2) Payment of wages and salaries for services.
(3) Power of dismissal or the power to impose disciplinary actions.
(4) Power to control the employee with respect to the means and methods by which the work is to be accomplished.
Among the elements mentioned, the power of control is usually the most determinative of the existence of employer-employee relationship. When it is found that the employer has control not only on the end to be achieved, but also as to the means of achieving such end, the labor authorities or the courts usually determine that there is employer-employee relationship.
Q: What is the economic reality test?
In the economic reality test, there is a need to consider the existing economic conditions prevailing between the parties, in addition to the standard of right-of-control like the inclusion of the employee in the payrolls, to give a clearer picture in determining the existence of an employer-employee relationship based on an analysis of the totality of economic circumstances of the worker.
Thus, the determination of the relationship between employer and employee depends upon the circumstances of the whole economic activity, such as:
(1) The extent to which the services performed are an integral part of the employers business;
(2) The extent of the workers investment in equipment and facilities;
(3) The nature and degree of control exercised by the employer;
(4) The workers opportunity for profit and loss;
(5) The amount of initiative, skill, judgment or foresight required for the success of the claimed independent enterprise;
(6) The permanency and duration of the relationship between the worker and the employer; and
(7) The degree of dependency of the worker upon the employer for his continued employment in that line of business. [See Francisco vs. NLRC, G.R. No. 170087, August 31, 2006].
Q: What is the multi-factor test?
In the multi-factor test, both the control test and the economic reality tests are used together to determine the existence of employer-employee relationship.
In the United States, aside from the right of control test, there are the “economic reality” test and the “multi-factor test.” The tests are drawn from statutes, regulations, rules, policies, rulings, case law and the like. The “right of control” test applies under the Federal Internal Revenue Code (“IRC”). The “economic reality” test applies to the Federal Fair Labor Standards Act (“FLSA”). The California Division of Labor Standards Enforcement (“DLSE”) uses a hybrid of these two tests often referred to as the “multi-factor test” in determining who an employee is. [See the footnotes in Sonza vs. ABS-CBN, G.R. No. 138051, June 10, 2004; and in Dumpit-Murillo vs. Court of Appeals, G.R. No. 164652, June 8, 2007].
Q: Is the contractor allowed to just supply workers who will do the work, to the principal?
No. A job contractor is supposed to undertake the work for the principal (utilizing his own employees), and not just supply workers to the principal. Such kind of arrangement is considered as labor-only contracting, which is prohibited.
Q: What is labor-only contracting?
There is labor-only contracting where the contractor or subcontractor merely recruits, supplies or places workers to perform a job, work or service for a principal, and the following elements are present:
(1) The contractor or subcontractor does not have substantial capital or investment to actually perform the job, work or service under its own account and responsibility; and
(2) The employees recruited, supplied or placed by such contractor or subcontractors are performing activities directly related to the main business of the principal.
Q: What is the effect of labor-only contracting?
Any finding of labor-only contracting shall render the principal jointly and severally liable with the contractor to the latter’s employees, in the same manner and extent that the principal is liable to employees directly hired by him/her. 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. Also, a finding of labor-only contracting shall be a ground for the cancellation of registration as legitimate job contractor with the DOLE.
If the labor-only contracting activity is undertaken by a legitimate labor organization, a petition for cancellation of union registration may be filed against it.
Q: What are the other prohibited acts that may be considered as similar to labor-only contracting?
In addition to the prohibition on labor-only contracting, Department Order No. 18-A also declared as contrary to law the contracting out of jobs, works or services when not done in good faith and not justified by the exigencies of the business, including the following:
- Contracting out of jobs, works or services when the same results in the termination or reduction of regular employees and reduction of work hours or reduction or splitting of the bargaining unit.
- Contracting out of work with a “cabo”, which refers to a person or group of persons or to a labor group which, in 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.
- Taking undue advantage of the economic situation or lack of bargaining strength of the contractor’s employees, or undermining their security of tenure or basic rights, or circumventing the provisions of regular employment, in any of the following instances:
(i) Requiring them to perform functions which are currently being performed by the regular employees of the principal; and
(ii) Requiring them 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, contractor or from any liability as to payment of future claims.
- Contracting out of a job, work or service through an in-house agency.
- Contracting out of a job, work or service that is necessary or desirable or directly related to the business or operation of the principal by reason of a strike or lockout whether actual or imminent.
- Contracting out of a job, work or service being performed by union members when such will interfere with, restrain or coerce employees in the exercise of their rights to self-organization as provided in Art. 248 (c) of the Labor Code, as amended.
- Repeated hiring of employees under an employment contract of short duration or under a Service Agreement of short duration with the same or different contractors, which circumvents the Labor Code provisions on Security of Tenure.
- Requiring employees under a subcontracting arrangement 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.
- Refusal to provide a copy of the Service Agreement and the employment contracts between the contractor and the employees deployed to work in the bargaining unit of the principal’s certified bargaining agent to the sole and exclusive bargaining agent (SEBA).
- Engaging or maintaining by the principal of subcontracted employees in excess of those provided for in the applicable Collective Bargaining Agreement (CBA) or as set by the Industry Tripartite Council (ITC).
Contracting out of jobs, works or services analogous to the above when not done in good faith and not justified by the exigencies of the business.
Q: What are the relationships created in a subcontracting arrangement?
(1) There is an employer-employee relationship between the contractor and its own employees it engages to perform a specific job, work, or service being contracted;
(2) There is a contractual relationship between the principal and the contractor as governed by the provisions of the general law on contracts.
There are three parties involved in these arrangements; the principal who decides to farm out a job, work or service to a contractor; the contractor who has the capacity to independently undertake the performance of the job, work or service; and the contractual workers engaged by the contractor to accomplish the job, work or service.
Q: If the contractor was not able to pay the wages of its own employees, will the principal be liable for it?
Yes. the principal shall be jointly and severally liable with his contractor in case the latter fails to its own employees’ wages to the extent of the work performed under the contract. Please take note that despite not having a direct relationship between the principal and the contractor’s employees, there exists a solidary liability on the part of the principal and the contractor for purposes of enforcing the provisions of the Labor Code and other social legislation, to the extent of the work performed under the employment contract.
Q: What are the required contracts in job contracting arrangements?
(1) Employment contract between the contractor and its employee. Notwithstanding any oral or written stipulations to the contrary, the contract between the contractor and its employee shall be governed by the provisions of Articles 279 and 280 of the Labor Code providing for the right of security of tenure, and on regular and casual status of employment. The employment contract shall include the following terms and conditions:
- The specific description of the job, work or service to be performed by the employee;
- The place of work and terms and conditions of employment, including a statement of the wage rate applicable to the individual employee; and
- The term or duration of the employment that must be co-extensive with the service agreement or with the specific phase of work for which the employee is engaged.
The contractor shall inform the employee of the foregoing terms and conditions of employment in writing on or before the first day of his/her employment.
(2) Service agreement between the principal and the contractor. The service agreement shall include the following:
- The specific description of the job, work or service being subcontracted;
- The place of work, and the terms and conditions governing the contracting arrangement, to include the agreed amount for the services to be rendered, the standard administrative fee of not less than 10% of the total contract cost;
- Provisions ensuring compliance with all the rights and benefits of the employees under the Labor Code and these Rules on: provision for safe and healthful working conditions; labor standards such as service incentive leave, rest days, overtime pay, 13th month pay and separation pay; retirement benefits; contributions and remittance of SSS, Philhealth, PagIbig Fund, and other welfare benefits; the right to self-organization, collective bargaining and peaceful concerted action; and the right to security of tenure;
- A provision on the Net Financial Contracting Capacity of the contractor which must be equal to the total contract cost;
- A provision on the issuance of the bond(s), renewable every year;
- The contractor or subcontractor shall directly remit monthly the employer’s share and employees’ contribution to the SSS, ECC, Philhealth and PagIbig.
- The term or duration of engagement.
Q: Is there a minimum capitalization requirement before one may engage as legitimate job contractor?
Yes. The minimum substantial capital requirement is that the contractor should have paid-up capital stocks/shares of at least P3,000,000.00 in the case of corporations, partnerships and cooperatives; in the case of single proprietorship, a net worth of at least P3,000,000.00.
Q: Is there a need for those engaged in job contracting to register with the DOLE?
Yes. Registration is mandatory for all persons and entities, including cooperatives, acting as contractors, to register with the Regional Office of the DOLE where it principally operates. This is consistent with the authority of the Secretary of Labor and Employment to restrict or prohibit the contracting out of labor to protect the rights of the workers.
The contractor shall be deemed registered only on the date of issuance of its Certificate of Registration, which shall be effective for a period of 3 years, unless earlier cancelled, and shall be valid in the region where the contractor is registered.
Failure to register shall give rise to the presumption that the contractor is engaged in labor-only contracting.
Q: What are the grounds for the cancellation of registration of a contractor?
The following are the grounds for the cancellation of a contractor’s registration:
- Misrepresentation of facts in the application;
- Submission of a falsified or tampered application or supporting documents to the application for registration;
- Non-submission of Service Agreement between the principal and the contractor when required to do so;
- Non-submission of semi-annual report required of contractors;
- Findings through arbitration that the contractor has engaged in labor-only contracting and/or the prohibited activities;
- Non-compliance with labor standards and working conditions;
- Findings of violation of the rights of contractor’s employees, or the provisions on the required contracts;
- Non-compliance with SSS, PagIbig, Philhealth, and ECC laws; and
- Collecting any fees not authorized by law and other applicable rules and regulations.
Q: What is the effect of cancellation of the contractor’s registration?
Cancellation of registration shall divest the contractor of its legitimate status to engage in contracting or subcontracting, and shall be a ground to deny application for renewal of registration as contractor.
However, the cancellation of the registration of the contractor for engaging in labor-only contracting, or violations involving a particular service agreement, will not impair the validity of existing legitimate job contracting arrangements the contractor may have entered into with other principals prior to the cancellation of its registration. Any valid and subsisting service agreement shall be respected until its expiration. Thereafter, contracting with a delisted contractor shall make the principal the direct employer of all employees under the service agreement.
Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries regarding the legal aspects of job contracting and outsourcing, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.
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