The entrepreneur who starts a small business is almost always an owner-employee, performing the tasks of that business in addition to managing the business itself. A webpage creator or a software programmer who starts out his own business does the programming and, in addition, does the marketing and management of the business.

 

It may happen that the entrepreneur hires one or two employees to help out in the growing business. Certain companies, to their credit, farm out works to small businesses and new entrepreneurs, recognizing the fact that these companies do the same competent work for a lower amount, and, maybe, as a conscious effort to encourage small entrepreneurs. After all, an outside provider specializing in that particular job would do better work.

Laws and regulations provide for benefits to small businesses and new entrepreneurs. In labor, there are certain exceptions to small enterprises. Retail and service establishments, for instance, are exempt from paying holiday pay (if regularly employing less than 10 workers) or night shift differential (if regularly employing not more than 5 workers). This kind of exemption, however, does not apply when it comes to labor contracting.

There is labor-only contracting, as opposed to independent or legitimate job contracting, when: (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 persons are performing activities directly related to the principal business of such employer. These are the basic criteria provided under the Labor Code.

The second part should hardly be a concern for the entrepreneur, primarily because the work performed is usually related to the principal business of the principal. The first part is more problematic to entrepreneurs and small businesses. There’s no hard and fast rule as to what constitutes substantial capital or investment. Authorized capital stock of P1 Million, with P75,000 paid up in one case (provider of temporary workforce) and P62,500 in another (contractual collectors), was not considered as substantial capitalization. The burden to prove the existence of an independent contractorship, including the existence of sufficient capitalization, is not on the employee, but on the contractor/principal. In the absence of such proof, the relationship is presume to be labor-only contracting.

We could say that it hardly matters because even with the existence of a valid independent contracting, the principal is still liable for unpaid wages. The distinction, however, is never immaterial. We've already discussed the distinction and the important point is the fact that in labor-only contracting, the principal is considered as the employer for all intents and purposes even if the contract states otherwise. Hence, the principal in a labor-only contracting is liable for backwages, reinstatement and other benefits in case the contractor illegally dismisses the employee. The principal in a legitimate independent contracting is not liable for these.

A capital or investment of just a few thousand pesos may hardly qualify as substantial. Also, an entrepreneur usually operates from home to save on rental costs, and this fact was considered to show that absence of an independent contracting. These matters definitely work against small entrepreneurs and new businesses.

No less than the Constitution expresses the policy to protect workers, but taming the “substantial capitalization” requirement is not really a choice between protecting labor and encouraging entrepreneurship. There are other equally (if not more) important factors currently considered by courts in determining whether independent contracting or labor-only contracting exists, including: whether the contractor is carrying on an independent business; the nature and extent of the work; the skill required; the term and duration of the relationship; the right to assign the performance of specified pieces of work; the control and supervision of the workers; the power of the employer with respect to the hiring, firing and payment of the workers of the contractor; the control of the premises; the duty to supply premises, tools, appliances, materials and labor; and the mode, manner and terms of payment.

Perhaps we could stick to the other requirements and not deal on the capitalization of a business, although this is harder said than done – that requirement is provided by law. Either this provision be repealed, which is a long shot, or amended, which is also difficult. Perhaps courts could interpret “substantial capitalization” in a way as not to kill the entrepreneurial spirit. In the meantime, both the legitimate independent contractor and the potential principal are placed in limbo as to the exact nature of the relationship, considering that contract provisions may be disregarded by courts. If the principal is too wary on its liability when it comes to workers of the contractor, then it may totally disregard small entrepreneurs in favor of big, established companies. That is definitely a roadblock to the encouragement of entrepreneurs and upstart businesses.