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New Guidelines for Contracting or Subcontracting

On 14 November 2011, the Department of Labor and Employment (DOLE) issued Department Order No. 18-A, which becomes effective fifteen (15) days after completion of its publication in a newspaper of general circulation. Considering that Department Order 18-A was published on 19 November 2011, it shall take effect on 4 December 2011. This introduction is Part 1 of a 6-part series (prepared by Atty.Fred, reproduced here with permission).



[See also Entrepreneurship and Job Contracting and Labor-Only Contracting and Independent Labor Contracting]

What is contracting or subcontracting?

“Contracting” or “subcontracting” refers to an arrangement whereby a principal agrees to put out or farm out with 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.

Contracting or subcontracting shall be legitimate if all the following circumstances concur:

1. The contractor must be registered in accordance with these Rules and carries a distinct and independent business and undertakes to perform the job, work or service on its own responsibility, according to its own manner and method, and free from control and direction of the principal in all matters connected with the performance of the work except as to the results thereof;

2. The contractor has substantial capital and/or investment; and

3. The Service Agreement ensures compliance with all the rights and benefits under Labor Laws. A “service agreement” refers to the contract between the principal and contractor containing the terms and conditions governing the performance or completion of a specific job, work or service being farmed out for a definite or predetermined period.

What is "substantial capital"?

"Substantial capital" refers to paid-up capital stocks/shares of at least Three Million Pesos (P3,000,000.00) in the case of corporations, partnerships and cooperatives; in the case of single proprietorship, a net worth of at least Three Million Pesos (P3,000,000.00). What constitutes "substantial capital" previously vary, as fixed by the court, as there was no specific threshold provided under the law or the implementing guidelines.

Prohibition on labor-only contracting

While the law recognizes contracting and subcontracting arrangements, in prohibits labor-only contracting. It is important, therefore, to know the differences between the two types of contracting.

What is labor-only contracting?

There are two general criteria to determine the existence of labor-only contracting. There is labor-only contracting when:

1. The contractor does not have substantial capital or investments in the form of tools, equipment, machinery, work premises, among others, and the employees recruited and placed are performing activities which are usually necessary or desirable to the operation of the company, or directly related to the main business of the principal 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; or

2. The contractor does not exercise the right to control over the performance of the work of the employee.

What are the other prohibited acts?

In addition to the prohibition on labor-only contracting, the new issuance 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:

1. 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.

2. 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.

3. 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.

4. Contracting out of a job, work or service through an in-house agency.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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).

10. 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).

(Summary or briefer on Contracting provided by Atty.Fred, reprinted with permission.)

You may also want to read:

Contracting: Contracts and Rights of of Contractual Employees

Contracting: Termination of Contractual Employees

Contracting: Liabilities of Principal and Contractor

Contracting: Registration of Legitimate Contractors

Contracting: Financial Relief Program

Full text of Department Order No. 18-A


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