Amicus Curiae

Contracting for services vs ‘endo’ employment

Martin Luigi G. Samson

August 10, 2016


For the first time in presidential campaign history, contracting became a mainstream issue with all five presidential candidates vowing to eradicate contractualization. However, back then, the candidates never discussed their plans as to how they would do away with contractualization, and whether they intend to do away with contracting and subcontracting (“outsourcing”) under Articles 106 to 109 of the Labor Code, or the illegal practice of “endo.”
Outsourcing is an arrangement whereby a principal agrees to farm out to a contractor the performance or completion of a specific job, work or service within a definite or predetermined period whether such job, work or service is to be performed or completed within or outside the principal’s premises. There are three parties involved in this arrangement, the principal which decides to farm out work, the contractor or subcontractor which has the capacity to independently undertake the performance of the work, and the contractual workers engaged by the contractor or subcontractor to accomplish the job, work or service.
On the other hand, strictly speaking, “endo,” also known as the “5-5-5 scheme,” is a fixed-period employment scheme entered into to prevent the employees from attaining the status of regular employment. “Endo” is a bilateral contract between the employee and the employer. Such arrangements have been repeatedly struck down by the Supreme Court.
While statements have been made that what the present administration abhors is the practice of “endo” rather than valid outsourcing, it appears that the administration also intends to look into the outsourcing arrangements. After all, “endo” may also happen between the contractor and the employees it assigns to a principal in an outsourcing arrangement.
In this regard, on July 25, 2016, Secretary of Labor and Employment (“SoLE”) Silvestre H. Bello III promulgated two (2) issuances, Department Order No. 162 Series of 2016, and Labor Advisory No. 10 Series of 2016.
D.O. No. 162 Series of 2016 entitled “Suspending Registration of New Applicants as Contractors or Subcontractors Under Department Order No. 18-A” is pretty much self explanatory, that new applicants as contractors or subcontractors will not be registered and issued a DO18-A Certificate of Registration anytime within the near future. This is to give the DoLE (Department of Labor and Employment) sufficient time to address all issues surrounding outsourcing. In this regard, the SoLE previously issued Administrative Order No. 405 series of 2016 which created a technical working group to develop and monitor the action plan on addressing contractualization.
L.A. No. 10 Series of 2016 entitled “Prohibition against Labor Only Contracting,” specifically Section 2 thereof seems to worry some Human Resource and labor law practitioners, which states:
“Section 2. Declaration of labor-only contracting; Effect. -- Pursuant to Article 128 of the Labor Code of the Philippines, as amended and existing jurisprudence, Regional Directors shall have authority to declare the existence of labor-only contracting between the contractors and subcontractors and the principals. Workers of labor-only contractor/subcontractor are considered employees of the principal.”
The power of the DoLE Regional Directors (RDs) to inspect is embodied in Article 128 of the Labor Code and even in Section 29 of D.O. 18-A. The visitorial and investigatory power under Article 128 (a) may cover any fact, condition or matter related to the enforcement of the Labor Code and any labor law. Verily, RDs may declare the existence of labor-only contracting, and consequently, the existence of employer-employee relationship between the principal and the contractor’s employees in the course of inspection. The employment relationship should still exist at the time of the initiation of the action under Article 128. Therefore, if at the time of initiation of the action, the employer-employee relationship had already ceased to exist such as in cases of illegal dismissal, the RDs do not have jurisdiction over these cases but the Labor Arbiter. Thus, RDs cannot award back wages nor reinstatement.
Nevertheless, RDs have the power to order and administer, after due notice and hearing, compliance with any labor law. Thereafter, a writ of execution may be issued for the enforcement of orders in line with Article 128 of the Labor Code. However, in cases where the employer contests the findings and raises issues supported by documentary proof not verifiable in the normal course of inspection, the RD must endorse the case to the appropriate arbitration branch of the National Labor Relations Commission for adjudication. With respect to the RD’s finding involving contractors, the principal must be cautious since an indirect employer can be held liable with the independent contractor or subcontractor in the event that the latter fails to pay the wages of its employees.
I believe that the present administration is not looking to make any abrupt changes to the current status. Rather, it looking to execute stricter implementation of current laws and rules, while reviewing the circumstances surrounding “endo” and outsourcing.
The administration’s determination to end “endo” and review issuances on outsourcing is laudable. However, it should not be done at the expense of those who engage in valid outsourcing. Any changes to the latter should be done in consideration of the interests of both labor and business.