Amicus Curiae

DO 174: More than meets the eye

Ma. Clarissa Excelsis S. Villanueva

May 12, 2017


Finally the long wait is over. After almost nine (9) months of numerous dialogues and consultations, DoLE Secretary Silvestre H. Bello III already issued Department Order No. 174, series of 2017. It sets out the new rules implementing Articles 106 to 109 of the Labor Code, thus, replacing Department Order 18-A, series of 2011. The new Order became effective last April 2, 2017.
At first reading, it appears that DO 174 did not deviate to a great extent from DO 18-A. It would seem that it simply borrowed the provisions of the old order and tweaked it a little to adjust to the current conditions. For instance, DO 174 no longer provides for a Net Financial Contracting Capacity (NFCC) or requires that the same be included in Service Agreements. The required substantial capitalization of contractors was increased from at least P3,000,000.00 to at least P5,000,000.00. Moreover, the registration and renewal fee was increased from P25,000.00 to P100,000.00. Also, the Certificate of Registration shall now be effective for only two (2) years.
Banking on the President’s vow to stop “contractualization” and the “endo,” labor groups had high hopes that the new Order will contain a total prohibition of all forms of contractualization. But as Secretary Bello himself recognized, the DoLE secretary has no power to do so because this is a function of the legislature. In short, the DoLE secretary can only regulate, but not totally prohibit contracting.
Nonetheless, some of the changes introduced by DO 174 are worth noting. They may appear innocent at first but there seems to be more to them than meets the eye.
For instance, DO 174 expanded DO 18-enumeration of illicit employment arrangements. Other arrangements declared by DO 174 as prohibited are: contracting out of work through an in-house cooperative, thus, apparently recognizing the proliferation of cooperatives engage in contracting; requiring contractor’s/subcontractor’s employees to perform functions which are currently being performed by regular employees; and such other schemes meant to circumvent security of tenure.
While the other prohibited arrangements under DO 18-A, other than labor-only contracting, are qualified by the phrase “not done in good faith and not justified by the exigencies of the business”, the other illicit forms of employment arrangements under DO 174 were unqualifiedly declared as prohibited for being contrary to law or public policy.
The strict and literal interpretation of Section 6 (f) on contracting out of regular functions will wield to the conclusion that as long as the functions are currently being performed by regular employees, they can no longer be outsourced to contractors regardless of the good faith of the company and the presence of any business exigencies that may justify one’s resort to contracting.
This interpretation, however, seems to contradict the Supreme Court’s ruling in De Ocampo v. NLRC, Asian Alcohol v. NLRC, Serrano v. NLRC and Aliviado v. P&G. These cases readily reveal that it is a valid exercise of management prerogative to avail of the services of an independent contractor to promote economy and efficiency in the business regardless of whether the activity to be contracted out is peripheral or core in nature.
This author believes that the prohibition under Section 6 (f) should not be interpreted in a strict and absolute manner. Three main reasons may be provided for this.
First, Article 106 of the Labor Code does not distinguish as to the kind of services that can be contracted out. It only mentions of “performance of work” without any distinction as to whether such work is peripheral or core in nature. As such, DO 174 which supposedly implements the same must not also make any distinction. Needless to say, an administrative issuance cannot extend nor amend a legislative enactment.
Second, the definition of labor-only contracting under the Labor Code effectively recognizes that even core functions or services can be contracted out. In fact, even if the contracted services are directly related to the business of the principal, an entity may still be deemed legitimate and not a labor-only contractor if it has substantial capitalization and exercises control over its employees.
Lastly, we must consider the policy behind the issuance of DO 174: to avoid the displacement of workers and to prevent employers from resorting to contractualization.
If we are to strictly apply the prohibition then, this might just aggravate the problem of contracting in the country because employers will no longer regularize positions and just contract them out altogether. Such situation will definitely not guarantee industrial peace and prosperity in the long run.