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Amicus Curiae

Senate Bill No. 1826: Redefining labor-only contracting

Angelo J. Logronio

November 15, 2018

One of the most controversial issues on management rights today is the right to enter into contracting arrangements. Contracting is an arrangement where a business owner, also called a principal, agrees to farm out to another entity, called a contractor, the performance of a specific job within a definite period. In turn, the contractor hires its own employees to perform the job farmed out by the principal.

While the issue on contracting out has been present for years, the people’s clamor began to resurface when President Rodrigo Duterte undertook to address labor-only contracting, evident by his signing of Executive Order No. 51, Series of 2018. Noticeably, various companies, adjudged as engaged in labor-only contracting arrangements, have since then been ordered to regularize some of their contractual workers.

All these ultimately led our lawmakers to revisit the existing laws on contracting arrangements and security of tenure. The Senate is presently considering the passage of Senate Bill No. 1826 (“S.B. No. 1826”), or the Senate Bill on The Security of Tenure and End of Endo Act of 2018. S.B. No. 1826 proposes significant changes to the Labor Code provisions on contracting and security of tenure. One of the more contentious propositions is the amendment in defining labor-only contracting.

Under the Department of Labor and Employment’s Department Order No. 174, Series of 2017 (“D.O. 174-17”), the current regulation on contracting arrangements, there is labor-only contracting when either:

• The contractor does not have substantial capital or investment AND the contractor’s employees are performing activities which are directly related to the main business operation of the principal; or

• The contractor does not exercise control over the performance of the work of its employees.

D.O. 174-17 thus merely prohibits insufficiently capitalized contractors that engage in supplying workers to perform activities which are directly related to the main business of the principal. Conversely, our current laws allow contracting arrangements where the contractor’s workers perform activities directly related to the main business of the principal, as long as the contractor possesses sufficient capital or investment and controls the means and manner by which its employees perform their work. Presently, therefore, our local business landscape abounds in legitimate contractors that are sufficiently capitalized, and are engaged in providing services relating to distribution, logistics, promotions, and other activities directly related to the principal’s business. Under our current laws, this is by all means legal and permissible.

S.B. No. 1826, however, may largely affect the current definition of labor-only contracting, through a seemingly simple change of the conjunction “AND” to “OR”:

• The contractor does not have substantial capital or investment OR the contractor’s employees recruited and placed are performing activities which are directly related to the main business operation of the principal; or

• The contractor does not exercise control over the performance of the work of the employee recruited and placed.

The proposed amendment implies that a supposed contractor can no longer engage in the business of providing workers who will perform activities which are directly related to the main business of the principal, even if such contractor has sufficient capital or investment.

Take, for example, presently, we have industries providing promotional, messengerial and logistics services. Several Supreme Court pronouncements have held that these businesses may be directly related to the main business of a specific principal. However, as long as the contractors providing these services are sufficiently capitalized, then these contracting arrangements are deemed legitimate. Following the proposed amendment under S.B. No. 1826, however, business owners would now be precluded from engaging the services of these legitimate contracting companies. The key point being that, as long as the service provided by the contractor is directly related to the main business of the principal, regardless of the other elements, then there is already labor-only contracting. This becomes all the more problematic considering that our laws have yet to clearly delineate activities which are directly related to the main business of the principal from those which are not.

While S.B. No. 1826 may in all likelihood guarantee that more workers do not find themselves without jobs after the end of a contractor’s agreement to perform services for a principal, this may go hand in hand with the closing down of legitimate contracting companies and the deterrence of foreign investors, which may find the limitation on contracting as unduly curbing their own rights to conduct a legitimate business.

It is anticipated that S.B. No. 1826 would be passed into a law within the next couple of months. Undoubtedly, the new law would change the landscape of our country’s work force. The question is: will this new law strike a balance between the clamor for a reduction of labor-only contracting arrangements versus the right of management to contract out some of its functions as part and parcel of its inherent right to determine the conduct of its own business? The answer remains to be seen.