Contracting arrangements in the Philippines: Where are we now?

Karenina Isabel A. Lampa

To recall, under the administration of former President Rodrigo Duterte, the Department of Labor and Employment (DoLE) issued Department Order No. 174, series of 2017 (“DoLE DO 174-17”).

DO 174-17 showcased former President Duterte’s thrust towards the stricter implementation of laws on contracting arrangements. While there have been cases on contracting arrangements prior to 2017, from this year onwards, the country saw an uptake in routine and complaint inspections.

As may be well-known, our regulations focus on two arrangements: (1) permissible contracting and (2) labor-only contracting.

A permissible contracting arrangement complies with the requirements of Section 8 of DO 174-17: (a) engaging in a distinct and independent business and undertaking to perform the job on its own responsibility, manner, and method; (b) possessing substantial capital or investment in the form of tools, equipment, machinery and supervision; (c) being free from the control of the principal, except as to the end result of the work; and (d) having the Service Agreement comply with the rights/benefits of the contractor’s employees.

Meanwhile, Section 5 of DO 174-17 states that there is labor-only contracting when the contractor: (a) (i) does not have substantial capital or investments in the form of tools, equipment, and machineries and (ii) the contractor’s employees perform activities which are directly related to the main business of the principal; or (b) the contractor does not exercise the right to control the performance of work of the employee.

All these led to much interpretation by the Supreme Court in determining whether there exists a permissible contracting arrangement.

Accordingly, one of the most often raised issues is this: Can a contractor’s employee perform work which is directly related to the principal’s main business? In the case of Aliviado, et al. v. Proctor and Gamble, et al. (G.R. No. 160506, 9 March 2010), the Supreme Court ruled in the affirmative and recognized that management has the “prerogative to farm out any of its activities, regardless of whether such activity is peripheral or core in nature.”

Further, DO 174-17 implies that a finding of labor-only contracting requires two (2) elements: first, the contractor has no substantial capital or investments in the form of tools, trades, or machineries; and second, the contractor’s employees perform work which is directly related to the principal’s main business. Thus, the existence of just one element is not sufficient for a finding of a labor-only contracting arrangement. However, establishments are reminded that this is still subject to the other prohibitions under DO 174-17 which include, among others, the prohibited activity of outsourcing functions which are performed by regular employees.

Relevantly, there has also been much issue regarding the requirement of substantial capitalization or investments via tools and machineries. Particularly, must these two requirements be present?

In Neri v. NLRC, et al. (G.R. Nos. 97008-09, 23 July 1993), the Supreme Court equivocally stated that: “the law does not require both substantial capital and investment in the form of tools, equipment, machineries, etc. This is clear from the use of the conjunction ‘or.’ If the intention was to require the contractor to prove that he has both capital and the requisite investment, then the conjunction ‘and’ should have been used.”

Thus, in San Miguel Foods v. Rivera, et al. (G.R. No. 220103, 31 January 2018), the Supreme Court reiterated the case of Neri and ruled that a contractor need not possess both substantial capital and investments in tools and trades.

Despite these, in Servflex, Inc. v. Urera, et al. (G.R. No. 246369, 29 March 2022), the Supreme Court seems to have required the contractor to possess both substantial capital and investments when it found that “in the context of labor-only contracting, substantial capital or investment rests not only on the capitalization indicated in the financial documents but on the pieces of equipment and machinery, and work premises a person or entity actually and directly used in the performance of the work.” As a caveat, however, the Supreme Court made such findings in the context of such case, where there existed other elements of a labor-only contracting arrangement.

Most importantly, the issue of control is primordial in determining whether a contracting arrangement is permissible. Significantly, a principal is only prohibited from exercising control over the means and methods of how the contractor’s employees perform the work. In Nestlé v. Puedan, et al. (G.R. No. 220617, 30 January 2017), the Supreme Court found that mere rules of conduct and guidelines set out by the “principal,” but which did not control how the “contractor” performed its business, do not warrant a finding of a labor-only contracting arrangement. Notably, while the Supreme Court ultimately found that the relationship in this case was not between a contractor and a principal, the discussion on “control” can still be instructive.

In any event, these discussions only give a glimpse of the issues pervading contracting arrangements in the Philippines. However, considering that the country is now under the new administration of President Ferdinand R. Marcos, Jr., it is likely that we will soon see his administration’s approach in regulating such contracting arrangements.

This article is for informational and educational purposes only. It is not offered and does not constitute legal advice or legal opinion.

 Karenina Isabel A. Lampa is a senior associate of the Labor and Employment Department of the Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW).

 [email protected]
(632) 8830 8000

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