Engaging individual independent contractors in the Philippines

Neptali B. Salvanera

Contracting out of services is recognized and allowed under Articles 106 to 109 of the Philippine Labor Code. These provisions are implemented by Department of Labor and Employment (“DOLE”) Department Order No. 147-17 (“DO 174”) which defines “contracting” or “subcontracting” as an “arrangement whereby a principal agrees to farm out with a contractor the performance or completion of a specific job or work within a definite or predetermined period, regardless of whether such job or work is to be performed or completed within or outside the premises of the principal.”

There are requirements under DO 174, like registration and substantial capitalization. However, pursuant to DOLE Circular No. 01, series of 2017, DO 174 does not apply to, among others, contracting out of a job or work to a professional or individual with unique skills and talents who himself/herself performs the job or work for the principal, or the so-called individual independent contractors. Thus, arguably, the individual contractors engaged by domestic and foreign corporations (the latter being remote engagement) need not comply with the requirements under DO 174, specifically the registration and capitalization requirements.

However, the tests to determine the existence (or absence) of employer-employee relationship as laid down in case law and in DO 174 as well, still apply, to wit: a) the four-fold test; b) the independent contractor test; and c) the economic dependency test.

Four-Fold Test

Our Supreme Court has held in several cases that in determining the existence of employer-employee relationship, the following elements are generally considered:

  • the selection and engagement of the employee;
  • the payment of wages;
  • the power of dismissal; and
  • the power to control the means and methods by which the work is accomplished by the employee, and not just the results. The last element, the so-called “control test,” is the most important element.

Independent Contractor Test

This test is usually used in contracting out or outsourcing arrangements under DO 174, under which it is provided that, a contracting arrangement is legitimate if the following circumstances concur:

  • The contractor or subcontractor is engaged in a distinct and independent business and undertakes to perform the job or work on its own responsibility, according to its own manner and method;
  • The contractor or subcontractor has substantial capital to carry out the job farmed out by the principal on his account, manner, and method, investment in the form of tools, equipment, machinery, and supervision;
  • In performing the work farmed out, the contractor or subcontractor is free from the control and/or direction of the principal in all matters connected with the performance of the work, except as to the result thereto; and
  • The Service Agreement ensures compliance with all the rights and benefits for all the employees of the contractor or subcontractor under the labor laws.

The Supreme Court, however, has also applied this test in cases involving consultants or individual independent contractors, especially (a) and (c).

Economic Dependency Test

This is also known as the economic reality test. This basically refers to the individual being economically dependent on the company for his/her continued employment in the latter’s line of business. This test has been used also for individual independent contractors.

Our Supreme Court has held in several cases that the specific selection and hiring of an individual, because of his unique skills, talent, expertise (and even celebrity status in certain cases) not possessed by ordinary employees, is a circumstance indicative, but not conclusive, of an independent contractual relationship. It even ruled that the “riders” of an e-commerce company are not independent contractors, as the work being performed by them, i.e. picking up and delivering goods from warehouse to buyers, does not require special skill, talent, expertise, or unique ability or competency. In this regard, the principal, whether a domestic or foreign corporation, must be able to prove that the work being performed by the individual contractors requires special skills, talent, expertise, or unique ability not possessed by its ordinary and regular employees. If the functions are usually necessary and desirable to the usual business of the principal and as such these can be performed by ordinary employees, this is a circumstance indicative (although not conclusive) of an employment relationship.

With respect to the payment of wages, the huge amount of compensation (e.g. around Php450,000 to Php500,000 a month in at least two (2) cases) has been considered as a badge of an independent contracting arrangement. Conversely, if the compensation is low, it may be considered as a circumstance indicative (although not conclusive) of an employment relationship.

The power of control refers to the authority of the employer to control the employee not only with regard to the results of the work to be done but also as to the means and methods by which the work is to be accomplished. If the control pertains only to the desired results and not to the manner and means by which the employee performs his work to achieve the desired results, this is not the control contemplated under the four-fold test and the one exercising such control is not considered as the employer. In one case, the fact that the company has the power to approve or reject the work output is not tantamount to control as to the means and manner of doing the work. According to the Court, “it is but logical that one who commissions another to do a piece of work should have the right to accept or reject the product.” In a contracting arrangement, the acts, reminders, or instructions from the principal which merely serve as guidelines to attain the desired result, do not indicate that the principal is the employer of the assigned workers.

If the application of the foregoing tests points to the principal as the employer of the individual independent contractors, it is liable to pay them the benefits under applicable laws, which may include back wages and benefits at least covering the prescriptive period of three years for money claims. Theoretically, there could also be administrative and criminal sanctions for not registering them with the Social Security System, Philippine Health Insurance Corporation, and Home Development Mutual Fund, aside from paying the remittances in arrears, but it can be argued that the company acted in good faith and that this obligation arises only if there is a definite declaration that it is the employer.

Moreover, by engaging employees (and not independent contractors), the foreign company may be considered as doing business in the Philippines without the requisite license from the Securities and Exchange Commission, which means that it can be sued but it cannot sue here in the country, and there could also be tax liabilities. If the foreign company is not keen on getting a license or establishing an entity in the Philippines, their next best recourse is to fix the independent contractor agreement and implement the same in conformity with our local labor laws.

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

Neptali B. Salvanera is a Partner 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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