This web page
the full text of the
Primer on Contracting and Subcontracting Under Articles 106 to 109 of
PRIMER ON CONTRACTING AND SUBCONTRACTING
of Department Order No. 3, Series of 2001
1. WHAT IS CONTRACTING
is contracting or subcontracting when an employer, referred to as the
farms out the performance of a part of its business to another,
to as the contractor or subcontractor. For the purpose of undertaking
principal's business that is farmed out, the contractor or
then employs its own employees.
2. IN THE
OF WORKERS, IS THERE A DIFFERENCE BETWEEN AN ORDINARY EMPLOYER-EMPLOYEE
RELATIONSHIP AND SUBCONTRACTING?
and subcontracting are synonymous under Philippine labor law. The term
that is more commonly used is subcontracting.
3. IS THERE A
BETWEEN A SUBCONTRACTOR AND A PRIVATE RECRUITMENT AND PLACEMENT AGENCY
employer-employee relationship, there are only two parties involved -
employer and the employee. This relationship is established through a
test, under which the employer:chanroblesvirtuallawlibrary
Directly exercises control and supervision over the employee not only
to the results of the work but also as to the means employed to attain
The power of
is the most important factor in determining the existence of an
relationship. The employer need not actually exercise this power. It is
enough that the employer retains the right to exercise this power. It
enough that the employer retains the right to exercise it as it may
necessary or appropriate.
to select and hire the employee;
to pay the employees his or her wages and other benefits.
there are three parties involved:chanroblesvirtuallawlibrary
The principal which decides to farm out a job or service to a
the four-fold test of employer-employee relationship should be
by the subcontractor in relation to the employees it engages to
the subcontracted job or service. In such cases, the subcontractor is
referred to as independent contractor.
which has the capacity to independently undertake the performance of
job or service; and
engaged by the subcontractor to accomplish the job or service.
test is satisfied not by the subcontractor but by the principal, the
then becomes the employer of the employees engaged to accomplish the
or service. What exists is not subcontracting but a direct
relationship between the principal and the employees.
4. WHAT LAW OR
RULES GOVERN SUBCONTRACTING?
directly undertakes a specific job or service for a principal, and for
this purpose, employs its own workers. A PRPA cannot be a
It simply recruits workers for the purpose of placing them with another
employer so that the workers recruited will not become the PRPA's
is governed by the laws and rules enumerated under Question # 4 below.
A PRPA is governed by Articles 25 to 39 of the Labor
Code and the rules implementing these articles.
does not need authority from the Department of Labor and Employment
to undertake a subcontracted job or service. A PRPA needs an authority
or license from DOLE to legally undertake a recruitment and placement
basic law governing subcontracting is the Labor
Code, particularly Articles 106 to 109. These provisions prescribe
the conditions for regulating subcontracting and the rights and
of parties to this arrangement. There was also a set of rules
Articles 106 to 109, known as Department
Order No. 10, issued by DOLE in 1997. However, D.
O. No. 10 was revoked by DOLE on 08 May 2001 through another order,
3, Series of 2001. D.
O. No. 3 took effect on 29 May 2001.
5. ASIDE FROM
NO. 10, WHAT ARE THE IMPORTANT FEATURES OF D.
O. NO. 3?
O. No. 10, the following laws and rules will apply in addition to
106 to 109 of the Labor
Article 248 (c) which disallows contracting out of services or
being performed by union members when such will interfere with,
or coerce employees in the exercise of their rights to
which classifies employees into regular, project or seasonal employees;
of the Civil
Code, under which the principal, in a civil suit for damages
by an injured person, can be held liable for any negligent acts of the
employees of a labor-only contractor;
Act No. 5487 and its implementing rules, which regulate the operation
interpreting the foregoing laws;
O. No. 3;
g. D. O.
19, Series of 1993, for subcontracting arrangements in the construction
stipulations provided these are not in conflict with Labor
Code provisions, jurisprudence, and D.
O. Nos. 3 and 19.
following are the important features of D.
O. No. 3.
6. DOES D.
O. NO. 3 RENDER SUBCONTRACTING ILLEGAL?
It prohibits labor-only contracting;
the continuing validity of contracts entered into when D.
O. No. 10 was still in force;
c. It is
process and mechanism, which is through consultations through the
Industrial Peace Council, by which a new set of rules shall be
provided the requirements for legitimate subcontracting are satisfied
the prohibition against labor-only subcontracting is observed.
7. WHAT IS
the Labor Code nor D.
O. No. 3 has a definition of legitimate subcontracting.
8. WHAT IS
CAPITAL? IS SUBSTANTIAL CAPITAL SUFFICIENT TO ESTABLISH LEGITIMATE
3 rendered D.
O. No. 10 ineffective, existing jurisprudence still provides
guidance. In two recent cases decided by the Supreme Court (Vinoy v.
Labor Relations Commission, G.R. No. 126586, 02 February 2000, and Lim
v. National Labor Relations Commission, G.R. No. 124630, 19 February
the definition of legitimate subcontracting in D.
O. No. 10 is favorably cited as follows:chanroblesvirtuallawlibrary
shall be legitimate if the following conditions concur:chanroblesvirtuallawlibrary
the contractor or subcontractor carries on a distinct and independent
and undertakes to perform the job, work or service on its own account
under its own responsibility, according to its own manner and method,
free from the control and direction of the principal in all matters
with the performance of the work except as to the results thereof;
or subcontractor has substantial capital or investment;
between the principal and the contractor or subcontractor assures the
employees entitlement to all occupational safety and health standards,
free exercise of the right to self organization, security of tenure,
social and welfare benefits.
capital refers to such investment, whether in the form of money,
tools, equipment, machineries, work premises, or subscribed capital
that would indicate the subcontractor's capacity to undertake the
work or service independently. For example, a subcontractor with a
stock of P1 Million which is fully subscribed and paid for has been
by the Supreme Court to be a highly capitalized venture which satisfies
the requirement of substantial capital.
SUBCONTRACTING DIFFERENT FROM LABOR-ONLY CONTRACTING? HOW IS LABOR-ONLY
is highly capitalized, the Supreme Court has held that it need not show
evidence that it has investment in the form of tools, equipment,
work premises, among others, to be considered legitimate. However, it
still necessary for it to show that it has the capacity to be an
contractor, That is, it can undertake the performance of the contract
to its own manner and method, free from the supervision of the
in all matters except as to the results of the work.
legitimate subcontracting is different from labor-only contracting
the former is allowed and the latter is illegal and prohibited.
10. WHAT IS THE
BASIS OF THE STATE IN PROHIBITING LABOR-ONLY CONTRACTING? WHAT IS THE
OF THE PROHIBITION?
3 states that there is labor-only contracting where the contractor
or subcontractor merely recruits, supplies or places workers to perform
a job, work or service for a principal, and the following elements are
The contractor or subcontractor does not have substantial capital or
to actually perform the job, work or service under its own account and
recruited, supplied or placed by such contractor or subcontractors are
performing activities directly related to the main business of the
bases of the State in prohibiting labor-only contracting are:chanroblesvirtuallawlibrary
O. NO. 10 ENUMERATED ACTIVITIES PERMITTED FOR SUBCONTRACTING. NOW
IT HAS BEEN REVOKED, DOES THIS MEAN THAT SUCH ACTIVITIES MAY NO LONGER
which mandates that the State shall protect labor and promote its
and shall guarantee basic labor rights including just and humane terms
and conditions of employment and the right to self-organization.
the State in prohibiting labor-only contracting is to ensure that labor
laws are followed and to prevent exploitation of workers. A labor-only
contractor is one which presents itself as an employer even if it does
not have capital to run a business or capacity to ensure that its
are paid their wages and other benefits as prescribed by law. As such,
it cannot independently undertake to perform a subcontracted job or
To allow a labor-only contractor to operate is to give it an
to circumvent the law and to exploit workers.
of the Labor
Code, which allows the Secretary of Labor to distinguish between
contracting and job contracting to prevent any violation or
of the Labor
O. No. 3 is not the first regulation to prohibit labor-only
The prohibition was embodied in the original rules implementing
106 to 109 issued right after the Labor
Code took effect in 1974. D.
O. No. 10 also contained a similar prohibition. D.
O. No. 3 merely reiterates the prohibition.
necessarily. These activities may still be subcontracted provided (a)
laws and rules under Question # 4 are observed; and (b) the conditions
for legitimate contracting under Question # 7 and the prohibition
labor-only contracting under Question # 9 are met.
O. NO. 10 ENUMERATED PROHIBITED ACTIVITIES. NOW THAT IT HAS BEEN
ARE THERE STILL ANY PROHIBITED SUBCONTRACTING ARRANGEMENTS?
Expressly prohibited are (a) labor-only contracting as defined in D.
O. No. 3; and (b) contracting out of services being performed by
members when such will interfere with, restrain or coerce employees in
the exercise of their right to self-organization under Article 248 (c)
of the Labor
13. WHAT WILL
THE EFFECT OF A LABOR-ONLY CONTRACTING ARRANGEMENT?
following are the effects:chanroblesvirtuallawlibrary
14. IF A
SUBCONTRACTOR CANNOT PAY THE WAGES OF THE EMPLOYEES IT ENGAGED TO
THE JOB OR SERVICE, WILL THE PRINCIPAL AUTOMATICALLY BECOME THE
OF SUCH EMPLOYEES?
The subcontractor will be treated as the agent of the principal. Since
the act of an agent is the act of the principal, representations made
the subcontractor to the employees will bind the principal.
contracting activity is undertaken by a legitimate labor organization,
a petition for cancellation of union registration may be filed against
it, pursuant to Article 239(e).
will become the employer as if it directly employed the workers engaged
to undertake the subcontracted job or service. It will be responsible
them for all their entitlements and benefits under the labor laws.
and the subcontractor will be solidarily treated as the employer.
will become employees of the principal, subject to the classifications
of employees under Article 28 of the Labor
15. WHAT DOES
OF EXISTING CONTRACTS MEAN AND WHY IS THIS NECESSARY?
106, a principal has two types of liability in relation to the
of the subcontractor. The first type of liability is limited, and is
by the first two paragraphs of Article 106. Thus, mere inability of the
subcontractor to pay wages will not automatically make the principal
direct employer. It will only make the principal jointly and severally
liable with the subcontractor for payment of the employees' wages to
extent of the work performed under the contract.
of liability, which arises from the third and fourth paragraphs of
106, is absolute and direct. This liability arises when there is
contracting as defined in D.
O. No. 3. In such cases, the principal shall be responsible to the
workers in the same manner and extent as if it directly employed these
3 of D.
O. No. 3 states that rights or benefits enjoyed by parties in
executed prior to D.
O. No. 3 shall not be impaired. The contracts referred to are those
contracts executed and already being implemented before D.
O. No. 3 took effect on 29 May 2001. Accordingly, the obligations,
rights and benefits or parties to any subcontracting arrangement prior
to the effectivity of D.
O. No. 3 shall not be diminished, subject to Articles 106 to 109 of
Code, and jurisprudence. The non-impairment provision in D.
O. No. 3 is derived from the Constitutional principle against
16. UNDER D.
O. NO. 10, THERE WAS A REGISTRY OF SUBCONTRACTORS ESTABLISHED IN
WHAT IS THE EFFECT OF REVOCATION ON THIS REGISTRY?
O. No. 3 abolished the DOLE registry of subcontractors. Thus, there
is no more requirement for subcontractors to register in DOLE.
O. NO. 10 CONTAINED PROVISIONS ON SECURITY OF TENURE AND PROCEDURES
FOR DISMISSAL. HAVE THESE BEEN REVOKED BY D.
O. NO. 3?
of the DOLE registry of subcontractors is specific. If a subcontractor
enrolls in this registry, it enjoys the presumption that it is engaged
in legitimate subcontracting. The burden of proving that it is an
or an illegal subcontractor will then be on the person claiming it.
the revocation, there is no more difference between DOLE-registered
and those that are not.
the DOLE registry, however, does not mean that a subcontractor will no
longer register at all. A subcontractor must still follow the
or licensing procedures required in other applicable laws. For example,
a corporation or cooperative which seeks to operate as a subcontractor
should still register with the Securities and Exchange Commission or
Cooperative Development Authority, as the case may be. Likewise, the
of the DOLE registry does not exempt a subcontractor from the licensing
or permit requirements administered by relevant regulatory agencies.
O No. 10 was revoked in its entirety by D.
O. No. 3. Thus, D.
O. No. 10 itself can no longer be cited as an implementing
of the Labor
Code provisions on security of tenure and dismissal of employees.
18. AFTER THE
O. NO. 10, ARE THERE PLANS FOR THE FORMULATION OF NEW GUIDELINES TO
IMPLEMENT ARTICLES 106 TO 109?
provisions of D.
O. No. 10 on security of tenure and dismissal are identical with
provisions of Rule XXIII, D. O. No. 9, series of 1997. These provisions
of D. O. No. 9 are not affected by D.
O. No. 3, and, therefore, remain in force relative to security of
and employee dismissal.
O. No. 10 was revoked to give government, workers and employers an
opportunity to formulate a new set of rules that is more responsive to
current employment arrangements and more acceptable to all concerned.
Section 4 of D.
O. No. 3 mandates that new guidelines shall be formulated by DOLE
prior consultations with all sectors concerned, particularly the
Industrial Peace Council (TIPC) established under Executive Order No.
series of 1998.
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