Contractor or Subcontractor

Summary

▪ A contractor or a subcontractor is registered with the Department of Labor and Employment (DOLE) as legitimate job contractors, who perform a job or work farmed out or outsourced by a principal under a Service Agreement.

▪ They have a distinct and independent business, which enables them to perform the outsourced job or work according to their own manner and method.

▪ They are free from the control and/or direction of the principal.

▪ The Service Agreement between the principal and the contractor should have terms that would ensure compliance with all rights and benefits for all the employees of the contractor or subcontractor under labor laws.

1. Concept

A contractor refers to “any person or entity engaged in a legitimate contracting or subcontracting arrangement providing services for a specific job or undertaking farmed out by (a) principal under a Service Agreement.” (Section 3(d), DO-174)

2. Permissible job contracting

Notwithstanding the rules on absolute prohibition against labor-only contracting (Section 5, DO-174) and the other illicit forms of employment arrangements (Section 6, DO-174), contracting or subcontracting are allowed if all of the following conditions are present:

1) 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;

2) 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;

3) In the performance of 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

4) The Service Agreement ensures compliance with all the rights and benefits for all the employees of the contractor or subcontractor under the labor laws. (Section 8, DO-174)

3. Distinct and independent business

The contractor or subcontractor should have a distinct and independent business, which is separate from that of the principal. Accordingly, the contractor or subcontractor should have its own set of business registration, permits, and licenses, as well as compliances with various Government agencies/offices, such as the Local Government Code, Bureau of Internal Revenue, Department of Trade and Industry, Securities and Exchange Commission, and so on.

As a separate business, the contractor or subcontractor should perform the job or work on its own manner and method. Thus, they should be able to come up with their own way of doing such work drawing from their technical knowledge, experience, and capital.

a. In-house agency and in-house cooperatives

In-house agency or in-house cooperatives are prohibited.

An in-house agency refers to “a contractor which is owned, managed, or controlled directly or indirectly by the principal or one where the principal owns/represents any share of stock, and which operates solely or mainly for the principal.” (Section 3(f), DO-174)

On the other hand, an in-house cooperative refers to “a cooperative which is managed or controlled directly or indirectly by the principal or one where the principal or any of its officers owns/represents any equity/interest, and which operates solely or mainly for the principal.” (Section 3(g), DO-174)

b. Cabo

The term cabo refers to “a person or group of persons or to a labor group which, under the guise of a labor organization, cooperative or any entity, supplies workers to an employer, with or without any monetary or other consideration, whether in the capacity of an agent or as an ostensible independent contractor.”

4. Substantial capital

A contractor is required to have substantial capital, which refers to “paid-up capital stock/shares at least Five Million Pesos (P5,000,000.00) in the case of corporations, partnerships and cooperatives; in the case of single proprietorships, a net worth of at least Five Million Pesos (P5,000,000.00).” (Section 3(l), DO-174)

For more detailed discussions, refer to Substantial Capital.

5. Free from control

Operating an independent business, the contractor or subcontractor should be free from any control and/or direction from the principal. The principal’s main interest is only on the desired results which the contractor or subcontractor will aim to accomplish. On how they will do so, it is the contractor or subcontractor which will decide as to how it will get done.

For more detailed discussions, refer to Control in Contracting and Subcontracting.

6. Service Agreement

The Service Agreement between the principal and the contractor should have terms that would ensure compliance with all rights and benefits for all the employees of the contractor or subcontractor under labor laws.

For more detailed discussions, refer to Service Agreement in Contracting and Subcontracting.

a. Expiration of Service Agreement

The expiration of a Service Agreement does not terminate the employment of a contractor’s or subcontractor’s employee. (Section 13, DO-174)

In case of expiration of the Service Agreement, the contractor has the following options:

1) Re-deploy/assign the concerned employee to another account or principal, if there is an opening and if the employee is suitable or fit for the position; or

2) Place the concerned employee under temporary work suspension for not more than three (3) months while the contractor or subcontractor look for an available position where he/she may be re-deployed; or

3) Accept the resignation of the concerned employee, if there is no available position for re-deployment after three (3) months, and thereafter pay his/her separation benefits in addition to his final pay.

7. Mandatory registration

All contractors, whether persons or entities, are required to register with the Regional Office of the Department of Labor and Employment (DOLE) which has jurisdiction over where their principal place of business. (Section 14, DO-174)

Failure to register shall result in the presumption that a contractor is engaged in labor-only contracting. (Ibid.)

a. DOLE Certificate of Registration

The validity of the DOLE Certificate of Registration is for a period of two (2) years.

The contractor is deemed registered only on the date of the issuance of its Certificate of Registration.

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References

▪ Presidential Decree No. 442, a.k.a. Labor Code of the Philippines

▪ DOLE Department Order No. 174, Series of 2017

▪ Jurisprudence or Supreme Court Decisions