Independent contractors are individuals who offer their services for a fee to a client/principal in the form of a business and thus they are not considered as employees but as professionals, talents, or freelancers.
“Independent Contractor”– refers to an individual or a registered business offers services for a fee to a client/principal.
(NB: There are two kinds of an independent contractor, namely: an individual who is skilled/talented/an expert, or a legitimate job contractor which is a registered business.)
“Client” or “Principal” – refers to an individual or a registered business who has farmed out job, work, or service to an independent contractor who shall perform such according to his/her own method or discretion.
For purposes of this article, the focus is on independent contractors who are individuals.
a. Legal basis
The legal basis for an independent contractor agreement is primarily found in the Labor Code, to wit:
|ART. 106. Contractor or Subcontractor. Whenever an employer enters into a contract with another person for the performance of the former’s work, the employees of teh contractor and of the latter’s subcontractor, if any, shall be paid in accordance with the provisions of this Code. (P.D. 442, Labor Code)|
In addition, the Civil Code provisions on the law on contracts further supports an independent contractor agreement, which is also known as a contractor for services. In such a contract, individuals who are independent contractors are engaged in the business of providing services in exchange for a fee to a client/principal who hires them to do a specific job, work, or service.
The contract for services or independent contractor agreement is likewise recognized under jurisprudence as a valid contract arrangement, viz:
|Jurisprudence has recognized another kind of independent contractor: individuals with unique skills and talents that set them apart from ordinary employees. There is no trilateral relationship in this case because the independent contractor himself or herself performs the work for the principal. In other words, the relationship is bilateral. (Fuji Television Network, Inc. v. Espiritu, G.R. No. 204944-45, 03 December 2014)|
b. Not employees
Independent contractors often have “special skills, expertise, or talent” which they use to earn a livelihood as a professional in their field. As they are often experienced or highly skilled, they render services without any intervention or control from their clients/principals, in terms of the manner and method of doing the work, except as to the desired results.
As individuals who are independent contractors are in the business of providing services in exchange for a fee, they do not have an employer-employee relationship with their clients/principals.
|Individuals with special skills, expertise or talent enjoy the freedom to offer their services as independent contractors. The right to life and livelihood guarantees this freedom to contract as independent contractors. The right of labor to security of tenure cannot operate to deprive an individual, possessed with special skills, expertise and talent, of his right to contract as an independent contractor. An individual like an artist or talent has a right to render his services without any one controlling the means and methods by which he performs his art or craft. This Court will not interpret the right of labor to security of tenure to compel artists and talents to render their services only as employees. If radio and television program hosts can render their services only as employees, the station owners and managers can dictate to the radio and television hosts what they say in their shows. This is not conducive to freedom of the press. (Sonza v. ABS-CBN Corporation, G.R. No. 138051, 10 June 2004)|
If there is a violation of an independent contractor agreement, labor courts may invalidate such an arrangement resulting in a finding of an employer-employee relationship between the independent contractor and the client/principal.
1) 4-fold test
When the validity of an independent contractor arrangement is challenged, the four-fold test is usually used to determine whether there is an employer-employee relationship between the parties under the law.
In the four-fold test, the arrangement between the parties is scrutinized using the following factors or criteria:
1) The selection and engagement of the employee;
2) The payment of wages;
3) The power of dismissal; and
4) The power of control, which is the most important element. (Fuji Television Network, Inc. v. Espiritu, G.R. No. 204944-45, 03 December 2014)
For more information, see: Four-fold test.
1) Economic reality test
In complex cases which cannot easily be resolved using the four-fold test, labor courts may resort to the economic reality test. In such a test, the totality of the circumstances is carefully evaluated and weighed to determine whether an individual is economically dependent on the alleged employer which may serve as a strong indication or support on the existence of an employer-employee relationship. For instance, there is an employer-employee relationship if an individual’s livelihood is solely dependent on the payments made by the alleged employer, and/or the latter has been remitting Government-mandated benefits (e.g. SSS, PhilHealth, Pag-IBIG), as well as placing the name of the individual on the payroll and issuing a pay slip.
For more information, see: Economic reality test.
Non-compliance with the requirements for a valid independent contractor agreement may result in the following consequences:
1) Finding of employer-employee relationship;
2) Illegal dismissal if the complainant’s engagement has been terminated; and
3) Being obligated to pay employee benefits.
1) Finding of employer-employee relationship
When an independent contractor agreement is invalidated by labor courts due to non-compliance, the logical consequence is for a finding of employer-employee relationship between the parties. This means that the independent contractor was an employee from the get-go or from the start of the engagement and the client/principal was an employer insofar as labor law is concerned.
2) Illegal dismissal
If the supposed independent contractor’s engagement has been terminated, this may result in a finding of illegal dismissal as no due process was observed. Following the principle on security of tenure in labor law, no employee may be dismissed without due process. Since the client/principal was under the incorrect or mistaken assumption that the independent contractor was not an employee, it is often the case that the termination of the services results in a finding of illegal dismissal after it is established that there actually exists an employer-employee relationship between the parties.
In case there is a finding of illegal dismissal, the employer may be held liable for full backwages, reinstatement (or separation pay if reinstatement is not feasible), moral damages, exemplary damages, monetary claims, and attorney’s fees.
3) Being obligated to pay employee benefits
Following the finding of employer-employee relationship, the supposed independent contractor would be entitled to employee benefits which he/she may have received from day one. The principal/client as the employer would be obligated to observe all the employee benefits due to the employee, such as overtime pay, holiday pay, premium pay, as well as service incentive leaves, maternity leaves, paternity leaves, among others. Further, the employee’s Government mandated contributions would have to be updated as well.
3. Burden of proof: on the client or principal
The burden of proof is on the client or principal that there is an independent contractor agreement between the parties.
a. Contract for services
The contract for services is a critical piece of documentation that will support the claim that the parties entered into an independent contractor agreement or a contract for services. While it is not required that the contract be notarized, it is strongly recommended that the document be notarized in order to convert its status from a private document to a public document. As a public document, the signatures of the signatories therein are presumed to be authentic as the notary public would have verified whether their identity and the genuineness of their signatures
1) Stipulation on no employer-employee relationship
In the contract, a stipulation on no employer-employee relationship should be indicated to clearly establish that the parties are entering into an independent contractor agreement, and not an employment contract.
2) Stipulation on professional fees
The stipulation on the payment should clearly show that the independent contractor is being paid professional fees for the services rendered, and not salaries/wages which are paid to employees. Further, the independent contractor should not be covered nor be extended employee benefits such as overtime pay and holiday pay, as well as be subjected to Government remittances such as contributions for SSS, PhilHealth, Pag-IBIG.
c. No control
In the process of rendering services, the independent contractor should be able to
⦁ Presidential Decree No. 442, a.k.a. Labor Code of the Philippines