Labor-only Contracting

Summary

▪ Labor-only contracting is prohibited.

▪ It refers to an arrangement that violates the laws and regulations on contracting and job contracting.

▪ All contractors are presumed to be labor-only contractors by default.

▪ Finding of labor-only contracting results in the principal being declared as the employer.

▪ There are illicit forms of employment arrangements that are prohibited in contracting and subcontracting.

1. Concept

Under Department Order No. 174, series of 2017 (DO-174), issued by the Department of Labor and Employment (DOLE), labor-only contracting is prohibited.

Labor-only contracting refers to an arrangement whereby:

1) The contractor or subcontractor does not exercise the right to control over the performance of the work of the employee; or

2) The contractor’s or subcontractor’s employees recruited and placed are performing activities which are directly related to the main business operation of the principal, plus: (a) the contractor or subcontractor does not have substantial capital; or (b) the contractor or subcontractor does not have investments in the form of tools, equipment, machineries, supervision, work premises, among others. (Section 5, DO-174)

“Labor-only contracting exists when the contractor or subcontractor merely recruits, supplies or places workers to perform a job, work or service for a principal and any of the following elements are present:

1) The contractor or subcontractor does not have substantial capital or investment which relates to the job, work or service to be performed and the employees recruited, supplied or placed by such contractor or subcontractor are performing activities which are directly related to the main business of the principal; or

2) The contractor does not exercise the right to control the performance of the work of the contractual employee.” (Manila Memorial Park Cemetery, Inc. v. Lluz, G.R. No. 208451, 03 February 2016)

a. As mere agent of principal

“Thus, the petitioner and the complainants (who withdrew from the case) were performing activities that were necessary to market the products that (the principal) Adidas itself manufactured. They sold these products for several years, starting in June 1995 until December 9, 2000. While Adidas explains that it amended its articles of incorporation in October 2002 to engage in retail, it cannot be denied that in 1995 it was already in the retail business through its agents WOSI and JCA and labor-only contractor PRIME. Thus, the petitioner had become an Adidas regular employee a long time before she was supposedly made a ‘contractual employee’ of PRIME. Adidas exercised control and supervision over the performance of the petitioner’s work.

In the absence of evidence showing how or in what manner PRIME carried out its promotion work under its contract with JCA and how it provided the necessary requirements for such undertaking (such as the maintenance of storage areas and engagement of sales outlets), we likewise find merit in the petitioner’s submission that it was Adidas who exercised control and supervision over the petitioner’s work performance, through its Sales Manager Sonny Niebres, its President Philip Go, and even Cornelia Indon, head of the WOSI concession.

In sum, we hold that PRIME failed to satisfy the four-fold employer-employee relationship test, making it a labor-only contractor under the law and the rules. Like JCA, it was merely an agent of Adidas, notwithstanding the quitclaims of some of the complainants in its favor. Adidas, therefore, is petitioner’s real employer who shall be responsible to her in the same manner and extent as if she were directly employed by the company. In this light, we find the petitioner to have been illegally dismissed, there being obviously no valid cause to and absent due process in her dismissal.” (Cusap v. Adidas Philippines, Inc., G.R. No. 201494, 29 July 2015)

b. As supplier of manpower

PMCI [the Contractor] was not engaged to perform a specific and special job or service, which is one of the strong indicators that an entity is an independent contractor as explained by the Court in the cases of Neri and Fuji. As stated in the Contract of Service, the sole undertaking of PMCI was to provide RFC with a temporary workforce able to carry out whatever service may be required by it. Such venture was complied with by PMCI when the required personnel were actually assigned to RFC. Apart from that, no other particular job, work or service was required from PMCI. Obviously, with such an arrangement, PMCI merely acted as a recruitment agency for RFC. Since the undertaking of PMCI did not involve the performance of a specific job, but rather the supply of manpower only, PMCI clearly conducted itself as labor-only contractor. (Alilin v. Petron Corporation, G.R. No. 177592, 09 June 2014)

c. Distinguished from permissible job contracting

Permissible job contracting or subcontracting has been distinguished from labor-only contracting such that permissible job contracting or subcontracting refers to an arrangement whereby a principal agrees to put out or farm out to a contractor or subcontractor the performance or completion of a specific job, work or service within a definite or predetermined period, regardless of whether such job, work or service is to be performed or completed within or outside the premises of the principal, while labor-only contracting, on the other hand, pertains to an arrangement where the contractor or subcontractor merely recruits, supplies or places workers to perform a job, work or service for a principal.” (Allied Banking Corporation v. Calumpag, G.R. No. 219435, 17 January 2018)

2. Kinds of labor-only contracting

There following are the different kinds of labor-only contracting:

1) The Principal exercises control (i.e. the contractor or subcontractor does not exercise the right to control over the performance of the work of the employee); or

2) Contractor’s workers perform activities directly related to main business of the principal plus contractor has no substantial capital or investments in the form of tools, equipment, machineries, supervision, work premises, etc.

3) Contractor’s workers are indispensable to the principal business of the Principal

a. Principal exercises control

See: Control in Contracting and Subcontracting.

b. Directly related to main business of the principal plus…

In labor-only contracting, the employees recruited, supplied or placed by the contractor perform activities which are directly related to the main business of its principal. In this case, the work of petitioner as sales representative is directly related to the business of RFC. Being in the business of food manufacturing and sales, it is necessary for RFC to hire a sales representative like petitioner to take charge of booking its sales orders and collecting payments for such. Thus, the work of petitioner as sales representative in RFC can only be categorized as clearly related to, and in the pursuit of the latter’s business. Logically, when petitioner was assigned by PMCI to RFC, PMCI acted merely as a labor-only contractor. (Vinoya v. NLRC, Regent Food Corporation, G.R. No. 126586, 02 February 2000)

1) No substantial capital

a) Paid-in capital is less than the minimum required capital

PMCI does not have substantial capitalization or investment in the form of tools, equipment, machineries, work premises, among others, to qualify as an independent contractor. While it has an authorized capital stock of P1,000,000.00, only P75,000.00 is actually paid-in, which, to our mind, cannot be considered as substantial capitalization [back then Php1 Million paid-in was required; currently, it is at Php5 Million]. (Vinoya v. NLRC, Regent Food Corporation, G.R. No. 126586, 02 February 2000)

b) Wages comes from the Principal even if paid via the Contractor

The Court takes judicial notice of the practice of employers who, in order to evade the liabilities under the Labor Code, do not issue payslips directly to their employees. Under the current practice, a third person, usually the purported contractor (service or manpower placement agency), assumes the act of paying the wage. For this reason, the lowly worker is unable to show proof that it was directly paid by the true employer. Nevertheless, for the workers, it is enough that they actually receive their pay, oblivious of the need for payslips, unaware of its legal implications. Applying this principle to the case at bar, even though the wages were coursed through PMCI, we note that the funds actually came from the pockets of RFC. Thus, in the end, RFC is still the one who paid the wages of petitioner albeit indirectly. (Vinoya v. NLRC, Regent Food Corporation, G.R. No. 126586, 02 February 2000)

2) No investments in the form of tools, equipment, machineries, supervision, work, premises, etc.

Records likewise reveal that DGMS has no substantial equipment in the form of tools, equipment and machinery. As a matter of fact, respondents were using office equipment and materials owned by petitioner while they were rendering their services at its offices. (First Philippine Industrial Corporation v. Calimbas, G.R. No. 179256, 10 July 2013)

c. Contractor’s workers are indispensable to the principal business of the Principal

The Court in Agito similarly struck down Coca-Cola’s [the Principal] contention that the salesmen therein were employees of Interserve, notwithstanding the submission by Coca-Cola of their personal data files from the records of Interserve; their Contract of Temporary Employment with Interserve [the Contractor]; and the payroll records of Interserve. In categorically declaring Interserve as a labor-only contractor, the Court found that the work of the respondent salesmen therein, constituting distribution and sale of Coca-Cola products, was clearly indispensable to the principal business of petitioner Coca-Cola. (Quintanar v. Coca-Cola Bottlers, Philippines, Inc., En Banc, 28 June 2016 citing Coca-Cola Bottlers Phils. Inc. v. Agito, G.R. No. 179546, 13 February 2009)

Respondents worked for petitioner as salesmen, with the exception of respondent Gil Francisco whose job was designated as leadman. In the Delivery Agreement between petitioner and TRMD Incorporated, it is stated that petitioner is engaged in the manufacture, distribution and sale of softdrinks and other related products. The work of respondents, constituting distribution and sale of Coca-Cola products, is clearly indispensable to the principal business of petitioner. The repeated re-hiring of some of the respondents supports this finding. Petitioner also does not contradict respondents’ allegations that the former has Sales Departments and Sales Offices in its various offices, plants, and warehouses; and that petitioner hires Regional Sales Supervisors and District Sales Supervisors who supervise and control the salesmen and sales route helpers. Coca-Cola Bottlers Phils. Inc. v. Agito, G.R. No. 179546, 13 February 2009)

3. Presumption: A labor-only contractor

“As a general rule, a contractor is presumed to be a labor-only contractor, unless such contractor overcomes the burden of proving that it has the substantial capital, investment, tools and the like.” (Allied Banking Corporation v. Calumpag, G.R. No. 219435, 17 January 2018)

“As defined under Article 106 of the Labor Code, labor-only contracting, a prohibited act, is an arrangement where the contractor, who does not have substantial capital or investment in the form of tools, equipment, machineries, work premises, among others, supplies workers to an employer and the workers recruited are performing activities which are directly related to the principal business of such employer.” (Petron Corporation v. Caberte, G.R. No. 182255, 15 June 2015)

“To restate, a contractor is deemed to be a labor-only contractor if the following elements are present: (i) the contractor does not have substantial capital or investment to actually perform the job, work or service under its own account and responsibility; and (ii) the employees recruited, supplied or placed by such contractor are performing activities which are directly related to the main business of the principal.45 Conversely, in proving that ABC is not a labor-only contractor, it is incumbent upon Petron to show that ABC has substantial capital or investment and that respondents were performing activities which were not directly related to Petron’s principal business.” (Petron Corporation v. Caberte, G.R. No. 182255, 15 June 2015)

“From the foregoing, it is clear that (the principal) Petron failed to discharge its burden of proving that (the contractor) ABC is not a labor-only contractor. Consequently, and as warranted by the facts, the Court declares ABC as a mere labor-only contractor. ‘A finding that a contractor is a ‘labor-only’ contractor is equivalent to declaring that there is an employer-employee relationship between the principal and the employees of the supposed contractor, and the ‘labor-only’ contractor is considered as a mere agent of the principal, the real employer.’ Accordingly, in this case, Petron is declared to be the true employer of respondents who are considered regular employees in view of the fact that they have been regularly performing activities which are necessary and desirable to the usual business of Petron for a number of years.” (Petron Corporation v. Caberte, G.R. No. 182255, 15 June 2015)

a. Consequence: Principal is the employer

“A finding that a contractor is a labor-only contractor, as opposed to permissible job contracting, is equivalent to declaring that there is an employer-employee relationship between the principal and the employees of the supposed contractor, and the labor-only contractor is considered as a mere agent of the principal, the real employer.” (Allied Banking Corporation v. Calumpag, G.R. No. 219435, 17 January 2018)

4. Other illicit forms of employment arrangements

Under DO-174, the following are prohibited for being contrary to law or public policy:

1) When the principal farms out work to a “Cabo”;

2) Contracting out of job or work through an in-house agency;

3) Contracting out of job or work though an in-house cooperative which merely supplies workers to the principal;

4) Contracting out of a job or work by reason of a strike or lockout whether actual or imminent;

5) Contracting out of a job or work being performed by union members and such will interfere with, restrain or coerce employees in the exercise of their rights to self-organization as provided in Article 259 of the Labor Code, as amended;

6) Requiring the contractor’s/subcontractor’s employees to perform functions which are currently being performed by the regular employees of the principal.

7) Requiring the contractor’s/subcontractor’s employees to sign, as a precondition to employment or continued employment, an antedated resignation letter; a blank payroll; a waiver of labor standards including minimum wages and social or welfare benefits; or a quitclaim releasing the principal or contractor from liability as to the payment of future claims; or require the employee to become member of a cooperative;

8) Repeated hiring by the contractor/subcontractor of employees under an employment contract of short duration;

9) Requiring employees under a contracting/subcontracting arrangement to sign a contract fixing the period of employment to a term shorter than the term of the Service Agreement, unless the contract is divisible into phases for which substantially different skills are required and this is made known to the employee at the time of the engagement.

10) Such other practices, schemes or employment arrangements designed to circumvent the right of workers to security of tenure.

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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