Principal in Contracting

Summary

▪ Principal is the one who farms out or outsources a job or work in a contracting and subcontracting arrangement.

▪ The principal’s main interests is on the desired results.

▪ The principal has no interest in supervising or controlling the contractor’s employees.

▪ The principal is solidarily liable with the contractor for labor law violations.

▪ The extent of liability by the principal depends on whether there is a finding of legitimate job contracting or subcontracting.

1. Concept

Principal refers to “any natural or juridical entity, whether an employer or not, who puts out or farms out a job or work to a contractor.” (Section 3[i], DO-174)

2. Desired results

In a contracting arrangement, the main interest of a principal is on the desired results which the contractor will be accomplishing through its own manner and method, free from the control and/or direction of the principal.

Conversely, the principal should have no interest on the contractor’s employees who are performing the job or work that has been farmed out or outsourced. The principal is not the employer of these workers, who are hired, paid, and controlled by the contractor who is their employer.

3. No control

Thus, in a contracting arrangement, the principal is prohibited from exercising any form of control or supervision over the contractor’s employees. Otherwise, if the principal exercises control, the arrangement with the contractor shall be considered as labor-only contracting. (Section 7, DO-174)

The consequence of labor-only contracting is that the principal shall be deemed as the employer of contractor’s employees. As the employer, the principal may be held liable for illegal dismissal, monetary claims, and damages.

4. Solidary liability

The principal and the contractor shall be solidarily liable for any violation of labor laws, including non-payment of wages and mandatories to the extent of the work performed under the employment contract of the contractor’s employees. (Section 9, DO-174)

The extent of a principal’s liability will vary depending on whether the arrangement has been declared as a legitimate job contracting or labor-only contracting. If the declaration is one for legitimate job contracting, the principal is solidarily liable only to the extent of monetary claims. However, if the finding is one of labor-only contracting, the principal is declared as the true employer and thus may be held liable for illegal dismissal and its consequences, such as backwages and damages.

“In legitimate job contracting, the law creates an employer-employee relationship for a limited purpose, i.e., to ensure that the employees are paid their wages. The principal employer becomes jointly and severally liable with the job contractor only for the payment of the employees’ wages whenever the contractor fails to pay the same. Other than that, the principal employer is not responsible for any claim made by the employees.” (San Miguel Corporation v. MAERC Integrated Services, Inc., G.R. No. 144672, 10 July 2003)

“On the other hand, in labor-only contracting, the statute creates an employer-employee relationship for a comprehensive purpose: to prevent a circumvention of labor laws. The contractor is considered merely an agent of the principal employer and the latter is responsible to the employees of the labor-only contractor as if such employees had been directly employed by the principal employer. The principal employer therefore becomes solidarily liable with the labor-only contractor for all the rightful claims of the employees.” (Ibid.)

5. Duty to produce Service Agreement in DOLE inspection

Both the principal and the contractor have the duty to produce a copy of the Service Agreement in the ordinary course of a DOLE inspection. (Section 29, DO-174)

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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