Legitimate Contracting vs. Labor-Only Contracting

Summary

The script discusses the legal framework of contracting and subcontracting in the Philippines, emphasizing the distinctions from recruitment and the requirements for valid arrangements. It outlines the roles of the principal, contractor, and workers, and the conditions under which a contractor must operate to avoid being classified as a labor-only contractor. The script also highlights illegal contracting scenarios and the legal consequences of such practices, including the principal's liabilities and the registration requirements for contractors.

Takeaways

• 📝 Contracting and subcontracting are legal arrangements where a contractor performs a specific job independently, with the principal only concerned about the outcome.
• 🔍 The distinction between recruitment and contracting lies in the agency's role in recruitment and the contractor's responsibility in delivering a specific service in contracting.
• 📜 In recruitment, a license is required, while in contracting, registration is necessary, reflecting different regulatory frameworks.
• 👥 Legitimate contracting involves a trilateral relationship among the principal, the contractor, and the workers, with the contractor being responsible for the workers' tasks.
• 🇵🇭 Philippine Labor Code Articles 106 and 107 recognize the employer's right to engage a contractor for specific work.
• 🏢 For a contracting arrangement to be valid, the contractor must have an independent business, substantial capital, and operate without the principal's control over the work process.
• 💰 Contractors must have a minimum paid-up capital of Five Million Pesos, ensuring they have the resources to fulfill their contractual obligations.
• 🛠️ The principal's interest is in the result of the work, not in how the contractor accomplishes the task, which is a key aspect of a legitimate contracting relationship.
• 🚫 If the principal controls the contractor's work process, it constitutes an employer-employee relationship, which is not the intent of contracting.
• 💼 In valid contracting, the principal is not directly liable for the contractor's employees unless the contractor fails to pay wages, in which case the principal is solidarily liable for the unpaid wages.
• 📋 Contractors must register with the Department of Labor and Employment, and failure to do so can lead to a presumption of labor-only contracting, which is generally considered illegal.

Q & A

What is the fundamental difference between contracting and recruitment?

Contracting involves a contractor performing a specific job or service for a principal, while recruitment is about an agency placing a job applicant with an employer.

Why is a license required in recruitment and registration in contracting?

A license is needed for recruitment to ensure the agency's legitimacy in placing job applicants, while registration is required in contracting to validate the contractor's business operations.

What are the three parties involved in a legitimate contracting or subcontracting relationship?

The three parties are the principal, who decides on the job to be contracted out; the contractor, who undertakes to perform the job; and the workers, who accomplish the job.

What are the legal requirements for a contractor or subcontractor to be valid under the Labor Code of the Philippines?

For a contractor or subcontractor to be valid, they must have a distinct and independent business, substantial capital or investments, and be free from the control and direction of the principal except for the results of the work.

What is the minimum paid-up capital required for contractors under the current rule?

Contractors are required to have a minimum paid-up capital of at least Five Million Pesos for corporations, partnerships, or cooperatives, or a net worth of at least Five Million Pesos for single proprietorship.

How does a principal's control over a contractor's work affect the principal-contractor relationship?

If the principal manages the contractor on both the result and the means of accomplishing the work, the relationship becomes one of employer-employee rather than principal-contractor.

What is the legal effect of a valid contracting or subcontracting arrangement on the principal and the contractor's employees?

In a valid arrangement, no employer-employee relationship is created between the principal and the contractor's employees. However, the principal can be solidarily liable for unpaid wages of the contractor's employees up to the extent of the work performed under the contract.

Under what circumstances is the principal not solidarily liable for the contractor's employees?

The principal is not solidarily liable for backwages, separation pay, or damages caused by the contractor's employees, as there's no employer-employee relationship and the contractor is responsible for the acts of their employees.

What is the purpose of registering contractors with the Department of Labor and Employment (DOLE)?

Registration with DOLE is mandatory to remove the legal presumption of being a labor-only contractor and to demonstrate that the contractor operates a distinct and independent business.

What are the conditions that make contracting or subcontracting illegal according to the script?

Contracting or subcontracting is illegal when entered into with a labor-only contractor, a cabo, an in-house agency, an in-house cooperative, during an impending or actual strike, or when it interferes with the right to self-organization, among other practices designed to circumvent the right to security of tenure.

What is labor-only contracting and why is it considered illegal?

Labor-only contracting is an arrangement where a contractor without substantial capital or investment supplies workers to perform activities directly related to the principal's main business. It is illegal because it does not involve the performance of a specific job or service and is often a means to evade labor standards and security of tenure.

Outlines

00:00

📜 Understanding Contracting and Subcontracting

This paragraph outlines the fundamental aspects of contracting and subcontracting, emphasizing the independence of the contractor from the principal's control, except for the outcome of the work. It distinguishes between recruitment and contracting, highlighting the need for a license in recruitment and registration in contracting. The paragraph also explains the trilateral relationship in legitimate contracting involving the principal, contractor, and workers. It further clarifies the legal requirements for valid contracting under Philippine law, including the necessity for the contractor to have a distinct business, substantial capital, and to operate independently. The responsibilities and liabilities of the principal in cases of unpaid wages by the contractor are also discussed, noting the principal's solidary liability limited to the work performed under the contract and the conditions under which this liability can be claimed or rebutted.

05:03

🛠 Legal Implications and Registration of Contractors

This section delves into the legal implications of contracting and subcontracting, particularly the importance of registration with the Department of Labor and Employment (DOLE) to avoid the presumption of being a labor-only contractor. It details the mandatory nature of registration and the consequences of non-compliance, such as the presumption of labor-only contracting. The paragraph also addresses the legal effects of valid registration, which serves to dispel the presumption of labor-only contracting but does not prevent parties from proving otherwise. It further identifies specific types of contractors who are exempt from registration, such as those in the construction industry and firms engaged in information technology-enabled services. The paragraph concludes by discussing illegal forms of contracting, including labor-only contracting, contracting with a cabo, in-house agency, in-house cooperative, and other practices designed to evade labor laws and security of tenure.

10:05

🏭 Labor-Only Contracting and Its Legal Ramifications

This paragraph focuses on the concept of labor-only contracting, which is an arrangement where a contractor without substantial capital or investment in tools, equipment, machinery, and work premises supplies workers to perform jobs directly related to the principal's main business. It clarifies that such contractors do not perform specific jobs or services but merely provide manpower. The paragraph explains the legal effects of labor-only contracting, where the labor-only contractor's employees become part of the principal's regular workforce, entitled to the same rights and benefits as regular employees. The labor-only contractor is considered an agent of the principal employer. Additionally, the paragraph discusses the criteria for determining substantial capital or investment and the types of activities that have been deemed directly related to an employer's principal business.

Keywords

💡Contracting

Contracting refers to an arrangement where a principal engages a contractor to perform a specific job, task, or service independently, without the control and direction of the principal, except for the final outcome. In the video's context, it highlights the legal and operational aspects of contracting, emphasizing the contractor's autonomy and the principal's focus on results rather than the means of execution. An example from the script is the requirement for a contractor to have a distinct and independent business, substantial capital, and to be free from the principal's control.

💡Subcontracting

Subcontracting is a form of contracting where a contractor further engages another contractor to perform part of the work. This is a common practice in large projects where specialized tasks are broken down and assigned to different entities. The video script discusses subcontracting in the context of the legal framework, emphasizing the need for the subcontractor to meet the same criteria as the main contractor, such as having a distinct business and substantial capital.

💡Recruitment

Recruitment is the process of finding, screening, and hiring new employees. It contrasts with contracting in that recruitment agencies place job applicants with employers, whereas in contracting, the contractor undertakes to perform a specific job using their own employees. The video script distinguishes recruitment from contracting by highlighting the need for a license in recruitment and the focus on placing individuals rather than performing tasks.

💡Principal

The principal is the entity that engages the services of a contractor or subcontractor for a specific job. The principal's role is to define the job requirements and ensure the desired outcome is achieved. The video script explains that the principal is not responsible for the day-to-day management of the contractor's employees but is concerned with the final results of the work.

💡Contractor

A contractor is an individual or entity that undertakes to perform a specific job or service for a principal. The contractor operates independently, with their own employees and resources. The video script outlines the legal criteria for a valid contractor, including having a distinct business, substantial capital, and being free from the principal's control over the means of work execution.

💡Labor-only contracting

Labor-only contracting is an arrangement where a contractor supplies workers to a principal without substantial capital or investment in tools, equipment, or work premises. This is considered illegal in many jurisdictions, including the Philippines, as it can be a form of disguised employment. The video script explains that labor-only contractors do not perform a specific job but merely supply manpower, which can lead to the workers being considered employees of the principal.

💡Solidary liability

Solidary liability refers to a legal concept where multiple parties are jointly and severally liable for a debt or obligation. In the context of the video, the principal may be solidarily liable with the contractor for unpaid wages of the contractor's employees, but this liability is limited to the work performed under the contract. The script clarifies that this does not extend to backwages or separation pay, which are not considered part of the contractual relationship.

💡Registration

Registration is a legal requirement for contractors to operate, as mandated by the Department of Labor and Employment. It is a process that legitimizes the contractor's business and removes the presumption of being a labor-only contractor. The video script emphasizes the importance of registration for contractors to prove their legitimacy and to operate within the legal framework.

💡Substantial capital

Substantial capital refers to the significant financial resources a contractor must have to carry out the contracted service. The video script specifies that contractors, particularly corporations, partnerships, or cooperatives, are required to have a minimum paid-up capital of at least Five Million Pesos. This capital serves as a proof of the contractor's ability to perform the contracted job independently.

💡Independent business

An independent business is a business entity that operates on its own, with its own methods and clientele, and is not controlled by a single client. The video script explains that for a contractor to be considered legitimate, they must have an independent business with substantial capital, catering to multiple clients and not just to one principal.

💡Cabro

A 'cabro' is a term used in the Philippines to describe a person or group that supplies workers to an employer under the guise of a labor organization or cooperative without monetary consideration. The video script discusses how contracting with a 'cabro' is illegal because it can be a form of disguised employment and undermines the rights of workers.

Highlights

Contracting or subcontracting is a legal arrangement where a contractor performs work independently under their own responsibility, except for the work's outcome.

Recruitment and contracting differ in that recruitment agencies place job applicants with employers, while contractors perform specific jobs for a principal.

A license is required for recruitment, while registration is necessary for contracting.

Legitimate contracting involves a trilateral relationship among the principal, the contractor, and the workers.

Contracting is valid when the contractor operates independently, with substantial capital, and is not under the principal's control except for the work's result.

An independent business implies the contractor has its own occupation or trade, substantial capital, and caters to multiple clients without being controlled by any single client.

Contractors must have a minimum paid-up capital of Five Million Pesos for corporations, partnerships, or cooperatives, or a net worth of the same amount for single proprietorship.

In a valid contracting arrangement, the principal is only interested in the work's result, not the contractor's methods.

If the principal controls the contractor's work methods, it constitutes an employer-employee relationship, not a principal-contractor one.

In valid contracting, no employer-employee relationship is created between the principal and the contractor's employees.

The principal can be held solidarily liable for unpaid wages of the contractor's employees but only to the extent of the work performed under the contract.

The principal is not liable for the contractor's employees' backwages or separation pay, as there's no employer-employee relationship.

The principal is not responsible for damages caused by the contractor's employees; the contractor is solely accountable.

The principal can seek reimbursement from the contractor for amounts paid to the contractor's employees but must do so through regular courts, not Labor Arbiters.

Contractors must register with the Department of Labor and Employment where they principally operate, which is a mandatory requirement.

Failure to register leads to a presumption of labor-only contracting, but this can be overcome with proof of a distinct and independent business.

Certain contractors, like those in the construction industry or IT-enabled services, are exempt from the registration requirement.

Illegal contracting includes labor-only contracting, farming out work to a 'cabo', using in-house agencies, and contracting during a strike or to evade union obligations.

Labor-only contracting is an arrangement where the contractor supplies workers without substantial capital or investment in tools, equipment, machinery, and work premises.

In labor-only contracting, the labor-only contractor's employees become employees of the principal, entitled to the same rights and benefits as regular employees.

Transcripts

Contracting or subcontracting is an arrangement whereby an employer or

principal engages the service of a contractor who undertakes to perform a

certain work, task, or job, on his own account, under his own responsibility,

free from the control and direction of his employer or principal, in all matters,

except as to the result of the work.

Note the distinctions between recruitment and contracting.

(1) In recruitment, the recruitment agency engages a job applicant for the

purpose of placing him with an employer.

In contracting, the contractor undertakes to do a specific job or service using

his own employees for a principal.

(2) In recruitment, there's a need for a license.

In contracting, there's a need for registration.

In legitimate contracting or subcontracting, a trilateral

relationship exists, to wit: (1) the principal who decides on the job to be

contracted out; (2) the contractor who undertakes to perform the job; and (3)

the workers who accomplish the job.

Contracting or subcontracting of a job, work, or service is not illegal per se.

The recognition of the right of an employer to engage the services of a

contractor for the performance of a specific work, task, or job could be

gleaned from Articles 106 and 107 of the Labor Code of the Philippines.

For contracting or subcontracting to be valid, the contractor or subcontractor

must have a distinct and independent business, must have substantial capital

or investments to carry out the contracted service, and must be free from control

and direction of the principal on all matters except as to the results thereof.

Independent business presupposes that the contractor has its own

occupation or trade, with substantial capital necessary to carry out the

contracted job or service, and caters not exclusively to one client, but to

several clientele, according to his own methods, without being controlled by

the client, except as to the results.

The contractor must have substantial capital.

Under the present rule, contractors are required to have a minimum paid-up

capital of at least Five Million Pesos in the case of corporations,

partnerships, or cooperatives; or a net worth of at least Five Million Pesos

in the case of single proprietorship.

In a legitimate contracting arrangement, the contractor performs

the job, work, or service according to his own manner and method.

The principal is interested only in the result.

If the principal manages the contractor on both the result of the work and

the means by which the work is to be accomplished, the relationship

is not one of principal-contractor, but employer-employee.

Note the legal effects of valid contracting or subcontracting.

In a valid contracting or subcontracting arrangement,

employer-employee relationship is not created between the principal

and the employees of the contractor.

However, if the contractor fails to pay the wages of his employees, the

principal becomes solidarily liable with his contractor for such unpaid wages.

The solidary liability for unpaid wages is limited only to the extent of the

work performed under the contract.

This is the period when the contractor's employees were working for the principal.

The principal is not solidarily liable for backwages of the contractor's employees.

This is because backwages are invested with a punitive character, which should

be imposed only against the guilty party, i.e., the person who committed the acts

constitutive of illegal dismissal, except when there is proof that the principal

conspired with the independent contractor in the illegal dismissal of the employees.

The principal is not solidarily liable for separation pay of

the contractor's employees.

This is because there's no employer-employee relationship between the

principal and the contractor's employees.

The principal is not solidarily liable for damages caused by

the contractor's employees.

The contractor alone is responsible for the acts and omissions of his employees.

The imposition of solidary liability does not preclude the principal from

seeking reimbursement from the contractor for whatever amount he may be adjudged

to pay the contractor's employees.

However, the claim for reimbursement should be filed before the regular courts.

It cannot be done through a cross claim before the Labor Arbiter because the

claim for reimbursement is beyond the jurisdiction of the Labor Arbiters,

considering that the matter does not have a reasonable causal connection

with employer-employee relationship.

It is a civil obligation arising from a contract.

Remember that contractors must be registered with the Department

of Labor and Employment.

They must register with the DOLE Regional Office where they principally operate.

This is a mandatory requirement.

Failure to register shall give rise to the presumption that the contractor is

engaged in labor-only contracting, but this presumption is not conclusive.

It is merely a disputable presumption which can be overcome by proof that

the contractor has a distinct and independent business with substantial

capital, work premises, and necessary equipment to carry out the contracted

services, and that it performs the contracted service free from control

and direction of the principal in all matters, except as to the results thereof.

Note the legal effect of registration.

Registration merely removes the legal presumption of being

a mere labor-only contractor.

Registration does not bar a party from proving that the contractor is

a labor-only contractor by showing that the contractor does not have

substantial capital, equipment, or work premises to carry out the

contracted service, and merely supplies workers only to the principal to

perform a job directly related to the main business of the principal.

Note the contractors that are not required to register: contractors in

the construction industry licensed by the Philippine Contractors Accreditation

Board.; firms engaged in information technology-enabled services involving an

entire business process, such as knowledge process outsourcing, business process

outsourcing, hardware or software support, medical transcription, animation services,

and back office operations or support.

Contracting or subcontracting is illegal: (1) when entered into

with a labor-only contractor.

A labor-only contractor is a contractor who does not have substantial capital

or investment in the form of tools, equipment, machinery, and work premises,

and merely recruits or supplies workers to a principal to perform a job, work,

or activity that is directly related to the main business of the principal

employer; (2) when the principal farms out work to a cabo, A cabo refers to

a person or group of persons which, under the guise of a labor organization,

cooperative, or any entity, supplies workers to an employer without monetary

consideration, whether in the capacity of an agent of the employer, or as an

ostensible independent contractor; (3) when entered into with an in-house agency.

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 or

represents any share of stock and which operates solely or mainly for

the principal; (4) when entered into without in-house cooperative, which

merely supplies workers to the principal.

An in-house cooperative is one which is managed or controlled directly or

indirectly by the principal, or one where the principal or any of its

officers owns or represents any equity or interest which operates solely or

mainly for the principal; (5) when contracting is done because of an

impending or actual strike or lockout.

Contracting out work because of an impending or actual strike is called

a runaway shop because the employer relocates or transfers operations in

an attempt to evade its obligations to deal with the union; (6) when

contracting interferes with the exercise of their right to self-organization.

Under Article 259 (c) of the Labor Code, it is unlawful for an employer

to contract out services or functions being performed by union members when

such will interfere with, restrain, or coerce employees in the exercise of their

right to self-organization; (7) when the contractual employees are required

to sign as a precondition to employment or continued employment an antedated

resignation letter, a blank payroll, a waiver of labor standards, minimum wages.

and welfare benefits, or a quitclaim, releasing the principal or contractor

for future claims; (8) when employees are required to become members of a

cooperative; (9) when the employees of the contractor or subcontractor are required

to perform functions which are currently being performed by regular employees of

the principal; (10) when the contractor or subcontractor repeatedly hires employees

under an employment contract of short duration; (11) when the employees of the

contractor or subcontractor are required 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 which require substantially different

skills made known to the employee at the time of engagement; and (12) such

other practices, schemes, or employment arrangements designed to circumvent

the right to security of tenure.

Labor-only contracting.

Labor-only contracting is an arrangement whereby the contractor, who does not have

substantial capital or investment in the form of tools, equipment, machinery, and

work premises, merely recruits or supplies workers to a principal to perform the job,

work, or activity that is directly related to the main business of the principal.

A labor-only contractor merely supplies workers.

In a labor-only contracting arrangement, the contractor merely provides

workers to a principal employer.

The engagement is not for the performance of a specific job or service, but for

the supply of manpower who will perform activities that are directly related

to the main business of the principal.

A labor-only contractor has no substantial capital.

The phrase substantial capital or investment refers to capital stock

and subscribed capitalization in the case of corporations, tools,

equipment, implements, machinery, and work premises, actually and

directly used by the contractor in the performance or completion of the

job, work, or service contracted out.

The sum of assets without more is insufficient to prove that an entity

is engaged in valid job contracting.

The assets must be manifested as investments relating to the job,

work, or service to be performed.

These investments may come in the form of tools, equipment,

machinery, and work premises.

It must be established that the contractor furnished its workers with

the tools or equipment necessary to carry out the contracted services.

It is not necessary for the contractor to prove that he has both substantial

capital and investment in the form of tools, equipment, or machinery.

The conjunction "or" is used in the law.

Thus, if the contractor can prove that he has substantial capital,

he need not further establish that he has investment in the form of

tools, equipment, or machinery.

Activities directly related to the main business.

The law neither defines nor enumerates what activities are directly related to

the principal business of an employer.

The following activities have been held as directly related to the principal

business of an employer: (1) automobile painting is directly related to an

automotive repair shop business; (2) merchandisers, cashiers, baggers,

sales ladies, checkout personnel, and warehouse men are jobs directly related

to the supermarket business; (3) Lathe Machine Operator, Buffing, Assembler,

and Quality Control are jobs directly related to the business of steel and

metal fabrication of machine parts.

Note the legal effect of labor-only contracting.

When there is labor-only contracting, the employees of the labor-only contractor

will become employees of the principal, which means that they will be absorbed

into the regular workforce and be entitled to all the rights and benefits according

to regular employees of the principal.

The labor-only contractor will be considered as a mere agent

of the principal employer.