Labor-only Contracting and Independent Job Contracting

Job contracting now appears to be the workplace trend. While job contracting has its positive aspects, the explanatory note of a House Bill asserts that workers hired by agencies through the job contracting scheme are the most underpaid, neglected and oppressed among the country’s labor force. Regardless of the veracity of this assertion, let’s discuss the basic concepts in labor-only contracting and independent job contracting.

What is contracting or subcontracting?

Contracting or subcontracting refers to an arrangement whereby a principal agrees to put out or farm out with 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 outside the premises of the principal. (Art. 106, Labor Code)

When is contracting or sub-contracting legitimate?

Contracting or subcontracting shall be legitimate if the following circumstances concur:

1. The contractor or subcontractor carries on a distinct and independent business and undertakes to perform the job, work or service on its own account and under its own directions of the principal in all matters connected with performance of the work except as to the results thereof.

2. The contractor or subcontractor has substantial capital or investment.

3. The agreement between, the principal and the contractor or subcontractor assures the contractual employees entitlement to all labor and occupational safety and health standards, free exercise of the right to self- organization, security of tenure and social and welfare benefits. (D.O. No. 18-02)

Persons or entities which engage in the prohibited form of contracting are also known as “labor-only-contractors”. Those which engage in legitimate contracting are known as an “independent contractors”.

What are the factors to be considered?

In determining the existence of an independent contractor relationship, several factors, as discussed in jurisprudence or cases decided by the Supreme Court, shall be considered, such as, but not limited to:

a. whether the contractor was carrying on an independent business.
b. the nature and extent of the work.
c. the skill required.
d. the term and duration of the relationship.
e. the right to assign the performance of specified pieces of work.
f. the control and supervision of the workers.
g. the power of the employer with respect to the hiring, firing and payment of the workers of the contractor.
h. the control of the premises.
i. the duty to supply premises, tools, appliances, materials and labor.
j. the mode, manner and terms of payment.

What is the effect?

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.

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. A finding of a “labor-only” contractor is equivalent to a finding that an employer-employee relationship exists between the company and the labor contractor’s employee, the relationship being such as provided by the law itself. (In technical terms, the principal employer is “solidarily” liable with the labor-only contractor for all the rightful claims of the employees).

(Sources: Department of Labor and Employment; House Bill 380; San Miguel Corporation vs. Maerc Integrated Services, Inc. (G.R. No. 144672, 10 July 2003); Philippine Bank of Communications vs. NLRC (G.R. No. L-66598, 19 December 1986); Ecal vs. NLRC, G.R. Nos. 92777-78, 13 March 1991).

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