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OUTLINE on DOLE Department Order No.

174, Series of 2017


and its legal impact to Customer Frontline Solutions, Inc.

A. Legitimate Contracting or Subcontracting vis--vis Labor Only Contracting

I. Coverage (Sec. 2)

These Rules shall apply to all parties in an arrangement where employer-employee


relationship exists.

Note: DO 174-17 applies to all establishments, whether or not they are engaged in
contracting or subcontracting arrangements. This is also apparent from the fact that DO
174-17 deleted the provision on trilateral relationship which characterizes contracting
or subcontracting arrangements.

II. Requisites of Permissible Contracting or Subcontracting Arrangements (Secs. 8 and 14)

Registration with the DOLE Regional Office where it principally operates;


Engaged in a distinct and independent business and undertakes to perform the job
or work on its own responsibility, according to its own manner and method;
Substantial capital (i.e., paid-up capital stock/shares of at least P5,000,000.00) to
carry out the job farmed out by the principal on his account, manner and method,
investment in the form of tools, equipment, machinery and supervision;
Free from the control and/or direction of the principal in all matters connected with
the performance of the work except as to the result thereto; and
Compliance with all the rights and benefits of all the contractors/subcontractors
employees under the labor laws as reflected in the Service Agreement.

III. Characteristics of Labor-only Contracting (Sec. 5)


Absolutely prohibited by law
Kinds:
(a) 1. The contractor or subcontractor does not have substantial capital, or
investments in the form of tools, equipment, machineries, work premises,
among others; and

2. Performance of work which is directly related to the main business


operation of the principal.

(b) The contractor or subcontractor does not exercise the right of control over
the performance of the work of the employee.

Note: Under DO 174-17, once it has been established that the contractor or
subcontractor has substantial capital, there is no need to prove that it made
investments in the form of tools, equipment, machineries, work premises, among
others. (Neri and Cabelin v. NLRC, et al.; G.R. Nos. 97008-09; 23 July 1993)
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Further, under the old policy (i.e., DO 18-A), labor-only contracting includes
arrangement where the workers recruited and placed by the labor-only contractor are
performing activities which are necessary and desirable to the business of the
principal. Under DO 174-17, what is considered as an element of labor-only
contracting is the performance of work which is directly related to the main business
operation of the principal.

DO 174-17 also omitted the phrase regardless of whether such job, work or service is
to be performed or completed within or outside the premises of the principal which
forms part of the original first requirement.

Works or services not directly related to the main business or operation of the principal
includes casual work, janitorial, security, landscaping, and messengerial services, and
work not related to manufacturing processes in manufacturing establishments. (Alilin, et
al. v. Petron Corporation; G.R. No. 177592; 9 June 2014 citing DOLE Department Order
No. 10, series of 1997)

Thus, CFS should ensure the following:

1. It is not merely deploying warm bodies to the project site of its principal
How?
o Provide training to the employees it will deploy
o Provide the materials, tools and equipment necessary to perform the
functions of its employees

2. The outsourced service involves the performance of work which is NOT directly
related to the main business or operation of the principal
How?
o Check the primary purpose of the principal as reflected in its latest Articles
of Incorporation

3. It has control over the performance of the work of the employees deployed
How?
o CFS should have direct supervision of its employees

B. Issues affecting CFS as Contractor or Subcontractor

I. Other illicit forms of employment arrangements (Sec. 6)


[*] Subparagraphs (c), (d) and (j) are new provisions found in DO 174-17.

(a) When the principal farms out work to a "Cabo"

Note: Under the cabo system, (i) the union is the independent contractor that
engages the services of its members who are seconded to the principal; (ii) the
charges against the principal are made by the Union; and (iii) the workers are paid
on union payroll without intervention of the principal.
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(b) Contracting out of job or work through an in-house agency

Note: An in-house agency is a contractor which is owned, managed, or controlled


directly or indirectly by the principal or one where the principal owns/represents
any share of stock, and which operates solely or mainly for the principal.

(c) Contracting out of job or work through an in-house cooperative which merely
supplies workers to the principal*

(d) Contracting out of a job or work by reason of a strike or lockout whether actual or
imminent*

Note: In DO 18-A, the job, work or service contracted out should be necessary or
desirable or directly related to the business or operation of the principal. In DO 174-
17, it is prohibited to contract out a job, work or service by reason of a strike or
lockout whether actual or imminent regardless whether or not the same is
necessary or desirable or directly related to the business or operation of the
principal.

(e) 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

NOTE: CFS should check whether the principal has an existing union to avoid any
possible issues arising from deployment of CFS employees

(f) Requiring the contractor's/subcontractor's employees to perform functions which


are currently being performed by the regular employees of the principal

(g) 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
payment of future claims; or require the employee to become member of a
cooperative

Note: In DO 18-A, subparagraphs (f) and (g) are instances to prove that the
employer took undue advantage of the economic situation or lack of bargaining
strength of the contractor's employees, or undermining their security of tenure or
basic rights, or circumventing the provisions of regular employment. In DO 174-17,
there is no need to prove the same.

(h) Repeated hiring by the contractor/subcontractor of employees under an


employment contract of short duration

Note:
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1. This is different from project employment. A project employee is assigned


to a project which begins and ends at determined or determinable times.
Unlike regular employees who may only be dismissed for just and/or
authorized causes under the Labor Code, the services of employees who are
hired as "project-based employees" may be lawfully terminated at the
completion of the project.

2. The principal test in determining whether particular employees are properly


characterized as "project-based employees" as distinguished from "regular
employees," is whether or not the employees were assigned to carry out a
"specific project or undertaking," the duration (and scope) of which were
specified at the time they were engaged for that project. The project could
either be (1) a particular job or undertaking that is within the regular or
usual business of the employer company, but which is distinct and separate,
and identifiable as such, from the other undertakings of the company; or (2)
a particular job or undertaking that is not within the regular business of the
company. In order to safeguard the rights of workers against the arbitrary
use of the word "project" to prevent employees from attaining a regular
status, employers claiming that their workers are project-based employees
should not only prove that the duration and scope of the employment was
specified at the time they were engaged, but also, that there was indeed a
project. (Gadia, et al. v. Sykes Asia, Inc., et al., G.R. No. 209499, 28 January
2015)

3. However, please be advised that once a project or work pool employee has
been: (1) continuously, as opposed to intermittently, rehired by the same
employer for the same tasks or nature of tasks; and (2) these tasks are vital,
necessary and indispensable to the usual business or trade of the employer,
then the employee must be deemed a regular employee.

Although it is true that the length of time of the employees service is not a
controlling determinant of project employment, it is vital in determining
whether he was hired for a specific undertaking or in fact tasked to perform
functions vital, necessary and indispensable to the usual business or trade
of the employer. (Manalo, et al. v. TNS Philippines Inc. and Gary Ocampo,
G.R. No. 208567, 26 November 2014)

(i) 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 engagement

(j) Such other practices, schemes or employment arrangements designed to


circumvent the right of workers to security of tenure*
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Note: Another significant change introduced in DO 174-17 is the deletion of the


provision on good faith and exigencies of the business as grounds to justify the above
acts. Under DO 18-A, the above acts are prohibited only when not done in good faith
and not justified by the exigencies of the business.

II. Required Contracts under these Rules (Sec. 11)


(a) Employment contract between the contractor/subcontractor and its employees,
which shall be governed by the provisions of Articles 294 and 295 of the Labor Code
including the provisions on general labor standards and shall include the following
stipulations:
1. Specific description of the job or work to be performed by the employee;
and
2. Place of work and terms and condition of employment, including a
statement of the wage rate applicable to the individual employee.

The contractor/subcontractor shall inform the employees of the foregoing


stipulations in writing on or before the first day of his/her employment.

Note:

Please note that Article 295 of the Labor Code recognizes regular
employment as well as fixed-term, seasonal and casual employment. Thus,
DO 174-17 does not prohibit these kinds of employment.

Please note that under DO 18-A, the term or duration of employment which
must be co-extensive with the Service Agreement or with the specific phase
of work for which the employee is engaged shall also be included in the
employment contract. However, though this was deleted in DO 174-17,
Section 6(i) thereof prohibits "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
engagement."

(b) Service Agreement between the principal and the contractor, which shall include
the following:
1. Specific description of the job or work being subcontracted, including its
term or duration;
2. Place of work and terms and conditions governing the contracting
arrangement, to include the agreed amount of the contracted job or work
[Note: It shall include the standard administrative fee of not less than ten
percent (10%) of the total contract cost]; and
3. Provision on the issuance of the bond/s as defined in Section 3(a) renewable
every year. (Note: Under DO 174-17, bond only refers to the bond under
Article 108 of the Labor Code that the principal may require from the
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contractor to be posted equal to the cost of labor under the contract. This
new rule deleted the bond that may be posted by the principal as a security
or guarantee for the payment of the services of the contractors or
subcontractors under the Service Agreement.)

Note: Please be advised that DO 174-17 deleted the previous requirement to


include in the Service Agreement the following clauses:
Provisions ensuring compliance with all the rights and benefits of the
employees under the Labor Code and these Rules on provision for safe and
healthful working conditions; labor standards such as, service incentive
leave, rest days, overtime pay, 13th month pay and separation pay;
retirement benefits; contributions and remittance of SSS, PhilHealth,
PaglBIG Fund, and other welfare benefits; the right to self-organization,
collective bargaining and peaceful concerted action; and the right to
security of tenure;
A provision on the Net Financial Contracting Capacity of the contractor,
which must be equal to the total contract cost; and
The contractor or subcontractor shall directly remit monthly the employers'
share and employees' contribution to the SSS, ECC, PhilHealth and PagIBIG.

III. Termination of Employment (Sec. 13)

(a) Termination prior to the expiration of the Service Agreement

Shall be governed by Articles 297 (just causes for termination), 298 and 299
of the Labor Code (authorized causes for termination)

If termination of employment is caused by the pre-termination of Service


Agreement not due to authorized causes under Article 298 of the Labor
Code:
The party at fault shall be liable to Contractors/Subcontractors
employee and pay the following without prejudice to the solidary
liability of the parties in the Service Agreement:
1. Unpaid wages; and
2. Other unpaid benefits including unremitted legal mandatory
contributions e.g., SSS, PhilHealth, Pag-IBIG, ECC.

(b) Termination resulting from the expiration of Service Agreement or completion of


the phase of the job/work/service

Employee may opt to wait for re-employment within three (3) months to
resign and transfer to another contractor-employer.

Failure of contractor to provide new employment for the employee shall


entitle the latter to payment of separation benefits as may be provided by
law or the Service Agreement, whichever is higher, without prejudice to
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his/her entitlement to completion bonuses or other emoluments, including


retirement benefits whichever is applicable.

The mere expiration of the Service Agreement shall not be deemed as a


termination of employment of the contractors/subcontractors employees
who are regular employees of the latter.

Note: This creates an obligation on the part of the CFS to provide new
employment to their employees even after expiration of the Service Agreement
with its principal. However, in the case of CFSs regular employees, CFS cannot
terminate the employment on the ground of expiration of Service Agreement.
These employees can only be terminated on just or authorized causes under the
Labor Code.

Moreover, for CFSs regular employees, DO 174-17 does not allow co-terminus
employment contract with the Service Agreement.

IV. Capacity to carry out the contract

(a) Net Financial Contracting Capacity (NFCC)


DO 174-17 deleted this previously required provision in Service Agreement.

(b) Registration Fee (Sec. 19)


DO 174-17 raised the amount of registration fee from Twenty-five Thousand
Pesos (P25,000.00) to one hundred thousand pesos (P100,000.00).

(c) Renewal Fee (Sec. 21)


DO 174-17 likewise raised the amount of renewal fee from Twenty-five
Thousand Pesos (P25,000.00) to One Hundred Thousand Pesos (P100,000.00).

(d) Substantial Capital [Sec. 3(l)]


DO 174-17 increased the required substantial capital from paid-up capital
stock/shares of Three Million Pesos (P3,000,000.00) to Five Million Pesos
(P5,000,000.00).

V. Validity of Certificate of Registration (Sec. 20)

DO 174-17 reduced the validity/effectivity of Certificate of Registration from three


(3) years to two (2) years.

VI. Semi Annual Reporting (Sec. 22)

Submission in triplicate of subscribed semi-annual report using a prescribed form to


appropriate Regional Office which shall include:
(a) List of contracts entered into with principals during the subject reporting
period;
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(b) Number of workers covered by each contract with the principal;


(c) Proof of payment of remittances to the SSS, PhilHealth, Pag-IBIG, ECC and BIR
due its employees during the subject reporting period and of amortization of
declared loans due from its employees; and
(d) Certified listing of all cases filed against the contractor before the NLRC and
DOLE.

Note: This is a reiteration of the semi-annual reporting requirements in Sec. 22 of


DO 18-A.

VII. Grounds for cancellation of registration (Sec. 23)


(a) Misrepresentation of facts in the application;
(b) Submission of a falsified or tampered application or supporting documents to the
application for registration;
(c) Non-submission of Service Agreement between the principal and the contractor
when required to do so;
(d) Non-submission of the required semi-annual report;
(e) Final findings that the contractor has engaged in labor only contracting and/or other
illicit forms of employment arrangements;
(f) Non-compliance with labor standards and working conditions;
(g) Findings of violation of the rights of the contractors employees;
(h) Non-compliance with SSS, Pag-IBIG, PhilHealth and ECC laws;
(i) Collecting any fees not authorized by law and other applicable rules and regulations;
and
(j) Violations of any provisions of the Labor Code.

Note: Subparagraph (j) is an additional ground for cancellation of registration under


DO 174-17.

VIII. Effects of cancellation of registration (Sec. 26)

On the contractor or subcontractor:


(a) It shall divest the contractor of its legitimate status to engage in
contracting/subcontracting.
(b) The order of cancellation shall be a ground to deny an application for
renewal of registration of a contractor.
(c) However, it shall not impair the validity of existing legitimate job-
contracting arrangements the contractor may have entered into with other
principals prior to the cancellation of its registration.

Note: No contractor whose registration is cancelled under DO 174-17 or any of its


officers shall be allowed to operate, and apply for new registration as contractor
under either the same or different name.

IX. Prohibition from engaging in recruitment and placement activities (Sec. 2)

Recruitment and placement refers to any act of:


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(a) Canvassing
(b) Enlisting
(c) Contracting
(d) Transporting
(e) Utilizing
(f) Hiring or procuring workers
(g) Referrals
(h) Contract services
(i) Promising or advertising for employment, whether locally or abroad

C. Impacts on violations of the contractor or subcontractor

I. Findings of Labor Only Contracting or commission of other illicit forms of employment


arrangements
Contractor Ground for cancellation of registration [Sec. 23(e)]
Principal Deemed the direct employer of the contractor's or subcontractor's
employees (Sec. 7)
Employees May directly sue the principal for the full payment of their monetary
claims

II. Findings of violation of the rights of contractors employees and required contracts
Contractor Ground for cancellation of registration [Sec. 23(g)]
Principal Shall be rendered as the direct employer of the employees of the
contractor or subcontractor (Sec. 12)
Employees May directly sue the principal for the full payment of their monetary
claims

-oOo-