A.

TRILATERAL WORK ARRANGEMENT

B. LABOR-ONLY CONTRACTING

ART. 106. Contractor or subcontractor. - Whenever an employer enters into a contract with
another person for the performance of the former’s work, the employees of the contractor and of
the latter’s subcontractor, if any, shall be paid in accordance with the provisions of this Code.

In the event that the contractor or subcontractor fails to pay the wages of his employees in
accordance with this Code, the employer shall be jointly and severally liable with his contractor
or subcontractor to such employees to the extent of the work performed under the contract, in
the same manner and extent that he is liable to employees directly employed by him.

The Secretary of Labor and Employment may, by appropriate regulations, restrict or prohibit the
contracting-out of labor to protect the rights of workers established under this Code. In so
prohibiting or restricting, he may make appropriate distinctions between labor-only contracting
and job contracting as well as differentiations within these types of contracting and determine
who among the parties involved shall be considered the employer for purposes of this Code, to
prevent any violation or circumvention of any provision of this Code.

There is "labor-only" contracting where the person supplying workers to an employer does not
have substantial capital or investment in the form of tools, equipment, machineries, work
premises, among others, and the workers recruited and placed by such person are performing
activities which are directly related to the principal business of such employer. In such cases,
the person or intermediary shall be considered merely as an agent of the employer who shall be
responsible to the workers in the same manner and extent as if the latter were directly employed
by him.

C. LIMITED AND ABSOLUTE LIABILITY OF PRINCIPAL

ART. 109. Solidary liability. - The provisions of existing laws to the contrary notwithstanding,
every employer or indirect employer shall be held responsible with his contractor or
subcontractor for any violation of any provision of this Code. For purposes of determining the
extent of their civil liability under this Chapter, they shall be considered as direct employers.

WHAT IS CONTRACTING AND SUBCONTRACTING?

There is contracting or subcontracting when an employer, referred to as the principal, farms out
the performance of a part of its business to another, referred to as the contractor or
subcontractor. For the purpose of undertaking the principal's business that is farmed out, the
contractor or subcontractor then employs its own employees.

Contracting and subcontracting are synonymous under Philippine labor law. The term that is
more commonly used is subcontracting.

IN THE EMPLOYMENT OF WORKERS, IS THERE A DIFFERENCE BETWEEN AN

ORDINARY EMPLOYER-EMPLOYEE RELATIONSHIP AND SUBCONTRACTING?
Yes.
In an ordinary employer-employee relationship, there are only two parties involved - the
employer and the employee. This relationship is established through a four-fold test, under
which the employer:

a. Directly exercises control and supervision over the employee not only as to the results of the
work but also as to the means employed to attain this result;
b. Has the power to select and hire the employee;

c. Has the obligation to pay the employees his or her wages and other benefits.

The power of control is the most important factor in determining the existence of an employer-
employee relationship. The employer need not actually exercise this power. It is enough that the
employer retains the right to exercise this power. It is enough that the employer retains the right
to exercise it as it may deem necessary or appropriate.
In subcontracting, there are three parties involved:

a. The principal which decides to farm out a job or service to a subcontractor;

b. The subcontractor which has the capacity to independently undertake the performance of the
job or service; and

c. The employees engaged by the subcontractor to accomplish the job or service.

In subcontracting, the four-fold test of employer-employee relationship should be satisfied by the
subcontractor in relation to the employees it engages to accomplish the subcontracted job or
service. In such cases, the subcontractor is also referred to as independent contractor.
If the four-fold test is satisfied not by the subcontractor but by the principal, the principal then
becomes the employer of the employees engaged to accomplish the job or service. What exists
is not subcontracting but a direct employer-employee relationship between the principal and the
employees.

IS THERE A DIFFERENCE BETWEEN A SUBCONTRACTOR AND A PRIVATE

RECRUITMENT AND PLACEMENT AGENCY (PRPA)?
Yes.
A subcontractor directly undertakes a specific job or service for a principal, and for this purpose,
employs its own workers. A PRPA cannot be a subcontractor. It simply recruits workers for the
purpose of placing them with another employer so that the workers recruited will not become the
PRPA's employees.

A subcontractor is governed by the laws and rules enumerated under Question # 4 below. A
PRPA is governed by Articles 25 to 39 of the Labor Code and the rules implementing these
articles.

A subcontractor does not need authority from the Department of Labor and Employment (DOLE)
to undertake a subcontracted job or service. A PRPA needs an authority or license from DOLE
to legally undertake a recruitment and placement activities.

IS LEGITIMATE SUBCONTRACTING DIFFERENT FROM LABOR-ONLY CONTRACTING?

HOW IS LABOR-ONLY CONTRACTING DEFINED?

Yes, legitimate subcontracting is different from labor-only contracting because the former is
allowed and the latter is illegal and prohibited.
Section 2 of D. O. No. 3 states that there is labor-only contracting where the contractor or
subcontractor merely recruits, supplies or places workers to perform a job, work or service for a
principal, and the following elements are present:

a. The contractor or subcontractor does not have substantial capital or investment to actually
perform the job, work or service under its own account and responsibility; and
b. The employees recruited, supplied or placed by such contractor or subcontractors are
performing activities directly related to the main business of the principal.
WHAT IS THE BASIS OF THE STATE IN PROHIBITING LABOR-ONLY CONTRACTING?
WHAT IS THE OBJECTIVE OF THE PROHIBITION?

The bases of the State in prohibiting labor-only contracting are:

a. The Constitution, which mandates that the State shall protect labor and promote its welfare
and shall guarantee basic labor rights including just and humane terms and conditions of
employment and the right to self-organization.
b. Article 106 of the Labor Code, which allows the Secretary of Labor to distinguish between
labor-only contracting and job contracting to prevent any violation or circumvention of the Labor
Code.

The objective of the State in prohibiting labor-only contracting is to ensure that labor laws are
followed and to prevent exploitation of workers. A labor-only contractor is one which presents
itself as an employer even if it does not have capital to run a business or capacity to ensure that
its workers are paid their wages and other benefits as prescribed by law. As such, it cannot
independently undertake to perform a subcontracted job or service. To allow a labor-only
contractor to operate is to give it an opportunity to circumvent the law and to exploit workers.