Contracting and Sub-Contracting

Articles 106 to 109

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 Mandaue Galleon Trade, Inc. v. Andales
(GR 159668; March 7, 2008)

• The first two paragraphs of Article 106 set the

general rule that

– a principal is permitted by law to engage the

services of a contractor for the performance of a
particular job,

– but the principal, nevertheless, becomes solidarily

liable with the contractor for the wages of the
contractor's employees.
Art. 106. Contractor or Sub-contractor.
Whenever [a PRINCIPAL] enters into a contract with another
person for the performance of the formers work, the
employees of the contractor and of the latter's sub-contractor,
if any, shall be paid in accordance with the provisions of this
Code.

In the event that the contractor or sub-contractor fails to pay

the wages of his employees in accordance with this Code, the
[PRINCIPAL] shall be jointly and severally liable with his
contractor or sub-contractor 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.
 Mandaue Galleon Trade, Inc. v. Andales
(GR 159668; March 7, 2008)

The third paragraph of Article 106, however,

empowers the Secretary of Labor to make
distinctions between permissible job contracting
and "labor-only" contracting -- which is a
prohibited act further defined under the last
paragraph.
 Art. 106, 3rd. Par.
• The Secretary of Labor may, by appropriate
regulations,

– restrict or prohibit the contracting out of labor

– to protect the rights of workers established under

this Code.
 Art. 106, 3rd. Par.
• 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 shall be considered the employer

for purposes of this Code, to prevent any violation
or circumvention of any provision of this Code.
 Art. 106. 4th Par.
There is "labor-only" contracting where

• The contractor does not have substantial capital or

investment in the form of tools, equipment, machineries,
work premises, among others,

and

• The contractor’s workers are performing activities which

are directly related to the principal business of [the
principal].
The prevailing rules are contained in
DOLE Order No. 174-17
What is contracting or
subcontracting?
 "Contracting" or "subcontracting"
• [A situation where] an employer [or any
person, partnership, association or
corporation, not being an employer] enters
into a contract with another person for the
performance of the former’s work.

(See Arts. 106 and 107)

 "Contracting" or "subcontracting"
• Arrangement where a principal agrees to farm
out with a contractor or subcontractor the
performance or completion of a specific job
or work

– within a definite or predetermined period,

– whether performed or completed within or

outside the premises of the principal.
 Serrano v. NLRC;
(GR 117040, January 27, 2000)

To [management] belongs the ultimate

determination of whether services should
be performed by its personnel or
contracted to outside agencies.
 How many parties are involved in a
legitimate contracting arrangement?
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What is legitimate job
contracting?
 Legitimate Contracting
a. C is 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;
b. C has substantial capital 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;
c. In performing the work farmed out, the C is 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
d. The Service Agreement ensures compliance with all the
rights and benefits for all the employees of the C under the
labor laws.
 Labor Only Contracting
a) i. The contractor or subcontractor does not have
substantial capital, or ii. The contractor or subcontractor does
not have investments in the form of tools, equipment,
machineries, supervision, work premises, among others,
and
iii. The contractor's or subcontractor's employees recruited
and placed are performing activities which are directly related
to the main business operation of the principal;

or

b) The contractor or subcontractor does not exercise the right

to control over the performance of the work of the employee.
a. No (i) Substantial Capital or
(ii) Investment
How much is substantial?
 CCBPI v. Agito
GR No. 179546, February 13, 2009

• The Court does not set an absolute figure for

what it considers substantial capital for an
independent job contractor, but it measures
the same against the type of work which the
contractor is obligated to perform for the
principal.

• DO 174 – At least Php 5 Million

 Does the law require both
substantial capitalization AND
investment?
 Neri v. NLRC
(G.R. Nos. 97008-09 July 23, 1993)
• The Court ruled that the law does not require
both substantial capital and investment in the
form of tools, equipment, machineries, etc.

• According to the Court, this is clear from the use

of the conjunction "or", because if the intention
was to require the contractor to prove that he
has both capital and the requisite investment,
then the conjunction "and" should have been
used.
 Vinoya v. NLRC
(GR No. 126586, February 2, 2000)

• The Supreme Court ruled that it is not enough

to show substantial capitalization or
investment in the form of tools, equipment,
machineries and work premises, among
others, to be considered as an independent
contractor.
 Vinoya v. NLRC
(GR No. 126586, February 2, 2000)
Other factors to consider:

1. whether the contractor is carrying on an independent business;

2. the nature and extent of the work;
3. the skill required;
4. the term and duration of the relationship;
5. the right to assign the performance of specified pieces of work;
6. the control and supervision of the workers;
7. the power of the employer with respect to the hiring, firing and payment
of the workers of the contractor;
8. the control of the premises;
9. the duty to supply premises, tools, appliances, materials and labor; and
10. the mode, manner and terms of payment.
 Vinoya v. NLRC
(GR No. 126586, February 2, 2000)

• The totality of the facts and the surrounding

circumstances of the case are to be
considered.

• Each case must be determined by its own facts

and all the features of the relationship are to
be considered.
SMC v. MAERC Integrated Services, Inc.
(GR No. 144672, July 10, 2003)

• The Supreme Court disregarded the

contractor’s investments in the form of
buildings, tools and equipment amounting to
more than P4 Million because it was the
principal which required the contractor to
make such investments, and because the
principal was the contractor’s only client.
SMC v. MAERC Integrated Services, Inc.
(GR No. 144672, July 10, 2003)

• The Court seemed to have tempered the

declaration in Neri by saying that in Neri, the
Court considered not only the fact that the
contractor had substantial capitalization but
noted that it carried on an independent business
and performed its contract according to its own
manner and method, free from the control and
supervision of its principal in all matters except as
to the results thereof.
 Dole Phil., Inc. v. Esteva
(GR No. 161115, November 30, 2006)

• The Supreme Court likewise disregarded the

multi-million peso assets of the contractor as
it found that the contractor only had P6,600
when it started and it was able to amass such
assets after years of engaging in labor only
contracting with Dole Phil.
 Sasan v. NLRC
(G.R. No. 176240, October 17, 2008)

• The Court again cited the ruling in Neri that

the law does not require both substantial
capital and investment in the form of tools,
equipment, machineries, etc.; and said that it
is enough that it has substantial capital.
 Sasan v. NLRC
(G.R. No. 176240, October 17, 2008)

• It bears noting, however, that in this case, the

Court ruled that the contractor had both capital
and investment and that it was carrying on a
business that was independent of the principal
and its workers were performing tasks that were
distinguishable from the principal’s business. The
Court also referred to the Vinoya ruling (i.e. the
totality of circumstances must be considered).
 De Castro v. CA
GR 204261, October 5, 2016
• For the sale and marketing of two condominium
buildings, it would require massive funds for
promotions, advertisements, shows, salaries, and
operating expenses of its more or less 40 personnel. In
light of this vast business undertaking, it is obvious that
the P1 million subscribed capital of Silvericon would
hardly suffice to satisfy this huge engagement.
Nuvoland was apparently aware of this that it had to
fund the marketing expenses of the project in an
amount not exceeding P30 million per building. This
was even provided in paragraph 6 of the SMA.
 De Castro v. CA
GR 204261, October 5, 2016
• This being the case, the paid-in capitalization
of Silvericon amounting to P1 million was
woefully inadequate to be considered as
substantial capital. Thus, Silvericon could not
qualify as an independent contractor.
 De Castro v. CA
GR 204261, October 5, 2016
• The CA finding that Silvericon's capital was sufficient for
independent contracting due to the agreement that Nuvoland
would advance the amount of P30,000,000.00 for marketing
expenses, though deductible from Silvericon's earned marketing
fees at a later time, was a strained reasoning. The Court agrees with
the observation of the LA that this set-up would not have been
resorted to if Silvericon's capital was substantial enough from the
start of the business venture. It is logical to presume that an
established corporation like Nuvoland would select an independent
contractor, which had the financial resources to adequately
undertake its marketing and advertising requirements, and not an
under capitalized company like Silvericon. It perplexes the Court
that the CA disregarded this set-up as it certainly shows that
Silvericon, from the beginning, did not have substantial capital to
service the needs of Nuvoland.
 Philippine Fuji Xerox Corp. v. NLRC
(GR 111501, March 5, 1996)
The phrase --

"substantial capital and investment in the form of

tools, equipment, machineries, work premises, and
other materials which are necessary in the conduct
of his business,"

-- in the Implementing Rules clearly contemplates

tools, equipment, etc., which are directly related
to the service it is being contracted to render.
 W.M. Manufacturing vs. Richard R. Dalag
(G.R. No. 209418, December 7, 2015)

”The basis for determining the

substantiality of a company's 'capital' rests
not only thereon but also on the tools and
equipment it owns in relation to the job,
work, or service it provides."
 Labor Only Contracting
a) i. The contractor or subcontractor does not have
substantial capital, or ii. The contractor or subcontractor does
not have investments in the form of tools, equipment,
machineries, supervision, work premises, among
others,
and
iii. The contractor's or subcontractor's employees recruited
and placed are performing activities which are directly related
to the main business operation of the principal;

or

b) The contractor or subcontractor does not exercise the right

to control over the performance of the work of the employee.
What if contractor is unable to pay
wages of its employees, is this not
an indication that it has no
substantial capitalization?
 Baguio v. NLRC
(GR 79004-08; October 4, 1991)

It may be that LUPO subsequently ran out of

capital and was unable to satisfy the award to
petitioners. That was an after-the-fact
development, however, and does not detract
from his status as an independent contractor.
 Labor Only Contracting
a) i. The contractor or subcontractor does not have
substantial capital, or ii. The contractor or subcontractor does
not have investments in the form of tools, equipment,
machineries, supervision, work premises, among others,
and
iii. The contractor's or subcontractor's employees recruited
and placed are performing activities which are directly related
to the main business operation of the principal;

or

b) The contractor or subcontractor does not exercise the right

to control over the performance of the work of the employee.
a. iii. Performing activities which are
directly related to the main business
of the principal.
 DIGITEL v. DEU
(G.R. No. 184903-04, October 10, 2012)

*** it is management prerogative to farm out

any of its activities, regardless of whether such
activity is peripheral or core in nature.
DR = UND?
 Labor Code
There is "labor-only" contracting where

• The contractor does not have substantial capital or

investment in the form of tools, equipment, machineries,
work premises, among others,

and

• The contractor’s workers are performing activities which

are directly related to the principal business of [the
principal].
 Last 2 IRRs on Contracting
DO 18-A-11
employees recruited and
placed are performing
activities which are usually
necessary or desirable to
the operation of the
company, or directly
related to the main
business of the principal
DO 174-17
employees recruited and
placed are performing
activities which are
directly related to the
main business operation
of the principal
 MERALCO v. Benamira
(GR 145271, July 14, 2005)

Security services are necessary and desirable to

the business of MERALCO, it is not directly
related to its principal business and may even
be considered unnecessary in the conduct of
MERALCOs principal business, which is the
distribution of electricity.
 BPIEUDAVAO CITY-FUBU v. BPI
(G.R. No. 174912, July 24, 2013)
Check clearing, delivery of bank statements, fund transfers,
card production, operations accounting and control, and cash
servicing

• [T]he outsourced functions appear to be not in any way

directly related to the core activities of banks.
• They are functions in a processing center of BPI which does
not handle or manage deposit transactions.
• Clearly, the functions outsourced are not inherent banking
functions, and, thus, are well within the permissible
services under CBP Circular No. 138838 that enumerated
functions which are ancillary to the business of banks and
hence are allowed to be outsourced.
 Janitors

• Chevron: Incidental or desirable to a petroleum

refiner’s main activity but it is not necessary and
directly related to it."

• Sasan: (janitors, messengers, and drivers) directly

related but not necessary.
 Basan v. Coca-Cola Bottlers Philippines, Inc.
(G.R. Nos. 174365-366, February 4, 2015)

Route helpers who are engaged in the service of

loading and unloading softdrink products of
respondent company, a softdrink manufacturer,
to its various delivery points, are performing
activities that are necessary or desirable in its
usual business or trade.
 Labor Only Contracting
a) i. The contractor or subcontractor does not have
substantial capital, or ii. The contractor or subcontractor does
not have investments in the form of tools, equipment,
machineries, supervision, work premises, among others,
and
iii. The contractor's or subcontractor's employees recruited
and placed are performing activities which are directly related
to the main business operation of the principal;

or

b) The contractor or subcontractor does not exercise the right

to control over the performance of the work of the employee.
b. Does not exercise
right of control
 Royale Homes Marketing Corp. v.
Alcantara; GR No. 195190
Not every form of control is indicative of employer-
employee relationship.

A person who performs work for another and is subjected

to its rules, regulations, and code of ethics does not
necessarily become an employee.

As long as the level of control does not interfere with the

means and methods of accomplishing the assigned tasks,
the rules imposed by the hiring party on the hired party
do not amount to the labor law concept of control that is
indicative of employer-employee relationship.
 Merchandising guidelines, stock
monitoring and inventory forms, and
promo mechanics = NOT CONTROL
 Fonterra Brands Phils., Inc. v. Largado
G.R. No. 205300, March 18, 2015
• Fonterra's issuance of Merchandising Guidelines,
stock monitoring and inventory forms, and promo
mechanics, for compliance and use of A.C. Sicat's
employees assigned to them, does not establish that
Fonterra exercises control over A.C. Sicat.

• These were imposed only to ensure the effectiveness

of the promotion services to be rendered by the
merchandisers as it would be risky, if not imprudent,
for any company to completely entrust the
performance of the operations it has contracted out.
Issuance of JD by principal is not
necessarily control.
 Neri
FEBTC issued a job description which detailed the
worker's functions as a radio/telex operator.
• However, a cursory reading of the job description
shows that what was sought to be controlled by FEBTC
was actually the end-result of the task, e.g., that the
daily incoming and outgoing telegraphic transfer of
funds received and relayed by her, respectively, tallies
with that of the register.
• The guidelines were laid down merely to ensure that
the desired end-result was achieved. It did not,
however, tell Neri how the radio/telex machine should
be operated.
Occasional instructions = NOT
CONTROL
 Shipside, Inc. v. NLRC
G.R. No. 50358, 2 November 1982

• If in the course of workers’ work, Shipside

occasionally issued instructions to them, that
alone does not in the least detract from the
fact that only the contractor is the employer
of the workers, for in legal contemplation,
such instructions carry no more weight than
mere requests, the privity of contract being
between Shipside and the contractor.
Right to request change of
worker = NOT CONTROL
 American President Lines v. Clave
G.R. No. L-51641, June 29, 1982
It is true that it may request the agency to change a
particular guard. But this, precisely, is proof that
the power lies in the hands of the agency. Since the
petitioner has to deal with the agency, and not the
individual watchmen, on matters pertaining to the
contracted task, it stands to reason that the
petitioner does not exercise any power over the
watchmen's conduct. Always, the agency stands
between the petitioner and the watchmen; and it is
the agency that is answerable to the petitioner for
the conduct of its guards.
Ordering contractor’s workers to
do other jobs = CONTROL
 Alilin v. Petron Corp.
GR No. 177592, June 9, 2014
• One manifestation of the power of control is
the power to transfer employees from one
work assignment to another.

– The principal could order the contractor’s workers

to do work outside of their regular
"maintenance/utility" job.
 Alilin v. Petron Corp.
GR No. 177592, June 9, 2014

• The Supreme Court also used the fact that the

principal (a petroleum company) was in an
industry where safety is of paramount concern
to say that the exercise by the principal of
control and supervision over the contractor’s
workers was inevitable if not necessary.
Right to require OT work =
CONTROL
 Vinoya
• The workers assigned by PMCI to RFC were
under the control and supervision of the
latter.
– The Contract of Service itself provides that RFC
can require the workers assigned by PMCI to
render services even beyond the regular eight
hour working day when deemed necessary.
– RFC undertook to assist PMCI in making sure that
the daily time records of its alleged employees
faithfully reflect the actual working hours.
Absence of on-site supervisors =
CONTROL
 Labor Only Contracting
a) i. The contractor or subcontractor does not have
substantial capital, or ii. The contractor or subcontractor does
not have investments in the form of tools, equipment,
machineries, supervision, work premises, among
others,
and
iii. The contractor's or subcontractor's employees recruited
and placed are performing activities which are directly related
to the main business operation of the principal;

or

b) The contractor or subcontractor does not exercise the right

to control over the performance of the work of the employee.
 FPIP v. Calimbas
G.R. No. 179256, July 10, 2013
FPIP exercised the power of control and supervision
over the workers.
• Their daily time records even had to be
countersigned by FPIP, and
• DGMS did not assign representatives to supervise
over their work.
– Their direct superiors were managerial employees of
FPIP, who had direct control over all their work-related
activities.
• Moreoever, FPIP's personnel gave them a verbal
notice of termination.
But presence of on-site supervisors
does not automatically preclude
control by principal.
 Dole Phil., Inc. v. Esteva
GR No. 161115, November 30, 2006
• The mere presence within the premises of a supervisor
from the cooperative did not necessarily mean that
CAMPCO had control over its members.
• Dole exercised control over CAMPCO members
including respondents.
• Even if there was a CAMPCO supervisor on site, the
CAMPCO members still had to undergo instructions
and pass the training by Dole. It was Dole who
determined and prepared the work assignments of
CAMPCO members, and they worked within Dole’s
plantation, performing identical jobs alongside regular
employees.
 Manila Memorial Park Cemetery, Inc., vs. Lluz
G.R. No. 208451, February 3, 2016

• SC: the following stipulations in the Contract

of Services showed that the principal retained
the right to control the performance of the
contractor’s workers because although the
contractor shall be in charge of the
supervision over the workers, the exercise of
its supervisory function is heavily dependent
upon the needs of the principal, particularly:
 Manila Memorial Park Cemetery, Inc., vs. Lluz
G.R. No. 208451, February 3, 2016

a) The CONTRACTOR's supervisor will conduct a regular inspection of

grave sites/areas being dug to ensure compliance with the COMPANY's
interment schedules and other related ceremonies.

b) The CONTRACTOR will provide enough manpower during peak

interment days including Sundays and Holidays.

c) The CONTRACTOR shall schedule off-days for its workers in

coordination with the COMPANY's schedule of interment operation.

d) The CONTRACTOR shall be responsible for any damage done to

lawn/s and/or structure/s resulting from its operation, which must be
restored to its/their original condition without delay and at the
expense of CONTRACTOR."
 Manila Memorial Park Cemetery, Inc., vs. Lluz
G.R. No. 208451, February 3, 2016

The SC also agreed that the following stipulation

shows that the contractor was at the mercy of
the principal as the contract states that the
latter may take over if it finds any part of the
services to be below its expectations, including
the manner of its performance:
 Manila Memorial Park Cemetery, Inc., vs. Lluz
G.R. No. 208451, February 3, 2016

"6.1 It is hereby expressly agreed and understood that,

at any time during the effectivity of this CONTRACT and
its sole determination, the COMPANY may take over the
performance of any of the functions mentioned in
Paragraph I above, in any of the following cases:

xxx xxx xxx

c. If the COMPANY finds the performance of the

CONTRACTOR in any part or aspect of the grave digging
works or other services provided by it to be
unsatisfactory."
 What if contractor is not
registered?
Failure to register shall give rise to the
presumption that the contractor is
engaged in labor-only contracting.
(Section 14)
 But...
A Certificate of Registration issued by the
Department of Labor and Employment is not
conclusive evidence of such status. The fact of
registration simply prevents the legal
presumption of being a mere labor-only
contractor from arising. (Babas v. Lorenzo
Shipping Corp; GR 186091, Dec. 15, 2010)
Other Illicit Forms of Employment
Arrangements.
For being contrary to law or public
policy.
 Other Illicit Arrangements
1. Contracting out to a “Cabo”

– "Cabo" — refers to a person or group of persons

or to a labor group which, under the guise of a
labor organization, cooperative or any entity,
supplies workers to an employer, with or without
any monetary or other consideration, whether in
the capacity of an agent of the employer or as an
ostensible independent contractor.
 Other Illicit Arrangements.
2. Contracting out of job or work through an in-
house agency.

– "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/represents any share of stock, and
which operates solely or mainly for the principal.
 Other Illicit Arrangements.
3. Contracting out of job or work through an in-
house cooperative which merely supplies
workers to the principal.

– "In-house cooperative" — refers to a cooperative

which is managed, or controlled directly or
indirectly by the principal or one where the
principal or any of its officers owns/represents any
equity or interest, and which operates solely or
mainly for the principal.
 Other Illicit Arrangements.

4. Contracting out of a job or work by reason of

a strike or lockout whether actual or
imminent.
Consolidated Labor Association of the Phils. v. Marsman
& Co., Inc.
G.R. No. L-17038. July 31, 1964.

It is recognized that during the pendency of an

economic strike an employer may take steps to
continue and protect his business by supplying
places left vacant by the strikers, and is not
bound to discharge those hired for that purpose
upon election of the strikers to resume their
employment.
 Other Illicit Arrangements.

5. 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.
 DIGITEL v. DEU

• The Supreme Court ruled that the closure of a

department within Digitel (Digiserv) which
resulted in the dismissal of the workers in that
department constituted ULP. The Court
considered the timing of the closure as an
indicia of bad faith.
 DIGITEL v. DEU
• Thus, the closure of Digiserv pending the existence of an assumption order
coupled with the creation of a new corporation performing similar
functions as Digiserv leaves no iota of doubt that the target of the closure
are the union member-employees. These factual circumstances prove
that Digitel terminated the services of the affected employees to defeat
their security of tenure. The termination of service was not a valid
retrenchment; it was an illegal dismissal of employees.

• It needs to be mentioned too that the dismissal constitutes an unfair

labor practice under Article 248 (c) of the Labor Code which refers to
contracting out services or functions being performed by union members
when such will interfere with, restrain or coerce employees in the exercise
of their rights to self-organization. At the height of the labor dispute,
occasioned by Digitel's reluctance to negotiate with the Union, I-tech
was formed to provide, as it did provide, the same services performed by
Digiserv, the Union members' nominal employer.
 DO 18-A-11 Other Prohibitions.
1. Contracting out of jobs, works or services
when the same results in

a. the termination or reduction of regular

employees and reduction of work hours or

b. reduction or splitting of the bargaining unit.

 Other Illicit Arrangements.

6. Requiring the contractor's/subcontractor's

employees to perform functions which are
currently being performed by the regular
employees of the principal.
 Other Illicit Arrangements.
7. Requiring the contractor's/subcontractor's
employees to sign, as a precondition to
employment or continued employment,

a. an antedated resignation letter;

b. a blank payroll;
c. a waiver of labor standards including minimum
wages and social or welfare benefits; or
d. a quitclaim releasing the principal or contractor from
liability as to payment of future claims; or
e. require the employee to become member of a
cooperative.
 Other Illicit Arrangements.

8. Repeated hiring by the

contractor/subcontractor of employees
under an employment contract of short
duration.
 Other Illicit Arrangements.

9. 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.
 Smart Communications v. Astorga
January 28, 2008
The reorganization undertaken by SMART is for no purpose other than
its declared objective as a labor and cost savings device.

By transferring the duties of CSMG/FSD to SNMI, SMART has created a

more competent and specialized organization to perform the work
required for corporate accounts.

It is also relieved SMART of all administrative costs management, time

and money-needed in maintaining the CSMG/FSD.

The determination to outsource the duties of the CSMG/FSD to SNMI

was, to Our mind, a sound business judgment based on relevant
criteria and is therefore a legitimate exercise of management
prerogative.
 Other Prohibitions.
3. Taking 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 any of the following
instances:
 Other Prohibitions.
3. Taking undue advantage xxx in any of the
following instances:

i. Requiring them to perform functions

which are currently being performed by
the regular employees of the principal;
and

• |||
Liabilities of the Principal
 Liabilities of the Principal
1. Under a legitimate
contracting/subcontracting arrangement.
2. Under a labor-only contracting arrangement.
3. For violations of Section 6, DO 174
 Liabilities of the principal under a legitimate
contracting/subcontracting arrangement

• In the event that the contractor or sub-

contractor fails to pay the WAGES of his
employees in accordance with this Code, the
employer principal shall be jointly and
severally liable with his contractor or sub-
contractor 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. (Art.
106, Labor Code)
 Liabilities of the principal under a legitimate
contracting/subcontracting arrangement
• The provisions of existing laws to the contrary
notwithstanding, every employer or indirect employer
principal 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. (Art. 109 (Solidary
liability), Labor Code)

– N.B. Art. 1728 of the Civil Code provides that the

contractor is liable for all the claims of laborers and others
employed by him. The opening phrase of Art. 109 refers to
this.
 Liabilities of the principal under a legitimate
contracting/subcontracting arrangement

• In the event of violation of any provision of

the Labor Code, including the failure to pay
wages, there exists a solidary liability on the
part of the principal and the contractor for
purposes of enforcing the provisions of the
Labor Code and other social legislations, to
the extent of the work performed under the
employment contract. (Sec. 9, DO 174)
• A finding of violation of either Sections 10 or
11 hereof, shall render the principal the direct
employer of the employees of the contractor
or subcontractor, pursuant to Article 109 of
the Labor Code, as amended. (Sec. 12)
The liability under Arts. 106 and 109 is
solidary.
• The contractual employees may collect
directly from the principal.
• There is no need to prove insolvency or
unwillingness to pay on the part of the
contractor or subcontractor.
 Liabilities of the principal under a labor-only
contracting arrangement

• In [cases of labor-only contracting], the person

or intermediary shall be considered merely as
an agent of the employer “principal” who shall
be responsible to the workers in the same
manner and extent as if the latter were
directly employed by him. (Art. 106, Labor
Code)
 Not Covered by DO 174-17
1. Construction
2. Private Security
3. IT-enabled services (BPO, etc.)
4. Contract Growing
5. Toll Manufacturing
6. Contract of Management, O&M
7. Professional, or individual with unique skills
or talents, who himself performs the job.