Should the State put an END to Contractualization or NOT?

Introduction

Contractualization is not per se illegal in the Philippines,1 even though the

Constitution has specifically mentioned employees’ security of tenure. 2 The fact
remains that there are two recognized schemes under the Labor Code: the
legitimate labor contracting and the prohibited labor-only contracting. The
legitimate one is found in law and practice. It is an exercise of management
prerogative and business judgment. Such prerogative is not only acknowledged
by the Labor Code but is anchored on the constitutional right of employers to
property.3 Provided, however, that the employer is motivated by good faith, and
the contracting out must not have been resorted to circumvent the law or must
not have been the result of malicious or arbitrary action. 4 While prohibited
labor-only contracting, notoriously known as endo, is the condition of
employment wherein 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. The employees recruited, supplied or placed by such
contractor or subcontractor are performing activities that are directly related to
the main business of the principal but not performing activities of the main
business.5

While it has become obvious that an absolute ban on contractualization is

impossible with the present scheme, there is this “dilemma” that, on one hand,
limiting government action to tightening enforcement might not be enough to
1
Atty. Patajo-Kapunan, L. (January 8, 2017). Demystifying contractualization. Retrieved from
https://businessmirror.com.ph/2017/01/08/demystifying-contractualization/
2
Section 3, Article XIII, 1987 Philippine Constitution
3
Id., citing the case of San Miguel Corp. Employees Union-PTGWO v. Bersamin, et al. 186 SCRA 495-505.
4
Id., citing the case of Temic Automotive Philippines Inc. v. Temic Automotive Philippines Inc. Employers
Union-FFW, G.R. 186965, December 23, 2009.
5
Id.

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eliminate endo practices. On the other hand, aggressive threats of government
harassment, huge penalties, business closures, as well as prohibition of all forms
of TECs [temporary employment contracts] to close ‘loopholes’ could lead to
unintended adverse consequences like reduction in job opportunities and
inclusive growth.6

Body

Security of Tenure is “supposed to be” one of the basic rights of every

employee recognized under the 1987 Philippine Constitution. As defined, it
refers to the right not to be dismissed or removed without just or authorized
cause and observance of procedural due process.7

Under our existing Labor Code, there are four major types of employees:
regular employees, fixed-term or project employees, seasonal employees and
casual employees. These varying types suggest different benefits and privileges.
For instance, casual, seasonal and fixed-term employees do not have security of
tenure, thus, they can be terminated anytime by their employers, 8 since as
expressly provided under the Labor Code, to wit:

ART. 294. [279] Security of Tenure. In cases of regular employment, the

employer shall not terminate the services of an employee except for a just cause
or when authorized by this Title. Xxx.

6
Business Mirror Editorial (July 9, 2018). Ending jobs vs ending contractualization. Retrieved from
https://businessmirror.com.ph/2018/07/09/ending-jobs-vs-ending-contractualization/
7
Executive Order No. 51 s. 2018
8
Cainglet, F.,et al. (2012). A Social Representations Study of Contractualization. Retrieved from
https://www.academia.edu/14701985/A_SOCIAL_REPRESENTATIONS_STUDY_OF_CONTRACTUALIZA
TION?auto=download citing Inocian & Lao, 2007

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 Clearly, only those employees which possess a regular status of
employment are given the right to enjoy the security of tenure clause under the
Constitution.

In addition, the Labor Code is explicit as regards contractor or sub-

contractor agreement, to wit:

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

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 be responsible to the workers in the same manner and extent as if the latter were
directly employed by him.

ART. 107. Indirect Employer. The provisions of the immediately preceding

article shall likewise apply to any person, partnership, association or
corporation which, not being an employer, contracts with an independent
contractor for the performance of any work, task, job or project.

ART. 108. Posting of Bond. An employer or indirect employer may require the
contractor or subcontractor to furnish a bond equal to the cost of labor under
contract, on condition that the bond will answer for the wages due the employees
should the contractor or subcontractor, as the case may be, fail to pay the same.

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.

According to SyCip, Salazar, Hernandez and Gatmaitan labor

bulletin9 that, the Department Order No. 174, series of 2017 (DO 174),
issued by the Department of Labor and Employment (DOLE), is providing
a new set of guidelines that would govern contracting and subcontracting:

“DO 174 identifies two arrangements that constitute labor-only contracting,

which is prohibited under the law. The first type is when (a) the contractor does
not have substantial capital or it does not have investments in the form of tools,
equipment, machineries, supervision, work premises, among others; and (b) the
contractor’s employees are performing activities which are directly related to the
main business of the principal. The second type is when the contractor does not
exercise the right of control over the performance of the work of its employees.

9
https://www.syciplaw.com/download/DO%20174.pdf

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 While many provisions of the previous guidelines governing contracting and
subcontracting were maintained, the most significant changes introduced by DO
174 include:

 The registration fee of contractors has been increased to ₱100,000 and the
effectivity of the certificate of registration has been decreased to two years. The
capitalization requirement of contractors has also been increased to ₱5,000,000.
 Contracting out work through an in-house cooperative, which merely
supplies workers to the principal, is a prohibited form of employment
arrangement.
 Prohibition on requiring the contractor’s employees to perform functions that
are currently being performed by regular employees of the principal.
 The mandatory provisions in a service agreement between a principal and
contractor has been reduced and it is no longer required to include provisions
on: (a) Net Financial Contracting Capacity; (b) ensuring compliance with all the
rights and benefits of the employees under the Labor Code; and (c) the obligation
of the contractor to directly remit the relevant contributions to the Social Security
System, Employees Compensation Commission, Philippine Health Insurance
Corporation, and the Home Mutual Development Fund.
 The termination of a service agreement between a principal and a contractor
does not automatically result in the termination of the employment of the
contractor’s employees.

Prior to the D.O. 174 series of 2017 issuance, the DOLE had already
issued a number of rules:

“Department Order No. 10, issued by DOLE in 1997. However, D. O. No. 10

was revoked by DOLE on 08 May 2001 through another order, D. O. No. 3,
Series of 2001. D. O. No. 3 took effect on 29 May 2001.

With the revocation of D. O. No. 10, the following laws and rules will apply in
addition to Articles 106 to 109 of the Labor Code:

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 a. Article 248 (c) which disallows contracting out of 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;
b. Article 280. which classifies employees into regular, project or seasonal
employees;
c. Article 2180 of the Civil Code, under which the principal, in a civil suit for
damages instituted by an injured person, can be held liable for any negligent acts
of the employees of a labor-only contractor;
d. Republic Act No. 5487 and its implementing rules, which regulate the
operation of security agencies;
e. Jurisprudence interpreting the foregoing laws;
f. D. O. No. 3;
g. D. O. No. 19, Series of 1993, for subcontracting arrangements in the
construction industry; and
h. Contractual stipulations provided these are not in conflict with Labor Code
provisions, jurisprudence, and D. O. Nos. 3 and 19.”10

However, despite the DOLE’s series of issuances pertaining to

contractualization, President Rodrigo Duterte, on 01 May 2018, issued
Executive Order No. 51 Implementing Article 106 of the Labor Code
acknowledging that the previous issuances lack efficacy. The purpose of this
new issuance by the President is again on the prohibition against illegal
contracting and subcontracting.

Just a little over two months after the President banned contractualization,
Rep. Ariel Casilao of Anakpawis party-list claims at least 200,000 workers have
already been fired, based on data gathered by the labor group Kilusang Mayo
Uno (KMU). He said several of the country’s biggest companies have chosen to
terminate their contractual workers instead of regularize them in accordance
with the President’s EO and the labor law provision that those whose jobs are
10
Chanroblesvirtuallawlibrary. Retrieved from
http://www.chanrobles.com/dolecontractingsubcontractingprimer.html#.XeOFkG5uLIU

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directly related to the business of a company cannot serve as a contractual
employee for more than six months.11

Moreover, in one of the articles I’ve read about contractualization there is

one article that struck me the most which is entitled, “Ban on contractualization
may hinge on semantics.”12 The article talks about the clashing interpretation of
contractualization between workers and employers. Employers believe that the
illegal form of contractualization, notoriously known as endo, has long been
outlawed under the Labor Code, but as for the other contractualization, our
jurisprudence is clear on it, and that employers can utilize service providers for
their work force. While the labor groups are pushing for a more stringent
measure against fixed-term employment, putting the practice of hiring
employees through a manpower agency in question.

To compare our labor law concept of contractualization with Singapore,

which I think has the better policy, we differ in such a way that they do not
recognize security of tenure since they highly rely on employment contracts
thus legitimizes all kinds of labor contracting. Singapore’s labor-only
contracting is governed by the Employment Act of Singapore (equivalent of the
Philippine Labor Code) while the independent contracting is governed under a
separate law.

Conclusion

Based on the researches I gathered, an absolute ban on contractualization

per se is not possible.

But is it ideal to remain with our current scheme which is a hybrid?

11
Business Mirror Editorial (July 9, 2018). Ending jobs vs ending contractualization. Retrieved from
https://businessmirror.com.ph/2018/07/09/ending-jobs-vs-ending-contractualization/
12
Rosales, E.F. (July 24, 2018). Ban on ‘contractualization’ may hinge on semantics. Retrieved from
https://businessmirror.com.ph/2018/07/24/ban-on-contractualization-may-hinge-on-semantics/

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 NO. First, consideration would be the existence of dilemma if we are to
remain with the current scheme and it has been a recurring source of problem,
since there lies the loophole in the law. Thus, I would rather go for the
legitimation of all sorts of contractual relations, but put some sort of safety net
like, in addition to the basic law, the State may provide additional laws that
would protect the vulnerable individuals like the security guards, utility worker
and construction workers among others whose capacity to enter into contracts
are limited and may be subject to abuse.

My second consideration would be because the two major programs for

the human resources have recently been implemented and these are the free
education program and the K-12 Program. Because of these, I believe, that most
if not all of those who will enter into the labor force in the near future would be
educated and be self-reliant. Since educated individuals are less likely
vulnerable and thus, the lesser need for governmental protection.

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