QuestionsQuestions (DEPARTMENT ORDER NO. 18-02, FEBRUARY 21, 2002)
Contracting and subcontracting are allowed by law but are regulated to promote employment and ensure workers’ rights to just and humane conditions of work, security of tenure, self-organization, and collective bargaining. Labor-only contracting is prohibited.
The Rules apply to all parties involved in contracting and subcontracting arrangements where an employer-employee relationship exists. Placement activities through private recruitment and placement agencies under Articles 26 to 39 of the Labor Code are not covered.
Legitimate contracting involves: (1) a contract for a specific job/work/service between the principal and the contractor/subcontractor; and (2) a contract of employment between the contractor/subcontractor and its workers—thus creating three parties: principal, contractor/subcontractor, and contractual workers.
It is an arrangement where a principal puts out/farms out to a contractor/subcontractor the performance or completion of a specific job/work/service within a definite or predetermined period, whether performed within or outside the principal’s premises.
Principal: the employer who farms out the job/service/work. Contractor/subcontractor: any person/entity engaged in legitimate contracting/subcontracting. Contractual employee: one employed by the contractor/subcontractor to perform or complete the contracted job/work/service pursuant to the principal-contractor arrangement.
An arrangement where the contractor/subcontractor merely recruits/supplies/places workers to perform the job for the principal and any of these elements exist: (1) contractor lacks substantial capital or investment related to the job and workers perform activities directly related to the principal’s main business; or (2) the contractor does not exercise the right to control work performance.
It refers to capital stock and subscribed capitalization (for corporations), or tools, equipment, implements, machineries, and work premises actually and directly used by the contractor/subcontractor in performing the contracted job/work/service.
It means the right reserved to the party for whom the services are performed to determine not only the end to be achieved but also the manner and means used to reach that end.
Examples include: (1) contracting out done not in good faith and not justified by business exigencies resulting in termination of regular employees and reduction/splitting of bargaining unit; (2) contracting out work with a “cabo” arrangement (a person/group or labor group in the guise of labor organization supplying workers to an employer).
When there is labor-only contracting, or when the arrangement falls within the prohibitions in Section 6, as declared by a competent authority.
The contractor/subcontractor is considered the employer of the contractual employee for enforcement purposes. However, the principal is solidarily liable in case of violations, including failure to pay wages.
Contractual employees are entitled to regular-employee rights and privileges, including safe/healthful working conditions; labor standards (SIL, rest days, overtime, holiday pay, 13th month pay, separation pay); SSS, HDMF, PhilHealth, ECC benefits; self-organization/collective bargaining and peaceful concerted action; and security of tenure.
It must include: (a) specific description of the job/work/service; (b) place of work and terms/conditions including wage rate applicable to the individual; and (c) term/duration of employment coextensive with the principal-contractor contract or the specific phase of engagement. The contractor must inform the employee on or before the first day of work.
If employment terminates due to expiration of the principal-contractor contract or completion of the phase for which the employee was engaged, the employee is generally not entitled to separation pay, without prejudice to completion bonuses or other emoluments including retirement pay provided by law or contract.
Failure to register gives rise to the presumption that the contractor is engaged in labor-only contracting.
Subject to due process, grounds include: non-submission of principal-contractor contracts when required; non-submission of annual report; findings in arbitration of labor-only contracting and prohibited activities; and non-compliance with labor standards and working conditions.
Regional Directors/labor regulation officers may conduct routine inspections anytime work is undertaken, access records and premises, copy relevant documents, question employees, and investigate facts/conditions to determine Labor Code violations. Findings are referred for action, and compliance orders may be issued to enforce labor standards and these guidelines.
The principal is deemed the direct employer and is solidarily liable with the contractor for monetary claims of contractual employees in cases involving labor-only contracting and prohibited activities, and for violations affecting rights (including wages). Solidarity also applies when the principal-contractor contract is preterminated for reasons not attributable to the contractor/subcontractor.
Construction industry contracting is generally under PCAB licensing coverage, but the Rules state that such arrangements “shall not include shipbuilding and ship repairing works,” which remain governed by Department Order No. 19, series of 1993.