Policy and purpose of the rules
- Contracting and subcontracting arrangements are expressly allowed by law but are subject to regulation.
- Regulation is for the promotion of employment and the observance of workers’ rights to just and humane conditions of work, security of tenure, self-organization, and collective bargaining.
- Labor-only contracting is declared prohibited and treated as unlawful conduct under the rules.
Coverage and excluded placement activities
- These Rules apply to all parties of contracting and subcontracting arrangements where an employer-employee relationship exists.
- Placement activities through private recruitment and placement agencies governed by Articles 26 to 39 of the Labor Code are not covered by these Rules.
Core definitions for contracting terms
- “Contracting” or “subcontracting” means an arrangement where a principal puts out or farms out to a contractor or subcontractor the performance or completion of a specific job, work or service within a definite or predetermined period, whether performed within or outside the principal’s premises.
- “Contractor or subcontractor” means any person or entity engaged in a legitimate contracting or subcontracting arrangement.
- “Contractual employee” means an employee employed by a contractor or subcontractor to perform or complete a job, work or service pursuant to an arrangement with the principal.
- “Principal” means any employer that puts out or farms out a job, service, or work to a contractor or subcontractor.
Legitimate contracting and prohibited labor-only
- Legitimate contracting creates a trilateral relationship consisting of: (1) a contract for a specific job/work/service between the principal and the contractor or subcontractor, and (2) a contract of employment between the contractor or subcontractor and its workers.
- The principal decides to farm out a job or service.
- The contractor or subcontractor must have the capacity to independently undertake performance of the job, work, or service.
- Labor-only contracting is prohibited and exists when the contractor or subcontractor merely recruits, supplies, or places workers for the principal and either of these elements is present:
- The contractor or subcontractor lacks substantial capital or investment related to the job/work/service, and the recruited/supplied/placed employees perform activities directly related to the principal’s main business; or
- The contractor does not exercise the right to control the performance of the contractual employees’ work.
- “Substantial capital or investment” means capital stocks and subscribed capitalization (for corporations), and tools, equipment, implements, machineries, and work premises that are actually and directly used by the contractor or subcontractor in the contracted performance.
- “Right to control” means the right reserved to the person for whom the services are performed to determine both the end to be achieved and the manner and means to be used.
- The prohibition on labor-only contracting is without prejudice to the application of Article 248 (c) of the Labor Code, as amended.
Enumerated prohibited contracting arrangements
- Contracting and subcontracting arrangements are prohibited when contrary to law or public policy, including these cases:
- Contracting out a job/work/service not done in good faith and not justified by business exigencies, resulting in termination of regular employees and reduction of work hours or reduction/splitting of the bargaining unit.
- Contracting out work using a “cabo” as defined in Section 1 (ii), Rule 1, Book V of these rules; “cabo” refers to a person/group/labor group that, in the guise of a labor organization, supplies workers to an employer with or without monetary or other consideration, whether as an agent of the employer or as an ostensible independent contractor.
- Taking undue advantage of the contractual employee’s economic situation or lack of bargaining strength, undermining security of tenure or basic rights, or circumventing regular employment, including:
- Requiring contractual employees to perform functions currently performed by the principal’s or the contractor’s/ subcontractor’s regular employees.
- Requiring contractual 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/contractor/subcontractor from liability for payment of future claims.
- Requiring a contract fixing a period of employment shorter than the principal–contractor/subcontractor contract, unless the principal–contractor/subcontractor contract is divisible into phases requiring substantially different skills and such divisibility is made known to the employee at engagement.
- Contracting out through an in-house agency defined as a labor-supplying contractor/subcontractor owned, managed, or controlled by the principal and operating solely for the principal.
- Contracting out directly related work/operations of the principal by reason of a strike or lockout, whether actual or imminent.
- Contracting out work being performed by union members when it interferes with, restrains, or coerces employees in exercising rights to self-organization under Article 248 (c) of the Labor Code, as amended.
Employer-employee relationship and solidary liability
- The contractor or subcontractor is considered the employer of the contractual employee for enforcing the Labor Code and other social legislation.
- The principal is solidarily liable with the contractor in case of violations of the Labor Code, including failure to pay wages.
- The principal is deemed the employer of the contractual employee when:
- There is labor-only contracting; or
- The contracting arrangement falls within the prohibitions in Section 6.
- The principal is deemed the direct employer of contractual employees and is solidarily liable with the contractor for monetary claims arising from violations under Sections 5 (Labor-Only contracting), 6 (Prohibitions), 8 (Rights of Contractual Employees), and 16 (Delisting).
- The principal is also solidarily liable when the contract between the principal and contractor/subcontractor is preterminated for reasons not attributable to the fault of the contractor or subcontractor.
Contractual employee rights and contract requirements
- Contractual employees are entitled to the rights and privileges due regular employees under the Labor Code, including:
- Safe and healthful working conditions.
- Labor standards such as service incentive leave, rest days, overtime pay, holiday pay, 13th month pay, and separation pay.
- Social security and welfare benefits.
- Self-organization, collective bargaining, and peaceful concerted action.
- Security of tenure.
- The contractor/subcontractor must have a written employment contract with the contractual employee notwithstanding oral or written stipulations to the contrary, and the contract must include:
- A specific description of the job/work/service.
- The place of work and terms and conditions of employment, including a statement of the wage rate applicable to the individual contractual employee.
- The term or duration of employment, which must be coextensive with the principal–contractor/subcontractor contract or with the specific phase for which the employee is engaged.
- The contractor/subcontractor must inform the contractual employee of the foregoing terms and conditions on or before the first day of employment.
Termination effects on separation benefits
- If employment is terminated prior to expiration of the contract between the principal and contractor/subcontractor, separation pay or related benefits are governed by applicable laws and jurisprudence on termination of employment.
- If termination results from expiration of the principal–contractor/subcontractor contract or completion of the engaged phase, the contractual employee is not entitled to separation pay.
- This exclusion does not prevent entitlement to completion bonuses or other emoluments, including retirement pay provided by law or by the principal–contractor/subcontractor contract.
Registration of contractors and subcontractors
- A registration system is established to govern contracting arrangements and is implemented by the Regional Offices.
- Registration is necessary to support an effective labor market information and monitoring system.
- Failure to register creates a presumption that the contractor is engaged in labor-only contracting.
- Contractors/subcontractors are listed in the registry upon completion of an application form provided by DOLE and submission of required information:
- Name and business address, and the area/areas where it seeks to operate.
- Officers’ names and addresses if the applicant is a corporation, partnership, cooperative, or union.
- Nature of the applicant’s business and the industry/industries where it seeks to operate.
- Number of regular workers; list of clients (if any); number of personnel assigned to each client (if any); and services provided to the client.
- Description of contract phases and number of employees covered in each phase where appropriate.
- Copy of audited financial statements (if corporation, partnership, cooperative, or union) or latest ITR (if sole proprietorship).
- The application must be supported by certified copies of:
- A certificate of registration of firm or business name from SEC, DTI, CDA, or from DOLE if the applicant is a union.
- A license or business permit issued by the local government unit(s) where the contractor/subcontractor operates.
- The application must be verified and must include an undertaking to abide by all applicable labor laws and regulations.
- Applications and supporting documents must be filed in triplicate in the Regional Office where the applicant principally operates.
- No application is accepted unless all requirements are complied with.
- The contractor/subcontractor is deemed registered upon payment of a registration fee of P100.00 to the Regional Office.
- After submission of all supporting documents, the Regional Office must deny or approve within seven (7) working days from filing.
- After processing, the Regional Office returns one set of duly stamped documents to the applicant, retains one for its file, and transmits the remaining set to the Bureau of Local Employment, which devises necessary forms for expeditious processing.
- Registered contractors/subcontractors must submit in triplicate an annual report to the appropriate Regional Office not later than the 15th of January of the following year, containing:
- A list of contracts entered with the principal during the reporting period.
- The number of workers covered by each contract with the principal.
- A sworn undertaking that benefits from SSS, HDMF, PhilHealth, ECC, and remittances to the BIR due its contractual employees have been made during the reporting period.
- The Regional Office must return one set of duly stamped reports to the contractor/subcontractor, retain one, and transmit the remaining set to the Bureau of Local Employment within five (5) days from receipt.
Delisting and renewal of registration
- Subject to due process, the Regional Director cancels registration based on:
- Non-submission of contracts between principal and contractor/subcontractor when required.
- Non-submission of annual report.
- Findings through arbitration that the contractor/subcontractor engaged in labor-only contracting and prohibited activities under Section 6.
- Non-compliance with labor standards and working conditions.
- Registered contractors/subcontractors may apply for renewal of registration every three years.
- Renewal oversight is performed by the Tripartite Industrial Peace Council (TIPC) created under Executive Order No. 49, which verifies and monitors:
- Engaging in allowable contracting activities.
- Compliance with administrative reporting requirements.
Enforcement and inspection powers
- Regional Directors, through authorized representatives including labor regulation officers, may conduct routine inspections of establishments engaged in contracting or subcontracting and may access employer records and premises any time of the day or night whenever work is being undertaken.
- Authorized representatives have the right to copy records, question employees, and investigate facts/conditions/matters necessary to determine violations or aid enforcement of the Labor Code and labor laws, wage orders, or rules/regulations issued pursuant thereto.
- Findings are referred to the Regional Director for action as provided in Article 128 and must be furnished to the collective bargaining agent, if any.
- The Regional Director issues compliance orders based on the Secretary’s visitorial and enforcement powers under Article 128 (a), (b), (c) and (d) to give effect to labor standards provisions of the Labor Code, other labor legislation, and these guidelines.
Supersession and special construction-industry rule
- All rules and regulations by the Secretary of Labor and Employment inconsistent with these Rules are superseded.
- Contracting/subcontracting arrangements in the construction industry under PCAB licensing coverage exclude shipbuilding and ship repairing works and continue to be governed by Department Order No. 19, series of 1993.
Implementation trigger and adoption
- The Order is adopted on 21 Feb. 2002.
- The Secretary of Labor and Employment issues the Order to operationalize contracting and subcontracting rules implementing Articles 106 to 109 of the Labor Code, as amended.