Rules on Labor Contracting and Subcontracting

Legal basis and implementing coverage

The Secretary of Labor and Employment exercises rule-making power under Articles 5 (Rule-making) and 106 (Contractor or Subcontractor) of the Labor Code of the Philippines, as amended.
The Order implements the framework for contracting and subcontracting arrangements that involve employer-employee relationships.
Section 1 declares that contracting and subcontracting are expressly allowed but subject to regulation, consistent with labor protections.
Sections 18 and 20 anchor enforcement and compliance with existing Labor Code provisions and supersession rules.

Policy and guiding principles

Section 1 provides that contracting and subcontracting arrangements are allowed by law and must be regulated.
Regulation is directed to promote employment and to ensure observance of workers’ rights to just and humane conditions of work, security of tenure, self-organization, and collective bargaining.
Section 1 prohibits labor only contracting, as defined in the rules.

Definitions: core terms

Section 4(a) defines “Contracting” or “subcontracting” as an arrangement where a principal puts out or farms out 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.
Section 4(b) defines “Contractor or subcontractor” as any person or entity engaged in a legitimate contracting or subcontracting arrangement.
Section 4(c) defines “Contractual employee” as an employee hired by a contractor or subcontractor to perform or complete a job, work, or service pursuant to an arrangement with the principal.
Section 4(d) defines “Principal” as any employer who puts out or farms out a job, service, or work to a contractor or subcontractor.

Scope: who is covered, what is excluded

Section 2 applies to all parties to contracting and subcontracting arrangements where an employer-employee relationship exists.
Section 2 excludes placement activities through private recruitment and placement agencies, which are governed by Articles 26 to 39 of the Labor Code.
Section 3 recognizes legitimate contracting as a trilateral relationship involving: (a) the principal, (b) the contractor or subcontractor, and (c) the contractual workers.
Section 3 states that the contractor or subcontractor must have the capacity to independently undertake performance of the job, work, or service.

Legitimate contracting vs labor-only contracting

Section 5 declares labor-only contracting prohibited.
Section 5 defines labor-only contracting as an arrangement where the contractor or subcontractor merely recruits, supplies, or places workers to perform work for a principal.
Section 5 identifies labor-only contracting where either of the following elements is present:
- (i) the contractor or subcontractor lacks substantial capital or investment related to the job, work, or service, and the workers perform activities directly related to the principal’s main business; or
- (ii) the contractor does not exercise the right to control the performance of the contractual employee’s work.
Section 5 states that the prohibition is without prejudice to the application of Article 248(c) of the Labor Code, as amended.
Section 5 defines “Substantial capital or investment” as capital stocks/subscribed capitalization (for corporations), and tools, equipment, implements, machineries, and work premises, actually and directly used by the contractor or subcontractor in the contracted performance.
Section 5 defines “right to control” as the right reserved to the person for whom the services are performed to determine not only the end to be achieved but also the manner and means to be used.

Prohibited contracting arrangements

Section 6 declares prohibited contracting or subcontracting arrangements that are contrary to law or public policy.
Section 6(a) prohibits contracting out when not done in good faith and not justified by exigencies of the business, resulting in termination of regular employees and/or reduction of work hours, or reduction/splitting of the bargaining unit.
Section 6(b) prohibits contracting out of work with a “cabo”, defined as a person/group/labor group which, in the guise of a labor organization, supplies workers to an employer with or without monetary or other consideration, as an agent of the employer or as an ostensible independent contractor.
Section 6(c) prohibits taking undue advantage of an economic situation or lack of bargaining strength to undermine security of tenure or basic rights, or to circumvent regular employment, through:
- (i) requiring contractual employees to perform functions currently performed by regular employees of the principal or the contractor/subcontractor;
- (ii) requiring contractual employees to sign antedated resignation letters, blank payrolls, waivers of labor standards (including minimum wages and social/welfare benefits), or quitclaims releasing the principal/contractor/subcontractor from liability for future claims; and
- (iii) requiring a contract fixing employment for a term shorter than the term of the principal-contractor contract, unless the principal-contractor contract is divisible into phases requiring substantially different skills and this is made known to the employee at engagement.
Section 6(d) prohibits contracting out through an in-house agency owned, managed, or controlled by the principal that operates solely for the principal.
Section 6(e) prohibits contracting out of work or service directly related to the principal’s business or operations by reason of a strike or lockout, whether actual or imminent.
Section 6(f) prohibits contracting out of work performed by union members when it interferes with, restrains, or coerces employees in exercising self-organization rights under Article 248(c) of the Labor Code, as amended.

Employer-employee relationship and employer liabilities

Section 7 provides that the contractor or subcontractor is considered the employer of the contractual employee for enforcing the Labor Code and other social legislation.
Section 7 provides solidary liability: the principal is solidarily liable with the contractor in case of violations of any Labor Code provision, including failure to pay wages.
Section 7 deems the principal employer in cases declared by a competent authority, including:
- (a) labor-only contracting, or
- (b) when the contracting arrangement falls within the prohibitions in Section 6.

Rights of contractual employees

Section 8 entitles contractual employees to the rights and privileges of regular employees under the Labor Code, including:
- (a) safe and healthful working conditions;
- (b) labor standards such as service incentive leave, rest days, overtime pay, holiday pay, 13th month pay, and separation pay;
- (c) social security and welfare benefits;
- (d) self-organization, collective bargaining, and peaceful concerted action; and
- (e) security of tenure.

Required written contract terms

Section 9 requires that the contract between the contractor/subcontractor and the contractual employee be in writing, regardless of oral or written stipulations to the contrary.
Section 9(a) requires inclusion of a specific description of the job, work, or service to be performed.
Section 9(b) requires inclusion of the place of work and terms and conditions of employment, including a statement of the wage rate applicable to the individual contractual employee.
Section 9(c) requires inclusion of the term/duration of employment, which must be coextensive with the principal-contractor/subcontractor contract, or with the specific phase for which the employee is engaged.
Section 9 requires the contractor/subcontractor to inform the contractual employee of the foregoing terms and conditions on or before the first day of employment.

Termination and separation pay effects

Section 10(a) states that termination of employment prior to expiration of the principal-contractor contract governs the contractual employee’s right to separation pay or other related benefits by applicable laws and jurisprudence on termination of employment.
Section 10(a) provides that when termination results from expiration of the principal-contractor/subcontractor contract or completion of the phase for which the employee is engaged, the contractual employee is not entitled to separation pay.
Section 10 preserves entitlement to completion bonuses or other emoluments, including retirement pay, if provided by law or by the principal-contractor/subcontractor contract.

Registration of contractors and subcontractors

Section 11 establishes a registration system to govern contracting arrangements and to be implemented by Regional Offices.
Section 11 makes registration necessary to establish an effective labor market information and monitoring system.
Section 11 provides that failure to register creates a presumption that the contractor is engaged in labor-only contracting.
Section 12 provides that a contractor/subcontractor is listed in the registry upon completion of an application form provided by DOLE.
Section 13 provides that the application and supporting documents must be filed in triplicate in the Regional Office where the applicant principally operates.
Section 13 requires denial of acceptance of any application that does not comply with all requirements.

Application, fee, and processing timelines

Section 13 provides that registration is deemed complete upon payment of a registration fee of P100.00 to the Regional Office.
Section 13 requires the Regional Office to deny or approve the application within seven (7) working days after filing when all supporting documents have been submitted.
Section 13 requires the Regional Office to return one set of duly-stamped application documents to the applicant and retain one set for its file.
Section 13 requires transmittal of the remaining set to the Bureau of Local Employment.
Section 13 directs the Bureau of Local Employment to devise necessary forms for expeditious processing of all applications for registration.

Registration requirements and supporting documents

Section 12(a)-(f) requires the application form to include the applicant’s:
- (a) name and business address and the area or areas where it seeks to operate;
- (b) officers’ names and addresses (if a corporation/partnership/cooperative/union);
- (c) nature of business and the industry or industries where it seeks to operate;
- (d) number of regular workers, list of clients (if any), number of personnel assigned to each client (if any), and services provided to clients;
- (e) description of phases of the contract and number of employees covered per phase where appropriate; and
- (f) audited financial statements if the applicant is a corporation/partnership/cooperative/union, or latest ITR if a sole proprietorship.
Section 12 requires application support by a certified copy of registration with SEC, DTI, CDA, or DOLE for unions.
Section 12 requires application support by a certified copy of the license or business permit issued by the local government unit(s) where the contractor/subcontractor operates.
Section 12 requires verification and an undertaking to abide by all applicable labor laws and regulations.

Contract production and bargaining-agent furnishing

Section 14 requires the principal or the contractor/subcontractor to produce a copy of the principal-contractor/subcontractor contract in the ordinary course of inspection.
Section 14 requires the contractor to produce the contract of employment of the contractual worker when directed by the Regional Director or authorized representative.
Section 14 requires furnishing a copy of the contract between the contractual employee and the contractor/subcontractor to the certified bargaining agent, if any.

Annual reporting by registered contractors

Section 15 requires each registered contractor/subcontractor to submit an annual report in triplicate to the appropriate Regional Office.
Section 15 requires submission not later than the 15th of January of the following year.
Section 15 requires the annual report to include:
- (a) a list of contracts entered with the principal during the reporting period;
- (b) the number of workers covered by each contract with the principal; and
- (c) a sworn undertaking that benefits from SSS, HDMF, PhilHealth, ECC, and remittances to the BIR due for contractual employees were made during the reporting period.
Section 15 requires the Regional Office to return one set of duly-stamped reports to the contractor and retain one set for its file.
Section 15 requires the Regional Office to transmit the remaining set to the Bureau of Local Employment within five (5) days from receipt.

Delisting, due process, and renewal

Section 16 authorizes the Regional Director, subject to due process, to cancel registration based on:
- (a) non-submission of contracts between principal and contractor/subcontractor when required;
- (b) non-submission of annual report;
- (c) arbitration findings that the contractor engaged in labor-only contracting and the prohibited activities under Sections 6; and
- (d) non-compliance with labor standards and working conditions.
Section 17 allows all registered contractors/subcontractors to apply for renewal of registration every three years.
Section 17 designates the Tripartite Industrial Peace Council (TIPC) created under Executive Order No. 49 as the oversight committee.
Section 17 requires TIPC to verify and monitor:
- (a) engaging in allowable contracting activities, and
- (b) compliance with administrative reporting requirements.

Enforcement, inspection, and compliance orders

Section 18 empowers the Regional Director through duly authorized representatives, including labor regulation officers, to conduct routine inspections of establishments engaged in contracting/subcontracting.
Section 18 authorizes access to employer records and premises at any time of day or night whenever work is undertaken there.
Section 18 authorizes copying records, questioning employees, and investigating facts, conditions, or matters necessary to determine violations or to aid enforcement of the Labor Code and any labor law, wage order, or rules issued under it.
Section 18 requires findings to be referred to the Regional Director for appropriate action as provided for in Article 128 of the Labor Code.
Section 18 requires furnishing the findings to the collective bargaining agent, if any.
Section 18 directs the Regional Director to issue compliance orders to give effect to labor standards provisions of the Labor Code, other labor legislation, and these guidelines.

Solidary liability triggers and additional employer liability

Section 19 provides that the principal is deemed the direct employer of contractual employees and is solidarily liable with the contractor/subcontractor for monetary claims arising from violations under Sections 5, 6, 8, and 16.
Section 19 further provides solidary liability when the principal-contractor/subcontractor contract is preterminated for reasons not attributable to the fault of the contractor/subcontractor.

Supersession and construction-industry special rule

Section 20 supersedes all rules and regulations issued by the Secretary of Labor and Employment that are inconsistent with these Rules.
Section 20 provides that contracting/subcontracting arrangements in the construction industry under PCAB licensing coverage shall continue to be governed by Department Order No. 19; series of 1993.
Section 20 specifies that the construction-industry rule does not include shipbuilding and ship repairing works, which remain subject to Department Order No. 19; series of 1993.

Violations, penalties, and sanctions

The Order provides solidary liability and delisting cancellation mechanisms through Sections 7, 16, 19, and enforcement powers under Section 18.
The Order does not impose separate criminal or administrative fine schedules within its operative provisions.