A Policy Analysis on Contracting and Subcontracting

Department Order 18-A Series of 2011

University of the Philippines Diliman, School of Labor and Industrial Relations

In partial fulfilment of the requirements in IR 207.2

Karla Krisanta Narvadez

Dr. Jonathan Sale

I. INTRODUCTION

The increasing use of flexible staffing has been a pressing issue in the Philippines. Workers

are employed on a non-regular basis (i.e. contractual, project based, probationary, and

temporary) which deprive workers of non-wage benefits that regular workers enjoy, and has

shorter job tenure, all of which points to cost minimization of firms. To survive the increasingly

global economic competition, companies avoid bonds to inflexible contracts that would make

workers termination costly and increase hiring costs. On the labor side, the response has been

to pressure the government to curb flexibility by constraining the companies’ power to terminate

workers. The call for the abolition of this practice aims to achieve security for workers,

employment terms which are typically associated with regular employment (continuous work,

wage and non-wage benefits, security of tenure, separation and retirement pay, and collective

bargaining agreements) (Esguerra et al. n.d., p. 4).

As a response, the government defines the scope of lawful labor contracting and

unequivocally by assigning the responsibility of providing the government mandated benefits

and labor standard compliance to either the contractor or the principal company which the

workers are rendering their services to. This is to assure that some party will provide the

government mandated benefits entitled to the contractual worker. (Esguerra et al. n.d., p. 5).

To strengthen the response to the unjust contracting and subcontracting practices, the

Department Order 18-A, was created to increase regulation. It was first released in 1997, which

was amended in 2011.The department order aims to address the following: “promotion of

employment and the observance of the rights of workers to just and humane conditions of work,

security of tenure, self-organization and collective bargaining.” It states a specific criterion that

geared towards regulation, to filter the establishment of contracting and subcontracting entities.

From registration, capital and document requirements to inspection and monitoring, based from

the data gathered from the Department of Labor and Employment from 2011 to second quarter

of 2013, on Private Recruitment and Placement Agencies, Job/Services Contractors/Sub

Contractors licenses issued have decreased from four hundred and thirteen (413) to four (4).

The number of job/services contractors/sub-contractors registered decreased from three

thousand two hundred forty six (3,246) in 2011 to three hundred ninety three (393) in the

second quarter of 2013. This paper aims to examine further the regulation and monitoring of DO

18-A and, if it provides enough protection to workers.

What is Contracting and Subcontracting?

There is contracting and subcontracting 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 to the provisions of Article

106, of the Labor Code of the Philippines.

It refers to “an arrangement whereby a principal agrees to put out or farm out with a

contractor the performance or completion of a specific job, work or service within a definite or

completion of a specific job, work or service within a definite or predetermined period,

regardless of whether such job, work or service is to be performed or completed within or

outside the premises of the principal.” (DO 18-A, Series of 2011 Section 2, para. (c))

“Principal” shall mean any employer, whether a person or entity, including government

agencies and government-owned and controlled-corporations (GOCCs), who/which puts out or

farms out a job, service or work to a contractor.

Provisions and Prohibitions of Contracting and Subcontracting

Provisions

Payment of Wages

In the event that the contractor or subcontractor fails to pay the wages of his employees

in accordance with the Labor Code of the Philippines shall be jointly and severely 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. (Article 106 para. 2, LCP)

In the event of bankruptcy or liquidation of an employer’s business, his workers shall

enjoy first preference as regards their wages and other monetary claims, any provisions of law

to the contrary notwithstanding. Such unpaid wages and monetary claims shall be paid in full

before claims of the government and other creditors may be paid. (Article 110, LCP)

Application to Indirect Employer

The provisions shall 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. (Article 107, LCP)

Solidary Liability

Every employer or indirect employer shall be held responsible with his contractor or

subcontractor for any violation of any provision of the Labor Code of the Philippines. For the

purposes of determining the extent of their civil liability under Article 109 of the Labor Code of

the Philippines, they shall be considered as direct employers.

Prohibitions

Labor-only Contracting

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 are recruited and placed by such person are

performing activities which are directly related (necessary and desirable) to the principal

business of such employer.

II. DEPARTMENT ORDER 18-A SERIES OF 2011

Contracting and subcontracting arrangements are commonplace in most businesses.

Contracting out jobs is more cost-efficient in terms of time and money for the common

businessperson, than to hire their own janitors, messengers, security guards, among others,

businesspersons learned the value of outsourcing these services to contractors.

In November 14, 2011, the Department of Labor and Employment (DOLE) issued

Department Order No. 18-A, to further regulate the contractual/sub contractual

arrangements to ensure that such engagements do not result to the exploitation of workers,

and labor-only contracting.

Policy Stakeholders

Department Order 18-A Series of 2011 shall apply to all parties of contracting and

subcontracting where employer-employee exists. It also applies to cooperatives (Cooperatives

may engage in subcontracting provided they comply with the requirements on legitimate

subcontracting under DO 18-A. What is prohibited is the use of cooperatives to circumvent the law,

and such practice is a prohibited activity that is subject to the same sanctions under the DO)

engaging in contracting or subcontracting arrangements.

Policy Environment

Required conditions for legitimate contracting/subcontracting (Section 4, DO 18-A, series of

2011)

1. The contractor must be registered in accordance with the rules and regulations of DO

18-A. The contractor should carry a distinct and independent business and undertakes

to perform a the job, work or service on its own responsibility, according to its own

manner and method, and free from control and direction of the principal in all matters

connected with the performance of the work.

2. The contractor has substantial capital and/or investment.

3. The Service Agreement ensures compliance with all the rights and benefits under Labor

Laws.

Arrangements in legitimate contracting or subcontracting (Section 5, DO 18-A, series of 2011)

1. An employer-employee relationship between the contractor and the employees it

engaged to perform the specific job, work or service being contracted.

2. A contractual relationship shall exist between the contractor and the principal as

governed by the principles of the Civil Code.

3. Article 109 (Solidary Liability) of the Labor Code of the Philippines shall apply in the

event of any violation of the Labor Code on the part of the principal and the contractor,

including payment of wages.

4. In cases where there is a finding by a competent authority of labor-only contracting, the

principal shall be deemed the direct employer of the contractor’s employee.

Prohibitions

1. Section 6 of the DO 18-A reiterates the prohibition of labor-only contracting as stated in

Article 106 of the Labor Code of the Philippines. Labor-only contracting arrangements

shall mean:

a.) The Contractor does not have a substantial capital or investments in the form of

tools, equipment, machineries, and work premises.

b.) The 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 company, within a definite or predetermined period, regardless

of whether such job, work or service is to be performed or completed within or

outside the premises of the principal.

c.) The contractor does not exercise control over the performance of the work of the

employee.

2. Contracting out of jobs, works or services not done in good faith and not justified by the

exigencies of the business:

a.) Contracting out of jobs, works or services that would result to the termination or

reduction of regular employees, reduction of work hours, or splitting of the bargaining

unit.

b.) Contracting out with a “Cabo”

c.) 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 and

circumventing provisions of regular employment.

Instances:

c.1. Requiring the contractor’s employees to perform functions which are being

performed by regular employees of the principal.

c.2. Requiring the contractor’s employees to sign a precondition to their

employment or continued employment an a.) antedated resignation letter, b.) a

blank payroll, c.) a waiver of labor standards including minimum wages and

social or welfare benefits, d.) a quitclaim releasing the principal, contractor or

from any liability as to payment of future claims (DO 18-A section 7, para A.ii)

d.) Contracting out of job, work or service through an in-house agency

e.) Contracting out of job, work or service that is necessary and desirable or directly

related to the business or operation of the principal.

f.) Contracting out of job, work or service being performed by union members.

g.) Repeated hiring of employees under an employment contract of short duration or

under a service agreement of short duration with the same or different contractors, which

circumvents the Labor Code provisions on Security of Tenure.

h.) Requiring the subcontractor’s employees to sign a contract fixing the period of

employment to a shorter term than what is stated on the service agreement.

Exception: Unless the contract is divisible into phases for which substantially different

skills are required and is made known to the employee at the time of the engagement.

i.) Refusal to provide a copy of the service agreement and the employment contracts

between the contractor and the employees deployed to work in the bargaining unit of

the principal’s certified bargaining agent.

Required Contracts

Individual Employee

One of the requirements stated in the DO 18-A as an added protection to workers, are

the specific contents of the contracts issued to the workers. The contracts should contain:

1. The specific description of the job, work or service to be performed by the employee.

2. Place of work, terms and conditions of employment including a statement of the

wage rate applicable to the individual employee.

3. The term and duration of employment or specific phase of work to which the

employee is engaged.

Between Contractor and Principal

1. Specific description of the job, work or service being subcontracted.

2. Place of work, terms and conditions governing the contracting arrangement, to

include the agreed amount of the services to be rendered, the standard

administrative fee of not less than ten percent (10%) of the total cost

3. Provisions ensuring compliance of all the rights and benefits of the employees under

the Labor Code and DO 18-A on:

a. Safe and healthful working conditions

b. Service incentive leave, rest days, retirement benefits, contributions and

remittances of SSS, Philhealth, Pag-ibig Fund, and other welfare benefits.

c. The right to self-organization, collective bargaining and peaceful concerted

action, and the right to security of tenure.

4. Provisions on the Net Financial Contracting Capacity of the contractor, which must

be equal to the total contract cost, and on issuance of the bond/s as defined in

section 3 of DO 18-A

5. The service agreement must conform to the DOLE standard computation and

standard service agreement.

Duty to produce copy of contract between the principal and the contractor

The principal and contractor shall be under an obligation to produce a copy of the

Service Agreement in the ordinary course of inspection. The contractor shall likewise be under

an obligation to produce a copy of any contract of employment when directed to do so by the

Regional Office Director or his/her authorized representative. (Section 30, DO 18-A)

Protection of Contractor/Subcontractor’s Employees

Security of Tenure

One of the major issues in contracting and subcontracting is the workers’ security of

tenure which the arrangement causes the automatic termination of the workers’ services once

the service is no longer needed. The department order 18-A addresses this issue on Section 11:

“It is understood that all contractor’s employees enjoy security of tenure regardless of

whether the contract of employment is co-terminus with the service agreement, or for a specific

job, work or service or phase thereof.”

Benefits

A contractor’s employees, whether deployed or assigned as reliever, seasonal, week-

ender, temporary, or promo jobbers, are entitled to all the rights and privileges as provided in

the Labor Code, to include:

(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 as may be provided in the Service Agreement or under the

Labor Code;

(c) retirement benefits under the SSS or retirement plans of the contractor, if there are any;

(d) social security and welfare benefits;

(e) self-organization, collective bargaining and peaceful concerted activities; and

(f) security of tenure. (DOLE Primer on DO 18-A)

Working Conditions

The Regional Director, through his/her duly authorized representatives shall conduct

routine inspection of establishments, engaged in contracting arrangement regardless of the

number of employees engaged by the principal or by the contractor. As stated in Section 29 of

the Department Order 18-A.

They shall have access to employer’s records and premises at any time of the day or

night, whenever work is being undertaken therein, and the right to copy therefrom, to question

any employee and investigate any fact, condition or matter which may be necessary to

determine violations or which may aid in the enforcement of the Labor Code and of any labor

law, wage order or rules and regulations.

Regulation Efforts

Requirements for legitimization

A.) Minimum capitalization requirement of at least P3 Million fully paid up capital for all

subcontractors whether corporation, partnership and cooperative; and a net worth of at least P3

Million for single proprietorship

B.) Proof of ownership or lease agreement on tools, equipment, machineries and work

premises

C.) Payment of P25,000.00 registration and renewal fee.

D.) Proof of financial capacity to pay the wages and benefits of the workers in every

service contract using the Net Financial Contracting Capacity (NFCC) formula in government

procurement. (DOLE FAQs on DO 18-A Series of 2011).

Verification inspection

Within two (2) working days upon receipt of the application with complete

supporting documents, the authorized representative of the Regional Director shall conduct a

verification inspection of the facilities, tools, equipment and work premises of the applicant.

(Section 18 DO 18-A Series of 2011).

Certification Validity

The certificate shall be effective for three (3) years unless cancelled after due process.

The same shall be valid in the region where it is registered.

Semi Annual Reporting

The contractor shall submit in triplicate its subscribed semi-annual report using a

prescribed form to the appropriate Regional Office. The report shall include:

a.) List of contracts entered with the principal during the subject reporting period.

b.) Number of workers covered by each contracts with the principal

c.) Proof of payment of remittances to SSS, Pag-Ibig Fund, Philhealth, ECC, and BIR

d.) Certified listings of all cases filed against the contractor before the NLRC and DOLE

Non-compliance of the abovementioned requirements will result to the cancellation of

registration.

III. ANALYSIS

While the DO 18-A 2011, as compared to DO 18-A 2002 has more prohibitions and

practices that favors the workers, the policy failed to:

1. Mandate compliance, and, in the event of non-compliance, the result is not punitive

in nature. It only provides delisting and cancellation of registration (Section 23) as

immediate punishment for violators.

2. The department order, merely imitates and reiterates the workers’ rights in the Labor

Code, but it failed to provide substantive rights. At the end of the day, a contractual

employee will not enjoy the same privileges as the regular employees. And their

contracts will be automatically terminated, once, the project, service or work is done.

Unless, the contract is extended or optimistically, the employee is absorbed to be

regular on the basis of performance, attendance and other metrics.

3. The rights given to employees to assert themselves are dependent on the Service

Agreement to be created by the employee and employer.

4. Though the department order creates a legal process in order for workers to receive

compensation for their grievances, against the principal and the contractors, it only

shows that the department order presumes the worst. In reality, legal processes are

lengthy and costly, which, is burdensome to the worker. In addition, most workers

engaged in contracting and subcontracting does not have the capacity to fight off

their employers (both contractor and principal).This shows that workers’ protection in

this context, is merely in writing.

5. As DO 18-A displaces employee-employer relationship between contractors and

employees, this further attenuates the already obscure relationship between the

principal and the employee. Hence, more companies are encouraged to practice

contracting because the arrangement pardons the accountability of the principal

employer to the worker.

6. DO 18-A only gives more freedom to principal employers to contract out, subcontract

or outsource employees (even regular employees) on the excuse that they will be

deemed regular workers under the employment of the contractor.

7. Security of tenure in the department order is not ensured, hence, misleading the

workers with the notion that they will be regularized.

IV. RECOMMENDATIONS

The DO 18-A was created to increase protection for the contractors’ employees,

promotion of employment and observance of the rights of workers, there are still practices that

violates the provisions of this Department Order. Which paves the way for labor institutions and

practitioners to seek additional methods to promote strict compliance by:

1. Inclusion of the employment contracts awarded to all the contractors’ employees in the

mandatory Semi-Annual Reporting. Reflecting the status of the employee (job title and

nature of the employment), start and end date, not just a list to whom the contracts were

given to.

2. Additional provision on inclusion of the “subject for renewal” clause in all employment

contracts that the contractor will give out to its employees. As, this is usually agreed

upon by the two parties (contractor and employee) verbally.

3. A provision that would ensure the regularization of contractors’ employees should his/her

services exceeds six months (equivalent to probationary period).

4. To make it a requirement for the contractor to present the employment contracts, as

inclusion to the contracts between principal and contractor, as stated in Section 30.

5. Increase the registration fee of Php 25,000 to establish control of putting up manpower

businesses.

6. Lastly, aside from the cancellation of registration for the violation of the Rules of DO 18-

A, a penalty amount should also be set to induce compliance.

7. Increase awareness by requiring companies to incorporate primers for such department

orders, in English and Filipino version to the employees’ employment kit, so that all

workers are equipped with the knowledge and awareness of their rights in such

arrangements.

8. Support the Regularization Bill of 2007, for the Regularization of Employees, Prohibiting

Contractual or Labor-Only Contracting for Regular Positions, Providing Penalties in the

Violation Thereof.

9. Further analysis and studies should be conducted intended to repeal the department

order which will cement the rights of the workers.

V.CONCLUSION

Contracting and subcontracting, is permissible with certain conditions, so as to promote

employment to our labor force. It is also used as a solution for companies to cut their costs and

accountability for people. Strict compliance must be implemented, forced if it need be, to ensure

that the workers of this country is protected from exploitation by contractors’ creative

circumvention of the provisions of this Department Order and the Labor Code of the Philippines.

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growth, policy brief #6. www. dlsu.edu.ph, 2011

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www. digitalcommons.ilr.cornell.edu, 2001

http://www.eiler.ph/wp-content/uploads/2012/03/DO-18-A-Primer.pdf

Lanzona, Leonardo Jr. A., Flexible Labor Contracts and Employment Consequences: The Case

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senate.gov.ph, 2008

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https://www.senate.gov.ph/lisdata/51814548!.pdf

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