CONTRACTING

AND

SUBCONTRACTING

Definition of Terms:

• Contracting or Subcontracting – refers to an arrangement

whereby the principal agrees to farm out a job, work or service

to a contractor/subcontractor within a definite period of time

regardless whether the job is completed within or outside the

premises of the principal.

• Contractor/Subcontractor – any person or entity engaged in a

legitimate contracting or subcontracting arrangement.

•Contractual employee – employed by a contractor or

subcontractor to perform or complete a job, work or service

pursuant to an arrangement between the contractor and the

principal.

* Principal – any employer who puts out a job, service to a

contractor.

Guiding Principle:

Contracting and subcontracting arrangements are

allowed by law and are subject to regulation for the 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. Labor-only is

definitely prohibited.

Coverage:

The rules are applicable to all parties of contracting and

subcontracting where employer-employee relationship

exists.

Trilateral Relationship

There should be 3 parties involved in the

arrangement – the principal which farms out

a job or service to the

contractor/subcontractor; the

contractor/subcontractor which has the

capacity to independently perform the job or

service; and the contractual employees who

will perform the job or service.

Prohibitions against Labor-Only Contracting

(Article 106)

Labor-only contracting shall refer to an arrangement where the contractor or subcontractor merely recruits and supplies workers to perform a job for a principal and these elements are present:

(1) Contractor or subcontractor does not have the substantial capital or investment which relates to the job to be performed by the employees hired.

(2) Contractor does not exercise the right to control over the working performance of the contractual employees. Right to control implies determining means and manner of the contractual employee in achieving the job.

Prohibitions (1) Contracting out a job which is not justified by the

urgent or immediate need of the company/business and the same results in the termination of regular employees and reduction of work hours or splitting of the bargaining unit.

(2) Contracting out of work with a “cabo.” “Cabo” refers to a person or group of persons or to a labor group which in the guise of a labor organization, supplies workers to an employer, with or w/o monetary or order of consideration whether in the capacity of an agent of the employer.

(3) Taking advantage of the economic situation or lack of bargaining strength of the contractual employee or undermining his security of tenure or basic rights or avoiding the provisions of regular employment in instances like :

a) Assigning tasks or job to the contractual employees

which are currently performed by regular employees of

the principal or contractor.

b) Requiring the contractual employee to sign, as a

precondition to employment, antedated resignation, a

blank payroll, waiver of labor standards including

minimum wages and social/welfare benefits, or a

quitclaim releasing the principal or contractor from any

liability to future claims

c) Requiring to sign a contract fixing the period of

employment to a term shorter than the contracting

agreement between the principal and the contractor,

unless the last contract is divided into phases in which

different skill are requires. Nevertheless, It should be

known at the time of engagement.

(4) Contracting out of a job, work or service through an in-

house agency in which the contractor supplying the labor is

managed, controlled or owned by the principal.

(5) Contracting out a job by reason of a strike or lockout.

(6) Contracting out a job, work or service being performed by

union members when such will interfere with the exercise of

their rights to self-organization.

Existence of an Employer-Employee

Relationship (Article 109)

The contractor shall be considered the employer of the contractual employees. The principal shall be solidarily liable with the contractor in the event of any violation of any provision of the Labor Code i.e failure to pay wages. The principal shall be deemed the employer of the contractual employee in the ff. cases:

a. Where there is labor-only contracting or

b. Where the contracting arrangement falls within the Prohibitions.

Rights of Contractual Employees:

• 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

Contract between Contractor and

Subcontractor and Contractual

Employee The contract between contractor/subcontractor shall be in the

ff. terms:

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

b) The place of work and terms and conditions of employment, including a statement of the wage rate applicable to the individual contractual employee.

c) The term or duration of employment.

Effect of Termination of Contractual

Employment

In cases of termination of employment prior to the

expiration of the contract between the principal

and the contractor/subcontractor, the right of the

contractual employee to separation pay or other

related benefits shall be governed by the applicable

laws and jurisprudence on termination of

employment. When the contract of the principal

and contractor has ended with the completion of

the contractual employee’s job, the employee shall

not be entitled to a separation pay but will be given

completion bonuses.

Enforcement of Labor Standards and

Working Conditions The Regional Director through his duly authorized representatives

shall:

a) Have the authority to conduct routine inspection of establishments engaged in contracting/subcontracting.

b) Have access to employer’s records and premises at any time of the day or night whenever work is being undertaken therein.

c) Right to question any employee and investigate any fact or matters necessary to determine violations in the enforcement of the Labor code.