Labor Law and Social Legislation › Employment Relationship › Contracting or Subcontracting (DO 174, s. 2017; DC 01, s. 2017; EO 51, s. 2018)
6. Labor-only Contracting
III. EMPLOYER-EMPLOYEE RELATIONSHIP
A. Employer-Employee Relationship
B. Legitimate Contracting vs. Labor-Only Contracting (Labor Code, arts. 106-109; DOLE D.O. No. 174-17; DOLE D.C. No. 01-17; E.O. No. 51, Series of 2018)
Job Contracting v. Labor-Only Contracting
| JOB CONTRACTING | LABOR-ONLY CONTRACTING |
| Has sufficient substantial capital OR investment in machinery, tools or equipment directly or intended to be related to the job contracted | Has NO substantial capital OR investment in the form of machinery, tools or equipment |
| Carries an independent business different from the employer’s | Has no independent business |
| Undertakes to perform the job under its own account and responsibility, FREE from the principal’s control | Performs activities directly related to the main business of the principal |
| In legitimate contracting, the contractor’s failure to pay wages does not, by itself, create an employer-employee relationship between the principal and the contractor’s employees; the principal may nevertheless be solidarily liable for those wages. | Principal treated as direct employer of the person recruited in all instances (contractor is deemed agent of the principal) |
| LIMITED liability (principal solidarily liable with contractor or subcontractor only when latter fails to comply with requirements as to unpaid wages and other labor standards violations. | In labor-only contracting, the contractor is deemed the principal’s agent, and the principal is responsible to the workers as their direct employer, including with respect to applicable labor rights. |
Labor-Only Contracting
Labor only contracting shall refer to an arrangement where the contractor or subcontractor recruits, supplies, or places workers to perform a job or work for a principal, and the elements hereunder:
- The contractor does not have substantial capital; or the contractor or subcontractor does not have investments in the form of tools, equipment, machineries; and the contractor’s or subcontractor’s employees recruited and placed are performing activities which are directly related to the main business operation of the principal; or
- The contractor or subcontractor does not exercise the right of control over the work of the employee (D.O. No. 174-17, Sec. 5)
Right to Control
Right reserved to the person for whom the services of the contractual workers are performed, to determine not only the end to be achieved, but also the manner and means to be used in reaching that end. (D.O. No. 18-A, Sec. 3[i])
Under Section 5 of D.O. No. 174-17, labor-only contracting exists when the contractor lacks substantial capital or investment and its workers perform activities directly related to the principal’s main business; alternatively, it exists when the contractor does not exercise the right of control over the workers’ work.
Performing activities directly related to the principal business of the employer and lack of substantial capital or investment must occur together under the first test for "labor-only" contracting. Under Section 5 of D.O. No. 174-17, these two conditions must occur together; lack of the contractor’s right of control is a separate alternative. (Quintanar, et al. v. Coca-Cola, G.R. No. 210565, 2016)
Principal as Direct Employer: Finding of 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 recruited and placed by such person are performing activities which are directly related to the principal business of such employer. In such cases, the person or intermediary shall be considered merely as an agent of the employer who shall be responsible to the workers in the same manner and extent as if the latter were directly employed by him. (Labor Code, Art. 106)
In the event that there is a finding that the contractor or subcontractor is engaged in labor-only contracting under Section 5 and other illicit forms of employment arrangements under Section 6 of these Rules, the principal shall be deemed the direct employer of the contractor's or subcontractor's employees. (D.O. No. 174-17, Sec. 7)
Therefore: The principal shall be deemed an employer of the contractual employee and shall be directly liable, in the following cases:
- Labor-only contracting; and
- Prohibited contracting arrangements (Broadway Motors v. NLRC, G.R. No. 78382, 1987)