4. Rights of Contractor’s or Subcontractor’s Employees

Posting of Bond

An employer or indirect employer may require the contractor or subcontractor to furnish a bond equal to the cost of labor under contract, on condition that the bond will answer for the wages due the employees should the contractor or subcontractor, as the case may be, fail to pay the same. (D.O. No. 174-17, Sec. 3[a], Labor Code, Art. 108)

Note: Labor-Only Contracting is legally wrong and prohibited because it is an attempt to evade the obligations of an employer. If proven, it amounts to employment avoidance (Convoy Marketing v. Albia, G.R. No. 194969, 2015)

Governing Laws

• Between the principal and the contractor the major laws applicable to their work relationship are the Civil Code and pertinent commercial laws.
• Between the contractor and his employees the major laws applicable to their work relationship are the Civil Code and special labor laws.
• In legitimate contracting, the contractor is the employer and no employer-employee relationship exists between the principal and the contractor’s employees. In labor-only contracting, the principal is deemed their direct employer. (Labor Code, Arts. 106 and 109; DOLE Department Order No. 174-17, Secs. 5 and 12) (Azucena, The Labor Code with Comments and Cases Volume I, 306, 2013)

The law recognizes and resolves this situation in favor of employees in order to protect their rights and interests from the coercive acts of the employer. In fact, the employee who is constructively dismissed may be allowed to keep on coming to work. (McMer Corp., Inc. v. NLRC, G.R. No. 193421, 2014)

Rights of contractor’s employees

All contractor’s/subcontractor’s employees, shall be entitled to security of tenure and all the rights and privileges as provided for in the Labor Code, as amended, to include the following:

• Safe and healthful working conditions;
• Labor standards such as but not limited to 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;
• Retirement benefits under the SSS or retirement plans of the contractor, if there is any;
• Social security and welfare benefits; and
• Self-organization, collective bargaining and peaceful concerted activities, including the right to strike. (D.O. No. 174-17, Sec. 10)

Required Contracts

• Employment contract between the contractor and its employee.
• Notwithstanding any oral or written stipulations to the contrary, the contract between the contractor and its employee shall be governed by the provisions of Articles 294 [279] and 295 [280] of the Labor Code, as amended.

It shall include the following terms and conditions:

• The specific description of the job, work or service to be performed by the employee;
• The place of work and terms and conditions of employment, including a statement of the wage rate applicable to the individual employee; and
• The term or duration of employment that must be co-extensive with the Service Agreement or with the specific phase of work for which the employee is engaged.
• The contractor shall inform the employee of the foregoing terms and conditions of employment in writing on or before the first day of his/her employment.

Labor Code Provisions on Liability

In the event that the contractor or sub-contractor fails to pay the wages of his employees in accordance with this Code, the employer shall be jointly and severally liable with his contractor or sub-contractor 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. (Labor Code, Art. 106)

Principal as Direct Employer: Violations of Rights of Employees or Required Contracts

A finding of violation of either Sections 10 (Rights of Contractor’s Employees) or 11 (Required Contracts) shall render the principal the direct employer of the employees of the contractor or subcontractor, pursuant to Art. 109 of the Labor Code (D.O. No. 174-17, Sec. 12)

Liability of employer and contractor

Whenever an employer shall contract with another for the performance of the employer's work, it shall be the duty of such employer to provide in such contract that the employees or homeworkers of the contractor and the latter's sub-contractor shall be paid in accordance with the provisions of this Rule.

In the event that such contractor or sub-contractor fails to pay the wages or earnings of his employees or homeworkers, such employer shall be jointly and severally liable with the contractor or sub-contractor to the workers of the latter, to the extent that such work is performed under such contract, in the same manner as if the employees or homeworkers were directly engaged by the employer.