Redefining labor-only contracting

One of the most controversial issues on management rights today is the right to enter into contracting arrangements. Contracting is an arrangement where a business owner, also called a principal, agrees to farm out to another entity, called a contractor, the performance of a specific job within a definite period. In turn, the contractor hires its own employees to perform the job farmed out by the principal.

While the issue on contracting out has been present for years, the people’s clamor began to resurface when President Rodrigo Duterte undertook to address labor-only contracting, evident by his signing of Executive Order No. 51, Series of 2018. Noticeably, various companies, adjudged as engaged in labor-only contracting arrangements, have since then been ordered to regularize some of their contractual workers.

All these ultimately led our lawmakers to revisit the existing laws on contracting arrangements and security of tenure. The Senate is presently considering the passage of Senate Bill No. 1826 (“S.B. No. 1826”), or the Senate Bill on The Security of Tenure and End of Endo Act of 2018. S.B. No. 1826 proposes significant changes to the Labor Code provisions on contracting and security of tenure. One of the more contentious propositions is the amendment in defining labor-only contracting.

Under the Department of Labor and Employment’s Department Order No. 174, Series of 2017 (“D.O. 174-17”), the current regulation on contracting arrangements, there is laboronly contracting when either:

• The contractor does not have

substantial capital or investment AND the contractor’s employees are performing activities which are directly related to the main business operation of the principal; or

• The contractor does not exer

cise control over the performance of the work of its employees.

D.O. 174-17 thus merely prohibits insufficiently capitalized contractors that engage in supplying workers to perform activities which are directly related to the main business of the principal. Conversely, our current laws allow contracting arrangements where the contractor’s workers perform activities directly related to the main business of the principal, as long as the contractor possesses sufficient capital or investment and controls the means and manner by which its employees perform their work. Presently, therefore, our local business landscape abounds in legitimate contractors that are sufficiently capitalized, and are engaged in providing services relating to distribution, logistics, promotions, and other activities directly related to the principal’s business. Under our current laws, this is by all means legal and permissible.

S.B. No. 1826, however, may largely affect the current definition of labor-only contracting, through a seemingly simple change of the conjunction “AND” to “OR”: