Permissible Contracting under DOLE

D.O. 174-17

MARCH 24, 2017 ~ ATTYDELACALZADA

Last week, I posted my first look at DOLE’s Department Order No. 174-17, which
supersedes Department Order No. 18-A, series of 2011, or the Rules and Regulations
Implementing Article 106 to 109 of the Labor Code (otherwise known as the Law on
Labor Contracting or Subcontracting).

I’ve made further comparisons between D.O. 18-A and this new rule, and below are
my findings:

 COVERAGE (Section 2)
The new D.O. expands the coverage from contracting and subcontracting
arrangements (under D.O. 18-A) to all parties in an arrangement where employer-
employee relationship exists.
In other words, the new D.O. applies to all establishments, regardless of whether or
not they are engaged in contracting or subcontracting arrangements. This is also
apparent from the fact that the new D.O. removed any mention of a “trilateral
relationship” which characterizes contracting or subcontracting arrangements. In that
regard, the new D.O. is a departure from Supreme Court rulings interpreting the
unique character of contracting or subcontracting arrangements under Article 106 to
Article 109 of the Labor Code.

 BOND (Section 3[a])

Under the new D.O., bond only refers to the bond under Article 108 of the Labor
Code (equal to the cost of labor under contract). It removes the bond posted by the
principal as a security or guarantee for the payment of the services of the contractors
or subcontractors under the service agreement.

Such new definition favors the principal, not the contractor.

 CONTRACTOR (Section 3[d])

Under D.O. 18-A, contractor refers to any person or entity, including a cooperative,
engaged in a legitimate contracting or subcontracting arrangement providing either
services, skilled workers, temporary workers, or a combination of services to a
principal under a service agreement.
Under the new D.O., the above meaning has been changed, removing the underlined
passages and installing this definition:

“any person or entity engaged in a legitimate contracting or

subcontracting arrangement providing services for a specific job or
undertaking farmed out by the principal under a service agreement”
This takes out “manpower” providers out of the equation. However, the Supreme
Court has previously ruled that pure supply of manpower is labor-only contracting so
this appears to be consistent with jurisprudential rulings.
 CONTRACTOR’S EMPLOYEE (Section 3[e])
Under D.O. 18-A, there are two kinds of contractor’s employees:

(1) those whose are performing a job, work or service under a service agreement with
a principal (the “deployed workers” of the contractor)

(2) those whose functions are not dependent on the performance or completion of a
specific job, work or service (the “admin staff” of the contractor)

The new D.O. makes no mention of the second kind. In doing so, DOLE seems to
stress that such distinction is superfluous.

 NET FINANCIAL CONTRACTING CAPACITY PROVISION REMOVED;

LABOR-ONLY CONTRACTING ADDED (Section 3[h])
The new D.O. removes the definition of Net Financial Contracting Capacity (NFCC)
and instead inserts a definition of labor-only contracting, referring to the elements of
under Section 5.

The new D.O. is consistent in removing all reference to NFCC as this provision seems
no longer required to be stated in the Service Agreement between the principal and the
contractor.

 PRINCIPAL (Section 3[i])

The new D.O. defines a principal as any natural or juridical entity whether an
employer or not who farms out a job or work to a contractor. The underlined phrase
seems to contradict Section 2 of the new D.O., which states that it applies in all
employer-employee relationships. If the principal is not an employer, how can this
new D.O. apply in his case?
 REMOVED RIGHT TO CONTROL AND TRILATERAL RELATIONSHIP
The new D.O. removes the meaning of “right to control” and “trilateral relationship”
in the Definition of Terms.
 SUBSTANTIAL CAPITAL (Section 3[l])
Substantial capital has been increased to paid-up capital stock/shares of 5 Million
Pesos for corporations, partnerships and cooperatives; in the case of single
proprietorship, a net worth of at least 5 Million Pesos.

 REGULATION OF CONTRACTING OR SUBCONTRACTING (Section 4)

This is not found under D.O. 18-A (and in fact, D.O. 18-A delegates some monitoring
and oversight powers to the TIPC), but emphasizes the regulatory powers of the
Secretary of Labor and Employment, absolutely prohibiting labor-only contracting
and restricting permissible contracting.

 ENHANCED MEANING OF LABOR-ONLY CONTRACTING (Section 5)

Labor-only contracting has two kinds:

(1) where there is lack of substantial capital OR investment and the contractor’s
employees are performing activities directly related to the main business of the
principal; and

(2) where the contractor has no power of control over its workers.

The first kind has been clarified by the new D.O. so that once it is proven that the
contractor has substantial capital, there is no need for it to prove substantial
investment. This is consistent with the Nericase.
 REMOVED PROVISION ON TRILATERAL RELATIONSHIP IN
CONTRACTING ARRANGEMENT
In legitimate contracting, there is a trilateral relationship involving the principal,
contractor and contractor’s employees. Between the principal and contractor, their
relationship is governed by the Civil Code. But between the contractor and the
contractor’s employee, their relationship is governed by the Labor Code.

The new D.O. has removed all mentions of a trilateral relationship.

 OTHER ILLICIT FORMS OF EMPLOYMENT ARRANGEMENTS
(Section 6)
The new D.O. removes the qualifying phrase “when not done in good faith and not
justified by the exigencies of the business.” Hence, all of these activities are now
absolutely prohibited, no exceptions.

 NEW MEANING OF PERMISSIBLE CONTRACTING OR

SUBCONTRACTING ARRANGEMENTS (Section 8)
Underlined words and phrases which changes the meaning:

(1) The contractor or subcontractor is engaged in a distinct and independent business

and undertakes to perform the job or work on its own responsibility, according to its
own manner and method;

(2) The contractor or subcontractor has substantial capital to carry out the job farmed
out by the principal on his account, manner and method, investment in the form of
tools, equipment, machinery and supervision;
(3) In performing the work farmed out, the contractor or subcontractor is free from the
control and/or direction of the principal in all matters connected with the performance
of the work except as to the result thereto; and
(4) The Service Agreement ensures compliance with all the rights and benefits for all
the employees of the contractor or subcontractor under the labor laws.

The underlined phrase qualifies what is meant by substantial capital. Under D.O. 18-
A, there was no such qualification; there was only the amount of 3 Million Pesos. The
new D.O. now qualifies that substantial capital must be one that allows the contractor
to carry out the job farmed out. This is a departure from Neri.
 CONTRACTOR’S EMPLOYEES ARE NO LONGER CO-TERMINUS
WITH THE SERVICE AGREEMENT (Section 11)
The new D.O. removes “co-terminus” employment contracts between the contractor
and its employees.
 EFFECT OF TERMINATION OF EMPLOYMENT (Section 13)
Termination of employment of contractor’s employees prior to the expiration of the
service agreement shall be governed by Articles 297, 298 and 299 of the Labor Code
(authorized causes of termination).

After expiration of the service agreement, the contractor has three months to reassign
the employee to another client; otherwise, the employee shall be entitled to separation
benefits. D.O. 18-A was silent on this issue so that the Supreme Court applied by
analogy (as it did with security agencies) the provision on bona fide suspension of
business, granting the employer six months within which to resume employment of
their workers. The new D.O. has reduced the period to only three months.
 REGISTRATION AND RENEWAL FEES (Section 19 and 21)
The new D.O. raises the amount of registration fee to Php100,000.00. Renewal fee has
likewise been raised to Php100,000.00.

 VALIDITY OF CERTIFICATE OF REGISTRATION (Section 20)

The new D.O. reduces the period of validity to two years only.

 NEW GROUND FOR CANCELLATION OF REGISTRATION (Section 32)

The new D.O. adds a new ground: violation of any provision of the Labor Code.

 DUE PROCESS IN CANCELLATION OF REGISTRATION (Section 24)

Period to file answer/counter-affidavit has been reduced to seven working days
(previously 10 calendar days).

Period for the contractor to make corrections or rectifications in order to be fully

compliant has been reduced to seven calendar days (previously 10 calendar days).

Period for the conduct of hearings has been reduced to ten calendar days (previously
fifteen calendar days) from the first scheduled hearing. Period for the Regional
Director to resolve the case has been reduced to seven working days (previously 10
working days).

 EFFECTS OF CANCELLATION OF REGISTRATION (Section 26)

The new D.O. puts a permanent ban on any contractor whose registration has been
cancelled.

 RETALIATORY MEASURES (Section 27)

This is not found under D.O. 18-A but is a reiteration of Article 118 of the Labor
Code.

 REMOVED THE OVERSIGHT FUNCTION OF THE NATIONAL TIPC

Under D.O. 18-A, the National TIPC verifies and monitors engagement in allowable
contracting activities; and compliance with administrative reporting requirements.
This has been removed under the new D.O.

Provision allowing the region-based tripartite monitoring team to use a portion of the
registration fees has been removed under the new D.O. The take-away from this is
that all regulatory powers over contracting arrangements are consolidated in the
Secretary of Labor and Employment.