Labor Contracting in The Philippines

Contracting or subcontracting has been defined by Department Order no. 18-02-02 of the Department of Labor and Employment in the Philippines as an arrangement whereby a principal agrees to put out or farm out with a contractor or subcontractor the performance or completion of a specific job, work or service within a definite or predetermined period, regardless of whether such job, work or service is to be performed or completed within or outside the premises of the principal. In such an agreement, there exists a trilateral relationship, that is, a contract for a specific job, work or service between the principal and the contractor or subcontractor; and a contract of employment between the contractor or subcontractor and its workers.

Under the said Department Order, labor contracting shall be considered legitimate when all of the following elements are present:

1. The contractor or subcontractor carries on a distinct and independent business and undertakes to perform the job, work or service on its own account and under its own directions in all matters connected with performance of the work except as to the results thereof.


2. The contractor or subcontractor has substantial capital or investment.


3. The agreement between the principal and the contractor or subcontractor assures the contractual employees entitlement to all labor and occupational safety and health standards, free exercise of the right to self- organization, security of tenure and social and welfare benefits.

In legitimate labor contracting, the contractor or subcontractor shall be considered the employer of the contractual employee for purposes of enforcing the provisions of the Labor Code practiced in the employment in the Philippines, and other social legislation. However, the employer himself may become solidarily liable for the wages of the employees only in cases where the contractor or subcontractor fails to pay the same; or in cases where a violation of the provisions of the Labor Code exists.

Labor contracting is defined as an arrangement where the contractor or subcontractor merely recruits, supplies or places workers to perform a job, work or service for a principal and any of the following elements are present:

1. The contractor or subcontractor does not have substantial capital or investment which relates to the job, work or service to be performed and the employees recruited, supplied or placed by such contractor or subcontractor are performing activities which are directly related to the main business of the principal; or


2. The contractor does not exercise the right to control over the performance of the work of the contractual employee.

Such a practice has been declared as prohibited and unlawful under the employment in the Philippines since it disregards the constitutional right of workers to security of tenure and of humane conditions of work. Moreover, engaging in labor contracting may also constitute unfair labor practice once it has been proven that was resorted to in order to interfere with, restrain or coerce employees in the exercise of their right to self-organization. In the event of labor contracting, the law considers the principal as the direct employer of the employees. In so doing, it produces an employer-employee relationship between the principal and the contractual employees for a comprehensive purpose. This means that the principal shall be liable not only for unpaid wages but for all rightful claims of the employees.