Compliance Check: Philippines Labour Arrangements

The Philippines Department of Labour and Employment (DOLE) continues to uphold stringent labour requirements. Department Order 174 of 2017 (DO 174) sets out prohibited forms of employment arrangements, and provides that the only permitted form of a contracting arrangement is "job contracting".

Labour-Only Contracting

As explained in a previous bulletin, DO 174 sets out an absolute prohibition against labour-only contracting, which occurs where:

1. the contractor does not have substantial capital or does not have investments in the form of tools, equipment, and so on, and the contractor's employees perform activities which are directly related to the main business operation of the principal (Type 1 Labour-Only Contracting); or
2. the contractor does not exercise the right to control the work performed by its employees (Type 2 Labour-Only Contracting).

Legislative amendments have been proposed to Type 1 Labour-Only Contracting. The proposed amendments clarify that labour-only contracting occurs as long as the contractor does not have substantial capital or does not have investments in the form of tools, equipment, and so on, or the contractor's employees perform activities which are directly related to the main business operation of the principal (i.e. when either of the two scenarios applies).

Other Prohibited Employment Arrangements

DO 174 expressly prohibits several other forms of employment arrangements for being contrary to law or public policy (Prohibited Arrangements), such as:

1. contracting out of a job or work by reason of a strike or lockout, whether actual or imminent;
2. requiring the contractor's employees to perform functions which are being performed by the regular employees of the principal; and
3. repeated hiring by the contractor of employees under an employment contract of short duration.

Job Contracting

Contracting is only allowed if it meets the requirements of job contracting. Job contracting occurs where:

1. the contractor 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 has substantial capital to carry out the job farmed out by the principal on his account, manner, method, investment in the form of tools, equipment, machinery and supervision;
3. the contractor is free from the control of the principal in all matters connected with the performance of the work; and
4. the Service Agreement (between the contractor and the principal) ensures compliance with
   all rights and benefits for employees of the contractor under labour laws.

Legal Risks

The failure to comply with all the above requirements renders the principal the direct employer of
the employees of the contractors. The DOLE may issue a Compliance Order against non-compliant
contractors and principals, directing the principal to absorb the contractor's employees.

Failure to comply with the Compliance Order is punishable by a fine of not less than PHP1,000 and
not more than PHP10,000, or imprisonment of not less than 3 months and not more than 3 years,
or both a fine and imprisonment. If the offense is committed by a corporation, the penalty shall be
imposed upon the guilty officer(s) of such corporation. Of greater impact, however, is the fact that
the principal will now assume all of the historic and current employment liabilities, including
obligations in relation to severance payments upon termination.

Key Takeaways

Labour-only contracting involves the supply of workers, and job contracting involves the supply of
services. Companies should be mindful that the DOLE has increased its efforts to regulate
compliance with DO 174, and ensure that they are compliant.