Independent Contractor – Trilateral Relations

Labor Code of the Philippines and its related issuances, such as Department Order (DO) No. 174, Series of 2017, Executive Order (EO) No. 51, and Department Circular No. 1, Series of 2017, govern labor relations in the Philippines, particularly in the context of independent contracting and trilateral employment relations. These legal frameworks aim to distinguish legitimate contracting from labor-only contracting while ensuring the rights of workers are protected.

1. Definition of Key Terms

A. Independent Contractor

An independent contractor refers to an individual or entity that:

Undertakes a specific job or project for a principal (or client) using their tools, methods, and strategies.
Is not controlled in terms of how they achieve the agreed results, although the principal may have input on what the results should be.
Possesses substantial capital, expertise, or resources, which indicates financial and operational independence from the principal.

B. Trilateral Relations

This refers to relationships among:

Principal/Client – The entity or individual who engages a contractor to perform a specific job.
Contractor/Subcontractor – The independent entity that executes the contracted job or service.
Worker/Employee – The individual directly engaged by the contractor to perform the required tasks.

2. Department Order No. 174, Series of 2017

Issued by the Department of Labor and Employment (DOLE), DO No. 174 provides the regulatory framework governing contracting and subcontracting arrangements. It aims to curtail illegal labor practices while ensuring flexibility for legitimate independent contracting.

A. Prohibited Labor-Only Contracting

Labor-only contracting occurs when:

The contractor does not have substantial capital or investment in tools, equipment, or resources needed for the contracted work.
The contractor merely supplies workers to the principal, who exerts control over the workers' performance.

Prohibited practices include:

Requiring workers to sign contracts that circumvent security of tenure.
Contracting out jobs that are usually performed directly by regular employees.

B. Conditions for Legitimate Contracting

To be classified as a legitimate contractor, the entity must:

Have substantial capital – Defined as paid-up capital of at least ₱5,000,000.
Own or lease sufficient tools, equipment, or materials for the work.
Be registered with the DOLE under prescribed procedures.
Have control over the workers’ methods of work, with the principal controlling only the results.

C. Key Provisions

Contractors must secure a Certificate of Registration from the DOLE.
Workers employed under contractors are entitled to labor standards benefits, including minimum wage, overtime pay, 13th-month pay, and statutory benefits (SSS, PhilHealth, and Pag-IBIG).
Principals are solidarily liable with contractors for violations of labor standards.

3. Executive Order No. 51, Series of 2018

Signed by President Rodrigo Duterte, EO No. 51 aims to strengthen the prohibition of illegal contracting and subcontracting practices.

A. Policy Directives

Enforces the absolute prohibition on labor-only contracting.
Reiterates the rights of workers to security of tenure.
Encourages direct hiring by principals, with subcontracting allowed only in exceptional circumstances.

B. Key Provisions

Strengthens the monitoring and inspection powers of the DOLE to enforce compliance with labor laws.
Expands the scope of prohibited activities, such as schemes designed to circumvent regularization.
Encourages businesses to adopt a Direct Hiring Policy, where feasible.

4. Department Circular No. 1, Series of 2017

This Circular provides additional guidelines for the implementation of DO No. 174. It clarifies the operational aspects and enforcement mechanisms to ensure compliance.

A. Guidelines for Registration

Contractors must regularly renew their registration and provide evidence of compliance with labor laws.
The DOLE may cancel the registration of contractors found violating provisions of DO No. 174.

B. Rights and Obligations

Workers under contracting arrangements are entitled to statutory benefits and fair treatment.
Principals must exercise diligence in selecting legitimate contractors.

C. Penalties for Non-Compliance

Cancellation of contractor registration.
Monetary penalties and possible litigation for principals engaging with illegal contractors.

5. Compliance and Enforcement

A. Role of DOLE

Conducts inspections of contractors and principals to ensure compliance.
Publishes a list of legitimate contractors to guide businesses.

B. Joint and Solidary Liability

Principals and contractors are jointly and solidarily liable for unpaid wages and violations of labor standards.

C. Remedies for Workers

Filing complaints before the DOLE or National Labor Relations Commission (NLRC).
Seeking regularization if illegal contracting is proven.

6. Practical Implications for Businesses

Businesses must evaluate their contracting arrangements to ensure compliance with DOLE regulations.
Contracts with independent contractors must specify that the contractor has full control over work execution and possesses the necessary resources.
Regular monitoring and audits of contractor compliance are essential to mitigate risks of liability.

Conclusion

The interplay of the Labor Code, DO No. 174, EO No. 51, and related issuances underscores the Philippine government’s commitment to balancing worker protection with business flexibility. Ensuring compliance requires vigilance from principals and contractors alike to maintain legal contracting arrangements and uphold workers' rights.