Permissible contracting or subcontracting; not covered | Independent Contractor – Trilateral Relations; Labor Code; Department… | WORK RELATIONSHIPS

Permissible Contracting or Subcontracting: Not Covered by Department Order No. 174, Series of 2017

Legal Framework

1. Labor Code of the Philippines:

   • Articles 106 to 109 of the Labor Code govern contracting and subcontracting arrangements.
   • The law prohibits labor-only contracting while permitting legitimate job contracting arrangements under certain conditions.

2. Department Order No. 174, Series of 2017:

   • This Department Order (DO 174-17) prescribes the rules governing contracting and subcontracting arrangements.
   • It strengthens the prohibition against labor-only contracting while providing guidelines for legitimate contracting.

3. Executive Order No. 51 (EO 51):

   • Issued to ensure stricter implementation of labor laws, reinforcing the prohibition of illegal contracting and subcontracting practices.

4. Department Circular No. 1, Series of 2017:

   • Issued by the Department of Labor and Employment (DOLE) to provide further clarification on the implementation of EO 51 and DO 174.

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What Constitutes Permissible Contracting/Subcontracting?

Permissible contracting or subcontracting exists when the following criteria are met under DO 174-17 and the relevant legal framework:

1. Independent Business:

   • The contractor or subcontractor must carry on an independent business and be engaged in the provision of services to clients/customers.
   • Independence implies financial and operational control over the means and methods of performing work.

2. Substantial Capital:

   • The contractor must have substantial capital, defined as paid-up capital of at least ₱5 million (for corporations) or net worth that demonstrates capacity to operate as an independent business.

3. Employee Rights:

   • Workers employed by the contractor must be entitled to all the rights and benefits mandated by labor laws, including minimum wage, statutory benefits (SSS, PhilHealth, Pag-IBIG), and occupational safety and health standards.

4. Contractual Relationship:

   • There must be a valid and binding contract between the principal and the contractor or subcontractor, which details the scope and nature of the work to be performed.
   • The contractor or subcontractor is engaged to perform work that is not within the principal's usual business or is not directly related to the production of the principal’s goods/services.

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Prohibited Practices under DO 174-17

DO 174 explicitly prohibits the following:

1. Labor-Only Contracting:
   • Exists when the contractor lacks substantial capital or investment in tools, equipment, or premises and does not exercise control over its workers.
2. Contracting to Circumvent Labor Laws:
   • Any arrangement intended to sidestep the rights of workers is unlawful.
3. Direct Hiring Interference:
   • Preventing workers from being directly hired by the principal is prohibited.
4. Co-Employment Schemes:
   • Arrangements that result in a co-employment relationship between the principal and contractor are prohibited.

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Work Arrangements Not Covered by DO 174-17

Certain work relationships are explicitly not covered by DO 174, provided they meet specific conditions:

1. Genuine Independent Contractors:

   • Those engaged in a distinct and independent business and who perform specialized or technical services (e.g., consultants, project-based contractors).

2. Service Agreements with Professionals:

   • Contracts with professionals (e.g., doctors, lawyers, engineers) who possess specialized skills and operate independently.

3. Government-Mandated Contracting:

   • Services performed under government-initiated projects or public-private partnership agreements.

4. Workers Covered by Other Employment Categories:

   • Regular employees directly hired by the principal.
   • Freelancers or gig workers who have no employer-employee relationship with the contracting principal.

5. Trilateral Work Arrangements Governed by Special Laws:

   • Certain arrangements are governed by special laws, such as those under the Security Service Act or those involving placement agencies under POEA rules for OFWs.

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Implications of Non-Covered Work Arrangements

1. No Employer-Employee Relationship:

   • If contracting or subcontracting falls under the above permissible categories, the principal is not considered the employer of the contractor’s workers.
   • Workers cannot claim regularization with the principal.

2. Liability:

   • While the principal is generally not liable for the contractor’s workers, it may be held jointly and severally liable for unpaid wages or benefits if the contracting arrangement is proven to be illegal.

3. Contractor Responsibilities:

   • The contractor retains full responsibility for the workers it employs, including compliance with labor standards.

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Recent Developments and Legal Trends

• Enhanced Monitoring: DOLE has increased inspections and enforcement to ensure compliance with DO 174 and EO 51.
• Public Policy Shift: There is a growing emphasis on minimizing subcontracting in favor of direct hiring to ensure worker security and rights.
• Court Decisions: Philippine courts have upheld DOLE's authority to regulate contracting arrangements and penalize erring principals or contractors.

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Conclusion

Permissible contracting or subcontracting under DO 174 and related legal instruments revolves around compliance with labor standards, substantial independence of contractors, and proper execution of service agreements. Work relationships not covered by DO 174 are limited to scenarios where no employer-employee relationship exists and labor laws are not undermined.