Department Order No.18-A Special Class Lecture Labor Law Review Class

Transcript on Department Order No.18-A Special Class Lecture

Labor Law Review Class, Ateneo Law School

Lecturer: Atty. Marlon Manuel

February 17, 2012

Note: This is based on the raw data or on the audio record made on the lecture.

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For the purpose of updating you on what we have now, and erasing whatever you have discussed in your past classes about Dept. Order No.18. The most recent class would be the class last sem, which took up the original Dept. Order No.18.

There are significant changes. Okay let’s start with a summary of the basic difference between a Legitimate Contracting Arrangement and an Illegitimate Contracting Arrangement.

In a Legitimate Contracting Arrangement, there are three parties. In an Illegitimate Contracting Arrangement, there are only two parties, because the contractor will be considered as an agent of the principal, and therefore he is only one person. The principal INCLUDES the contractor as an agent.

Insofar as the liabilities are concerned in a legitimate contracting arrangement, principal is NOT employer. In Illegitimate Contracting Arrangement, principal IS employer. Okay. In Legitimate Contracting Arrangement, the principal is liable for wages for work performed. And this liability is as indirect employer. Which means that despite that liability to pay the unpaid wages in case of default, in case of failure on the part of the contractor, the principal does NOT thereby become the employer of the employees. There’s a limitation, on the liabilities of the principal, as indirect employer. Emphasis on the word INDIRECT EMPLOYER. The liability of the principal as employer, being an indirect employer, is limited only to wages, and limited only for work performed under the contract. NOT to anything else, as far as a legitimate contracting arrangement is concerned. And that is precisely the reason for contracting, so that the principal will not bear the burden of managing the employees. So that the principal will not have burden of liability for employees’ wages etc. etc. So the principal, in a way, distances itself from the workers. Although the workers are still performing services ultimately for the benefit of the principal. The principal shields itself, and distances itself through the contractor and that is the reason why the contractor must be legitimate. So that there has to be a legitimate entity that will be made answerable for the rights of the workers under the contract. And because the contractor in a legitimate contracting arrangement is or should be legitimate, then the principal to a certain extent becomes SECONDARILY liable only. Because the contractor, as a legitimate entity is the real employer of the employees.

Now, in an Illegitimate Contracting Arrangement, because the principal is employer, then the principal as employer is liable for ALL liabilities to the employees. As far as solidary liability is concerned, therefore, solidary liability is NOT important, is not relevant. As far as the practical effects are concerned, if there is an Illegitimate Contracting Arrangement. Why? Because the object of imposing solidary liability is to go after the principal, in case the contractor defaults. Because the assumption is, the principal is more responsible than the contractor. And therefore, the objective of imposing solidary liability is to ensure that the rights of the workers will be guaranteed. And the guarantee is to hold the principal liable also solidarily with the contractor, for illegitimate contracting arrangement.  So even if the principal is NOT the employer, the principal is held liable WITH the contractor. Because of that, there is no sense, there is no relevance to such solidary liability. Because in this case, the principal is the employer. So the contractor defaults, that is not a material event. Because the principal will always be liable, as employer.  Are we saying there is no solidary liability here? No. We are not saying that. There is solidary liability involved. But the value, of the solidary liability is to hold the employer liable, and therefore it is valuable in illegitimate contracting arrangement. Because in a legitimate contracting arrangement, the principal is not the employer. Here, the solidary liability loses its value. Because the presumption is, the conclusion is that the principal is employer and therefore it is always liable for all rights of the employees. And the principal is primarily liable as employer as opposed to here (referring to Legitimate Contracting Arrangement) where the principal is secondarily liable only.

Any questions, as to the distinction?

Now that the distinction is clear, it is important now to determine when a contracting arrangement is legitimate and when it is illegitimate. And so we now go to the rules of contracting arrangement, Dept. Order No.18, as amended now, well not amended but supplanted by Dept. Order No.18-A.

Dept. Order No. 18-A is not a partial amendment, it is a substitution. It’s an amendment by substitution. So Dept. Order No.18-A erases Dept. Order No.18. So this is now the set of rules that we need to follow. Why do we always have a change in the set of rules governing contracting arrangement? Because the Labor Code itself has provided the Sec. of Labor shall regulate contracting arrangements. So the Labor Code subjected the regulation of contractors of contracting arrangements to the powers of the Sec. of Labor. There is NO prohibition in the Labor Code for contracting arrangements. In fact, if you look at the Labor Code’s provision, the Labor Code will not even declare that Labor Only Contracting is prohibited. There is no prohibition in the Labor Code. BUT the intent clearly stated is to REGULATE contracting arrangements. And because of such intent, the Sec. of Dept. of Labor is authorized to regulate and even prohibit certain types of contracting arrangement. And because of that, the Sec. of Labor had in the past and until now prohibited Labor Only Contracting arrangement.

So now, despite the absence of a categorical prohibition in the Labor Code against Labor Only Contracting arrangement, there is a DEFINITION in the Labor Code of what a Labor Only Contracting arrangement is. So while there is no prohibition, there is a definition of Labor Only Contracting arrangements.

So the Labor Code starts the definition by saying that a Labor Only Contractor merely recruits workers, the contractor does not have substantial capital, work is directly related to the business of the principal. That is the basic definition of a Labor Only Contracting in the labor code. There are three major components:

1. There is mere recruitment,
2. No substantial capital or investment, and
3. The work performed is directly related to the business of the principal.

Now, okay, let’s back track a bit. Labor Only Contracting arrangement is what is considered by the RULES, not by the Labor Code, but by the rules (IRR) as prohibited. And therefore ILLEGITIMATE. As opposed to what? As opposed to LEGITIMATE Job Contracting  Arrangement. And the terms are significant in understanding the meaning of the contracting arrangements, the difference of the two types of contracting arrangements.  So when we say JOB CONTRACTING, you are contracting out a particular job or service. When you say LABOR ONLY CONTRACTING, what you are contracting out is the work itself, the labor. So you are focusing on the workers, as far as Labor Only Contracting is concerned. And therefore you are merely recruiting persons. You are merely recruiting individuals or workers. As opposed to a JOB contracting, you are contracting out a particular chunk of work, a set of services or a package of services. And that is what job contracting is about. In the Labor Code you will find all these in one paragraph, or in a single provision.

When D.O.#18 (the original), came, it defined Labor Only Contracting as merely recruiting and any of the ff:

A.   No substantial capital AND work is directly related to the business of the principal; and

B.   Control is in the hands of the contractor.

I’m also doing this not only for the benefit of the students in the past classes. But also for the benefits of the students in the current class, because they did not have the opportunity to discuss the particular D.O.#18 (the original).

Now, what was the effect of the formulation of definition of Labor Only Contracting Arrangement in D.O.#18? The problematic formulation combined substantial capital and the nature of the work. So I have a standard question in the past classes. Whether (A) is A1 + A2, meaning whether you need to have both elements in order to have Labor Only Contracting. In short, if a contractor has enough capital but work is directly related to the business of the principal, will this qualify as Labor Only Contractor? And the answer is YES. Despite the substantial capitalization. Because the work is directly related to the business of the principal. The question now is, why are we considering this as Labor Only Contractor? If the formulations says “any of the following”, meaning “A” OR “B”. And “A” combines two elements. Here (referring to A2), there is only one element. Meaning work is directly related to the business of the principal. And therefore, following that argument, this contractor (referring to a contractor who satisfies A2 only) should not be considered a Labor Only Contractor. Because only one of the two items are present. And the answer that I have given in the past, would be an illogical, an absurd result. If we follow that interpretation. Why? Bec that would mean that if work is NOT directly related and therefore you lose the 2^nd element or the first paragraph, then even without substantial capitalization, a contractor will be considered a legitimate contractor. And that is not, definitely, the intention of the regulation. Let’s pause for a while and see if this is clear.

So in the past formulation, the substantial capitalization and the work’s relationship with the principal’s business were COMBINED in one paragraph. But the preliminary paragraph says “ANY of the following”. So does that mean “A” OR “B”? And I have always maintained, it has to be “A-1 OR A-2” OR “B”. Meaning, if you don’t have substantial capitalization, automatically you are a Labor Only Contractor. Even if you have substantial capitalization, but the work is directly related to the business of the principal, automatically you are a Labor Only Contractor. Even if you have substantial capitalization, and even if the work is NOT directly related to the business of the principal, if control is in the hands of the principal, instead of in the hands of the contractor, then you also have an ILLEGITIMATE Labor Only Contracting Arrangement. And what is the reason for that argument? There is no change in the definition in the Labor Code. There is a problem when D.O.#18 dissected the definition, the statutory definition into two paragraphs, with the first paragraph combining two elements. But the regulation cannot change the statutory definition. And the statutory definition as interpreted would say “substantial capitalization” is not enough. If work is directly related, you can still be considered a Labor Only Contractor. You have to look at the totality of the circumstances. You have to look at the entire picture. And so I have suggested in the past, that what you have to do is to reverse the situation. In order to be a LEGITIMATE contractor, you need to have ALL the elements- (1) capital, (2) work is not directly related, (3) control is in the hands of the contractor. So for you to be legitimate, you need to qualify in ALL THREE aspects. You need to complete all three. But for you to be considered an ILLEGITIMATE Labor Only Contractor you only need ONE.

You miss one, you are Labor Only Contractor. You miss capital, you are a Labor Only Contractor. You miss the work, work is in short work directly related to the business of the principal, then you are a Labor Only Contractor. Or control is in the hands of the principal, then you are a Labor Only Contractor. Any questions about these, before we go to the new rule?

Now what did D.O.#18 do (referring to the NEW one)? It recombined the different elements. So if you have your copy of the D.O#18 (new one), can you please refer to the definition under Section 6. What Sec.6 did was to put “merely recruits, no substantial capital, work is directly related to the business of the principal,” combined as one paragraph. That’s paragraph 1. And then paragraph 2, is similar to the paragraph two of the old Dept.Order., referring to control being in the hands of the principal. And making the two connected by the disjunctive “OR”. Where does that lead us? It leads us back to the statutory definition, plus the element of control. So binalik fortunately. Fortunately, the new Dept.Order abandoned this dissecting (referring to A1+A2 of the old D.O.). I did not say this “formulation”. Because the formulation is the same, similar. Except that it has divided. It is the dissection that the confusion came about. In short, binalik lang ulit sa definition. Pinagsama-sama na ulit, para hindi na tayo malito kung alin ba yan, “1” ba yan “2” ba yan, or “3” ba yan. Any questions?

So hindi na tayo malilito about this (referring to A1+A2 of the old D.O.), about the compound paragraph in the old Dept. Order.  Wala na yung compound paragraph. Even yung merely recruits na inakyat ng D.O#18 (old), doon sa introductory paragraph, at hiniwalay doon sa paragraph 1, nilagay niya sa preliminary statement yung “merely recruits”, ngayon (with the new D.O.18-A) binalik na ulit, sinama-sama na niya. Which is consistent with the statutory definition, the definition in the Labor Code. Today’s hope in the Dept. of Labor.

Aside from that, teka muna, mai mga nakikita pa ako na mga parang nalilito.

So how do we treat that? The same interpretation. To be an ILLEGTIMATE Labor Only Contractor, you miss ONE positive qualification, you are ILLEGITIMATE. You don’t have substantial capital, you are illegitimate. Even if you have substantial capital, but work is directly related to the business of the principal, you are illegitimate. Even if you have substantial capital, even if work is not directly related to the business of the principal, but if the control is surrendered to the principal, and not retained by the contractor, you are engaged in illegitimate Labor Only Contracting arrangement. Questions? Any questions? Clear? So far? Okay!

The new D.O.#18, aside from bringing back the formulation in the law (Labor Code), adds a definition of what is a Legitimate contracting arrangement. Which is good, because in D.0.18 (old), we did not have a definition of a Legitimate Contractor or a Legitimate Contracting Arrangement. And in the past, whenever I would discuss Dept.Order #18, I would say that in the old rules, in the old IRR, before the D.O.18, we used to have a definition of an independent contractor, which would simply reverse the definition of a Labor Only Contractor, and would enumerate the qualifications of an Independent Contractor. Now, in the (new) D.O.18, that definition is back.  This time, not a definition of Independent Contractor, but a definition of a LEGITIMATE contracting, and that is in Section 4 of D.O.18-A.

Part of the definition of a Legitimate Contractor, is the requirement of REGISTRATION. Section 4 states “the contractor…”, ah okay, wait, the preliminary statement is very important: “Contracting or Subcontracting shall be LEGITIMATE, if all the following circumstances CONCUR. Number One, the contractor must be registered in accordance with the rules, and carries a DISTINCT and INDEPENDENT business, and undertakes to perform a job, work, or service, on its own responsibility according to its own manner and method and free from the control and direction of the principal.” This is the same definition that used to be in the old IRR as a definition of an independent contractor. The second element is the substantial capitalization. And the third element is the service agreement that ensures compliance with all the rights and benefits under labor laws.

It would have been better if Section 4 included the qualification that work should not be directly related to the business of the principal. Because in that case, we would really have two definitions- one the converse of the other. But even without that, we still adopt the same interpretation. One should be the converse or the reverse of the other. For LEGITIMATE contracting, you need to have ALL the qualifications. The qualification of the entity(the contractor), the qualification of the work (the work should not be directly related),  and control. On the other hand, ILLEGITIMATE Labor Only Contracting arrangement, need only to MISS ONE of the qualifications. Either the contractor is disqualified because of the absence of substantial capitalization, OR the work is disqualified, meaning it is not supposed to be contracted out because it is directly related to the business of the principal, OR the contractor surrenders control over the work to the principal.

(Question is raised. Sorry, it can’t be heard)

Atty. Manuel: Okay, that is the problem with D.O.#18-A. I’m not sure if they miss this, or it was deliberate. I never took part in any of the discussions. But I’m quite happy with how it went out. Why? In Section 4, it says that the following circumstances concur, and it includes, ah, it starts the enumeration with the registration. If you go to Section 14, and while Section 14 starts with “mandatory registration and registry of legitimate contractors” it still includes the same provision in the old, in the original D.O#18. Saying that “failure to register, shall give rise to the presumption, that the contractor is engaged in Labor Only Contracting.” That is NOT consistent with Section 4. If you say in Section 4, that “all the following circumstances must concur”, and therefore there must be registration. Therefore the absence of registration, you cannot be legitimate. But unfortunately Section 14 says, “only gives rise to the presumption that the contractor is engaged in Labor Only Contacting arrangement. So that is one problematic area of D.O.#18-A.

(Question is raised; Sorry, it can’t be heard)

Atty. Manuel: Ah, that is a different item all together, we will go to service agreement later because that is one additional prohibited activity.

Any questions?

Question: Sir the requirement that the contractor does not exercise _____ control, is it found in the Labor Code?

Atty. Manuel: No. That is not part of the definition. And that was precisely what D.O.#18 merely added to the definition.

(Follow-up Question is raised)

Atty. Manuel: Yes, because that is jurisprudential. That is simply following the jurisprudence on the four-fold test. Because the Four-fold test is not even in the Code. You will not find the four-fold test in the Labor Code. But that had been enshrined in jurisprudence- that control is what determines the Employer-Employee relationship. And the general proposition is, whoever has control is THE employer. So it’s just an incorporation of that principle in the rules. But that is not in Article 106. That is not in the definition in the Labor Code. In the same way that the four-fold test, you cannot find that in the (Labor Code)

Question: So sir if we are asked what is legitimate labor contracting arrangement, we answer only _______ or do we add control requisite, no control by the principal…

Atty Manuel: The best way is to combine both. And to say you have to be legitimate under Section 4, and you should not be illegitimate under Section 6. That’s why I was saying earlier, it would have been better if all the elements in Section 6, had been reversed and included in Section 4. Para kumpleto ka talaga. Wala kang lusot. But in this case, mai iniwan. But that’s pardonable. We’ve seen worse Departmental Orders of the DOLE. So there has been an improvement even in the formulation of department orders. Even in the process.

Any questions? Before we proceed to other items in the new Department Order…

Okay! One significant innovation introduced by D.O.#18-A, is the definition of CAPITAL. What is “substantial capitalization”? And this is a very good regulation. Good in the sense that “substantial” is now really very substantial. What do you mean by that? Under Section 3, definition of terms, subparagraph L, substantial capital refers to PAID-UP capital. Paid-up capital stocks, or shares of AT LEAST Three Million pesos paid-up capital. So what is the reason for this? To avoid fly by night Labor Only Contractors. To avoid recruiters, contactors who do not have capital and merely recruits workers and pass them off as employees or pass them off as fixed term employees to work for a principal.  Yun yong iniiwasan. And so there is a high capitalization requirement. Which means you need to HAVE three million pesos to be a contractor, to be a legitimate contractor. That’s for corporations, partnerships, cooperatives, and even single proprietors. Magkaiba lang yung terms used, because for single proprietors, its not capital stock. So it says “net worth”, parang SALN, “net assets”. At least 3M pesos, parehong 3M pesos. So that weeds out fly by night contractors.

Take note that the definition of “contractors” under subparagraph D, specifically states “including a cooperative”, and this is in reaction to many cooperatives set up to act as contractors. And you have encountered many cases where workers will be terminated and then the company will facilitate, will help them organize a cooperative, and then they will be rehired but this time not as regular employees, but as cooperative members, supplied by the cooperative, to work for their former employer. Nasilip na yan. And many cases had been decided and so now in the rules, ginawa ng categorical, including “cooperatives”. There’s no pretension now. Whether you are a corporation or cooperative, you are considered a contractor, as long as you are engaged in this type of work.

Another significant provision in so far as the substantial capital requirement is concerned, is a new term, a new concept now called “Net Financial Contracting Capacity (NFCC)”. That is under subparagraph G. Again in the hope of ensuring that contractors will be substantially capitalized, there is now a requirement that in the service agreement, and you have a model service agreement, there is a requirement to include the “capacity to carry out a contract”. And that is the NFCC. It’s a mathematical formula. The current assets minus the current liabilities, multiplied by the contract duration. In the contract duration, there are numbers assigned: 10 for 1 year or less; 15 for more than 1 year up to 2 years; and 20 for more than 2 years. Minus the value of all outstanding or ongoing projects, including contracts to be started.

What is the reason for that? In addition to the substantial capitalization, the Net Financial Contracting Capacity must be EQUIVALENT to the work contracted out. In short you are matching the capacity with the work.  Why is that needed on top of the substantial capitalization? Because you might have substantial capitalization but you are over-exposed. And therefore your net financial capacity will be lower than the actual value of the contract that you have committed to carry out. So that’s an additional requirement- substantial capitalization minimum but there is an additional requirement that your Net Financial Contracting Capacity will be at least be equivalent to the value of the contract you want to carry out. And that is a requirement for the contract. That is under subparagraph B(4) of Section 9: “The service agreement between the principal and the contractor shall include the following:…” That includes a provision on the Net Financial Contracting Capacity of the contractor which must be equal to the total contract cost. It’s a mathematical formula. And that amount should be equivalent to the cost of the contract with a particular principal. Any questions? Any questions about the substantial capitalization requirement?

Now we go to the prohibited activities. In D.O.18 (old), there are two instances when the principal will be considered as the employer, the direct employer. One is when you have Labor-Only-Contracting Arrangement. The principal shall be the employer. That’s not new. That is what’s stated in the Code. Second, when there is a commission of a prohibited activity. And D.O.18 (old) has a list of the  prohibited activities. We will go to that later. I just want to compare it now with D.O.18-A.

So in D.O.18-A, when is the principal the employer? Same with D.O.18, D.O.18-A says of course when there is Labor Only Contracting, the principal shall be considered the direct employer. Two, similar to D.O.18, D.O.18-A now also says that the principal shall be the employer if prohibited activities are committed. Why do we need two? Why do we need two items? Because you can be a legitimate contractor, meaning you are not falling into the definition of a Labor Only Contractor, but you engage in prohibited activities. And so your commission of the prohibited activity will not make you a Labor-Only Contractor, but will make the principal liable as employer.

Let’s give a simple example. Asking the employees of your contractor to sign an undated resignation letter. That’s a prohibited activity. Will that make a contracting arrangement a Labor Only Contracting? No! Because Labor Only Contracting shall be determined by the definition. You fall outside the definition, you are not a labor-only contractor. But if employees are required to submit signed undated resignation letters, that’s a commission of a prohibited activity, even if that will not qualify, even if that will not make the contracting arrangement as Labor Only Contracting, it will make the principal liable as direct employer. So same effect. Same effect as a Labor Only Contracting arrangement.

Now, D.O.18-A adds to that. Adds to instances when the principal shall be considered as the direct employer. And that is in Section 5 of D.O.18-A. The last paragraph: “The principal shall be deemed the direct employer of the contractor’s employee in cases where there is a finding by a competent authority of Labor Only Contracting.” So that’s one. “Or commission of prohibited activities.”(That’s)Two. “…OR a violation”- that’s the additional. Or a violation of either Sections 8 or 9 of the Rules.  Which brings us to Section 8 and 9. Section 8 refers to rights of contractor’s employees. Under D.O.18 (old), that was not explicitly enumerated, as one of the grounds for the principal to be liable as a direct employer. Now, it is stated, it is included by reference. Section 5 makes a cross-reference to Section 8, that is violation of the rights of the employees. And Section 9, which refers to the contract and the requirement of the contract. So the principal, aside from the prohibited activities,   should now be accountable of violations of the rights of the employees, and violations of the requirements for the contract. And violations will have the same effect as the enumerated prohibited activities. That means the principal becomes liable as employer.

Question: Sir in here, when you were comparing illegitimate and legitimate contracting, we said that in illegitimate contracting, they become primary liable for all, while in Legitimate only for _________. So Sir, in this case, if you don’t do prohibited activity, you’re still Legitimate Contractor?

Atty. Manuel: Yes. You are still Legitimate Contractor, because you do not fall under the definition of Labor Only Contracting. But despite that, the principal becomes liable as employer. Same liability as a Labor Only Contractor, but the contracting arrangement itself is not a Labor Only Contracting arrangement. But the same effect. Principal becomes liable as direct employer.

What is the reason for that? We are holding the principal liable for the mistakes of the contractor. Why are we doing that? Because we want the principal to be very choosy before entering into contracts with the contractor. So the principal should ensure that the contractor it will enter into contract with will be a legitimate contractor, and a contractor that does NOT deprive employees of their rights under the labor code. Any questions?

Question: Sir, is that a valid provision? Because, you’re imposing a liability on the principal, when the contract is between the employees and the contractor, Sir. Isn’t that a violation of the privity of contracts, Sir?

Atty. Manuel: Again, you are saying that you are making the principal liable for the liabilities of the contractor?  Ah, in a way, yes, but again, as I said, that is suppose to ensure that the principal will ensure that the rights of the employees are guaranteed by the contractor. So you pass on to the principal the burden. Otherwise, the principal will not be interested. Bahala ka kahit hindi mo binabayaran ang mga employees mo. Basta ikaw binabayaran ko. Kahit hindi mo binabayaran ng tama, wala akong pakialam. That could be the attitude of the principal. But not this time. So instead of just being solidarily liable, the principal is now declared to be employer.

Question: Sir what if po kung mai violation for Section 8 and 9 _______?

Atty. Manuel: For Section 8, rights of contractual employees. The contractor. Because the Employer-Employee relationship originally, before the violation, or not before the violations (because the situation could be that the violation was committed from the very start). But in the general scheme of things, the employment contract or the employment relationship is between the contractor and the workers. And therefore, who commits the violations of labor rights/labor laws? The contractor.

Let’s look at the examples. (Sir referring to Section 9(b)(iii) of D.O.#18-A)Safe and healthful working conditions (occupational safety), Labor Standards, Payment of service incentive leave, Overtime pay, holiday pay. Sino nagbabayad nun? The contractor. Because the contractor is the employer. But the effect of that, pag hindi nagbabayad ng tama ang contractor, the principal becomes liable as employer. What is the effect of that? The principal should now ensure that the contractor pays the employees properly. It adds that burden to the principal. Because otherwise, the principal would be a disinterested party, as far as compliance with labor laws is concerned.

Question: Sir, does the principal have a remedy against the violating contractor?

Atty. Manuel: The bond. And that is specifically mentioned in subparagraph (b) of Section 9- Required contracts and its rules. A provision on the issuance of the bond as defined in Section 3 and renewable every year. Under Section 3, there is a definition of the bond. And that is referred to in Section 9, subparagraph (b), subparagraph (v) but there is a mistake in the identification of the item number, the letter. It refers to 3(m) when under Section 3, bond is letter (a), not letter (m). Di na siguro nila nagalaw.

Question: So Sir, a bond is now required? Since in my own understanding of the Code it says the employer MAY be required…

Atty. Manuel: That’s right. It (the bond) is a requirement as part of the contract.

Okay let’s address the question on whether the Secretary of Labor can do it when the Labor Code does not impose it. And the answer to that is the Secretary of Labor was given by the Labor Code a wide discretion to regulate contracting arrangement. And that is part of the powers given to the Secretary of Labor- to hold the principal liable as employer.

Take not that under Section 5, and this only states the obvious. That will only happen if there is a finding by a competent authority that there is a violation. So you need to have a DECLARATION because of a violation the principal becomes liable as a direct employer.

So same plus violation of the rights of the employees. And violations of the provisions concerning the contract. Any other questions on this?

There is a difference in the enumeration of the prohibited activities. If you compare your list in the D.O.#18 (old), with the list of the prohibited activities under D.O.#18-A, there is a difference in the formulation. There is a paragraph A (of Section 7, D.O.#18-A), saying that “contracting-out of jobs, works or services, when not done in good faith and not justified by the exigency of the business.” That is a general introductory paragraph for a list of prohibited activity. In the old or original Department Order, that is only part of one item, or part of one paragraph. I will not consider it as a significant change. The interpretation should remain the same.

Subparagraph 7, is a significant item of the prohibited activities enumeration under D.O.#18-A. That states “repeated hiring of employees under an employment contract of short duration, or under a service agreement of a short duration, with the same or different contractors.” Subparagraph 9, in the enumeration, now makes “refusal to provide a copy of the service agreement in the employment contracts between the contractor and the employees to the certified bargaining agent (in the bargaining unit).” It is now a prohibited activity. In the original, there is a statement that it should also be given to the certified exclusive bargaining agent. But a violation of that provision was not made a prohibited activity. Now, it was elevated, it was transferred to the enumeration of the prohibited activities, which means that, the principal will now be liable as employer if the union, the certified bargaining agent requested for a copy of the contracts and was refused. The principal will again be liable, as the direct employer. Any questions?

Subparagraph 10 is also significant. It refers to the Collective Bargaining Agreement (CBA) and the provisions concerning what can be contracted out. Because a CBA can say that only 10 percent of the total work force can be contracted out. There is now a pending bill, limiting by percentage of the total number work force, what can be contracted out. But I’m not sure if that will be approved and enacted into law before the end of the current congress. But the idea is to limit the percentage or the ratio of the regular employees or directly hired employees and the employees hired through contracting arrangement.

Subparagraph (B)[of Section 7, D.O.#18-A] is an addition of a catch-all phrase saying analogous to the foregoing. “Contracting out of jobs, works, services analogous to the above.” Analogous to any of the enumerated items, “when not done in good faith and not justified in the exigencies of the business.” Any questions?

Section 8, rights of the contractors-employees is an attempt to cover different terminologies used. So you will find reliever, seasonal, weekender, temporary, promo jobbers. Aaah I haven’t encountered promo jobbers in the past, but reliever definitely, ginagamit yan. The idea is to include all the different category of employees. Basta you are hired by a contractor, you are insured on paper of the rights that you should enjoy, as an employee. Even if you are NOT an employee of the principal. You are an employee of the contractor, you should be guaranteed the rights available to all employees. Including the right to self-organization, collective bargaining and peaceful concerted activities.

There are a number of provisions concerning termination. There are no new provisions. But let me just caution you that the provisions on termination on the procedure for termination will only be significant if the termination will happen WITHIN the contract of employment. In short, tatanggalin ka bago matapos yung 1-year contract mo, then the provisions on termination will apply. But if the end of the term of your contract is the reason for the end of your employment, then the provisions on the termination would be useless. It is not even a dismissal but an ending of a term. An expiration of a term. Because you are fixed term employees.

So what do I mean by that? On paper it is good to have all these provisions concerning termination of employment, the rights of an employee about to be dismissed but in reality you are a fixed term employee. And therefore if your term is fixed to one year, at the end of 1 year, you’re out. And you will NOT even have that right to a notice in that case, because in decisions of the Supreme Court, the end of a fixed term employment is NOT a dismissal. It is an expiration of a term. And therefore you are not even entitled to be notified that your term will expire. Because you should have known it by signing that employment contract.

Take not that we are still maintaining or D.O.#18-A is still maintaining the requirement that the two contracts should be COTERMINOUS. That if the contract between the principal and the contractor is for two years, the contract between the contractor and the employees should also be for two years. Unless the job contract can be divided into separate phases, and the phases will require different skills. In which case, the contract between the principal and contractor may be for two years. But there can be two phases. Phase 1- and therefore your 1 year employment contract; and phase 2- another 1 year employment contract, this time for a different set of employees, with different set of skills. Otherwise, the contracts should be coterminous.

Is that protection enough? Ah, I don’t think so. Because the principal and the contractor can always limit their contract to short period of 1 year, or even less than 6 months, or 6 months. But again there is a provision that repeated hiring of employees for short term periods will be considered as one of the prohibited activities.

There are provisions concerning cancellations of the registration. And there is a provision saying that despite the cancellation, or the registration of a contractor, because of a problematic contracting arrangement with respect to a particular principal, the other contracts will not be adversely affected. And the other contracts shall remain, at least until the expiration. Hindi automatic na nababaliwala ang kontrata, especially with other principals. And that is stated in Section 26, Effects of Cancellation of Registration. “A final order of cancellation shall divest the contractor of his legitimate status, to engage in contracting or subcontracting.” Can you re-register under a different name? No because part of the requirements for registration of the new entity, would be a statement that you had not been part, that the officers are not the same as the officers of a past contractor. So dapat mai history ka na… aah, dapat magpapakita ka ng history, and they are suppose to check that. In order to avoid re-registration, under a different name, of a contractor whose registration has been previously cancelled.

Any questions? I think those are the significant changes introduced by Department Order No.18-A.

Okay, uhm, what changes can be expected as a result of the Department Order No. 18-A? I am thinking of the case of Rosewood, for example. If you remember in the case of Rosewood, there is a limitation, the Supreme Court limited the liability of the employer, the principal for the consequences of an unlawful dismissal, or an illegal dismissal. And the Supreme Court said, in the Rosewood case, an obiter dictum that eventually was repeated in other cases. The court said that the liability of the principal, under Art. 109, for other violations, for violation of any provision of the labor code shall be limited, to situations where the principal was at fault. Either it connived with the contractor, or it actively participated in the illegal dismissal. That was the case of Rosewood.

Will that change with D.O.#18-A? If the Supreme Court will read the D.O.#18-A properly, it should abandon the Rosewood formula. Why? Because Section 8 says, Rights of Contractor Employees, Right to Security of Tenure. So if there is an illegal dismissal, done by a contractor, that is a violation of the right of security of tenure under Section 8. But under Section 5, the effect of a violation of Section 8 will be to make the principal liable as direct employer.

And therefore, unlike in the case of Rosewood, the conclusion now should be, because there was a violation of the right of the security of tenure done by the contractor, REGARDLESS of whether or not the principal was at fault, it should now be considered LIABLE for the remedies available, including the separation pay, backwages etc. Because by virtue of Section 5, it is considered the direct employer. And that is also repeated in Section 27 of D.O.#18-A, Effects of finding of Labor-Only Contracting and/or Violation of Section 7, 8 or 9 of the rules. A finding of commission of any of the prohibited activities under Section 7, or violation of Section 8 (rights of employees), or Section 9 (provision concerning contracts), shall render the principal the DIRECT employer of the employees of the contractor or subcontractor, pursuant to Art. 109 of the Labor Code, as amended. If the court will interpret it that way. That should be the proper interpretation.

Any questions…? I hope the Department Order will stay for a few years. And that if ever it will be changed, it will be for the better.  

               

(END OF TRANSCRIPT)

Department Order No. 18-A 

Series of 2011 
RULES IMPLEMENTING ARTICLES 106 TO 109 OF THE LABOR CODE, AS AMENDED

By virtue of the power vested in the Secretary of Labor and Employment under Articles 5 and 106 to 109 of the Labor Code of the Philippines, as amended, the following regulations governing contracting and subcontracting arrangements are hereby issued:

Section 1. Guiding principles. Contracting and subcontracting arrangements are expressly allowed by law and are subject to regulations for the promotion of employment and the observance of the rights of workers to just and humane conditions of work, security of tenure, self-organization and collective bargaining. Labor-only contracting as defined herein shall be prohibited. 

Section 2. Coverage. These Rules shall apply to all parties of contracting and subcontracting arrangements where employer-employee relationships exist. It shall also apply to cooperatives engaging in contracting or subcontracting arrangements. 

Contractors and subcontractors referred to in these Rules are prohibited from engaging in recruitment and placement activities as defined in Article 13(b) of the Labor Code, whether for local or overseas employment. 

Section 3. Definition of terms. The following terms as used in these Rules, shall mean:

(a) “Bond/s” refers to the bond under Article 108 of the Labor Code that the principal may require from the contractor to be posted equal to the cost of labor under contract. The same may also refer to the security or guarantee posted by the principal for the payment of the services of the contractors under the Service Agreement. 

(b) “Cabo” refers to a person or group of persons or to a labor group which, in the guise of a labor organization, cooperative or any entity, supplies workers to an employer, with or without any monetary or other consideration, whether in the capacity of an agent of the employer or as an ostensible independent contractor. 

(c) “Contracting” or “Subcontracting” refers to an arrangement whereby a principal agrees to put out or farm out with a contractor 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. 

(d) “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. 

(e) “Contractor’s employee” includes one employed by a contractor to perform or complete a job, work, or service pursuant to a Service Agreement with a principal. It shall also refer to regular employees of the contractor whose functions are not dependent on the performance or completion of a specific job, work or service within a definite period of time, i.e., administrative staff. 

(f) “In-house agency” refers to a contractor which is owned, managed, or controlled directly or indirectly by the principal or one where the principal owns/represents any share of stock, and which operates solely or mainly for the principal. 

(g) “Net Financial Contracting Capacity (NFCC)1” refers to the formula to determine the financial capacity of the contractor to carry out the job, work or services sought to be undertaken under a Service Agreement. NFCC is current assets minus current liabilities multiplied by K, which stands for contract duration equivalent to: 10 for one year or less; 15 for more than one (1) year up to two (2) years; and 20 for more than two (2) years, minus the value of all outstanding or ongoing projects including contracts to be started. 

1 Refers to the formula set out in the Implementing Rules and Regulations of Republic Act No. 9184, or An Act Providing for the Modernization, Standardization and Regulation of the Procurement Activities of the Government and For Other Purposes. 

(h) “Principal” refers to any employer, whether a person or entity, including government agencies and government-owned and controlled-corporations, who/which puts out or farms out a job, service or work to a contractor. 

(i) “Right to control” refers to the right reserved to the person for whom the services of the contractual workers are performed, to determine not only the end to be achieved, but also the manner and means to be used in reaching that end. 

(j) “Service Agreement” refers to the contract between the principal and contractor containing the terms and conditions governing the performance or completion of a specific job, work or service being farmed out for a definite or predetermined period. 

(k) “Solidary liability” refers to the liability of the principal, pursuant to the provision of Article 109 of the Labor Code, as direct employer together with the contractor for any violation of any provision of the Labor Code. 

It also refers to the liability of the principal, in the same manner and extent that he/she is liable to his/her direct employees, to the extent of the work performed under the contract when the contractor fails to pay the wages of his/her employees, as provided in Article 106 of the Labor Code, as amended. 

(l) "Substantial capital” refers to paid-up capital stocks/shares of at least Three Million Pesos (P3,000,000.00) in the case of corporations, partnerships and cooperatives; in the case of single proprietorship, a net worth of at least Three Million Pesos (P3,000,000.00). 

(m) “Trilateral Relationship” refers to the relationship in a contracting or subcontracting arrangement where there is a contract for a specific job, work or service between the principal and the contractor, and a contract of employment between the contractor and its workers. There are three (3) parties involved in these arrangements: the principal who decides to farm out a job, work or service to a contractor; the contractor who has the capacity to independently undertake the performance of the job, work or service; and the contractual workers engaged by the contractor to accomplish the job, work or service. 

Section 4. Legitimate contracting or subcontracting. Contracting or subcontracting shall be legitimate if all the following circumstances concur: 

(a) The contractor must be registered in accordance with these Rules and carries a distinct and independent business and undertakes to perform the job, work or service on its own responsibility, according to its own manner and method, and free from control and direction of the principal in all matters connected with the performance of the work except as to the results thereof; 

(b) The contractor has substantial capital and/or investment; and 

(c) The Service Agreement ensures compliance with all the rights and benefits under Labor Laws. 

Section 5. Trilateral relationship in contracting arrangements; Solidary liability. In legitimate contracting or subcontracting arrangement there exists: 

(a) An employer-employee relationship between the contractor and the employees it engaged to perform the specific job, work or service being contracted; and 

(b) A contractual relationship between the principal and the contractor as governed by the provisions of the Civil Code. 

In the event of any violation of any provision of the Labor Code, including the failure to pay wages, there exists a solidary liability on the part of the principal and the contractor for purposes of enforcing the provisions of the Labor Code and other social legislation, to the extent of the work performed under the employment contract. 

However, the principal shall be deemed the direct employer of the contractor’s employee in cases where there is a finding by a competent authority of labor-only contracting, or commission of prohibited activities as provided in Section 7, or a violation of either Sections 8 or 9 hereof. 

Section 6. Prohibition against labor-only contracting. Labor-only contracting is hereby declared prohibited. For this purpose, labor only contracting shall refer to an arrangement where: 

(a) The contractor does not have substantial capital or investments in the form of tools, equipment, machineries, work premises, among others, and the employees recruited and placed are performing activities which are usually necessary or desirable to the operation of the company, or directly related to the main business of the principal 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; or 

(b) The contractor does not exercise the right to control over the performance of the work of the employee. 

Section 7. Other Prohibitions. Notwithstanding Section 6 of these Rules, the following are hereby declared prohibited for being contrary to law or public policy: 

A. Contracting out of jobs, works or services when not done in good faith and not justified by the exigencies of the business such as the following:

(1) Contracting out of jobs, works or services when the same results in the termination or reduction of regular employees and reduction of work hours or reduction or splitting of the bargaining unit. 

(2) Contracting out of work with a “Cabo”. 

(3) Taking undue advantage of the economic situation or lack of bargaining strength of the contractor’s employees, or undermining their security of tenure or basic rights, or circumventing the provisions of regular employment, in any of the following instances:

(i) Requiring them to perform functions which are currently being performed by the regular employees of the principal; and 

(ii) Requiring them to sign, as a precondition to employment or continued employment, an antedated resignation letter; a blank payroll; a waiver of labor standards including minimum wages and social or welfare benefits; or a quitclaim releasing the principal, contractor or from any liability as to payment of future claims.

(4) Contracting out of a job, work or service through an in-house agency. 

(5) Contracting out of a job, work or service that is necessary or desirable or directly related to the business or operation of the principal by reason of a strike or lockout whether actual or imminent. 

(6) Contracting out of a job, work or service being performed by union members when such will interfere with, restrain or coerce employees in the exercise of their rights to self-organization as provided in Art. 248 (c) of the Labor Code, as amended. 

(7) Repeated hiring of employees under an employment contract of short duration or under a Service Agreement of short duration with the same or different contractors, which circumvents the Labor Code provisions on Security of Tenure. 

(8) Requiring employees under a subcontracting arrangement to sign a contract fixing the period of employment to a term shorter than the term of the Service Agreement, unless the contract is divisible into phases for which substantially different skills are required and this is made known to the employee at the time of engagement. 

(9) Refusal to provide a copy of the Service Agreement and the employment contracts between the contractor and the employees deployed to work in the bargaining unit of the principal’s certified bargaining agent to the sole and exclusive bargaining agent (SEBA). 

(10) Engaging or maintaining by the principal of subcontracted employees in excess of those provided for in the applicable Collective Bargaining Agreement (CBA) or as set by the Industry Tripartite Council (ITC).

B. Contracting out of jobs, works or services analogous to the above when not done in good faith and not justified by the exigencies of the business. 

Section 8. Rights of contractor’s employees. All contractor’s employees, whether deployed or assigned as reliever, seasonal, week-ender, temporary, or promo jobbers, shall be entitled to all the rights and privileges as provided for in the Labor Code, as amended, to include the following:

(a) Safe and healthful working conditions; 

(b) Labor standards such as but not limited to service incentive leave, rest days, overtime pay, holiday pay, 13th month pay, and separation pay as may be provided in the Service Agreement or under the Labor Code; 

(c) Retirement benefits under the SSS or retirement plans of the contractor, if there is any; 

(d) Social security and welfare benefits; 

(e) Self-organization, collective bargaining and peaceful concerted activities; and 

(f) Security of tenure.

Section 9. Required contracts under these Rules.

(a) Employment contract between the contractor and its employee. 

Notwithstanding any oral or written stipulations to the contrary, the contract between the contractor and its employee shall be governed by the provisions of Articles 279 and 280 of the Labor Code, as amended. It shall include the following terms and conditions:

i. The specific description of the job, work or service to be performed by the employee; 

ii. The place of work and terms and conditions of employment, including a statement of the wage rate applicable to the individual employee; and 

iii. The term or duration of employment that must be co-extensive with the Service Agreement or with the specific phase of work for which the employee is engaged.

The contractor shall inform the employee of the foregoing terms and conditions of employment in writing on or before the first day of his/her employment. 

(b) Service Agreement between the principal and the contractor. The Service Agreement shall include the following:

i. The specific description of the job, work or service being subcontracted. 

ii. The place of work and terms and conditions governing the contracting arrangement, to include the agreed amount of the services to be rendered, the standard administrative fee of not less than ten percent (10%) of the total contract cost. 

iii. Provisions ensuring compliance with all the rights and benefits of the employees under the Labor Code and these Rules on: provision for safe and healthful working conditions; labor standards such as, service incentive leave, rest days, overtime pay, 13th month pay and separation pay; retirement benefits; contributions and remittance of SSS, Philhealth, PagIbig Fund, and other welfare benefits; the right to self-organization, collective bargaining and peaceful concerted action; and the right to security of tenure. 

iv. A provision on the Net Financial Contracting Capacity of the contractor, which must be equal to the total contract cost. 

v. A provision on the issuance of the bond/s as defined in Section 3(m) renewable every year. 

vi. The contractor or subcontractor shall directly remit monthly the employers’ share and employees’ contribution to the SSS, ECC, Philhealth and Pagibig. 

vii. The term or duration of engagement. The Service Agreement must conform to the DOLE Standard Computation and Standard Service Agreement, which form part of these Rules as Annexes “A” and “B”.

Section 10. Duties of the principal. Pursuant to the authority of the Secretary of Labor and Employment to restrict or prohibit the contracting of labor to protect the rights of the workers and to ensure compliance with the provisions of the Labor Code, as amended, the principal, as the indirect employer or the user of the services of the contractor, is hereby required to observe the provisions of these Rules. 

Section 11. Security of tenure of contractor’s employees. It is understood that all contractor’s employees enjoy security of tenure regardless of whether the contract of employment is co-terminus with the service agreement, or for a specific job, work or service, or phase thereof.

Section 12. Observance of required standards of due process; requirements of notice. In all cases of termination of employment, the standards of due process laid down in Article 277(b) of the Labor Code, as amended, and settled jurisprudence on the matter2, must be observed. Thus, the following is hereby set out to clarify the standards of due process that must be observed: 

2 King of Kings Transport, Inc., Claire dela Fuente, and Melissa Lim, vs. Santiago O. Mamac, G.R. No. 166208, (29 June 2007); and Felix B. Perez and Amante G. Doria v. Philippine Telegraph and Telephone Company and Jose Luis Santiago, G.R. No. 152048, (7 April 2009), (en banc Decision). 

I. For termination of employment based on just causes as defined in Article 282 of the Code, the requirement of two written notices served on the employee shall observe the following: 

(A) The first written notice should contain:

(1) The specific causes or grounds for termination; 

(2) Detailed narration of the facts and circumstances that will serve as basis for the charge against the employee. A general description of the charge will not suffice; 

(3) The company rule, if any, that is violated and/or the ground under Art. 282 that is being charged against the employee; and 

(4) A directive that the employee is given opportunity to submit a written explanation within a reasonable period. 

“Reasonable period” should be construed as a period of at least five (5) calendar days from receipt of the notice to give the employee an opportunity to study the accusation, consult a union official or lawyer, gather data and evidence, and decide on the defenses against the complaint.

(B) After serving the first notice, the employer should afford the employee ample opportunity to be heard and to defend himself/herself with the assistance of his/her representative if he/she so desires, as provided in Article 277(b) of the Labor Code, as amended. 

“Ample opportunity to be heard” means any meaningful opportunity (verbal or written) given to the employee to answer the charges against him/her and submit evidence in support of his/her defense, whether in a hearing, conference or some other fair, just and reasonable way. A formal hearing or conference becomes mandatory only when requested by the employee in writing or substantial evidentiary disputes exist or a company rule or practice requires it, or when similar circumstances justify it. 

(C) After determining that termination of employment is justified, the employer contractor shall serve the employee a written notice of termination indicating that: (1) all circumstances involving the charge against the employees have been considered; and (2) the grounds have been established to justify the severance of their employment. The foregoing notices shall be served on the employee’s last known address.

II. For termination of employment based on authorized causes defined in Article 283 of the Labor Code, the requirement of due process shall be deemed complied with upon service of a written notice to the employee and the appropriate regional office of the Department of Labor and Employment at least thirty days before the effectivity of the termination, specifying the ground or grounds for termination. 

III. If the termination is brought about by the completion of the contract or phase thereof, no prior notice is required. If the termination is brought about by the failure of a probationary employee to meet the reasonable standards of the employer, which was made known to the employee at the time of his/her employment, it shall be sufficient that a written notice is served upon the employee within a reasonable time prior to the expiration of the probationary period. 

Section 13. Effect of termination of employment. The termination of employment of the contractor employee prior to the expiration of the Service Agreement shall be governed by Articles 282, 283 and 284 of the Labor Code. 

In case the termination of employment is caused by the pre-termination of the Service Agreement not due to authorized causes under Article 283, the right of the contractor employee to unpaid wages and other unpaid benefits including unremitted legal mandatory contributions, e.g., SSS, Philhealth, Pag-ibig, ECC, shall be borne by the party at fault, without prejudice to the solidary liability of the parties to the Service Agreement. 

Where the termination results from the expiration of the service agreement, or from the completion of the phase of the job, work or service for which the employee is engaged, the latter may opt for payment of separation benefits as may be provided by law or the Service Agreement, without prejudice to his/her entitlement to the completion bonuses or other emoluments, including retirement benefits whenever applicable. 

Section 14. Mandatory Registration and Registry of Legitimate Contractors. Consistent with the authority of the Secretary of Labor and Employment to restrict or prohibit the contracting out of labor to protect the rights of workers, it shall be mandatory for all persons or entities, including cooperatives, acting as contractors, to register with the Regional Office of the Department of Labor and Employment (DOLE) where it principally operates. 

Failure to register shall give rise to the presumption that the contractor is engaged in labor-only contracting. 

Accordingly, the registration system governing contracting arrangements and implemented by the Regional Offices of the DOLE is hereby established, with the Bureau of Working Conditions (BWC) as the central registry. 

Section 15. Requirements for registration. The application for registration as a contractor shall be filed at the DOLE Regional Office in the region where it seeks to principally operate. The applicant shall provide in the application form the following information:

(a) The name and business address of the applicant and the areas where it seeks to operate; 

(b) The names and addresses of officers, if the applicant is a corporation, partnership, cooperative or a labor organization; 

(c) The nature of the applicant’s business and the industry or industries where the applicant seeks to operate; 

(d) The number of regular workers and the total workforce; 

(e) The list of clients, if any, the number of personnel assigned to each client, if any, and the services provided to the client; 

(f) The description of the phases of the contract, including the number of employees covered in each phase, where appropriate; and 

(g) Proof of compliance with substantial capital requirement as defined in Section 3(l) of these Rules.

The application shall be supported by:

(a) A certified true copy of a certificate of registration of firm or business name from the Securities and Exchange Commission (SEC), Department of Trade and Industry (DTI), Cooperative Development Authority (CDA), or from the DOLE if the applicant is a labor organization; 

(b) A certified true copy of the license or business permit issued by the local government unit or units where the contractor operates; 

(c) A certified listing, with proof of ownership or lease contract, of facilities, tools, equipment, premises implements, machineries and work premises, that are actually and directly used by the contractor in the performance or completion of the job, work or service contracted out. In addition, the applicant shall submit a photo of the office building and premises where it holds office; 

(d) A copy of audited financial statements if the applicant is a corporation, partnership, cooperative or a labor organization, or copy of the latest ITR if the applicant is a sole proprietorship; and 

(e) A sworn disclosure that the registrant, its officers and owners or principal stockholders or any one of them, has not been operating or previously operating as a contractor under a different business name or entity or with pending cases of violations of these Rules and/or labor standards, or with a cancelled registration. In case any of the foregoing has a pending case, a copy of the complaint and the latest status of the case shall be attached. 

The application shall be verified. It shall include a DOLE certification of attendance to orientation seminar on these Rules and an undertaking that the contractor shall abide by all applicable labor laws and regulations.

Section 16. Filing and processing of application. The application with all supporting documents shall be filed in triplicate in the Regional Office where the applicant principally operates. No application for registration shall be accepted unless all the requirements in the preceding Section are complied with. 

Section 17. Verification inspection. Within two (2) working days upon receipt of the application with complete supporting documents, the authorized representative of the Regional Director shall conduct a verification inspection of the facilities, tools, equipment, and work premises of the applicant. 

Section 18. Approval or denial of the application. The Regional Office shall deny or approve the application within one (1) working day after the verification inspection. 

Applications that fail to meet the requirements set forth in Section 15 of these Rules shall be denied. 

Section 19. Registration fee. Payment of registration fee of Twenty-Five Thousand Pesos (P25,000.00) shall be required upon approval of the application. 

Upon registration, the Regional Office shall return one set of the duly-stamped application documents to the applicant, retain one set for its file, and transmit the remaining set to the Bureau of Working Conditions (BWC) within five (5) days from registration. 

Section 20. Validity of certificate of registration of contractors. The contractor shall be deemed registered only on the date of issuance of its Certificate of Registration. 

The Certificate of Registration shall be effective for three (3) years, unless cancelled after due process. The same shall be valid in the region where it is registered. 

In case the contractor has Service Agreements or operates outside the region where it is registered, it shall request a duly authenticated copy of its Certificate of Registration from the registering Regional Office and submit the same to the DOLE Regional Office where it seeks to operate, together with a copy of its Service Agreement/s in the area, for purposes of monitoring compliance with these Rules. 

Section 21. Renewal of registration. All registered contractors shall apply for renewal of their Certificates of Registration thirty (30) days before the expiration of their registration to remain in the roster of legitimate service contractors. The applicant shall pay a registration renewal fee of Twenty-Five Thousand Pesos (P25,000.00) to the DOLE Regional Office. 

Copies of all the updated supporting documents in letters (a) to (e) of Section 15 hereof shall be attached to the duly accomplished application form, including the following: 

(a) Certificate of membership and proof of payment of SSS, Philhealth, BIR, ECC and Pag-Ibig contributions for the last three (3) years, as well as loan amortizations; and 

(b) Certificate of pending or no pending labor standards violation case/s with the National Labor Relations Commission (NLRC) and Department of Labor and Employment (DOLE). The pendency of a case will not prejudice the renewal of the registration, unless there is a finding of violation of labor standards by the DOLE Regional Director. 

Section 22. Semi-annual reporting. The contractor shall submit in triplicate its subscribed semi-annual report using a prescribed form to the appropriate Regional Office. The report shall include: 

(a) A list of contracts entered with the principal during the subject reporting period; 

(b) The number of workers covered by each contract with the principal; 

(c) Proof of payment of remittances to the Social Security System (SSS), the Pag-Ibig Fund, Philhealth, Employees Compensation Commission (ECC), and Bureau of Internal Revenue (BIR) due its employees during the subject reporting period and of amortization of declared loans due from its employees; and 

(d) A certified listing of all cases filed against the contractor before the NLRC 

The Regional Office shall return one set of the duly-stamped report to the contractor, retain one set for its file, and transmit the remaining set to the Bureau of Working Conditions (BWC) within five (5) days from receipt thereof. 

Section 23. Grounds for cancellation of registration. The Regional Director shall, upon a verified complaint, cancel or revoke the registration of a contractor after due process, based on any of the following grounds: 

(a) Misrepresentation of facts in the application; 

(b) Submission of a falsified or tampered application or supporting documents to the application for registration; 

(c) Non-submission of Service Agreement between the principal and the contractor when required to do so; 

(d) Non-submission of the required semi-annual report as provided in Section 22 (Semi-annual reporting) hereof; 

(e) Findings through arbitration that the contractor has engaged in labor-only contracting and/or the prohibited activities as provided in Section 7 (Other Prohibitions) hereof; 

(f) Non-compliance with labor standards and working conditions; 

(g) Findings of violation of Section 8 (Rights of contractor’s employees) or Section 9 (Required contracts) of these Rules; 

(h) Non-compliance with SSS, the HDMF, Pag-Ibig, Philhealth, and ECC laws; and 

(i) Collecting any fees not authorized by law and other applicable rules and regulations. 

Section 24. Due process in cancellation of registration. Complaint/s based on any of the grounds enumerated in the preceding Section against the contractor shall be filed in writing and under oath with the Regional Office which issued the Certificate of Registration. 

The complaint/s shall state the following:

(a) The name/s and address/es of the complainant/s; 

(b) Name and address of the contractor; 

(c) The ground/s for cancellation; 

(d) When and where the action complained of happened; 

(e) The amount of money claim, if any; and 

(f) The relief/s sought.

Upon receipt of the complaint, the Regional Director shall direct the contractor, with notice to the complainant, to file a verified answer/counter affidavit within ten (10) calendar days without extension, incorporating therein all pertinent documents in support of his/her defenses, with proof of service of a copy to the complainant. Failure to file an answer/counter affidavit shall constitute a waiver on the part of the respondent. No motion to dismiss shall be entertained. 

The Regional Director or his duly authorized representative may conduct a clarificatory hearing within the prescribed ten (10) calendar days within which to file a verified answer/counter affidavit. 

Within the said ten (10) calendar days period, the contractor shall make the necessary corrections/rectifications on the violations that are immediately rectifiable upon its own initiative in order to be fully compliant. 

The Regional Director may avail himself of all reasonable means to ascertain the facts of the case, including conduct of inspection, where appropriate, and examination of informed persons. 

The proceedings before the Regional Office shall be summary in nature. 

The conduct of hearings shall be terminated within fifteen (15) calendar days from the first scheduled clarificatory hearing. The Regional Director shall resolve the case within ten (10) working days from the date of the last hearing. If there is no necessity to conduct a hearing, the case shall be resolved within ten (10) working days from receipt of the verified answer/counter affidavit. 

Any motion for reconsideration from the Order of the Regional Director shall be treated as an appeal. 

Section 25. Appeal. The Order of the Regional Director is appealable to the Secretary within ten (10) working days from receipt of the copy of the Order. The appeal shall be filed with the Regional Office which issued the cancellation Order. The Office of the Secretary shall have thirty (30) working days from receipt of the records of the case to resolve the appeal. The Decision of the Secretary shall become final and executory after ten (10) days from receipt thereof by the parties. No motion for reconsideration of the Decision shall be entertained. 

Section 26. Effects of cancellation of registration. A final Order of cancellation shall divest the contractor of its legitimate status to engage in contracting/subcontracting. 

Such Order of cancellation shall be a ground to deny an application for renewal of registration to a contractor under the Rules. 

The cancellation of the registration of the contractor for engaging in labor-only contracting or for violation of any of the provisions of these Rules involving a particular Service Agreement will not, however, impair the validity of existing legitimate jobcontracting arrangements the contractor may have entered into with other principals prior to the cancellation of its registration. Any valid and subsisting Service Agreement shall be respected until its expiration; thereafter, contracting with a delisted contractor shall make the principal direct employer of all employees under the Service Agreement pursuant to Articles 106 and 109 of the Labor Code. 

Section 27. Effects of finding of labor-only contracting and/or violation of Sections 7. 8 or 9 of the Rules. A finding by competent authority of labor-only contracting shall render the principal jointly and severally liable with the contractor to the latter's employees, in the same manner and extent that the principal is liable to employees directly hired by him/her, as provided in Article 106 of the Labor Code, as amended. 

A finding of commission of any of the prohibited activities in Section 7, or violation of either Sections 8 or 9 hereof, shall render the principal the direct employer of the employees of the contractor or subcontractor, pursuant to Article 109 of the Labor Code, as amended. 

Section 28. Retaliatory measures. Pursuant to Article 118 of the Labor Code, as amended, it shall be unlawful for the principal, contractor, or any party privy to the contract or services provided to refuse to pay or reduce the wages and benefits, and discharge or in any manner discriminate against any worker who has filed any complaint or instituted any proceeding on wages (under Title II, Book III of the Labor Code), labor standards violation, or has testified or is about to testify in such proceedings. 

Section 29. Enforcement of labor standards and working conditions. Consistent with Article 128 (Visitorial and Enforcement Power) of the Labor Code, as amended, the Regional Director through his/her duly authorized representatives, shall conduct routine inspection of establishments engaged in contracting arrangement regardless of the number of employees engaged by the principal or by the contractor. 

They shall have access to employer’s records and premises at any time of the day or night whenever work is being undertaken therein, and the right to copy therefrom, to question any employee and investigate any fact, condition or matter which may be necessary to determine violations or which may aid in the enforcement of the Labor Code and of any labor law, wage order, or rules and regulations issued pursuant thereto. 

The findings of the duly authorized representative shall be referred to the Regional Director for appropriate action as provided for in Article 128, and shall be furnished the collective bargaining agent, if any. 

Based on the visitorial and enforcement power of the Secretary of Labor and Employment in Article 128 (a), (b), (c), and (d), the Regional Director shall issue compliance orders to give effect to the labor standards provisions of the Labor Code, other labor legislation, and these Rules. 

Section 30. Duty to produce copy of contract between the principal and the contractor. The principal or the contractor shall be under an obligation to produce a copy of the Service Agreement in the ordinary course of inspection. The contractor shall likewise be under an obligation to produce a copy of any contract of employment when directed to do so by the Regional Office Director or his/her authorized representative. 

Section 31. Tripartite implementation and monitoring of compliance; Use of registration fees. A region-based tripartite monitoring team on the observance of labor standards in contracting and subcontracting arrangements shall be constituted as a subcommittee of the Regional Tripartite Industrial Peace Council (RTIPC) within fifteen (15) days from the effectivity of these Rules. It shall submit a quarterly regional monitoring report to the DOLE Secretary and to the National Tripartite Industrial Peace Council (NTIPC). The Bureau of Working Conditions (BWC) shall ensure the implementation of this provision, and shall conduct capacity building to the members of the regional tripartite monitoring team. 

For this purpose, a portion of the collected registration fees shall be used in the operation of the region-based tripartite monitoring team, including in the development of an internet-based monitoring system and database. It shall likewise be used for transmittal of the monthly report of all registered contractors to the Bureau of Local Employment (BLE), and in generating labor market information. 

Section 32. Oversight function of the National TIPC. The National Tripartite Industrial Peace Council (NTIPC) as created under Executive Order No. 49, Series of 1998, as amended, shall serve as the oversight committee to verify and monitor the following: 

(a) Engagement in allowable contracting activities; and 

(b) Compliance with administrative reporting requirements. 

Section 33. Collective bargaining and/or Industry Tripartite Council (ITC). Nothing herein shall preclude the parties in collective bargaining agreements (CBAs) to determine the functions that can or cannot be farmed out or contracted out to a legitimate contractor, including the terms and conditions of the workers’ engagement under the arrangement, provided the provisions of these Rules are observed. 

In industries with established Industry Tripartite Councils (ITCs), the tripartite partners may agree, through a voluntary code of good practices, on the functions or processes that can or cannot be contracted out to a legitimate contractor. 

Section 34. Financial Relief Program; Tripartite Co-Regulation Engagement. A Financial Relief Program or Unemployment Assistance Fund shall be established for employees under a Service Agreement or employees in transition from one Service Agreement to the next. For this purpose, the National Tripartite Industrial Peace Council (NTIPC), upon the effectivity of this issuance, shall constitute a Local Service Provider Tripartite Working Group (LSP-TWG) composed of representatives of the stakeholders in the industry. The LSP-TWG shall: 

(a) Recommend the mechanics and details in setting up the Financial Relief Program or Unemployment Assistance Fund with proposed funding sources before end of June 2012; and 

(b) Draw-up the terms of a Tripartite Co-Regulation Engagement in ensuring full compliance with labor laws for approval/endorsement by the NTIPC, including a proposed Table of Progressive Rate of Increases in the minimum capitalization requirement at reasonable intervals to ensure that only legitimate contractors can engage in subcontracting arrangement. 

Section 35. Enrollment in DOLE programs on improving compliance with labor standards. For purposes of ensuring compliance with labor standards, the principal and subcontractors covered by these Rules are encourage to enroll and participate in the DOLE Kapatiran Work Improvement for Small Enterprise (WISE)-TAV Program (Department Advisory No. 06, dated 07 March 2011) and/or in the Incentivizing Compliance Program (Department Order No. 115-11). 

Section 36. Contracting or subcontracting arrangements in the Construction and Other Industries. Contracting or subcontracting arrangements in the Construction Industry, under the licensing coverage of the Philippine Construction Accreditation Board (PCAB), shall be covered by the applicable provisions of these Rules and shall continue to be governed by Department Order No. 19, Series of 1993 (Guidelines Governing the Employment of Workers in the Construction Industry); Department Order No. 13, Series of 1998 (Guidelines Governing the Occupational Safety and Health in the Construction Industry); and DOLE-DPWH-DILG-DTI and PCAB Memorandum of Agreement-Joint Administrative Order No. 1, Series of 2011 (on coordination and harmonization of policies and programs on occupational safety and health in the construction industry). 

In industries covered by a separate regulation of the DOLE or other government agency, contracting or subcontracting therein shall be governed by these Rules unless expressly provided otherwise. 

Section 37. Prohibition on DOLE officials or employees. Any official or employee of the DOLE or its attached agencies is prohibited from engaging or having any interest in any contracting or subcontracting business. 

Section 38. Non-impairment of existing contracts; Non-diminution of benefits. Subject to the provisions of Articles 106 to 109 of the Labor Code, as amended, the applicable provisions of the Civil Code and existing jurisprudence, nothing herein shall impair the rights or diminish the benefits being enjoyed by the parties to existing contracting or subcontracting arrangements. 

The effectivity of Certificates of Registration acquired under Department Order No. 18, Series of 2002, issued on 21 February 2002, shall be respected until expiration. 

Section 39. Supersession. All rules and regulations issued by the Secretary of Labor and Employment inconsistent with the provisions of these Rules are hereby superseded. 

Section 40. Separability Clause. If any provision or portion of these Rules are declared void or unconstitutional, the remaining portions or provisions hereof shall continue to be valid and effective. 

Section 41. Effectivity. This Department Order shall be effective fifteen (15) days after completion of its publication in a newspaper of general circulation. 

Manila, Philippines, 14 November 2011. 

Source: Atty. Marlon Manuel