Chapter 7 - Understanding the Legal Codes

Employment of Foreigners | Employing Filipino Workers | Recorking the Genie
Labor Disputes | Labor-Only Contracting

The Philippine government prohibits the so-called practice of labor-only contracting - an arrangement wherein the job contractor or subcontractor merely recruits, supplies, or places workers to perform a job, work, or service for a principal.

According to the labor department, there is "contracting" or more popularly known as "subcontracting" when an employer, referred to as the principal, farms out the performance of a part of its business to another, referred to as the contractor or subcontractor. "For the purpose of undertaking the principal's business that is farmed out, the contractor or subcontractor then employees its own employees."

Contracting or sub-contracting becomes legitimate if the following conditions are met:

i. The contractor or subcontractor carries on a distinct and independent business and undertakes to perform the job, work or service on its own account and under its own responsibility, according to its own manner and method, and free from the control and direction of the principal in all matters connected with the performance of the work except as to the results thereof.

ii. The contractor or subcontractor has substantial capital or investment;

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

Labor-only contracting is deemed illegal because this merely recruits, supplies or places workers to perform a job, work or service for a principal. Under DOLE Department Order No. 18-02, such practice is particularly illegal when the contractors or subcontractor does not have substantial capital or investment and the workers supplied are performing regular jobs, and when the contractor or subcontractor does not have direct control over the workers.

In particular, the department order highlights the following prohibitions:

- Contracting out of a job, work or service when not done in good faith and not justified by the exigencies of the business and the same results in the termination of regular employees and reduction of work hours or reduction or splitting of the bargaining unit.

- Contracting out of work with a "cabo" as defined in Section 1 (ii), Rule I, Book V of these Rules. "Cabo" refers to a person or group of persons or to a labor group which, in the guise of a labor organization, 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.

- Taking undue advantage of the economic situation or lack of bargaining strength of the contractual employee, or undermining his security of tenure or basic rights, or circumventing the provisions of regular employment, in any of the following instances:

i. In addition to his assigned functions, requiring the contractual employee to perform functions which are currently being performed by the regular employees of the principal or of the contractor or subcontractor;

ii. Requiring him or her 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 subcontractor from any liability as to payment of future claims; and

iii. Requiring him or her to sign a contract fixing the period of employment to a term shorter than the term of the contract between the principal and the contractor or subcontractor, unless the latter 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;

Contracting out of a job, work or service through an in-house agency which refers to a contractor or subcontractor engaged in the supply of labor which is owned, managed or controlled by the principal and which operates solely for the principal;

Contracting out of a job, work or service directly related to the business or operation of the principal by reason of a strike or lockout whether actual or imminent;

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.

The new order also disallows the following practices:

- Hiring of contractual workers during an abnormal increase in demand for products and services;

- When an undertaking requires expert or highly technical personnel to improve management or operations; and

- When substitute services are needed to perform the work of absent regular employees.

In defending the order, the labor department has said, "The objective of the State in prohibiting labor-only contracting is to ensure that labor laws are followed and to prevent exploitation of workers. A labor-only contractor is one that presents itself as an employer even if it does not have capital to run a business or capacity to ensure that its workers are paid their wages and other benefits as prescribed by law. As such, it cannot independently undertake to perform a subcontracted job or service. To allow a labor-only contractor to operate is to give it an opportunity to circumvent the law and to exploit workers."

A Word from the Wise The Labor Code of the Philippines
Foreign Employers "Beware"

Step by Step, the foreign employer, Corporations or Individual, CEO's & others, whether employing a housemaid or CEO, production or contract worker;

MUST - read and understand the Labor Code and its Intent. (Available at your favorite National Book Store -. approximate cost P350)

Some key areas:

1. Conditions of Employment, contract - conditions of employment

2. Health, Safety and Social Welfare, - employee & employer contributions.

3. Termination of Employment. - Standards of due process to be observed.

If you get it wrong you will pay:

4. Make sure your Law Firm has an experienced lawyer in human relations. Further, they know and are known favorably by officers of the Department of Labor & Employment (DOLE) and National Labor Relations Commission in your area and/or region, as cases start with area conciliation and may progress to regional arbitration and then the courts if not handled properly.

5. Where you find an employee has made a claim against you or your firm, work closely with your lawyer at the outset, make very sure that both you and your lawyer understands the explicit circumstances of the claim. Where the claim is warranted, deal with it accordingly. Where the claim is considered to be without merit, then work tirelessly to have the matter resolved at the outset. If the matter cannot be resolved, then make sure you have it right or your will be left with more than the feeling that you are underpinning the future lifestyle of the legal profession.

6. Provisional employees should be treated as though they are "permanent" employees except where they are unable to meet conditions of employment (see contract). Termination must follow "standard due process."

Remember, an out of work employee is very short of money and may see an action for wrongful dismissal as a shot to nothing. We understand there are plenty of lawyers that will take their case on a no cost, but on a percentage of recovery basis. Employer files are stuffed with wrongful dismissal claims; they all end somewhere, always at a cost to someone.

What if you have observed the letter of the Code and have terminated an employee for just cause then you may find you are the recipient of a Summons from DOLE where the employee has claimed wrongful dismissal. You may have the feeling that the ex-employee is simply trying you on however during the reconciliation phase you will be asked by the DOLE officer to make an offer to the employee (since it is costing the employee nothing but costing you the time of your senior management staff, what has the employee got to lose from this?).

a) You may make an offer (which may be from a position of commercial expediency rather than guilt). If so, do it through your lawyer as conditions (secrecy) may apply.

b) At Provincial level and/or where "contract based" employment prevails and where "precedent" may play a more prominent role in your decision making you can be assured the mediator (the claimant my not have counsel at this stage) will be aware of that. If you or the claimant declines reconciliation and chooses to proceed to arbitration at Regional NRLC you may find all but the most ardent of claimants do not pursue their claim, your writer has found this to be the case. However some will pursue the claim so be on guard.

c) Why?

i. Because they quite properly feel their claim is just;

ii. Because the outcome may influence other claims by establishing precedence;

iii. Because they and/or their lawyer feels they still have a chance to profit from the commercial expedience of the defendant - i.e. you will pay them to go away;

iv. Worse, that there is an improper relationship between the claimant and the arbitrator.

Your writer does not have first hand knowledge of corruption by arbitrators however a well-informed lawyer should be able to give you some idea or will have heard rumors where individuals have been identified as corrupt.

The system is not hard to follow: The arbitrator finds against the defendant, and some claims can be considerable, particularly where the defendant's case is weak and would not stand well in full court regardless of the circumstances.

The proceeds would then be split between the claimant, the lawyer and the arbitrator. Hopefully this rumor is not true, but be on guard.

Your writer has followed a considerable number of cases through to conclusion both with and without a lawyer as not all our readers can afford a lawyer.

At Provincial levels reconciliation and/or arbitration were generally of an acceptable standard, regrettably that was not the writers experience in Manila where reconciliation was not pursued by the arbitrator who instead pressured the defendants to offer a settlement even though the case was without merit.

Best advice:

i. Read and understand the "Labor Code," do not leave it to others.

ii. Insure the "Labor Code" is followed at every level of your dealings with employees.

iii. Choose an experienced "human resources" lawyer carefully and you will be rewarded.

iv. Where you are the subject of a claim prepare affidavits accurately and in detail from the outset.

Work hard at stopping claims from the outset, if not, at the earliest, follow the CODE to the letter and more, this will save you a lot of time and money in the future.


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