Regulating the Practice of Independent Contracting

DO No. 18-A: Regulating the Practice of Independent Contracting

Independent contracting is a global trend and has become an accepted business practice. Contracting out various auxiliary services enables companies to concentrate their resources and place more focus on their primary business purpose.

Although outsourcing allows companies to increase operations while retaining the flexibility to cut back should profits take an unexpected downturn, this practical and efficient means of conducting business is prone to exploitation by companies that treat workers as contractors for the benefits and yet treat them as employees when it comes to work duties.

In the Philippines, Department Order No. 18-A, a regulation issued by the Department of Labor and Employment, sets in place increased legal mechanisms to hold accountable both companies and their contractors for their outsourcing practices. The said order gives definition to the term “independent contracting” and gives recognition to the trilateral relationship that is formed among the principal, the contractor, and the contractual workers under the contractor’s employ.

Two contracts govern the relationship between the parties: the Service Agreement between the principal and the contractor, which defines the terms and conditions of the contract for services between the contractor and the principal, and the Employment Contract between the contractor and the worker, which provides for the terms and conditions of employment of the contractual worker. DO No. 18-A creates legal requirements that spell out the rights, obligations, and liabilities of the principal, contractor, and workers who are parties to a job contracting arrangement.

The principal, as the indirect employer or the user of the services of the contractor, has limited liability over the employees of the contractor, being jointly and severally liable with the contractor for payment of the employees’ wages to the extent of the work performed under the contract. The principal likewise has absolute and direct liability in the case of labor-only contracting, where the principal shall be responsible to the workers in the same manner and extent as if it directly employed the contractual workers.

The contractor, to be considered legitimate, must have a minimum capitalization of at least P3 Million and must be registered with the Regional Office of the DOLE where it principally operates. The contractor’s failure to register shall give rise to the presumption that the contractor is engaged in labor-only contracting. The contractor must also be able to present proof of ownership or lease agreement on tools, equipment, machineries and work premises, as well as proof of financial capacity to pay the wages and benefits of its workers, and control over the performance of the work of the employee deployed or assigned to render the contracted work or services.

Contractual workers are entitled to all the rights and privileges as provided for in the Labor Code, as well as retirement benefits under the SSS or retirement plans of the contractor, if there are any. It is understood that all of a 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.

This article is prepared by Atty. Reynaldo T. Dizon, a partner and head of the Labor and Employment Practice Group. This article is for general information purposes only and does not purport to contain a complete and comprehensive information of the subject matter discussed. The Firm expressly disclaims any and all liability for loss or damage for actions taken or not taken based on any or all of the contents of this article. Readers should seek specific legal advice as to their particular circumstances or situations.