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End of Endo? 5 Things You Need to Know About the DOLE's New Order on Contracting

Find out if your employment deal is legal based on the new issuance that takes effect next month
By Elyssa Christine Lopez |



When Labor Secretary Silvestre Bello III signed a department order setting out stricter regulations over contracting practices last March 16, the news was immediately greeted by protest actions from several workers’ organizations who wanted contractualization totally banned. The main employers’ group doesn’t seem too happy with it as well, warning it may lead to higher unemployment.


But before we can debate the pros and cons of the new order, we must first understand what exactly the new department directive is saying. Based on a close reading of the 12-page issuance and consultation with a labor law expert, the following are some of the most important points that a well-informed person, whether employer or employee, should know about the order.


1. Some forms of contracting are still allowed 

Contracting and subcontracting remain legal. These refer to an arrangement whereby a principal agrees to farm out to a contractor the performance or completion of a specific job or work within a definite or predetermined period, regardless of whether such job or work is to be performed or completed within or outside the premises of the principal.”



How do you know that an employment arrangement is the permissible kind of farming out of work?  Only if all of the following circumstances are present:


• The contractor or subcontractor is engaged in a distinct and independent business and undertakes to perform the job or work on its own responsibility, according to its own manner and method;

• The contractor or subcontractor has substantial capital to carry out the job farmed out by the principal on his account, manner and method, investment in the form of tools, equipment, machinery and supervision;

• In performing the work farmed out, the contractor or subcontractor is free from the control and/or direction of the principal in all matters connected with the performance of the work except as the result; and

• The Service Agreement ensures the compliance with all the rights and benefits for all the employees of the contractor or subcontractor under the labor laws.



2. Tougher regulation of contracting

While considered legal, contracting or subcontracting will be subject to tougher regulations. The minimum capital of contractors and subcontractors will be increased to Php5 million from only Php300,000 previously.  The license to operate must also be renewed every two years instead of threeMeanwhile, the registration fee for such agencies was raised to Php100,000 from Php25,000.

As well, contractors and subcontractors are prohibited from engaging in recruitment and placement activitiesThe aim is to separate the business of contracting from recruitment and placement. Business entities doing both should choose whether they are in the contracting or in the recruitment/placement business.



3. But labor-only contracting is totally prohibited

Labor-only contracting is defined as “an arrangement where the contractor or subcontractor merely recruits, supplies or places workers to perform a job or work for a principal.” How do you know that an employment arrangement is labor-only contracting? Helpfully, the order provides the following tell-tale signs:


• The contractor or subcontractor does not have substantial capital (defined as paid-up capital stock or shares of at least Php5 million for corporations, partnerships and cooperatives, or a net worth of at least Php5 million for individual proprietorships), or

• The contractor or subcontractor does not have investments in the form of tools, equipment, machineries, supervision, work premises, among othersand

• The contractor or subcontractor’s employees recruited and placed are performing activities which are directly related to the main business operation of the principal, or

• The contractor or subcontractor does not exercise the right to control over the performance or work of the employee.


4. Prohibition of other illicit forms of employment arrangements

In addition to labor-only contracting, the department order also prohibits the following illicit forms of employment arrangements:


• when the principal farms out work to a “cabo,” a person or group under the guise of labor organization or cooperative supplies workers to an employer;

• contracting out of a job or work through an in-house agency;


• contracting out of a job or work through an in-house cooperative which merely supplies workers to the principal;


• contracting out of a job or work by reason of a strike or lockout whether actual or imminent;



• contracting out of a job or work being performed by union members and such will interfere with, restrain or coerce employees in the exercise of their rights to self-organization;


• requiring the contractor’s/subcontractor’s employees to perform functions which are currently being performed by the regular employees of the principal; 


• requiring the contractor’s/subcontractor’s employees 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 or contractor from liability as to payment of future claims; or require the employee to become member of a cooperative;


• repeated hiring by the contractor/subcontractor of employees under an employment contract of short duration;


• requiring employees under a contracting/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;


• such other practices, schemes or employment arrangements designed to circumvent the right of workers to security of tenure.



5. Exemption of the construction industry from the new department order

Contracting or subcontracting arrangements in the construction industry, under the licensing coverage off the Philippine Construction Accreditation Board (PCAB), are not covered by the new department order. Instead the industry shall be covered by Department Order No. 19 Series of 1993 (Guidelines Governing the Employment of Workers in the Construction Industry) and Department Order No. 13 Series of 1998 (Guidelines Governing the Occupational Safety and Health in the Construction Industry; and a memorandum agreement between the labor, trade public works and local governments department. Other industries covered by separate regulations of the DOLE and other government agencies, however, are covered by the new department order.







Elyssa Christine Lopez is a staff writer of Entrepreneur PH. Follow her on Twitter @elyssalopz

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