Consistent with President Rodrigo Duterte’s campaign promise to end fixed-term employment, more commonly known as “endo”, the Department of Labor and Employment (“DOLE”) launched a review of Department Order (“D.O.”) No. 18-A, the existing implementing rules and regulations on contracting and subcontracting since 2011. In the interim, prior to the issuance of a new order, the DOLE released two issuances on 25 July 2016: (1) D.O. No. 162, series of 2016, which suspends the registration of all new applicants as contractors and subcontractors under D.O. No. 18-A; and (2) Labor Advisory No. 10, series of 2016, which grants to DOLE Regional Directors visitorial and investigative power under Article 128 of the Labor Code, including the authority to declare the existence of labor-only contracting between the contractors and subcontractors.

On 16 March 2017, Secretary of Labor and Employment Hon. Silvestre H. Bello III signed and issued Department Order No. 174, series of 2017, as the rules and regulations implementing Article 106 to 109 of the Labor Code on contracting and subcontracting, effectively superseding D.O. No. 18-A. Among the notable changes are:

First, the requirement of substantial capital in paid-up capital stock or shares for corporations, partnerships and cooperatives, or in the net worth for single proprietorship has been increased from Three Million Pesos (Php3,000,000.00) under D.O. No. 18-A to Five Million Pesos (Php5,000,000.00) under D.O. No. 174.

Second, the elements of Labor-Only Contracting in Section 6 of D.O. No. 18-A have been substantially retained in Section 5 of D.O. No. 174, which now provides:

“Section 5. Absolute Prohibition against Labor-only Contracting. Labor-only contracting, which is totally prohibited, refers to an arrangement where:

a)

i. The contractor or subcontractor does not have substantial capital, or

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

and

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

or

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

Section 5 of D.O. No. 174 is essentially a reiteration of the old rules in D.O. No. 18-A with the exception of the omitted phrase “regardless of whether such job, work or service is to be performed or completed within or outside the premises of the principal” which forms part of the original first requirement.

Third, Section 8 of D.O. No. 174 added a list of requirements for a permissible contracting or subcontracting arrangement:

“Section 8. Permissible Contracting or Subcontracting Arrangements. Notwithstanding Sections 5 and 6 hereof, contracting or subcontracting shall only be allowed if all the following circumstances concur:

a) 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 manner and method;

b) 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;

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

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

Fourth, the element of registration as a requisite in legitimate contracting or subcontracting under Section 4 of D.O. No. 18-A has been omitted in the requirements for permissible contracting and subcontracting arrangements under Section 8 of D.O. No. 174. However, the effect of failure or lack of registration has been maintained from D.O. No. 18-A to Section 14 of D.O. No. 174. Like the old rules, failure to register under the Registry of Legitimate Contractors shall give rise to the presumption that the contractor is engaged in labor-only contracting.

Lastly, procedural changes introduced in D.O. No. 174 include: requiring that the application for registration must be verified [Section 15]; raising registration fees for contractors from Php25,000.00 to Php100,000.00 [Section 19]; shortening the validity of a certificate of registration from three (3) years to two (2) years [Section 20]; and increasing the frequency of required reports to the DOLE Regional Office by contractors from an annual to a semi-annual basis [Section 22].

D.O. No. 174, while superseding all the rules and regulations implementing Article 106 to 109 of the Labor Code, did not depart from the rules laid down by its predecessor, D.O. No. 18-A. Moreover, like D.O. No. 18-A, D.O. No. 174 merely implements the provisions on contracting and subcontracting under the Labor Code. Like any other administrative or implementing rule or regulation, D.O. No. 174 cannot go beyond or amend the law it seeks to implement. Considering that the Labor Code does not prohibit legitimate job contracting, D.O. No. 174 cannot prohibit the same, but can only define what is a legitimate job contracting and what is labor-only contracting within the parameters and standards set by the Labor Code. Furthermore, like any other administrative or implementing rule or regulation, it may be amended, modified or superseded with another issuance from the Secretary of Labor and Employment anytime. Whether the issuance of D.O. No. 174 will fulfill the President’s campaign promise to end contractualization remains to be seen.

Copyright © 2017. All Rights Reserved.

Cruz Marcelo & Tenefrancia