MANGILIMAN, Neil Francel D.

JD II-2
201980051

PAMANTASAN NG LUNGSOD NG MAYNILA

LABOR STANDARDS

COMPARISON OF SALIENT PROVISIONS

OF D.O. 18 - A AND D.O. 174-17

D.O. 18 - A, S. D.O. 174-17 NOTES

2011

I. GUIDING PRINCIPLES

SEC. 1. Guiding SEC. 1. Guiding principles. Article 106. Contractor or sub-

principles. Non-permissible forms of contractor. X X X
Contracting and contracting and
subcontracting subcontracting arrangements The Secretary of Labor and
arrangements are undermine the Constitutional Employment may, by appropriate
expressly allowed and statutory right to security regulations, restrict or prohibit the
by law and are of tenure of workers. contracting out of labor to protect
subject to the rights of workers established
regulations for the SEC. 4. Regulation of under this Code. In so prohibiting or
promotion of Contracting or restricting, he may make
employment and Subcontracting. The appropriate distinctions between
the observance of Secretary of Labor and labor-only contracting and job
the rights of Employment shall regulate contracting as well as
workers to just and contracting or subcontracting differentiations within these types
humane conditions arrangement by absolutely of contracting, and determine who
of work, security of prohibiting labor-only among the parties involved shall be
tenure, self- contracting, and restricting considered the employer for
organization and job contracting allowed under purposes of this Code, to prevent
collective the provisions of the Labor any violation or circumvention of
bargaining. Labor- Code, as amended any provision of this Code.
only contracting as
defined herein
shall be prohibited.
Sections 1 and 6 (a) of Department
Order No. 18-02 state:

Section 1. Guiding principles. –

Contracting or subcontracting
arrangements are expressly allowed
by law and are subject to regulation
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.

xxxx

Section 6. Prohibitions. –
Notwithstanding Section 5 of these
Rules, the following are hereby
declared prohibited for being
contrary to law or public policy:

(a) 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;
(Temic Automotive v. Temic
Automotive Phils. Employees
Union, GR No. 186965

)
II. CONTRACTING OR SUBCONTRACTING, DEFINITION

SEC. 3 (c) SEC. 3 Compared to an employee, an

independent contractor is one who
“Contracting” or “Contracting” or carries on a distinct and independent
“Subcontracting” “Subcontracting” – refers to business and undertakes to perform
refers to an an arrangement whereby a the job, work, or service on its own
arrangement principal agrees to farm out to account and under its own
whereby a a contractor the performance responsibility according to its own
principal agrees to or completion of a specific job manner and method, free from the
put out or farm out or work within a definite or control and direction of the principal
with a contractor predetermined period, in all matters connected with the
the performance or regardless of whether such performance of the work except as
completion of a job or work is to be performed to the results thereof. Hence, xxx an
specific job, work or completed within or outside independent contractor enjoys
or service within a the premises of the principal. independence and freedom from the
definite or control and supervision of his
predetermined principal xxx. [Chavez vs. NLRC, GR
period, regardless No. 146530, 2005]
whether such job,
work or service is ART. 106. Contractor or
to be performed or subcontractor. - Whenever an
completed within employer enters into a contract with
or outside the another person for the performance
premises of the of the former[‘s] work, the
principal. employees of the contractor and of
the latter[‘s] subcontractor, if any,
shall be paid in accordance with the
provisions of this Code.
In the event that the contractor or
subcontractor fails to pay the wages
of his employees in accordance with
this Code, the employer shall be
jointly and severally liable with his
contractor or subcontractor to such
employees to the extent of the work
performed under the contract, in the
same manner and extent that he is
liable to employees directly
employed by him. xxx (Manila
Electric Company v. Benamira, GR
No. 145271, July 14, 2005)
 In the course of this appeal, ABS-
CBN took matters into its own hands
and terminated the petitioners’
services, clearly disregarding its own
appeal then pending with the NLRC.
Notably, this appeal posited that the
petitioners were not employees
(whose services therefore could be
terminated through dismissal under
the Labor Code); they were
independent contractors whose
services could be terminated at will,
subject only to the terms of their
contracts. To justify the termination
of service, the company cited
redundancy as its authorized cause
but offered no justifiable supporting
evidence. It merely claimed that it
was contracting out the petitioners’
activities in the exercise of its
management prerogative. Fulache v.
ABS-CBN (January 21, 2010)

III. LEGITIMATE CONTRACTING v. PERMISSIBLE CONTRACTING

Sec. 4. SEC. 8. Rule VIII-A, Book III of the Omnibus

Rules Implementing the Labor Code,
Legitimate Permissible Contracting or as amended by Department Order
contracting or Subcontracting No. 18, distinguishes between
subcontracting. Arrangements. legitimate and labor-only
Contracting or contracting:
subcontracting Notwithstanding Sections 5
shall be legitimate and 6 hereof, contracting or Section 3. Trilateral Relationship in
if all the following subcontracting shall only be Contracting Arrangements. In
circumstances allowed if all the following legitimate contracting, there exists a
concur: a. The circumstances occur: trilateral relationship under which
contractor must be there is a contract for a specific job,
registered in a. The contractor or work or service between the
accordance with subcontractor is engaged in a principal and the contractor or
these Rules and distinct and independent subcontractor, and a contract of
carries a distinct business and undertakes to employment between the contractor
and independent perform the job or work on its or subcontractor and its
business and own responsibility, according workers. Hence, there are three
undertakes to to its own manner and parties involved in these
perform job, work method; arrangements, the principal which
or service on its decides to farm out a job or service
own responsibility, b. The contractor or to a contractor or subcontractor, the
according to its subcontractor has substantial contractor or subcontractor which
own manner and capital to carry out the job has the capacity to independently
method, and free farmed out by the principal on undertake the performance of the
from control and his account, manner and job, work or service, and the
direction of the method, investment in the contractual workers engaged by the
principal in all form of tools, equipment, contractor or subcontractor to
matters connected machinery and supervision; accomplish the job, work or service.
with the
performance of the c. In performing the work Section 5. Prohibition against labor-
work except as to farmed out, the contractor or only contracting. Labor-only
the results thereof; subcontractor is free from the contracting Sis hereby declared
b. The contractor control and/or direction of the prohibited. For this purpose, labor-
has substantial principal in all matters only contracting shall refer to an
capital and/or connected with the arrangement where the contractor
investment; and performance of the work or subcontractor merely recruits,
The service except as to the result supplies or places workers to
agreement ensures thereto; and d. The service perform a job, work or service for a
compliance with all agreement ensures principal, and any of the following
the rights and compliance with all the rights elements are present:
benefits under and benefits for all the
Labor Laws. employees of the contractor i) The contractor or subcontractor
or subcontractor under the does not have substantial capital or
labor laws. investment which relates to the job,
work or service to be performed and
the employees recruited, supplied or
placed by such contractor or
subcontractor are performing
activities which are directly related to
the main business of the principal, or

ii) The contractor does not exercise

the right to control over the
performance of the work of the
contractual employee.(San Miguel
Corporation vs. Aballa 461 SCRA 392
, June 28, 2005)
 In legitimate labor contracting, the
law creates an employer-employee
relationship for a limited purpose,
i.e., to ensure that the employees
are paid their wages. The principal
employer becomes jointly and
severally liable with the job
contractor, only for the payment of
the employees’ wages whenever the
contractor fails to pay the
same. Other than that, the principal
employer is not responsible for any
claim made by the employees.(San
Miguel Corporation vs. Aballa 461
SCRA 392 , June 28, 2005)

In labor-only contracting, the

statute creates an employer-
employee relationship for a
comprehensive purpose: to prevent
a circumvention of labor laws. The
contractor is considered merely an
agent of the principal employer and
the latter is responsible to the
employees of the labor-only
contractor as if such employees had
been directly employed by the
principal employer.(San Miguel
Corporation vs. Aballa 461 SCRA
392 , June 28, 2005)

Section 6. Permissible contracting

and subcontracting. – Subject to
the conditions set forth in Section
3(d) and (e) and Section 5 hereof,
the principal may engage the
services of a contractor or
subcontractor for the performance
of any of the following;

(a) Works or services temporarily or

occasionally needed to meet
abnormal increase in the demand of
products or services, provided that
the normal production capacity or
regular workforce of the principal
cannot reasonably cope with such
demands;

(b) Works or services temporarily or

occasionally needed by the principal
for undertakings requiring expert or
highly technical personnel to
improve the management or
operations of an enterprise;

(c) Services temporarily needed for

the introduction or promotion of
new products, only for the duration
of the introductory or promotional
period;

(d) Works or services not directly

related or not integral to the main
business or operation of the
principal, including casual work,
janitorial, security, landscaping, and
messengerial services, and work
not related to manufacturing
processes in manufacturing
establishments;

(e) Services involving the public

display of manufacturer’s products
which does not involve the act of
selling or issuance of receipts or
invoices;

(f) Specialized works involving the

use of some particular, unusual, or
peculiar skills, expertise, tools or
equipment the performance of
which is beyond the competence of
the regular workforce or production
capacity of the principal; and

(g) Unless a reliever system is in

place among the regular workforce,
substitute services for absent
regular employees, provided that
the period of service shall be
coextensive with the period of
absence and the same is made clear
to the substitute employee at the
time of engagement. The phrase
"absent regular employees"
includes those who are serving
suspensions or other disciplinary
measures not amounting to
termination of employment meted
out by the principal, but excludes
those on strike where all the formal
requisites for the legality of the
strike have been prima facie
complied with based on the records
filed with the National Conciliation
and Mediation Board. (Dole Phils. v.
Esteva, GR No. 161115, Novemebr
30, 2006)

Section 3. Trilateral Relationship in

Contracting Arrangements. In
legitimate contracting, there exists
a trilateral relationship under which
there is a contract for a specific
job, work or service between the
principal and the contractor or
subcontractor, and a contract of
employment between the
contractor or subcontractor and its
workers. Hence, there are three
parties involved in these
arrangements, the principal which
decides to farm out a job or
service to a contractor or
subcontractor, the contractor or
subcontractor which has the
capacity to independently
undertake the performance of the
job, work or service, and the
contractual workers engaged by
the contractor or subcontractor to
accomplish the job[,] work or
service. (Aliviado v. Procter and
 Gamble, GR No. 160506, March 9,
2010)

IV. LABOR - ONLY CONTRACTING, DEFINITION AND ELEMENTS

Section 6. Section 3. The test to determine the

existence of independent
Prohibition against Definition of terms. The contractorship is whether one
labor-only following terms, as used in claiming to be an independent
contracting. Labor- these Rules, shall mean: x x contractor has contracted to do the
only contracting is x h) ”Labor-only contracting” work according to his own
hereby declared – refers to arrangement methods and without being subject
prohibited. For this where the contractor or to the control of the employer,
purpose, labor- subcontractor merely except only as to the results of the
only contracting recruits, supplies or places work.
shall refer to an workers to perform a job or
arrangement work for a principal, and the To consider the respondent workers
where: (a) The elements enumerated in as employees of the maestros
contractor does Section 5 hereunder are would mean that Teng committed
not have present. x x x impermissible labor-only
substantial capital contracting. As a policy, the Labor
or investments in Section 5. Absolute Code prohibits labor-only
the form of tools, Prohibition against Labor- contracting:
equipment, only Contracting. Labor-only
machineries, work contracting, which is totally
premises, among prohibited, refers to an ART. 106. Contractor or
others, and the arrangement where: Subcontractor - x x x The
employees Secretary of Labor and
recruited and a) i. The contractor or Employment may, by
placed are subcontractor does not have appropriate regulations,
performing substantial capital, or restrict or prohibit the
activities which are contracting-out of labor.
usually necessary ii. The contractor or
or desirable to the subcontractor does not have xxxx
operation of the investments in the form of
company, or tools, equipment, There is "labor-only"
directly related to machineries, supervision, contracting where the person
the main business work premises, among supplying workers to an
of the principal others, and employer does not have
within a definite or substantial capital or
iii. The contractor’s or investment in the form of
predetermined
subcontractor’s employees tools, equipment, machineries,
period, regardless
recruited and placed are work premises, among others,
of whether such
job, work, or performing activities which and the workers recruited and
service is to be are directly related to the placed by such persons are
performed or main business operation of performing activities which are
completed within the principal; or directly related to the principal
or outside the business of such employer. In
premises of the b) The contractor or such cases, the person or
principal, or (b) subcontractor does not intermediary shall be
The contractor exercise the right to control considered merely as an agent
does not exercise over the performance of the of the employer who shall be
the right to control work of the employee. responsible to the workers in
over the the same manner and extent
performance of as if the latter were directly
the work of the employed by him.
employee.
Section 5 of the DO No. 18-02,46
which implements Article 106 of the
Labor Code, provides:

Section 5. Prohibition against

labor-only contracting. -
Labor-only contracting is
hereby declared prohibited.
For this purpose, labor-only
contracting shall refer to an
arrangement where the
contractor or subcontractor
merely recruits, supplies or
places workers to perform a
job, work or service for a
principal, and any of the
following elements are
present:

(i) The contractor or

subcontractor does not have
substantial capital or
investment which relates to
the job, work or service to be
performed and the employees
recruited, supplied or placed
by such contractor or
subcontractor are performing
activities which are directly
related to the main business of
the principal; or
 (ii) The contractor does not
exercise the right to control
over the performance of the
work of the contractual
employee. (Teng vs. Pahagac,
G.R. No. 169704)

Labor-only contracting is considered

as a form of ULP when the same is
devised by the employer to "interfere
with, restrain or coerce employees in
the exercise of their rights to self-
organization." Article 259 of the
Labor Code, as amended, which
enumerates certain prohibited
activities constitutive of ULP,
provides:

Article 259. Unfair Labor Practices of

Employers. - It shall be unlawful for
an employer to commit any of the
following unfair labor practice:

xx xx

(c) To contract out services or

functions being performed by union
members when such will interfere
with, restrain or coerce employees in
the exercise of their rights to self-
organization. (CEPALCO vs CEPALCO
Employees Labor Union, G.R. No.
211015)

Accordingly, we hold that employer-

employee ties exist between Teng
and the respondent workers. A
finding that the maestros are labor-
only contractors is equivalent to a
finding that an employer-employee
relationship exists between Teng
and the respondent workers. As
regular employees, the respondent
workers are entitled to all the
benefits and rights appurtenant to
regular employment. (Teng vs
Pahagac, G.R. No. 169704)

There is "labor only" contract when

the person acting as contractor is
considered merely as an agent or
intermediary of the principal who is
responsible to the workers in the
same manner and to the same
extent as if they had been directly
employed by him. (Manila Electric
Company v. Benamira, GR No.
145271, July 14, 2005)

In a legitimate job contract, an

employer enters into a contract with
a job contractor for the
performance of the former’s work;
In legitimate job contracting, the
law creates an employer-employee
relationship between the employer
and the contractor’s employees only
for a limited purpose, i.e., to ensure
that the employees are paid their
wages; Labor-only contracting is an
arrangement wherein the
contractor merely acts as an agent
in recruiting and supplying the
principal employer with workers for
the purpose of circumventing labor
law provisions setting down the
rights of employees (Coca-Cola
Bottlers Phils., Inc. vs. Agito,
579 SCRA 445, G.R. No. 179546
February 13, 2009)

The parties cannot dictate by the

mere expedience of a unilateral
declaration in a contract the
character of their business.—In
declaring BMSI as an independent
contractor, the CA, in the
challenged Decision, heavily relied
on the provisions of the Agreement,
wherein BMSI declared that it was
an independent contractor, with
substantial capital and investment.
De Los Santos v. NLRC, 372 SCRA
723 (2001), instructed us that the
character of the business, i.e.,
whether as labor-only contractor or
as job contractor, should be
measured in terms of, and
determined by, the criteria set by
statute. The parties cannot dictate
by the mere expedience of a
unilateral declaration in a contract
the character of their business.
(Babas vs. Lorenzo Shipping
Corporation, 638 SCRA 735,
G.R. No. 186091 December 15,
2010)

"Section 9 Labor Only Contracting –

a) Any person who undertakes to
supply workers to an employer shall
be deemed to be engaged in labor-
only contracting where such
person:

1) Does not have substantial capital

or investment in the form of tools,
equipment, machineries, work
premises and other materials; and

2) The workers recruited and placed

by such person are performing
activities which are directly related
to the principal business or
operation of the employer to which
workers are habitually employed.

b) Labor-only contracting as
defined herein is hereby prohibited
and the person acting as contractor
shall be considered merely as an
 agent or intermediary of the
employer who shall be responsible
to the workers in the same manner
and extent as if the latter were
directly employed by him." (Dole
Phils. v. Esteva, GR No. 161115,
November 30, 2006)

There is “labor-only” contracting

where the person supplying workers
to an employer does not have
substantial capital or investment in
the form of tools, equipment,
machineries, work premises, among
others, and the workers recruited
and placed by such person are
performing activities which are
directly related to the principal
business of such employer. In such
cases, the person or intermediary
shall be considered merely as an
agent of the employer who shall be
responsible to the workers in the
same manner and extent as if the
latter were directly employed by him.
(San Miguel Corporation vs. Aballa
461 SCRA 392 , June 28, 2005)

In view of the "distinct and

independent business" of
independent contractors, no
employer-employee relationship
exists between independent
contractors and their principals.
Independent contractors are
recognized under Article 106 of the
Labor Code:

Art. 106. Contractor or

subcontractor. Whenever an
employer enters into a contract with
another person for the performance
of the former’s work, the employees
of the contractor and of the latter’s
subcontractor, if any, shall be paid in
accordance with the provisions of
this Code.

The Secretary of Labor and

Employment may, by appropriate
regulations, restrict or prohibit the
contracting-out of labor to protect
the rights of workers established
under this Code. In so prohibiting or
restricting, he may make appropriate
distinctions between labor-only
contracting and job contracting as
well as differentiations within these
types of contracting and determine
who among the parties involved shall
be considered the employer for
purposes of this Code, to prevent
any violation or circumvention of any
provision of this Code.

There is "labor-only" contracting

where the person supplying workers
to an employer does not have
substantial capital or investment in
the form of tools, equipment,
machineries, work premises, among
others, and the workers recruited
and placed by such person are
performing activities which are
directly related to the principal
business of such employer. In such
cases, the person or intermediary
shall be considered merely as an
agent of the employer who shall be
responsible to the workers in the
same manner and extent as if the
latter were directly employed by him.
(Fuji Television v. Espiritu, Dec. 3,
2014)

There is "labor-only" contracting

where the person supplying workers
to an employer does not have
substantial capital or investment in
the form of tools, equipment,
 machineries, work premises, among
others, and the workers recruited
and placed by such persons are
performing activities which are
directly related to the principal
business of such employer. In such
cases, the person or intermediary
shall be considered merely as an
agent of the employer who shall be
responsible to the workers in the
same manner and extent as if the
latter were directly employed by him.
(Temic Automotive v. Temic
Automotive Phils. Employees Union,
GR No. 186965, December 23, 2009)

V. SUBSTANTIAL CAPITALIZATION

Section 3. Section 3. Mere compliance with substantial

capital requirement will not suffice
Definition of terms. Definition of terms. The for a contractor to be considered a
The following following terms, as used in legitimate contractor. If the
terms as used in these Rules, shall mean: x x x workers supplied by the contractor
these Rules, shall l) “Substantial capital” – refers work alongside the principal’s
mean: x x x (l) to paid-up capital regular employees who are
“Substantial stock/shares at least Five performing identical work, such is
capital” refers to Million Pesos (P5,000,000.00) an indicium of labor-only
paid-up capital in the case of corporations, contracting.
stocks/shares of at partnerships and
least Three Million cooperatives; in the case of
Pesos single proprietorship, a net
(P3,000,000.00) in worth of at least Five Million It is the totality of the facts and the
the case of Pesos (P5,000,000.00). x x x surrounding circumstances of the
corporations, case which is determinative of the
partnerships and parties’ relationship. Several
cooperatives; in factors may be considered, such as,
the case of single whether the contractor was
proprietorship, a carrying on an independent
net worth of at business; the nature and extent of
least Three Million the work; the skill required; the
Pesos term and duration of the
(P3,000,000.00). x relationship; the right to assign the
xx performance of specified pieces of
work; the control and supervision of
the workers the power of the
employer with respect to the hiring,
firing and payment of the workers
of the contractor; the control of the
premises; the duty to supply
premises, tools, appliances,
materials and labor; and the mode,
manner and terms of payment.
(Coca-Cola v. Agito, 13 Feb. 2009)

As to the supposed substantial

capital and investment required of
an independent job contractor, the
Court stated that it "does not set an
absolute figure for what it considers
substantial capital for an
independent job contractor, but it
measures the same against the type
of work which the contractor is
obligated to perform for the
principal." The Court reiterated that
the contractor, not the employee,
had the burden of proof that it has
the substantial capital, investment
and tool to engage in job
contracting. (Quintanar vs. Coca-
Cola Bottlers, G.R. No. 210565)

As stated above, however, the

possession of substantial capital is
only one element. Labor-only
contracting exists when any of the
two elements is present. Thus, even
if the Court would indulge Coca-
Cola and admit that Interserve had
more than sufficient capital or
investment in the form of tools,
equipment, machineries, work
premises, still, it cannot be denied
that the petitioners were
performing activities which were
directly related to the principal
business of such employer. Also, it
has been ruled that no absolute
figure is set for what is considered
'substantial capital' because the
same is measured against the type
of work which the contractor is
obligated to perform for the
principal.(Quintanar vs. Coca-Cola
Bottlers, G.R. No. 210565)

"Substantial capital or investment"

refers to capital stocks and
subscribed capitalization in the case
of corporations, tools, equipment,
implements, machineries and work
premises, actually and directly used
by the contractor or subcontractor
in the performance or completion of
the job, work or service contracted
out. (CEPALCO vs CEPALCO
Employees Labor Union, G.R. No.
211015)

In order to be considered an
independent contractor it is not
enough to show substantial
capitalization or investment in the
form of tools, equipment,
machinery and work premises. The
conjunction "and," in defining what
a job contractor is, means that
aside from having a substantial
capital or investment in the form of
tools, equipment, machineries,
work premise, and other materials
which are necessary in the conduct
of his business, the contractor must
be able to prove that it also carries
on an independent business and
undertakes the contract work on his
own account under his own
responsibility according to his own
manner and method, free from the
 control and direction of his
employer or principal in all matters
connected with the performance of
the work except as to the results
thereof. (Dole Phils. v. Esteva, GR
No. 161115, November 30, 2006)

"Substantial capital or investment"

refers to capital stocks and
subscribed capitalization in the case
of corporations, tools, equipment,
implements, machineries and work
premises, actually and directly used
by the contractor or subcontractor
in the performance or completion of
the job, work or service contracted
out. (Aliviado v. Procter and
Gamble, GR No. 160506, March 9,
2010)

VI. “RIGHT TO CONTROL”

Section 3. N/A Of the four, the power of control is

the most important element. More
Definition of terms. importantly, the control test merely
The following calls for the existence of the right to
terms as used in control, and not necessarily the
these Rules, shall exercise thereof. [Dealco Farms vs.
mean: x x x (i) NLRC, as cited in Tongko vs.
“Right to control” Manufacturers Life, GR No. 167622,
refers to the right 2011]
reserved to the
person for whom Not every form of control is
the services of the indicative of employer-employee
contractual relationship. A person who
workers are performs work for another and is
performed, to subjected to its rules, regulations,
determine not only and code of ethics does not
the end to be necessarily become an employee.
achieved, but also As long as the level of control does
the manner and not interfere with the means and
means to be used methods of accomplishing the
in reaching that assigned tasks, the rules imposed
end. by the hiring party on the hired
party do not amount to the labor
law concept of control that is
indicative of employer-employee
relationship.(Royale Homes
Marketing Corporation vs. Alcantara
731 SCRA 147 , July 28, 2014)

Although it has been said that

among the four (4) tests to
determine the existence of any
employer-employee relationship, it is
the "control test" that is most
persuasive, the courts cannot simply
ignore the other circumstances
obtaining in each case in order to
determine whether an employer-
employee relationship exists
between the parties. (Quintanar vs.
Coca-Cola Bottlers,G.R. No. 210565)

The "right to control" shall refer 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. (CEPALCO vs CEPALCO
Employees Labor Union, G.R. No.
211015)

The mere presentation of codes or of

rules and regulations, however, is
not per se indicative of labor law
control as the law and jurisprudence
teach us. Guidelines indicative of
labor law "control," as the first
Insular Life case tells us, should not
merely relate to the mutually
desirable result intended by the
contractual relationship; they must
have the nature of dictating the
means or methods to be employed in
attaining the result, or of fixing the
methodology and of binding or
restricting the party hired to the use
of these means. [Tongko vs.
Manufacturers Life Insurance, GR
No. 167622(Res.), 2010]

In other words, where the element

of control is absent; where a person
who works for another does so more
or less at his own pleasure and is not
subject to definite hours or
conditions of work, and in turn is
compensated according to the result
of his effort, the relationship of
employer-employee does not exist.
[SSS vs. CA, as cited in Tongko vs.
Manufacturers Life, GR No. 167622,
2011]

The existence of an employment

relation is not dependent on how the
worker is paid but on the presence
or absence of control over the means
and method of the work; that the
amount earned in excess of the
"boundary hulog" is equivalent to
wages; and that the fact that the
power of dismissal was not
mentioned in the Kasunduan did not
mean that private respondent never
exercised such power, or could not
exercise such power. (Villamaria vs.
CA | G.R. No. 165881 | 2006-04-19)

Jurisprudence is abound with cases

that recite the factors to be
considered in determining the
existence of employer-employee
relationship, namely: (a) the
selection and engagement of the
employee; (b) the payment of
wages; (c) the power of dismissal;
 and (d) the employer's power to
control the employee with respect to
the means and method by which the
work is to be accomplished.16 The
most important factor involves the
control test. Under the control test,
there is an employer-employee
relationship when the person for
whom the services are performed
reserves the right to control not only
the end achieved but also the
manner and means used to achieve
that end. (TELEVISION AND
PRODUCTION EXPONENTS, INC.
and/or ANTONIO P. TUVIERA vs.
ROBERTO C. SERVAÑA, G.R. No.
167648, January 28, 2008)

The "right to control" shall refer 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. (Aliviado
v. Procter and Gamble, GR No.
160506, March 9, 2010)

VII. EFFECTS OF “LABOR-ONLY CONTRACTING” AND OTHER ILLICIT FORMS OF

CONTRACTING / COMMISSION OF PROHIBITIONS

SEC. 27. SEC. 7. ART. 106. Contractor or

subcontracting. – Whenever an
Effects of finding When principal is deemed the employer enters into a contract with
labor-only direct employer of the another person for the performance
contracting and or contractor’s or of the former’s work, the employees
violation of subcontractor’s employees. In of the contractor and of the latter’s
Sections 7, 8 or 9 the event that there is a subcontractor, if any shall be paid in
of the Rules. A finding that the contractor or accordance with the provisions of
finding by subcontractor is engaged in this Code.
competent labor-only contractor under
authority of labor- Section 5 and other illicit In the event that the contractor or
only contracting forms of employment subcontractor fails to pay the wages
shall render the arrangements under Section 6 of his employees in accordance with
principal jointly of these Rules, the principal this Code, the employer shall be
and severally liable shall be deemed the direct jointly and severally liable with his
with the contractor employer of the contractor’s contractor or subcontractor to such
to the latter’s or subcontractor’s employees employees to the extent of the work
employees, in the performed under the contract, in
same manner and the same manner and extent that
extent that the he is liable to employees directly
principal is liable to employed by him.(San Miguel
employees directly Corporation vs. Aballa 461 SCRA
hired by him/her, 392 , June 28, 2005)
as provided in
Articles 106 of the An indirect employer (as defined by
Labor Code, as Article 107) can only be held
amended. A solidarily liable with the
finding of independent contractor or
commission of any subcontractor (as provided under
of the prohibited Article 109) in the event that the
activities in Section latter fails to pay the wages of its
7, or violation of employees (as described in Article
either Sections 8 or 106) Meralco Industrial Engineering
9 hereof, shall Services Corporation vs. National
render the Labor Relations Commission, 548
principal the direct SCRA 315, March 14, 2008
employer of the
employees of the The joint and several liability of the
contractor or principal with the contractor and
subcontractor, subcontractor were enacted to
pursuant to Article ensure compliance with the
109 of the Labor provisions of the Labor Code,
Code, as amended principally those on statutory
minimum wage. This liability
facilitates, if not guarantees,
payment of the workers'
compensation, thus, giving the
workers ample protection as
mandated by the 1987
Constitution.Meralco Industrial
Engineering Services Corporation
vs. National Labor Relations
Commission, 548 SCRA 315, March
14, 2008

VIII. EFFECT OF TERMINATION OF EMPLOYMENT

SEC. 13. SEC. 13. Under Article 279 of the Labor
Code, an employee who is unjustly
Effect of Effect of Termination of dismissed from work shall be
termination of Employment. The termination entitled to reinstatement without
employment. The of employment of the loss of seniority rights and other
termination of contractor’s/subcontractor’s privileges and to his full backwages,
employment of the employee prior to the inclusive of allowances, and to his
contractor expiration of the Service other benefits or their monetary
employee prior to Agreement shall be governed equivalent computed from the time
the expiration of by Articles 297, 298 and 299 his compensation was withheld
the Service of the Labor Code. from him up to the time of his actual
Agreement shall be reinstatement. The law intends the
governed by In case the termination of award of backwages and similar
Articles 282, 283 employment is caused by the benefits to accumulate past the
and 284 of the pre-termination of the Service date of the LA decision until the
Labor Code. In Agreement not due to dismissed employee is actually
case the authorized causes under reinstated (Malicdem v. Marulas
termination of Article 298, the right of the Industrial Corp., G.R. No. 204406,
employment is contractor’s/subcontractor’s February 26, 2014).
caused by the pre- employee to unpaid wages
termination of the and other unpaid benefits Where the dismissal is based on an
Service Agreement including unremitted legal authorized cause under Article 283
not due to mandatory contributions, of the Labor Code but the employer
authorized causes e.g., SSS, PhilHealth, Pag- failed to comply with the notice
under Article 283, IBIG, ECC, shall be borne by requirement, the sanction should be
the right of the the party at fault, without stiff as the dismissal process was
contractor prejudice to the solidary initiated by the employer’s exercise
employee to liability of the parties to the of his management prerogative, as
unpaid wages and Service Agreement. opposed to a dismissal based on a
other unpaid just cause under Article 282 with
benefits including Where the termination results the same procedural infirmity
unremitted legal from the expiration of the where the sanction to be imposed
mandatory Service Agreement, or from upon the employer should be
contributions, e.g., the completion of the phase tempered as the dismissal process
SSS, Philhealth, of the job or work for which was, in effect, initiated by an act
Pag-ibig, ECC, shall the employee is engaged, the imputable to the employee. (San
be borne by the latter may opt to wait for re- Miguel Corporation vs. Aballa 461
party at fault, employment within three (3) SCRA 392 , June 28, 2005)
without prejudice months to resign and transfer
to the solidary to another company. Failure The dismissal of an employee,
liability of the of the contractor to provide which the employer must validate,
parties to the new employment for the has a twofold requirement: one is
Service employee shall entitle the substantive, the other is procedural.
Agreement. Where latter to payment of Not only must the dismissal be for a
the termination separation benefits as may be just or an authorized cause, as
results from the provided by law or the Service provided by law; the rudimentary
expiration of the Agreement, whichever is requirements of due process - the
service agreement, higher, without prejudice to opportunity to be heard and to
or from the his/her entitlement to defend oneself - must be observed
completion of the completion bonuses or other as well. The employer has the
phase of the job, emoluments, including burden of proving that the dismissal
work or service for retirement benefits whenever was for a just cause; failure to show
which the applicable. The mere this, as in the present case, would
employee is expiration of the Service necessarily mean that the dismissal
engaged, the latter Agreement of the was unjustified and, therefore,
may opt for contractor’s/subcontractor’s illegal. (Teng vs. Pahagac, G.R. No.
payment of employees who are regular 169704)
separation benefits employees of the latter.
as may be Under prevailing jurisprudence the
provided by law or termination for an authorized cause
the Service requires payment of separation pay.
Agreement, Procedurally, if the dismissal is based
without prejudice on authorized causes under Articles
to his/her 283 and 284, the employer must
entitlement to the give the employee and the
completion Deparment of Labor and
bonuses or Employment written notice 30 days
emoluments, prior to the effectivity of his
including separation. Where the dismissal is
retirement benefits for an authorized cause but due
whenever process was not observed, the
applicable dismissal should be upheld. While
the procedural infirmity cannot be
cured, it should not invalidate the
dismissal. However, the employer
should be liable for non-compliance
with procedural requirements of due
process. (TELEVISION AND
PRODUCTION EXPONENTS, INC.
and/or ANTONIO P. TUVIERA vs.
ROBERTO C. SERVAÑA, G.R. No.
167648, January 28, 2008)

ART. 282. Termination by

employer. An employer may
terminate an employment for any of
the following causes:
a. Serious misconduct or willful
disobedience by the employee of
the lawful orders of his employer or
representative in connection with
his work

b. Gross and habitual neglect by the

employee of his duties;

c. Fraud or willful breach by the

employee of the trust reposed in him
by his employer or duly authorized
representative;

d. Commission of a crime or offense

by the employee against the person
of his employer or any immediate
member of his family or his duly
authorized representatives; and

e. Other causes analogous to the

foregoing. (Philippine Airlines, Inc.
vs. Ligan 547 SCRA 181 , February
29, 2008)

While retrenchment is a valid

exercise of management
prerogative, it is well settled that
economic losses as a ground for
dismissing an employee is factual in
nature, and in order for a
retrenchment scheme to be valid,
all of the following elements under
Article 283 of the Labor Code must
concur or be present,41 to wit:

(1) That retrenchment is reasonably

necessary and likely to prevent
business losses which, if already
incurred, are not merely de minimis,
but substantial, serious, actual and
real, or if only expected, are
reasonably imminent as perceived
objectively and in good faith by the
employer;
(2) That the employer served
written notice both to the
employees and to the Department
of Labor and Employment at least
one month prior to the intended
date of retrenchment;

(3) That the employer pays the

retrenched employees separation
pay equivalent to one (1) month
pay or at least one-half (1/2) month
pay for every year of service,
whichever is higher;

(4) That the employer exercises its

prerogative to retrench employees
in good faith for the advancement
of its interest and not to defeat or
circumvent the employees' right to
security of tenure; and,

(5) That the employer uses fair and

reasonable criteria in ascertaining
who would be dismissed and who
would be retained among the
employees, such as status,
efficiency, seniority, physical
fitness, age, and financial hardship
for certain workers.

The absence of one element

renders the retrenchment scheme
an irregular exercise of
management prerogative. The
employer's obligation to exhaust all
other means to avoid further losses
without retrenching its employees is
a component of the first element
enumerated above. To impart
operational meaning to the
constitutional policy of providing full
protection to labor, the employer's
 prerogative to bring down labor
costs by retrenching must be
exercised essentially as a measure
of last resort, after less drastic
means have been tried and found
wanting.4(Philippine Airlines, Inc.
vs. Ligan 547 SCRA 181 , February
29, 2008)

For termination due to

retrenchment to be valid, however,
the law requires that written notices
of the intended retrenchment be
served by the employer on the
worker and on the DOLE at least
one (1) month before the actual
date of the retrenchment,[76] in
order to give employees some time
to prepare for the eventual loss of
their jobs, as well as to give DOLE
the opportunity to ascertain the
verity of the alleged cause of
termination.(San Miguel
Corporation vs. Aballa 461 SCRA
392 , June 28, 2005)

Labor laws expressly prohibit

"labor-only" contracting. To prevent
its circumvention, the Labor Code
establishes an employer-employee
relationship between the employer
and the employees of the ‘labor-
only’ contractor.(Aliviado v. Procter
and Gamble, GR No. 160506, March
9, 2010)

IX. REQUIRED CONTRACTS

SEC 9. Required Section 11. Required ART. 280. Regular and Casual
contracts under Contracts under these Rules. Employment.-- The provisions of
these Rules. written agreement to the contrary
a. Employment contract notwithstanding and regardless of
between the the oral agreement of the parties,
a. Employment contractor/subcontractor and an employment shall be deemed to
contract between its employees. be regular where the employee has
the contractor and Notwithstanding any oral or been engaged to perform activities
its employee. written stipulations to the which are usually necessary or
Notwithstanding contrary, the contract desirable in the usual business or
any oral or written between the trade of the employer, except
stipulations to the contractor/subcontractor and where the employment has
contrary, the its employees shall be been fixed for a specific project
contract between governed by the provisions of or undertaking the completion
the contractor and Articles 294 and 295 of the or termination of which has
its employees shall Labor Code, as amended, been determined at the time of
be governed by the including the provisions on the engagement of the
provisions of general labor standards. It employee or where the work or
Articles 279 and shall include the following service to be performed is seasonal
280 of the Labor terms and conditions: in nature and the employment is for
Code, as amended. the duration of the season.
It shall include the i. The specific description of
following terms the job or work to be An employment shall be deemed to
and conditions: performed by the employee; be casual if it is not covered by the
and preceding paragraph: Provided,
i. The specific That, any employee who has
description of the ii. The place of work and rendered at least one year of
job, work or terms and conditions of service, whether such service is
service to be employment, including a continuous or broken, shall be
performed by the statement of the wage rate considered a regular employee with
employee; applicable to the individual respect to the activity in which he is
employee. employed and his employment shall
ii. The place of continue while such actually exists
work and terms The contractor/subcontractor (Leyte Geothermal Power
and conditions of shall inform the employee of Progressive Employees Union v.
employment, the foregoing stipulations in PNOCEDC, G.R. No. 170351, March
including a writing on or before the first 30, 2011).
statement of the day of his/her employment.
wage rate The foregoing contemplates four
applicable to the b. Service Agreement (4) kinds of employees: (a) regular
individual between the principal and the employees or those who have been
employee; and contractor. The Service "engaged to perform activities
Agreement shall include the which are usually necessary or
iii. The term or following: desirable in the usual business or
duration of trade of the employer"; (b) project
employment that i. The specific description of employees or those "whose
must be co- the job or work being employment has been fixed for a
extensive with the subcontracted, including its specific project or undertaking[,]
Service Agreement term or duration; the completion or termination of
or with the specific which has been determined at the
phase of work for time of the engagement of the
which the ii. The place or work and employee"; (c) seasonal
employee is terms and conditions employees or those who work or
engaged. The governing the contracting perform services which are
contractor shall arrangement, to include the seasonal in nature, and the
inform the agreed amount of the employment is for the duration of
employee of the contracted job or work as well the season; and (d) casual
foregoing terms as the standard administrative employees or those who are not
and conditions of fee of not less than ten regular, project, or seasonal
employment in percent (10%) of the total employees. Jurisprudence has
writing on or contract cost; and added a fifth kind-- a fixed-term
before the first day employee (Leyte Geothermal Power
of his/her A provision on the issuance of Progressive Employees Union v.
employment. the bond/s as defined in PNOCEDC, G.R. No. 170351, March
Section 3(a) renewable every 30, 2011).
b. Service year.
Agreement “Under Art. 280, project
between the employment is one which "has been
principal and the fixed for a specific project or
contractor. The undertaking the completion or
Service Agreement termination of which has been
shall include the determined at the time of the
following: engagement of the employee." To
be considered as project-based,
i. The specific the employer has the burden of
description of the proof to show that: (a) the
job, work or employee was assigned to carry out
service being a specific project or undertaking
subcontracted. and (b) the duration and scope of
which were specified at the time the
ii. The place of employee was engaged for
work and terms such project or undertaking. It
and conditions must be proved that
governing the the particular work/service to be
contracting performed as well as its duration
arrangement, to are defined in the employment
include the agreed agreement and made clear to the
amount of the employee who was informed
services to be thereof at the time of hiring
rendered , the (Ganzon, Inc. v. Ando,G.R. No.
standard 214183, February 20, 2017).
administrative fee
of not less than ten The activities of project employees
percent (10%) of may or may not be usually
the total contract necessary or desirable in the usual
cost. business or trade of the employer
iii. Provisions (Ganzon, Inc. v. Ando,G.R. No.
ensuring 214183, February 20, 2017).
compliance with all
the rights and As the assigned project or phase
benefits of the begins and ends at determined
employees under or determinable times, the
the Labor Code services of the project employee
and these Rules may be lawfully terminated at its
on: provision for completion(Ganzon, Inc. v.
safe and healthful Ando,G.R. No. 214183, February
working 20, 2017).
conditions; labor
standards such as, Duration of project employment
service incentive should be determined at the time of
leave, rest days, hiring (Asos v. PNCC,G.R. No.
overtime pay, 13th 192394 July 3, 2013).
month pay and
separation pay; Failure of an employer to file
retirement termination reports after every
benefits; project completion proves that an
contributions and employee is not a project
remittance of SSS, employee (Asos v. PNCC,G.R. No.
Philhealth, PagIbig 192394 July 3, 2013).
Fund, and other
A regular employee dismissed for a
welfare benefits;
cause other than the just or
the right to self-
authorized causes provided by law
organization,
is illegally dismissed (Asos v.
collective
PNCC,G.R. No. 192394 July 3,
bargaining and
2013).
peaceful concerted
action; and the Under Article 281 of the Labor Code,
right to security of however, "an employee who is
tenure. allowed to work after a probationary
period shall be considered a regular
iv. A provision on
employee." When an employer
the Net Financial
renews a contract of employment
Contracting
after the lapse of the six-month
Capacity of the
probationary period, the employee
contractor, which
thereby becomes a regular
must be equal to
employee. No employer is allowed to
the total contract
determine indefinitely the fitness of
cost.
its employees.While length of time is
v. A provision on not the controlling test for project
the issuance of the employment, it is vital in determining
bond/s as defined if the employee was hired for a
in Section 3(m) specific undertaking or tasked to
renewable every perform functions vital, necessary
year and indispensable to the usual
business of trade of the employer.
vi. The contractor Thus, in the earlier case of
or subcontractor Maraguinot, Jr. v. NLRC, it was ruled
shall that a project or work pool
employee, who has been: (1)
directly remit continuously, as opposed to
monthly the intermittently, rehired by the same
employers’ employer for the same tasks or
nature of tasks; and (2) those tasks
share and are vital, necessary and
employees’ indispensable to the usual business
contribution to or trade of the employer, must be
deemed a regular employee
the SSS, ECC,
(Malicdem v. Marulas Industrial
Philhealth and Pag-
Corp., G.R. No. 204406, February
ibig.
26, 2014)
vii. The term or
The test to determine whether
duration of
employment is regular or not is the
engagement.
reasonable connection between the
The Service particular activity performed by the
Agreement must employee in relation to the usual
conform to the business or trade of the employer. If
DOLE the employee has been performing
the job for at least one year, even if
Standard the performance is not continuous or
Computation and merely intermittent, the law deems
Standard Service the repeated and continuing need for
its performance as sufficient
Agreement, which evidence of the necessity, if not
form part of these indispensability of that activity to the
Rules as Annexes business (Malicdem v. Marulas
Industrial Corp., G.R. No. 204406,
“A” and “B”. February 26, 2014).

To begin with, there is no actual

project. The only stipulations in the
contracts were the dates of their
effectivity, the duties and
responsibilities of the petitioners as
extruder operators, the rights and
obligations of the parties, and the
petitioners’ compensation and
allowances. As there was no specific
project or undertaking to speak of,
the respondents cannot invoke the
exception in Article 280 of the Labor
Code. This is a clear attempt to
frustrate the regularization of the
petitioners and to circumvent the law
(Malicdem v. Marulas Industrial
Corp., G.R. No. 204406, February
26, 2014).

In D.M. Consunji, Inc. v. Estelito

Jamin and Liganza v. RBL Shipyard
Corporation, the Court reiterated the
ruling that an employment ceases to
be coterminous with specific projects
when the employee is continuously
rehired due to the demands of the
employer’s business and re-engaged
for many more projects without
interruption (Malicdem v. Marulas
Industrial Corp., G.R. No. 204406,
February 26, 2014).

The language of a contract is not,

however, determinative of the
parties’ relationship; rather it is the
totality of the facts and surrounding
circumstances of the case. A party
cannot dictate, by the mere
expedient of a unilateral declaration
in a contract, the character of its
business,i.e., whether as labor-only
contractor or job contractor, it being
crucial that its character be
measured in terms of and
determined by the criteria set by
statute (San Miguel Corporation vs.
Aballa 461 SCRA 392 , June 28,
2005)

We take it that any agreement may

provide that one party shall render
services for and in behalf of another,
no matter how necessary for the
latter's business, even without
 being hired as an employee. This
set-up is precisely true in the case of
an independent contractorship as
well as in an agency agreement.
Indeed, Article 280 of the Labor
Code, quoted by the appellate court,
is not the yardstick for determining
the existence of an employment
relationship. (Phil. Global
Communications vs. De Vera G.R.
No. 157214 | 2005-06-07)

X. MANDATORY REGISTRATION AND EFFECT OF FAILURE TO REGISTER

Section 14. Section 14.

Mandatory Mandatory Registration and

Registration and Registry of Legitimate
Registry of Contractors. Consistent with
Legitimate the authority of the Secretary
Contractors. of Labor and Employment to
Consistent with the restrict or prohibit the
authority of the contracting out of labor to
Secretary of Labor protect the rights of workers,
and Employment it shall be mandatory for all
to restrict or persons or entities, including
prohibit the cooperatives, acting as
contracting out of contractors to register with
labor to protect the the Regional Office of the
rights of workers, it Department of Labor and
shall be mandatory Employment (DOLE) where it
for all persons or principally operates. Failure to
entities, including register shall give rise to the
cooperatives, presumption that the
acting as contractor is engaged in
contractors to labor-only contracting.
register with the Accordingly, the registration
Regional Office of system governing contracting
the Department of arrangements and
Labor and implemented by the Regional
Employment Offices of the DOLE is hereby
(DOLE) where it established, with the Bureau
principally
operates. Failure of Working Conditions (BWC)
to register shall as the central registry.
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

XI. INDUSTRIES NOT COVERED

Section 36. Section 33.

Contracting or Contracting or subcontracting

subcontracting in the Construction and Other
arrangements in Industries. Contracting or
the Construction subcontracting arrangements
and Other in the Construction Industry,
Industries. under the licensing coverage
Contracting or of the Philippine Construction
subcontracting Accreditation Board (PCAB),
arrangements in shall not be covered by the
the Construction provisions of these Rules and
Industry, under shall continue to be governed
the licensing by Department Order No. 19,
coverage of the Series of 1993 (Guidelines
Philippine Governing the Employment of
Construction Workers in the Construction
Accreditation Industry); Department Order
Board (PCAB), No. 13, Series of 1998
shall be covered by (Guidelines Governing the
the applicable Occupational Safety and
provisions of these Health in the Construction
Rules and shall Industry); and DOLE-DPWH-
continue to be DILG-DTI and PCAB
governed by Memorandum of Agreement-
Department Order Joint Administrative Order No.
No. 19, Series of 1, Series of 2011 (on
1993 (Guidelines coordination and
Governing the harmonization of policies and
Employment of programs on occupational
Workers in the safety and health in the
Construction construction industry). In
Industry); industries covered by a
Department Order separate regulation of the
No. 13, Series of DOLE or other government
1998 (Guidelines agency, contracting therein
Governing the shall be governed by these
Occupational Rules unless expressly
Safety and Health provided otherwise.
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.