CONTRACTUALIZATION IN THE PHILIPPINES

What is Contractualization?
Contractualization refers to the practice of hiring employees who would render their services for
a finite amount of time, usually, for a few months only. This is a system that has been practiced
and used by many companies, including large corporations. These enterprises often utilize this
arrangement in order to maintain their revenues up.
What is Endo?
In the previous presidential race, the issue of contractualization was put under the spotlight when
it was discussed during the final presidential debate that was held on April 24, 2016.
The five candidates, including current president Rodrigo Duterte, have all expressed their
opposition against “endo.” Endo means end of contract; it is also sometimes referred to as “5-5-
5” practice. Why? This is because some employers hire workers and then terminate their
contracts after five months, to avoid regularizing them – something that is mandated by the law.
According to the law, an employee who has been working for a company for six months should
be regularized unless the individual is not eligible to be a regular employee.
Regular employees are entitled to benefits and bonuses. However, through endo, employees are
stripped of these privileges. These benefits include:
 PhilHealth
 SSS
 Pag-IBIG
 Home Development and Mutual Fund (HDMF)
 13th month pay
 Paid sick leaves
 Paid vacation leaves
 Service incentive leave
 Meal and rest periods
 Housing and housing plans
 Expense account
 Company-sponsored vehicle
 Educational assistance
Endo has received several criticisms from many people, particularly workers; in spite of this, it is
important to note that 5-5-5 is in no way synonymous to contractualization unlike what some of
you might think. Endo or end of contract is a practice that utilizes contractualization to abuse
workers instead of valuing their contribution to different businesses.

Why Companies Practice Contractualization?

There are many legal forms of contractualization, such as the subcontracting of Filipino workers
abroad or to foreign countries like Hong Kong and Singapore. Laws have been established to
allow this system to run under certain industries like the car manufacturing, agriculture, and
business process outsourcing (BPO) sectors in the local scene.
There are a number of conglomerates in the country, for example SM Investments Corporation,
that would legally employ workers under this system for seasonal events or special occasions
like Christmas and school openings.
Furthermore, companies are choosing to practice this structure because they receive a lot of
benefits and these include:
 Being able to adjust quickly and efficiently when their workload changes
 Saving them the time and money from hiring full-time employees
 Improving your staff’s work by hiring contractual employees who are highly skilled and
could impart their knowledge to the internal staff
Can Local Firms Survive Without Contractualization?
The practice of contractualization has begun under the government of former president
Ferdinand Marcos back in the 1970s, when the Philippine economy was experiencing a high
unemployment rate and was suffering from instability.
Some people like the vice dean of the Economics Program at the University of Asia and the
Pacific (UA&P), Cid Tereso, believes that the time to end contractualization is now. He claims
that the local economy has grown to be robust and strong. According to him, it would be perfect
timing to implement strategies like a no-firing policy to move away from the current abuse.
However, there are many firms such as Human Nature that suggest that not many businesspeople
believe instigating such policies is a good idea. They think that it would open opportunities for
some people to take advantage of various businesses, knowing that they cannot be fired.
Moreover, there is no assurance that all corporations and organizations in the Philippines will be
able to survive without hiring temporary workers; and without this guarantee, there is no way to
tell if the market will thrive at all.
Will No-Contractualization Lead to Negative Economics?
The current Government has pledged to work on removing the entire system of
contractualization in the Philippine Labor law, in order to end the abuse some corporations are
participating in.
They are also working to end it in order to help workers get the benefits that being a regular
employee entails. It is understandable for all political parties to want to get rid of endo for noble
reasons however, they say that “the road to hell is paved with good intentions” and in this case,
getting rid of contractualization might result into a disaster.
There are two main reasons as to why establishing a no-contractualization rule will cause
negative economics:
First, putting a deadline to this system will result into the closing down of numerous business
establishments across the country. This is because they simply do not have enough money to pay
for the financial trappings that come hand in hand with regular-status employment.
Second, would-be investors will likely refuse to establish their businesses here because the new
law would mean that they will not be able to develop profits from their own capital.
PROS:
Staffing Flexibility for Companies – lack of benefits, employees will not encouraged since
they are only temporary employess

Today, big and small corporations are being asked to supply several requirements which include
flexible working arrangements for their employees. Providing temporary work is probably the
best step they could take in order to offer the required flexibility while meeting their own needs
as well.

According to Denise Ridenour from Kelly Services, employing both a mix of permanent and
temporary workers will result into a more efficient and effective workplace. She adds that this
practice also leads to a flexible     job market that presents greater prospects for both companies
and workers.

Growth in Economy ???

Contractualization has been devised by previous lawmakers in order to address and tackle the
issue of poor economic growth in the country. Many individuals like Cid Tereso from the
Economics Program at the University of Asia and the Pacific have argued that the time is right to
end this practice because of the improving status of the Philippine economics but there are also
others who have debated that it is simply not enough to sustain the country in the long term.
Creating job opportunities albeit temporarily will help cater into the growth of economics here in
the Philippines even more.
Skill Development – useless efforts
For an employee, engaging in these short-term jobs makes them exposed to different roles and
activities. These jobs may have limited training in comparison to those on regular shifts but
exposing yourself to the working environment, you will surely pick up a trick or two. This is also
read well in your resume, knowing that you are exposed to many jobs in many industries shows
that you have knowledge in those industries and you become more employable because you have
the skills to be integrated easier.
Increased Job Opportunities – lack of benefits, it will be hard to put up a business
Contractualization creates opportunities for the unemployed work force. The number of
companies that look to outsource their unemployment look to hire a larger number of people for
a short time. This means that as an employee you have numerous opportunities and a variety of
jobs to choose from. The knowledge that companies do practice contractualization will give you
the peace of mind that there will always be a job around the corner.
Recognition of Talent
Though originally employees that are employed through contractualization are only supposed to
stay for 5 months, companies take this opportunity to look through the employees’ performance
and can extend them to a regular contract. The beauty of contractualization is this is a bonus for
the employers because they are not obliged to do this but if they were looking to fill their regular
spots, employing internally is the best choice.

CONS:
Issues with Training

It does not matter whether the temporary worker you are hiring has previous experiences with a
similar company to yours. You will still end up training them so that they can perform their
assigned tasks and responsibilities to best fit the specific needs of your company where they are
currently being employed.

There are times when you will have to exert more training periods to some of your temporary
employees which will waste so much time and effort, coming from the perspective of the
company. You are lucky if you manage to employ someone who is verse enough with your
particular industry that they will not need so much training.

Job Security
The most common point brought about the work force is that contractualization is a band aid
solution to the unemployment problem. Given that you will only be employed for 5 months
maximum and that the company has a high chance of just letting you go unless you stand out will
cause some form of stress. This may also hamper your efforts on building a career in an industry.
Lack of Benefits
Contractualization also keeps the employer from the trouble of providing these employees with
certain benefits. Benefits like PhilHealth, SSS, and Pag-IBIG is meant for regular contracted
employees. Being contractualized means that you don’t have the right to ask and receive these
benefits. Other benefits like bonuses and leaves are also not given to temporary employees.
Work Stress
Being contractualized means that the company will provide you little to no training and expect
you to learn everything on the job. They do not want to invest training budget into employees
that will not even last half the year. It will put some stress on the worker and cause tension.
There is also added stress in knowing that if you want a chance to stand out and be regularized, if
not you know that you must go through the whole process again.
Contractualization will continue to be a point of debate between two parties, but as long as both
parties are participating in this practice there will be no change. If both parties are still enjoying
some benefits from this then maybe a negotiation or a change of procedures and regulations is
what is needed and not a complete take away of the practice.
Contractualization and the larger issue of employment and poverty reduction
The Department of Labor and Employment (DOLE) has finally signed off on the “endo”
problem with Department Order No. 174.
The outcome of the order will likely lead to more unemployment, some early confusion, and
likely more dissatisfaction among stakeholders. The worst outcome is for labor – the unskilled
and the unemployed and underemployed.
Endo ends, but contractualization continues. The new department order declares that the practice
of “labor-only” contracting in which an agency recruits or supplies workers to perform a job or
work, is prohibited. In the same breadth, however, it recognizes that some forms of labor
contracting need to continue.
As a result, large companies serving the domestic market that have relied on some degree of
labor contracting will continue with practices of labor hiring that they have with sub-contractors.
Also, many foreign direct investments operating especially in the industrial export sector will
continue with their hiring practices with the help of labor contractors.
Those allowed to engage in labor contracting have been required to raise their capitalization. The
order raises the financial requirement to qualify as a service contractor.
In the same order, however, it allows the contracting and subcontracting of labor services under
specific conditions in which labor standards are observed and where the contractor has the ability
to perform the job of subcontracting the labor activity.
Reactions of stake-holders. The government, through DOLE and its secretary, Silvestre Bello,
undertook a difficult and almost impossible task of reconciling the conflicting demands of
various stakeholders.
Organized labor groups wanted it to end contractualization to force enterprises to hire workers
for longer term periods. Many labor supporters and sympathizers are also critical of the order.
They see it as a continuation of the same contractualization practices, even with the termination
of “endo”.
Business enterprises find labor costs to be too high in relation to productivity. A major reason is
the high labor standards that have accumulated through the years of rising labor welfare
legislation – from minimum wages, pension deductions, to vacation leaves to 13th month pay.
Many local businesses are apprehensive that shouldering the costs of regularization of employees
would result to less hirings and/or retrenchments.
Foreign investor groups already operating in the country are less bothered. As long as they can
continue to hire their labor force, they are compliant with the changes.
The labor contracting that many foreign investors have been undertaking would continue without
much disturbance. Moreover, their pay structures are, in general, able to deal with the cost of
hiring labor which, from their viewpoint, remains affordable.
Of course, the foreign direct investments the country attracts depends on the choices about costs
that the investors prefer and the industry they are in. Many investors in the garments industry are
not present in the country, but semiconductor assemblers are plentiful. Foreign investments that
depend on much lower labor costs would be squeezed somewhat harder.
Among local enterprises that do business mainly in the local economy, there is great sensitivity
to the new policy. Some of the businesses are very sensitive to the cost of labor and the hiring
practices that they have developed over time.
In general, many of the larger domestic enterprises serving the local market would survive some
of the changes in the labor policy.
This is not the case with small enterprises. Will they survive a change in their framework, or will
it mean their demise into the informal sector of the economy?
Many small and medium scale domestic enterprises will face a rising cost of hiring labor. Those
unable to adjust to these circumstances would simply have to dispense with additional hirings or
evaporate into informality.
In general, the worse hit among the stakeholders is the worker who could be forced out of a job.
Our hope is to improve labor and industrial policies. Our labor market policies have tilted more
and more toward worker protection and safeguarding of income rather than on creating
employment. The result of this bias has been to raise the cost of labor hiring within the economy
to the great detriment of labor.
Other countries have avoided our problem by choosing the opposite approach. They did not
focus on labor protection and income enhancements and in periodic government interventions in
behalf of labor.
The solution of the contractualization issue mainly retained the importance of continued
contractualization, but it did not touch on improving the labor market policies by making them
more flexible.
The problem of creating employment depends on (1) more investments and (2) improvement of
policies that open the way for investments that were difficult to materialize before. This means
liberalization of policies, including those that might improve and make labor policies more
flexible.
The government has not yet made any progress in liberalizing provisions for removing the
economic restrictions on foreign direct investments in the constitution despite its plan to do so.
There is no progress on this point in the discussions on constitutional amendments.
There have been no major changes in BOI policies concerning the improvement of incentives to
foreign direct investments, despite pronouncements to that effect. Most FDI over the years have
only come through the incentives given by PEZA, which are mainly dependent on tax-free
imported inputs. As a result, most FDIs have little domestic impact. The BOI industries, had they
welcomed more basic FDIs in greater quantities, would have enabled more industries that
produce basic materials used by other domestic companies. The same policies on joint-venture
preferences in incentives are still in play.
In the meantime, employment is rising in industry among our neighbors much faster than in the
country. Recently, an Asian Development Bank official noted the transfer of many labor-using
industries of restructuring China to Cambodia, Indonesia, Vietnam and other ASEAN countries.
Conveniently omitted is the mention of the Philippines from the list.
This, unfortunately, is a continuous description of the lost opportunities the country has been
unable to take full advantage of because of labor market policies that has out-priced Philippine
labor through the mechanisms of very extensive restrictive labor laws and government mandated
wage policies.

Top 3 Ways the End Of “Endo” will Affect Businesses in the Philippines
The Philippine job market could be less competitive

Endo is primarily a loophole exploited by employers looking for a low-cost workforce. This is a part
of why the Philippines is such an attractive job market. According to estimates, about 30% of the
Philippine workforce subscribes to contract labor, and this will be affected adversely. When the
country falls out of favor in terms of its labor force, the economy will take a hit — and this will strike
right back at the businesses who have lost the ability for short-term hiring.

This said, most of the major industry segments will remain unaffected by the proposed endo law. The
most heavily impacted will be the Construction segment, 71% of which are contractual workers.

More people may be unemployed and unemployable

According to PALSCON President Rhoda Caliwara, outlawing the practice of contractualization can
throw about a million workers out of a job. Because businesses cannot hire them contractually, this
will also cause a drought for companies as the latter will lose an option to hire workers for the short
term.This stands in stark contrast to the opinions of lawmakers such as Representative Emmeline
Aglipay-Villar, who sees the abolishment of endo as a step towards widespread job security.

According to Caliwara, legitimate service contractors do not really deprive its workers of the proper
privileges. It is common perception that “endo employers” do not retain the proper employer-
employee relationships, throwing the worker out after six months just to avoid giving benefits.
Caliwara stated that this belief is false, and noted that the act of contractualization helps lots of
workers earn a living — even for a limited time.

For her part, Aglipay-Villar said that contractualization is a violation of the right to security of
tenure. She argues that if a certain job is central to the processes of the business — such as the sales
person post in department stores — the lawmaker asserts that it should be a regular post. A proposed
“endo law” is aimed at fixing the Labor Code loopholes that allowed companies to take advantage of
endo.

Business processes may be disrupted

There’s no denying that contractualization is a means for companies to get people when they need it
— and to dispose of them when they see fit. This has become an “accepted” reality for the most part
that some companies have built their business processes around it. Going back to the salesperson
example, a company may already have a concrete set of processes meant to “replenish” the ‘endo’-ed
personnel.

Thus, these businesses can be affected when endo is removed. If the companies are not flexible
enough, they will end up removing the additional hiring and training teams they instituted for the six-
month hiring cycle. There will also be reorganization in terms of providing the needed benefits for
newly-regularized employees.

Endo has had such a deep influence in the Philippine labor scene that there will be rippling changes
when the endo law is enacted. Right now several labor groups are bringing forth proposals meant to
criminalize businesses who hire on a contractual basis. These submissions still have to be properly
reviewed to bring to light all the pros and cons. And what a delicate balancing act this will be. While
many businesses will be shaken up by the removal of endo in the Philippines, many workers will see
the measure as heaven-sent. Because they are already regular employees after their first six months,
they can snap back from being underpaid and being withheld from their benefits.

The general public’s purchasing power will also increase, because workers will be eligible to receive
incentives. Also, contractual employees tend to have a hard time getting loans or credit from the bank
since they have no stable source of income. This is also bound to change.

The Bottomline for Endo 2017

There are, of course, positive things that businesses stand to gain when endo has been eradicated. For
one, there will no longer be as much resources dedicated to training new batches of employees.
These funds can be diverted to something else. By giving benefits, businesses can be assured of a
more productive workforce.

A person who has job security will be more dedicated to success than someone who dreads the day
the contract ends. Incentives can also be used to drive productivity and motivation, bringing forth a
more active workforce. This can upturn any dent in the labor force made by the initial
implementation of the measure. At the pace that the Duterte administration is handling its pet
projects, we can be sure to hear more news about this in the coming weeks. There will be birth pains
when the change finally comes, but hopefully we can all look forward to a brighter future for our
workforce and our businesses alike.