Laws governing contractual employment

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The 1987 Constitution mandates that the State shall protect labor and promote its welfare, and provide basic rights, including just and humane terms and conditions of employment and the right to self-organization, for Filipino workers. But it is the Labor Code of the Philippines that provides the rights and privileges of Filipino workers, which include contractual employees.

It was in the early 1900s when the American colonial government, through its newly established Department of Labor, passed a labor code. This code introduced the concept of the right of workers to security of tenure while legalizing the use of contractual labor through the "Independent Contractor" system. This system prevailed mainly in ports, plantations, haciendas, constructions and lumberyards.

But it was in 1974 during the Marcos government when Presidential Decree No. 442 was signed to become the Labor Code of the Philippines. Since then, the Labor Code has been amended by Presidential Decree Nos. 570-A, 626, 643, 823, 849, 850, 865-A, 891, 1083, 1367, 1368, 1391, 1412, 1641, 1691, 1692, 1693, 1920, 1921 and 2018; Executive order No. 707; Batas Pambansa Blg. 32, 70, 130, and 227; Executive Orders Nos. 74, 111, 126, 180, 203, 247, 251, 292; and Republic Acts Nos. 6715, 6725, 6727, 7610, 7641, 7655, 7658, 7700, 7730, 7796, 7877, 8042 and 9177.

Among these amendments, Republic Acts 6715 was the first major revision in the Labor Code. This was followed by Republic Act 6727, which created the Regional Tripartite Wages and Productivity Board in all regions. These regional tripartite boards determine the regional minimum wages and wage increases. The minimum wage and wage increases are different per region because of the Regional Tripartite Wages and Productivity Boards.

At this point, it should be noted that contractual employment is allowed under Article 106 of the Labor Code:

Article 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.
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.
The Secretary of Labor and Employment may, by appropriate regulations, restrict or prohibit the contracting-out of labor to protect the right 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 the 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 the workers to an employer does not have the 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.

While there are two parties in the ordinary-employee relationship ---- the employer and the employee, contractual employment has three parties --- principal or employer who decides to farm out a job to subcontractor; subcontractor who has the capacity to perform the job; and employees who are engaged by the subcontractor to accomplish the job. This is also called trilateral relationship.

Article 106 of the Code provided the flexibility to the Secretary of Labor to spell out the nuances of contractual employment:

  1. Department Order No. 10 (series of 1997). This resulted from the non-passage of the Omnibus Amendment to the Labor Code under the Ramos administrations. This Department Order amended the rules implementing Books III and VI of the Labor Code, specifically Articles 106 to 109. In particular, the Order provided:
    1. Contracting and subcontracting arrangements are expressly allowed by law, but may be subject to regulations consistent with the promotion of employment, protection of workers' welfare and enhancement of industrial peace and rights of workers to self-organization and collective bargaining; for this reason, labor-only contracting as defined herein shall be prohibited; and
    2. Flexibility for the purpose of increasing efficiency and streamlining operations is essential for every business to grow in an atmosphere of free competition; however, any form of flexibility intended to circumvent or evade workers' rights shall in no case be countenanced.
  2. DOLE Primer on Contracting and Subcontracting under Articles 106 to 109 of the Labor Code, which answers frequently asked questions on contractual employment.
    1. Department Order No. 03 (series of 2001). This revoked the Department of Labor and Employment's Department Order No. 10 issued by DOLE in 1997, and Continuing to Prohibit Labor-Only Contracting. It prohibited labor-only contracting; recognized the continuing validity of contracts entered into when Department Order No. 10 was still in force; and applied the following laws and rules in addition to Articles 106 to 109 of the Labor Code:
    2. Article 248 (c) which disallows contracting out of 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;
    3. Article 280, which classifies employees into regular, project or seasonal employees;
    4. Article 2180 of the Civil Code, under which the principal, in a civil suit for damages instituted by an injured person, can be held liable for any negligent acts of the employees of a labor-only contractor;
    5. Republic Act No. 5487 and its implementing rules, which regulate the operation of security agencies;
    6. Jurisprudence interpreting the foregoing laws;
    7. Department Order No. 19 (series of 1993) for subcontracting arrangements in the construction industry; and
    8. Contractual stipulations provided these are not in conflict with Labor Code provisions, jurisprudence, and Department Order Nos. 3 and 19.
    9. Department Order No. 18 (series of 2002). This essentially restored DOLE Order No. 10 as stipulated in its Section 1:
Section 1. Guiding principles. - Contracting and 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.

Moreover, Section 3 of DOLE Order No. 18 (series of 2002) explained trilateral relationship in contracting arrangements:

Section 3. 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.


  • Department of Labor and Employment (DOLE). (1997). Amending the Rules Implementing Books III and VI of the Labor Code, as Amended. DOLE Order No. 10, Series of 1997.
  • DOLE. (2001). Revoking department order no. 10, series of 1997, and continuing to prohibit labor-only contracting. DOLE No. 03, Series of 2001.
  • Department of Labor and Employment official website



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