This research provides a wide-scope and informative education on Labor-only Contractualization and the government’s steps of Ending Contractualization or most commonly referred to as the “ENDO” in the local setup specifically in Bacolod City.
Anent thereto, through data-gathering, this research also reflects the different political and economic stance of the most influential labor union in Bacolod City with respect to the implementing rules and regulations of Executive Order No. 51 series of 2018 of the present administration as a reinforcement of Department Order No. 174 series of 2017 and the existing provisions of the Labor Code of the Philippines vis-à-vis the relevant and pertinent laws and department orders enacted by past administrations against the practice of end-of-contract schemes.
The purpose of this study is to shed light on Labor-only Contractualization in the Philippines.
Specifically, this study aims to answer the following questions:
- What is Labor-only Contractualization and how does it differ from other kinds of employment?
- What are the manifestations of Labor-only Contractualization?
- What are the pertinent laws enacted that are applicable to Labor-only Contractualization and the different administration’s steps in ending it?
- What is the perspective of the labor union in ending labor-only Contractualization?
- What are the issues faced by the government in implementing the policy against labor-only contractualization.
SCOPE AND LIMITATION OF THE STUDY
This research limits its study only to Labor-Only Contracting involving a policy study on Executive Order No. 51 series of 2018 as a reinforcement of Department Order No. 174 series of 2017 in relation to previous enactments against policy on ending labor-only contractualization. Due to time-constraints and availability of resource persons, the group decided to interview only one representative from a Labor group in Bacolod City known for its active participation, involvements, and contributions to the labor sector of the Philippines especially in Bacolod City. In line therewith, the group has able to get resource materials from the internet, department orders, laws, and DOLE handbooks for purposes of research.
Furthermore, this research only shows simple and informative discussion on labor-only contractualization and the group’s conclusion and recommendation on the latter part based on available resources.
SIGNIFICANCE OF THE STUDY
The findings of this study will redound to the benefit of the Filipino society considering that labor plays an important role in the preservation of the basic unit of the state¾ the family, and the individual itself. A more secure job with the right benefits ensure such preservation, which may be achieved in a two-way manner¾ the effort and performance of the worker and the proper implementation of the rules and regulation by the government agency tasked to carry it out. Thus, the employers that will apply the findings of this study may be informed more and know the prohibitions set by the law as to the hiring of employees and personnel. A deeper look into the labor force in the Philippines would allow the workers and the future ones to know their rights in the labor world and also the limitations that should be followed. The researchers of this study will help them uncover critical areas in the implementation of the prohibition of labor-only contracting that many do not comprehend well. Thus, a deeper study of the aforementioned topic, under Philippine setting, is arrived at.
This part of the paper presents the different procedures utilized in conducting this study.
This research employs a descriptive research design that seeks to achieve its objectives through acquiring of information through Key-Informant interview regarding Labor-only Contracting with the most influential labor union sector. Further research was conducted based on available and resources such as reliable internet articles, DOLE handbooks, and the Philippine labor laws and relevant jurisprudence.
Participant of the Study
The Key-informant interviewee is a Trade Union Congress of the Philippines (TUCP) Labor Coordinator in Bacolod City, Zoilo B. Dela Cruz, IV.
The researchers herein designed an interview questionnaire used throughout the process of the interview with the Trade Union Congress of the Philippines (TUCP) representative to keep the exploratory method on track and come up with the most objective analyses. See Annex “A” for further reference. The interview was conducted in the office of the TUCP-NACUSIP at Geocadin Bldg., Mabini Street, Barangay 33, Bacolod City.
RESULTS AND DISCUSSION
Labor-Only Contractualization defined.
Labor-only contractualization is prohibited (Art. 106, Labor Code of the Philippines). 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.
Types of Employment.
- Permanent Employment
When an employee performs activities that are usually necessary or desirable in the usual business or trade of the employer, such employee enjoys permanent or regular employment. There is benefit of security of tenure provided by the Philippine Constitution and cannot be terminated for causes other than those provided by law and only after due process is given to them.
However, some employers can require their new employees to undergo probationary employment before they can be qualified for regular employment. Although probationary employment is not a formal type of employment in the Philippines, it is widely practiced to help employers observe the skills, competence, and performance of new employees and determine if they are able to meet the reasonable standards to become permanent employees. Article 281 of the Labor Code of the Philippines states in essence that the maximum length of probationary employment shall be six (6) months, and is counted from the date an employee started working. When the employment is not terminated after the six-month probationary period, it shall then be considered regular employment. The employer must notify the employee of the probationary period and the standards they must satisfy on or before the end of the probationary employment. If the employee is not properly notified of the arrangement, then they are prescribed by law to be classified as a regular employee from the time they started working for the company.
- Seasonal Employment
If the work to be performed is only for a certain time or season of the year and the employment is only for that duration, it is considered seasonal employment. This is to cover the demand of work during peak seasons in the Philippines. Some employers hire “regular seasonal employees” who are called to work during peak seasons (e.g. Christmas season) and are temporarily suspended during off-seasons. These employees are not separated from service but are only considered on Leave of Absence (LOA) without pay until re-employed.
- Casual Employment
Casual employees are engaged on an irregular basis according to business demands and have no expectation of ongoing work; no obligation to accept offers of work; a loading paid on top of their hourly rate of pay; no sick or annual leave pay; and no obligation to provide notice of ending their employment, unless this is a requirement of an award, employment contract or registered agreement. For example, some casual employees may be eligible for long service leave and parental leave after being employed for 12 months.
- Project Employment
When an employee is hired for a specific project or undertaking, there is project employment. Its duration depends on the scope of work and/or length of the project. A project employee may acquire the status of a regular employee when they are continuously rehired after the completion of the project or when the tasks they perform are vital, necessary, and indispensable to the usual business or trade of the employer.
- Probationary Employment
In a workplace setting in the Philippines, Probationary Employment or status is given to a new employee of a company or business. During the probationary period of six (6) months, an employer is allowed to terminate an employee who is not doing well at their job or is not fit for the job. It can be deemed as a trial period to see the ability and competency of the employee.
Labor-only Contracting v. Job Contracting.
Labor-only contracting is prohibited by the Labor Code while job-contracting in the Philippines is allowed by the same law.
Under Philippine Jurisprudence, specifically in Rolando Sasan, Sr. et al. vs. NLRC, et al. G.R. No. 176240, October 17, 2008, permissible job contracting vis a vis Labor-only contracting was differentiated. Permissible job contracting or subcontracting refers to an arrangement whereby a principal agrees to put out or farm out to a contractor or subcontractor the performance or completion of a specific job, work or service within a definite or predetermined period, regardless of whether such job, work or service is to be performed or completed within or outside the premises of the principal.
A person is considered engaged in legitimate job contracting or subcontracting if the following conditions concur: (a) The contractor or subcontractor carries on a distinct and independent business and undertakes to perform the job, work or service on its own account and under its own responsibility according to its own manner and method, and free from the control and direction of the principal in all matters connected with the performance of the work except as to the results thereof; (b) The contractor or subcontractor has substantial capital or investment; and (c) The agreement between the principal and contractor or subcontractor assures the contractual employees entitlement to all labor and occupational safety and health standards, free exercise of the right to self-organization, security of tenure, and social and welfare benefits. In contrast, labor-only contracting, a prohibited act, is an arrangement where the contractor or subcontractor merely recruits, supplies or places workers to perform a job, work or service for a principal. In labor-only contracting, the following elements are present:(a) The contractor or subcontractor does not have substantial capital or investment to actually perform the job, work or service under its own account and responsibility; and (b) 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.
Contractor v. Subcontractor.
A contractor is not considered to be an employee. Instead, a contractor will act as an independent entity, performing certain tasks for the company.
A subcontractor is responsible for completing certain tasks for the contractor. In turn, the contractor will be responsible for compensating the subcontractor. Both a contractor and subcontractor work together to complete specified duties for a company or an individual.
Difference between the principal and contractor/sub-contractor.
D.O. No. 18-02 offers a definition on Principals and Contractors/Sub-contractors.
A Principal would refer to “any employer who puts out or farms out a job, service or work to a contractor or subcontractor. A Contractor or a Subcontractor are any persons/entities who are engaged in a legitimate contracting or subcontracting agreement.
Further defined, a contractor is a person or a company that seeks to do business by obtaining contracts and carrying them out. A subcontractor on the other hand is also another type of contractor, but instead of forming agreements with the principal, they form agreements with the contractor.
Manifestations of Labor-only Contractualization.
Section 2 of D. O. No. 3 states that there is labor-only contracting where the contractor or subcontractor merely recruits, supplies or places workers to perform a job, work or service for a principal, and the following elements are present:
- The contractor or subcontractor does not have substantial capital or investment to actually perform the job, work or service under its own account and responsibility; and
- The employees recruited, supplied or placed by such contractor or subcontractors are performing activities directly related to the main business of the principal.
To put simply, there is Labor-only contractualization only when the contractor does not actually have enough capital nor sufficient equipment to perform the job assigned to him by the principal, instead only supply labor workers to the said principal. These workers also have to be assigned to jobs pertaining to activities relating directly to the main purpose of the principal.
According to the study conducted by the Philippine Statistics Authority last 2014, 39.00%of Filipino workers are non-regulars. The industries with highest level of contractualization are admin and support service activities (27.40%), manufacturing (21.80%), wholesale and retail trade (10.90%), and construction (8.40%).
On the 29th of May, 2018, the Department of Labor and Employment (DOLE) released a list containing the name of 3,377 companies that were somewhat engaged in Labor only Contracting. Among those were prominently named companies such as Jollibee Food Corporation, Dole Philippines, Philippine Airlines, and PLDT. Around 767 companies were confirmed to have been engaged in Labor only Contractualization. 
Effects of Labor-only Contracting.
Labor only Contracting is often used to circumvent certain protective legal clauses that are necessary for the well-being of employees. Since the LOC contractor acts as the employer of the employees, they’re often underpaid because of the incapacity of the LOC contractor to consistently pay wages. The LOC also weakens the power of labor unions because how can the deployed workers economically benefit from organizing a labor union as employees of the fictitious employer?
These are the effects of a LOC agreement:
a. The subcontractor will be treated as the agent of the principal. Since the act of an agent is the act of the principal, representations made by the subcontractor to the employees will bind the principal.
b. The principal will become the employer as if it directly employed the workers engaged to undertake the subcontracted job or service. It will be responsible to them for all their entitlements and benefits under the labor laws.
c. The principal and the subcontractor will be solidarily treated as the employer.
d. The employees will become employees of the principal, subject to the classifications of employees under Article 28 of the Labor Code.
If the labor-only contracting activity is undertaken by a legitimate labor organization, a petition for cancellation of union registration may be filed against it, pursuant to Article 239(e).
History through Presidential Administration.
Contractualization has its roots tracing back to 1974 under Ferdinand Marcos regime when Labor Code 1974 was drafted introducing the concept of Probationary Employment to the Philippines and under Article 281 which states that “employers are allowed to hire people under a probationary status for up to six months”.
Consequently in 1986-1992 under the presidency of Corazon Aquino, Herrera Law also known as Republic Act 6715 or 1989 was passed which gave first major revisions to the Philippine Labor Code drafted earlier by President Marcos. However, this revision under the administration of Corazon Aquino did not tackle contractualization directly and effectively. For example, Art. 279 of the labor code was amended to provide better security of tenure for workers.
In 1997, DOLE Secretary Leonardo Quisumbing issued Department Order No. 10 under the Fidel V. Ramos administration thereby strengthening the contracting out of labor practice by giving the employers more allowances whilst safeguarding employee rights. It was this Department Order 10 of DOLE Secretary Quisumbing which propagated the concept of agencies through “Permissible contracting or subcontracting.” It was here when employees started coining the word Endo in response to the 5 months – 5 months – 5 months work schedule of most contractual employees.
Furthermore, during the time of President Joseph Estrada, Labor Secretary Patricio Sto. Tomas passed DOLE Department Order 3 in 2001 which served as a revocation of the previously passed DOLE Department Order 10. This however, also removed the changes to the rights of a contractual employee mention in Department Order 10. These rights included giving contractual employees the same benefits as regular employees, a promise of proper working conditions, service incentive leave, rest days, and overtime pay among others
The administrations of President Gloria Macapagal Arroyo and Benigno Aquino have provided stricter and aggressive restrictions and regulations to agency Contractualization practice through the release of DOLE Department Order 3 and DOLE Department Order 18, respectively.
Pertinent laws and policies prohibiting and/or governing Labor-only Contractualization under the administration of President Rodrigo Duterte.
After the group had traced back the roots and developments involving the efforts of the Government to regulate and/or restrict the Contractualization in the Philippines, how does it really differ from today’s practice of Contractualization under present presidency of President Rodrigo Duterte?
Going into March 16, 2017, then DOLE Secretary Bello signed the Department Order 174, which sets stricter guidelines on contractualization but doesn’t immediately illegalize it.
On May 1, 2018, President Rodrigo Duterte signed Executive Order No. 51 series of 2018 which only reinforces existing provisions found in the Labor Code of the Philippines and the provisions of the said Department Order No. 174 which provides comprehensive defining working terms under contractualization.
Citing excerpts from the interview of Director Benjo M. Benavidez of DOLE’s Bureau of Labor Relations conducted by Mr. Gillian M. Cortez of Philstar, Mr. Benavidez said the order just reinforces existing provisions that are already found in the Labor Code of the Philippines and some provisions were also explained thoroughly by the Department Order 174 series of 2017.
“The very nature of an executive order is to execute and implement existing laws, rules, and regulations. It (the EO) cannot amend or supplant existing provisions of law,” he added.
According to certain laws under the Philippine employment protection laws employers must offer permanent employment after six months of engagement; otherwise, or otherwise lay them off. (LCP Articles 106, 109 as amended, 279, 280, 281, 286 and 287). This is commonly referred to as the regularization laws protecting the security of tenure of the employees.
Penalties imposed on companies engaged in labor-only contracting.
Section 3 and Section 5 of the Executive Order No. 51 series of 2018 specifically provides sanction and effect of violation of the said E.O., to wit:
SECTION 3. Effect of Violation. The principal engaged in any arrangement in violation of this Order shall be considered the direct employer of the contractor’s or subcontractor’s workers for all purposes.
SECTION 5. Sanctions. Where appropriate, violations of this Order shall be penalized as provided for under existing laws and/or regulations.
Section 12 of Department Order 174 series of 2017 also provides, to wit:
Section 12. Effect of Violation of the Provisions on the Rights of Contractor’s Employees and Required Contracts. A finding of violation of either Sections 10 or 11 hereof, shall render the principal the direct employer of the employees of the contractor or subcontractor, pursuant to Article 109 of the Labor Code, as amended.
Labor Union/Group’s role in ending contractualization.
The Trade Union Congress of the Philippines (TUCP), is the biggest confederation of labor federations in the Philippines who is committed to developing cooperation with government, advocating for an economic policy which promotes national interest and international competitiveness in the labor sector as well as promoting equal rights and opportunities for all.  Hence, its participation in ending contractualization is vital in the labor industry. Following the interview conducted by the group with Mr. Zoilo Dela Cruz, he expressly said:
“The TUCP’s participation in ending labor-only contractualization is to propose policies and amendments for the protection of labor rights. Furthermore, as representatives of the laborers in the government, we are also responsible of informing and educating the labor workforce of their rights to security of tenure and all forms of labor exploitation and their remedies in such circumstances. The TUCP also propose compromise between the labor sector and the employers. Most especially, the TUCP is acting as the voice of the labor workforce to make sure that the employees’ concerns are being relayed to the Government”.
Labor Union take on Executive Order No. 51 series of 2018
The clamors on E.O. 51 caused opposition and disappointments from various labor groups and party-list. In a statement, Bayan Muna Representative Carlos Isagani T. Zarate said the President’s EO is “useless as its general provisions are already stipulated in the labor code.” ALU-TUCP also expressly made its opinion on the newly signed E.O. stating that it’s the same provisions as with the previous enactments. 
Furthermore, Mr. Dela Cruz added that the said EO only has the same provisions as the Department Order 174 and the previous laws that were enacted by previous administrations. Nevertheless, DO 147 provides for clearer provisions with respect to defining contractualization. “However, it doesn’t totally abolish contractualization but instead place a heavier burden for employers and contractors who are engage in contractualization such as for example the registration of the contractors to the Department of Labor and Employment.”
The struggle of the Government why ending contractualization is difficult to achieve.
There was an almost immediate and widespread reaction from the business sector. Many asserted that ending contractualization will spell disaster for business and the Philippine economy.
The Philippine Institute for Development Studies released a paper in 2018 authored by Vicente Paqueo and Aniceto Orbeta issuing grave warnings about how ending temporary employment contracts or TECs will not only hurt business but argued that it is not even favored by workers affected by it.
In the article published by Inquirer on January 2, 2018, they cited the common arguments of ENDO are:
- High cost of regularizing employees. They say it will hit the small and medium sized enterprises and many of them will not be able to afford regularizing employees.
- Low productivity of regularized employees. Another common argument against regularizing staff. The employees turn lazy and only deliver the bare minimum once they are regularized.
- Management prerogative to terminate underperforming employees. Many employers complain that regularized employees are almost impossible to fire given the conditions of termination in the Labor Code of the Philippines.
- Job opportunities for low-skilled workers will be gone if TECs are abolished. Perhaps one of the strongest arguments for maintaining the status quo is that the majority of Philippine workers who are low-skilled will be out of jobs when this model is abolished.
The same also cited unique challenges in ENDO
Another major point being put forward by the proponents of temporary employment contracts in industries such as retail merchandising and manufacturing is that the practice filters out workers who do not make the cut. And since the Philippines has such a massive pool of low-skilled, cheap labor, contractualization basically legitimizes having a disposable workforce that allows business owners to keep their labor costs rock-bottom low.
Economists further assert that contractual arrangements will create the most jobs and address unemployment, a sentiment echoed by many business owners who say that inclusive growth can be achieved through job creation regardless of the quality of those jobs.
But not all jobs are created equal and temporary employment contracts in positions that are needed all year round and are integral to business are in a way a form of legal exploitation or an extractive economic practice meant to benefit only the business owners.
In the group’s interview with Mr. Dela Cruz of TUCP, he added that:
“Many corporations most especially large business groups and industries in the Philippines who are engaged in contracting oppose to the idea of abolishing contractualization since the same is not cost-efficient, thereby adding large expenses to regularization of employees and only imposes heavier burden on them. By reason thereof, these big corporations meddle or intervene with the affairs of the government and thus, the latter is easily influenced considering that these big corporations have contributed to the economic development of the country. Furthermore, there is a lack of strong and stricter implementation of the laws governing contractualization of the employees as the government agencies are easily priced for it and most likely be influenced by big corporations as said.”
Even with Department Order 18-A—a department order which provides rules and regulations on subcontracting—there is still clamor among the labor sector to end the practice of end-of-contract schemes (more popularly known as ENDO) by employers. In ENDO, contractual employees sign an employment contract with the principal for ﬁve months, then move their employees again to another principal to evade giving workers their security of tenure. Department Order 174 was signed as a response to the diﬀerent issues that sprung from DO 18-A. This new DO imposed stricter regulations on ENDO contracts by making the subcontracting industry more expensive and putting more liability on contractors. This DO acts as a compromise between employees and employers, making sure that employers do not deprive their employees of their security of tenure while still making the subcontracting industry possible.
The Department Order 174 placed tighter restrictions on contractualization. It did not abolish it, nor did it make the practice more lenient. This decision will be met with negative reactions from labor parties and business organizations as the compromise did not satisfy the two. Labor parties will continue to call for the abolition of contractualization, while business organizations will call for improving the ease of doing business.
Following the enactment of Executive Order No. 51 series of 2018, the same serves as only a reinforcement of the existing provisions of the Labor Code with respect to regularization laws and the rights of the employees’ to security of tenure.
What the government needs to do is to be able to communicate to both parties that the Department Order is a workable compromise that aims to uphold the workers’ right to a security of tenure while sustaining economic growth. In doing so, the administration must also sustain its rhetoric of being pro-labor while also achieving economic growth. This shall be done by pursuing non-labor economic policies that improve the ease of doing business (i.e. lower taxes) while taking the implementation of its ﬁght against illicit and abusive practices of contractualization seriously.
ISSUES AND RESPONSES OF THE GROUP
- Displacement for contractual workers who cannot be absorbed
There will be jobs oﬀered by the government from its various resources including but not limited to POEA’s expansion of technical internship programs in Japan and Israel with just compensation, as well as the various job vacancies for the current administration’s infrastructure plans. In addition, general capacity building programs as well as special capacity building for more in-demand jobs would be provided by TESDA with three months compensation.
Conduct an information campaign which disseminates the information to the laborers that there will be available job openings, skills, trainings, and internships.
This can be the one through press statements, online promotional material, posters pinned on the walls of DOLE, and informing the diﬀerent labor union groups. Costs maybe incurred for graphic design, content development, and web management. Printouts for posters and telecommunication services must also be accounted for.
- Entrepreneurs who had close down their businesses as a result of higher labor costs
Entrepreneurs of newly-closed down businesses will be assured that the government will make up the higher labor costs by improving the ease of doing business through other means. The administration can emphasize this that improve the ease of doing business by stating policies that do this, such as increasing spending power of Filipinos in the proposed tax reform.
Release press statements concerning setting up ready loans for small to medium businesses and contractual ﬁrms to shoulder the higher cost of labor. Conduct an information campaign on how to avail of these services and loans. Similar costs will be incurred for the above-mentioned information campaign.
- Contractualization as a demonized business practice
Release information campaign on the role of TECs in the functioning of eﬃcient labor markets through social media, radio, and news outlets as these are the main contact points.
Emphasize that while anti-contractualization sentiments may be well-intentioned, pursuing the policy agenda can undermine the goal of achieving rapid, inclusive, and sustained economic growth. Cite empirical studies that demonstrate stricter labor regulations lead to a higher unemployment rate and a lower rate of employment. Clarify the deﬁnition of contractualization as not synonymous with abuse but a business practice that allows for a bigger participation in the entire employment sector. As for the costing, the information campaign will incur fees for information design and promotions. Radio airtime is accounted for as well.
RECOMMENDATIONS ON EXECUTIVE ACTIONS
Strengthening Executive Order 51
Recognizing the need to balance the rights of the workers to security of tenure and the need of business enterprises for temporary employment contracts (TECs) in the functioning of an eﬃcient labor market, the following recommendations are made:
Reform the Labor Laws Compliance System (LLCS) in DOLE. The LLCS can be reformed to take a more proactive role in investigating the labor practices of subcontractors and principals. A task force can be formed by the LLCS to comprise activists from labor groups to investigate and relay information to DOLE the names of companies and contracting ﬁrms who engage in illicit contracting practices. The sole mandate of this task force is to report information to the LLCS. This will show the public that while the administration chooses not to abolish ENDO altogether, it still has a hard stance on exploitative labor practices and seeks to have a more active role in ﬁnding out the ﬁrms who circumvent workers’ right to security of tenure altogether.
Set up safety nets for small-to-medium enterprises who will be affected by higher labor costs. Government banks can oﬀer low-interest loans to businesses and contractual ﬁrms to aﬀord the high registration fees and higher costs of labor. This shows the administration’s commitment to fostering economic growth in the Philippines by giving forms of ﬁnancial subsidies to businesses.
Study a way to scale contractual labor regulations depending on the asset size of the principal and subcontractor. The reason small to medium enterprises are complaining over the recent contractual regulations is the burden of cost is spread evenly regardless of the size of assets. Labor regulations should be scaled—larger businesses are given stricter regulations, while smaller ones are given relaxed ones. Scaling labor regulations depending on the size of assets can be a great compromise between economic development via entrepreneurship and upholding workers’ rights to security of tenure.
RECOMMENDATION FOR THE STUDY
This study is limited in its scope; only one key-informant is included in the study. A bigger study with a wider scope would open up new results and possibilities for policy recommendations for ending contractualization. An expanded interview and focus group discussion should be conducted especially with the Government agency in charge of its implementation. The questionnaire should have more probing questions.
Guide Questions for Interview with TUCP Representative:
- What is the TUCP’s role in countering the practice of ENDO?
- Does the newly enacted Executive Order 51 provides for an effective scheme to end contractualization?
- What do you think is the struggle of the Government why ending contractualization is difficult to achieve considering that many laws have already passed to end contractualization?
 Statistics on Non-Regular Workers. 2014. Philippine Statistics Authority
Dela Cruz, Thalia B.