ASSIGNMENT NO.

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 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.

ARTICLE 107. Indirect employer.

The provisions of the immediately preceding article shall likewise apply to any person, partnership,
association or corporation which, not being an employer, contracts with an independent contractor for the
performance of any work, task, job or project.

ARTICLE 108. Posting of bond.

An employer or indirect employer may require the contractor or subcontractor to furnish a bond
equal to the cost of labor under contract, on condition that the bond will answer for the wages due the
employees should the contractor or subcontractor, as the case may be, fail to pay the same.

ARTICLE 109. Solidary liability.

The provisions of existing laws to the contrary notwithstanding, every employer or indirect employer shall
be held responsible with his contractor or subcontractor for any violation of any provision of this Code. For
purposes of determining the extent of their civil liability under this Chapter, they shall be considered as
direct employers.

VII. Department Order No. 174, Series of 2017

Guide Questions:

1. What is “Labor-only” contracting?

Labor-only contracting refers to arrangement where the contractor or subcontractor merely recruits,
supplies or places workers to perform a job or work for a principal, and elements enumerated in Section 5
hereunder are present.
Labor-only Contracting, Prohibited

Entirely different is the case of a labor-only contractor. His contract is not to accomplish a job or service
but merely to supply the people to do the job. In effect, he does not really hire people but merely recruits
and supplies people. He is an agent of the true employer, the enterprise to which the labor-only contractor
sends the people.

To sum up, employer-employee relationship exists between the job contractor and the people he hires;
on the other hand, in labor-only contracting the employer-employee relationship is between the workers
and the enterprise to which they are supplied.

Under Section 15 of Department Order No. 174, Series of 2017 “Labor-only contracting is hereby
declared prohibited. For this purpose labor-only contracting shall refer to an arrangement where:

a) i. the contractor does not have substantial capital or

ii. the contractor does not have investments in the form of tools, equipment, machineries, work
premises, among others,
the contractor’s and subcontractor’s employees recruited and placed are performing activities which
are usually necessary or desirable to the operation of the company;
b) iii. the contractor does not exercise the right to control over the performance of the work of the
employee.”
2. What are illicit forms of employment arrangements?

Under Section 6 of Department Order No. 174, Series of 2017: Other Illicit Forms of Employment
Arrangements. The Labor Code and its regulations also prohibit certain contracting arrangements,
including the following:

1) When the principal farms out work to a cabo.

2) Contracting out of job or work through an in-house agency.
3) Contracting out of job or work through an in-house cooperative which merely supplies workers to
the principal.
4) Contracting out of a job or work by reason of a strike or lockout whether actual or imminent;
5) Contracting out of a job or work being performed by union members and such will interfere with,
restrain or coerce employees in the exercise of their rights to self-organization as provided in Article
259 of the Labor Code, as amended.
6) Requiring the contractor’s/subcontractor’s employees to perform functions which are currently being
performed by the regular employees of the principal.
7) Requiring the contractor’s/subcontractor’s employees to sign, as a precondition to employment or
continued employment, an antedated resignation letter; a blank payroll; a waiver of labor standards
including minimum wages and social or welfare benefits; or a quitclaim releasing the principal or
contractor from liability as to payment of future claims; or require the employee to become member
of a cooperative;
8) Repeated hiring by the contractor/subcontractor of employees under an employment contract of
short duration.
9) Requiring employees under contracting/subcontracting arrangements to sign a contract fixing the
period of employment to a term shorter than the term of the Service Agreement, unless the contract
is divisible into phases for which substantially different skills are required and this is made known to
the employee at the time of engagement.
10) Such other practices, schemes or employment arrangements designed to circumvent the right of
workers to security of tenure.
3. What are permissible contracting arrangements?

“Permissible job contracting, or subcontracting refers to an arrangement whereby a principal agrees to

farm out with a contractor or subcontractor the performance 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.

Under Section 8 of Department Order No. 174, Series of 2017: Permissible contracting or
Subcontracting arrangements. Notwithstanding Section 5 and 6 hereof, contracting or subcontracting
shall only be allowed if all following circumstances concur:

a) The contractor carries on a distinct and independent business and undertakes the contract work
on his account under his own responsibility according to his own manner and method;
b) The contractor has substantial capital to carry out the job farmed out by the principal on his
account, manner and method, investment in the form of tools, equipment, machinery and
supervision;
c) In performing the work farmed out, the contractor or subcontractor is free from the control and/or
direction of the principal in all matters connected with the performance of the work except as to
the result thereto; and
d) The Service Agreement ensures compliance with all the rights and benefits for all the employees
of the contractor or subcontractor under the labor laws.
4. What are the rights of employees of contractors?

Under Section 10 of Department Order No. 174, Series of 2017: Rights of Contractor’s/
Subcontractor’s Employees.

All Contractor’s/ Subcontractor’s employees, shall be entitled to security of tenure and all rights and
privileges as provided for in the Labor Code, as amended, to include following:

a) Safe and healthful working conditions;

b) Labor standards such ah but not limited to service incentive leave, rest days, overtime, pay, holiday
pay, 13th month pay, and separation pay;
c) Social security and welfare benefits; and
d) Self-organization, collective bargaining and peaceful concerted activities including the right to strike.

5. What are the requirements for mandatory registration of legitimate contractors?

Under Department Order No. 174, Series of 2017: Section 14. Mandatory Registration and Registry
of Legitimate Contractors.

Consistent with the authority of the Secretary of Labor and Employment to restrict or prohibit the
contracting out of labor to protect the rights of workers, it shall be mandatory for all persons or entities,
including cooperatives, acting as contractors to register with the Regional Office of the Department of Labor
and Employment (DOLE) where it principally operates.

Failure to register shall 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.

Also, Under Section 15. Requirements for registration. The application for registration as a contractor
shall be filed at the DOLE Regional Office in the region where it seeks to principally operate. The applicant
shall provide in the application form the following information:

a) The name and business address of the applicant and the areas where it seeks to operate;
b) The names and addresses of officers, if the applicant is a corporation, partnership, cooperative or a
labor organization;
 c) The nature of the applicant’s business and the industry or industries where the applicant seeks to
operate;
d) The number of regular workers and the total workforce;
e) The list of clients, if any, the number of personnel assigned to each client, if any, and the services
provided to the client;
f) The description of the phases of the contract, including the number of employees covered in each
phase, where appropriate; and
g) Proof of compliance with substantial capital requirement as defined in Section 3(l) of these Rules.

The application shall be supported by:

a) A certified true copy of a certificate of registration of firm or business name from the Securities and
Exchange Commission (SEC), Department of Trade and Industry (DTI), Cooperative Development
Authority (CDA), or from the DOLE if the applicant is a labor organization;
b) A certified true copy of the license or business permit issued by the local government unit or units
where the contractor operates;
c) A certified listing, with proof of ownership or lease contract, of facilities, tools, equipment, premises
implements, machineries and work premises, that are actually and directly used by the contractor in
the performance or completion of the job, work or service contracted out. In addition, the applicant
shall submit a photo of the office building and premises where it holds office;
d) A copy of audited financial statements if the applicant is a corporation, partnership, cooperative or a
labor organization, or copy of the latest ITR if the applicant is a sole proprietorship; and
e) A sworn disclosure that the registrant, its officers and owners or principal stockholders or any one of
them, has not been operating or previously operating as a contractor under a different business
name or entity or with pending cases of violations of these Rules and/or labor standards, or with a
cancelled registration. In case any of the foregoing has a pending case, a copy of the complaint and
the latest status of the case shall be attached.

The application shall be verified. It shall include a DOLE certification of attendance to orientation seminar
on these Rules and an undertaking that the contractor shall abide by all applicable labor laws and
regulations.

6. What are the grounds for cancellation of registration of contracts?

Under Department Order No. 174, Series of 2017: Section 23. Grounds for cancellation of
registration.

The Regional Director shall, upon a verified complaint, cancel or revoke the registration of a contractor after
due process, based on any of the following grounds:

a) Misrepresentation of facts in the application;

b) Submission of a falsified or tampered application or supporting documents to the application for
registration;
c) Non-submission of Service Agreement between the principal and the contractor when required to do
so;
d) Non-submission of the required semi-annual report as provided in Section 22 (Semi-annual
reporting) hereof;
e) Findings through arbitration that the contractor has engaged in labor-only contracting and/or the
prohibited activities as provided in Section 7 (Other Prohibitions) hereof;
f) Non-compliance with labor standards and working conditions;
g) Findings of violation of Section 8 (Rights of contractor’s employees) or Section 9 (Required
contracts) of these Rules;
h) Non-compliance with SSS, the HDMF, Pag-Ibig, Philhealth, and ECC laws; and
i) Collecting any fees not authorized by law and other applicable rules and regulations.