The Paradox of Labor-Only Contracting

Contracting out work to a service provider per se is not necessarily illegal. Neither is it prohibited by Philippine laws. However, stringent conditions must be met for the arrangement to be legitimate. Otherwise, it falls into a legal paradox, a totally and absolutely prohibited arrangement in the sphere of employment law – labor-only contracting.

Labor-only contracting is an arrangement where a person, who does not have substantial capital or investment in the form of tools, equipment, machineries, work premises, among others, supplies workers to an employer to perform activities which are directly related to the principal business of the employer. Philippine laws, specifically DOLE Dept. Order No. 174, expressly consider this type of arrangement as illegal and prohibited. 

Despite its illegality in the Philippines, many companies still engage labor-only contractors since they provide advantages for businesses seeking flexibility in staffing and avoiding the administrative burdens associated with hiring employees directly. However, the other side of this double-edged sword raises serious concerns regarding labor rights, worker protections, and the potential for abuse of labor. Worse, the pervading effects of labor-only contracting emits an aura of unfairness and creates a discriminatory gap between the regular employees of the business and the contractor’s employees both of which perform the same line of work for the principal.

The BPO industry, in particular, has experienced the use of labor-only contracting arrangements in some sectors. These arrangements often involve hiring workers on short-term contracts or through third-party agencies, without guaranteeing the benefits of regularization and protections afforded to regular employees. Hence, sparking major movements against this type of scheme that are widely called “ENDO” contracts.

Michael Concepcion, spokesperson for BPO Industry Employees Network in 2017, has said that despite the widely publicized growth and expansion of the BPO industry in the Philippines, employment within the BPO does not guarantee secure jobs for over a million of Filipinos working in BPOs. In most cases, BPO clients carry a hefty influence over the retention of BPO employees in the BPO company even though they are not the direct employers of the workers. Such an ominous circumstance can be argued as tantamount to taking control of the contractor’s employees. Case law depicts the power of control as a tall-tale sign of labor-only contracting in situations where the principal exerts encompassing control over the performance of the contractor’s workers.

Clearly, the issue of labor-only contracting in the BPO sector has been a topic of debate and concern among labor groups, government agencies, and other stakeholders. Efforts are being made to address this issue, including the filing of the “BPO Workers Welfare Act” by Kabataan Partylist Representative Raoul Manuel which is a bill that seeks fair labor practices, healthful working conditions, and job security for BPO workers. Call center workers have been hoping for a law that can effectively alleviate their hardships since 2013, when it was Former Senator Miriam Defensor-Santiago who first filed a similar bill that did not come to fruition. Apparently, BPO employees are not amused by the so-called rights and fair treatment provided to them by the Telecommuting Act of 2018.

Additionally, some BPO companies have voluntarily adopted measures to improve the working conditions of their employees and ensure compliance with labor standards. Unfortunately, laudable efforts from the private sector alone are often not enough as challenges remain when it comes to counteracting labor-only contracting.

Thankfully, the present Constitution’s pro-labor agenda is opposed to labor-only contracting as Section 3, Article XIII unequivocally states that “the State shall afford full protection to labor”. Hence, any measure or arrangement that seeks to supplant or diminish labor rights are stricken down in this country, including labor-only contracting. This also equips the Supreme Court with the necessary arsenal to bombard labor-only contractors within the Philippines. Not only that, but judicial intervention also paved the way to the crafting of practical tests designed to expose a labor-only contractor acting as a legitimate one.

At the forefront of these arsenal is the test of whether the work being performed by the contractor’s employees is necessary and desirable in the usual business of the client. An affirmative finding leads to the positive determination of a labor-only contracting arrangement. Admittedly, the Supreme Court has already acknowledged the common practice of businesses in engaging independent contractors for specialized services, including janitorial, security, auditing, and other specific services. Although these services may have a direct connection to the employer’s operation, they are not necessary in the conduct of its principal and usual business.

But there are those that still employ contractors who deploy workers to the client for the purpose of conducting work that is necessary and desirable for the business. The case of Luces et. al. vs. Coca-Cola Bottlers Philippines, Inc. (G.R. No. 213816, December 2, 2020), is a fitting example.

It is a case where the Supreme Court found a labor-only contracting arrangement between Coca-Cola and some of its service contractors, Interserve Management Manpower Resources Inc., and Hotwired Marketing Systems, Inc. The service contractors deployed workers in the premises of Coca-Cola to perform their functions as route helpers, truck drivers, messengers, and forklift operators. The Court rejected the argument of Coca-Cola that the contractor’s employees work as route helpers only involves “postproduction activities” is not indispensable to its main line of business which is the manufacture of softdrink products. Instead, it was held that the work they do in preparing the products from the warehouse, loading and unloading them to delivery trucks, transporting the goods to Coca-Cola’s clients, and bringing back those that were undelivered are tasks that are indispensable in the aspect of manufacturing softdrinks. According to the SC, these jobs are not mere incidental functions but one that is wholly necessary since without which the main product line of Coca-Cola will not be placed in commerce.

One of the more simple tests, but not less potent, to determine whether there is labor-only contracting is by examining whether the contractor has substantial capitalization or investments in tools and equipment necessary for the work. Notably, if the issue of labor-only contracting was raised, it is the burden of the principal to prove that the contractor it engaged in legitimate job contracting by proffering evidence of substantial capital or investments in tools. Failing to do so leads to the presumption that the contractor so engaged is a labor-only contractor.

The case of Allied Banking Corp. vs. Calumpang (G.R. No. 219435, January 17, 2018) presents the application of the substantial capitalization test. Simply stated, the facts are as follows:

Allied Bank and Race Cleaners Inc. (RCI) entered into a service agreement, where RCI will provide janitorial and messengerial services to the Bank. With this, RCI deployed one of its employees, Mr. Calumpang, to perform those services but Allied Bank dismissed him upon learning that he allegedly borrowed money from the Bank’s clients.

A complaint for illegal dismissal was filed by Mr. Calumpang wherein he claims, among other things, that his employer was Allied Bank. The case reached the Supreme Court and it was ruled that Allied Bank was indeed the employer of Mr. Calumpang primarily because the Bank failed to establish proof that RCI is a legitimate job contractor. Other than the bare assertion that RCI had substantial capitalization to support its business, Allied Bank did not present any documents to prove its claim regarding RCI’s legitimate job contractor status. Consequently, RCI was considered as a labor-only contractor and, therefore, the real and direct employer of Mr. Calumpang is Allied Bank. In this case, Allied Bank was ordered to pay the backwages and other employee benefits to Mr. Calumpang.

All these counter-measures contributes to the exposition of labor-only contracting in the Philippines and serves to foster a more equitable and just working conditions for all contractual employees. Through continued vigilance, as well as the hope of a more effective law, e.g., BPO Workers Welfare Bill, that promotes job security and regularization, Filipinos can strive towards ensuring dignity, respect, and fair treatment in and around the workplace.