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LABOR

CONTRACTING
ARRANGEMENTS
Articles 106-109 of the Labor Code

Legitimate Job Contracting


An arrangement whereby a principal
(indirect employer) agrees to farm out with a
contractor or subcontractor the performance
or completion of a specific job, work or
service, within a definite or pre-determined
period, regardless of whether such job is to
be performed within or outside the premises
of the principal

Relationships under a
Legitimate
Job Contracting Arrangement
1. Contract for specific job, work or service, between
the principal and the contractor/ subcontractor
2. Contract of employment between the contractor/
subcontractor and the hired workers

In legitimate job contracting, no employeremployee relationship exists between the


employees of the job contractor and the principal
employer.

In effect
The principal employer becomes jointly and
severally liable with the job contractor for the
payment of the employees' wages only
whenever the contractor fails to pay the same.
In such case, the law creates an employeremployee relationship between the principal
employer and the job contractor's employees
for a LIMITED PURPOSE, that is, to ensure that
the employees are paid their wages.

Labor-only Contracting
An arrangement where the contractor or
subcontractor merely recruits, supplies or
places workers to perform a job, work or
service for a principal, who is deemed the
actual employer of the workers.

How?
There is no apparent employer-employee
relationship between the principal and the
workers
Precludes the employee from acquiring regular
status, the work being done on a periodic basis
with the same employee being juggled from
one employment contract to another; hiring
and re-hiring workers over a period of time
without considering them as regular employees

toss the poor workers from one job contractor to


another,
make
them
go
through
endless
applications, lining up, paperwork, documentation,
and physical examinations; make them sign five- or
ten-month-only job contracts, yet re-hire them after
brief "rest periods," but not after requiring them to
go through the whole application and selection
process once again; prepare and have them sign
waivers, quitclaims, and the like; refuse to issue
them identification cards, receipts or any other
concrete proof of employment or documentary
proof of payment of their salaries; fail to enroll
them for entitlement to social security and other
benefits; give them positions, titles or designations
that connote short-term employment.

Setting up of shell or dummy companies: the


mother company avoids the employer-employee
relations, and is thus shielded from liability from
employee claims in case of illegal dismissal,
closure, unfair labor practices and the like. In
those instances, the poor employees, finding the
shell or dummy company to be without assets,
often end up confused and without recourse as to
whom to run after. They sue the mother company
which conveniently sets up the defense of
absence of employer-employee relations.

TESTS:

1. The contractor or subcontractor does not have


substantial capital or investment which relates to
the job, work or service to be performed;
2. 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;
3. The contractor does not exercise the right to
control the performance of the work of the
contractual employee

Illustrative Examples
Jolli-Mac Restaurant Company (Jolli-Mac) owns and operates the
largest food chain in the country. It engaged Matiyaga Manpower
Services, Inc. (MMSI), a job contractor registered with the
Department of Labor and Employment, to provide its restaurants the
necessary personnel, consisting of cashiers, motorcycle delivery
boys and food servers, in its operations. The Service Agreement
warrants, among others, that MMSI has a paid- up capital of
P2,000,000.00; that it would train and determine the qualification
and fitness of all personnel to be assigned to Jolli- Mac; that it would
provide these personnel with proper Jolli-Mac uniforms; and that it is
exclusively responsible to these personnel for their respective
salaries and all other mandatory statutory benefits. After the
contract was signed, it was revealed, based on research conducted,
that MMSI had no other clients except Jolli- Mac, and one of its major
owners was a member of the Board of Directors of Jolli-Mac.

Illustrative Examples
A golf and country club outsourced the jobs in its food
and beverage department and offered the affected
employees an early retirement package of 1 months
pay for each year of service. The employees who
accepted the package executed quitclaims. Thereafter,
employees of a service contractor performed their jobs.
Subsequently, the management contracted with other
job contractors to provide other services like the
maintenance of physical facilities, golf operations, and
administrative and support services. Some of the
separated employees who signed quitclaims later filed
complaints for illegal dismissal.

Illustrative Examples
Reach-All, a marketing firm with operating capital
of
P100,000,
supplied
sales
persons
to
pharmaceutical companies to promote their
products in hospitals and doctors' offices. ReachAll trained these sales persons in the art of selling
but it is the client companies that taught them
the pharmacological qualities of their products.
Reach-Alls
roving
supervisors
monitored,
assessed, and supervised their work performance.
Reach-All directly paid their salaries out of
contractor's fees it received.

In labor-only contracting, an employer-employee


relationship is created by law between the principal
employer and the employees of the labor-only
contractor. In this case, the labor-only contractor is
considered merely an agent of the principal employer.
The principal employer is responsible to the
employees of the labor-only contractor as if such
employees had been directly employed by the
principal employer. The principal employer therefore
becomes solidarily liable with the labor-only
contractor for all the rightful claims of the employees.

In short, the legitimate job contractor


provides services while the labor-only
contractor provides only manpower.
The
legitimate
job
contractor
undertakes to perform a specific job for
the principal employer while the laboronly contractor merely provides the
personnel to work for the principal
employer.

PERMISSIBLE/
LEGITIMATE
JOB CONTRACTING

LABOR ONLY
CONTRACTING

PROVIDES SERVICES

PROVIDES
MANPOWER

TECHNICALLY, NO
ER-EE
RELATIONSHIP

THERE IS ER-EE
RELATIONSHIP

LIABILITY OF
PRINCIPAL LIMITED
TO UNPAID WAGES

PRINCIPAL IS LIABLE
FOR ALL CLAIMS
DUE THE EMPLOYEE

Right to reimbursement
Article 108
Failure of the principal to require the
contractor to post a bond should not be
construed as a waiver on its part to seek
reimbursement from the contractor for the
amount paid to the employees

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