Issues and Concerns

1. How much is the Substantial Capital or investment required to become

legitimate Subcontractor
Required Substantial Capital is clear...
Minimum capitalization requirement of at least P3Million paid up capital for corporations,
cooperative, partnership; same P3M net worth for sole proprietorship (Section 3[l]) Tools,
equipment, machineries and work premises are separately considered from the paid up
capital requirement. It must be actually and directly used for the subcontracted work or
services. Proof of ownership or lease agreement must be shown with photograph.
Subject to verification inspection.
The P3 Million capitalization requirement is intended to:

clarify and quantify substantial capital, which has been the source of litigation
(the amount is the high-end of DTI capitalization category for SMEs)
deter fly-by night and unscrupulous contractors from engaging in subcontracting
and profiteering through underpayment of wages, non-remittance of collected
SSS, Philhealth, or PagIBIG contributions, non-payment of other labor standards
benefits such as overtime pay, and non-observance of occupational health and
safety standards resulting to workplace accidents (to protect the principal or
user enterprises and the workers)

2. How many subcontractors will be covered by the new issuance?

Approximately, 200,000 workers under 2,624 registered subcontractors

will be covered (data as of Oct. 2011)
It also covers manpower cooperatives or cooperatives that engage in
subcontracting

3. How would the new DO induced Ethical and Professionalization of

Subcontracting?
1.
2.
3.
4.
5.

6.
7.
8.

Requiring an employment contract and Service Agreement.

Prescribing a standard form for Service Agreement (will be checked
through seal of Good Housekeeping)
Setting a standard administrative fee of at least ten (10) percent to
prevent the race to the bottom competition to the detriment of workers.
Inclusion of cooperatives to observe the regulations on subcontracting
and the required registration with DOLE Regional Offices to ensure their compliance
to labor standards and regulations.
Validity of registration is limited to the region where it is registered. In
case of Service Agreement outside the region where registered, the subcon should
submit a DOLE certified copy of its registration to the region where it seeks to
operate for registration & monitoring purposes.
Development of co-regulation schemes with the tripartite stakeholders.
Prohibition of repeated hiring of employees under an employment
contract of short duration (5-month employment contract) or under a Service
Agreement of short duration with the same or different contractors.
Underscoring observance of security of tenure by requiring compliance
with the clear standards of due process in termination cases.

4. Is there a Difference between a subcontractor and a private recruitment and

placement agency(PRPA)?
YES.

Subcontractor directly undertakes a specific job or service for a principal, and for this
purpose, employs its own workers.The PRPA merely recruits workers for the purpose of
placing them with an employer or company. It is not the employer of the workers it
recruited and placed. It is an agent of the employer.In subcontracting, the four-fold test
of E-E relationship should be satisfied by the subcontractor in relation to the employees
it engages to accomplish the subcontracted job or service. In such cases, the
subcontractor is also referred to as independent contractor. If the four-fold test is
satisfied by the principal, the principal becomes the employer of the employees engaged
by the subcontractor to accomplish the job or service. What exists is not subcontracting
but a direct employer-employee relationship between the principal and the employees.
5. In the employment of workers, is there a difference between an ordinary
employer-employee relationship and subcontracting?
YES.
In an ordinary ER-EE relationship, there are only two parties involved - the employer, who
directly hires the employee, and the employee. Jurisprudence is well-settled that to
ascertain the existence of an E-E relationship, the four-fold test is applied.In
subcontracting, there are three parties involved: the principal, the subcontractor, and the
employees. The four-fold test is satisfied by the contractor/subcontractor.
6. Is legitimate subcontracting different from a labor-only contracting ? How is
labor-only contracting define?
YES. Legitimate subcontracting is different from labor-only contracting. The former is
allowed and the latter is prohibited. Section 6: There is LOC where the contractor/
subcontractor merely recruits, supplies or places workers to perform a job, work or
service for a principal, and 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 subcontractors are
performing activities directly related to the main business of the principal; or
c)The contractor does not exercise the right to control over the performance of the work
of the employees.
7. What is the basis of the state in prohibiting labor-only contracting? What is
the objective of the prohibition?
The basis in prohibiting labor-only contracting are:
The Constitution, which mandates that the State shall protect labor and promote its
welfare, and shall guarantee basic labor rights including just and humane terms and
conditions of employment and the right to self-organization.
Article 106 of the Labor Code, which allows the Secretary of Labor to distinguish between
labor-only contracting and job contracting to prevent any violation or circumvention of
the Labor Code.
8. What will be the effect of the labor-only-contracting arrangement?
1.

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.
2.
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.

3.

The principal and the subcontractor will be solidarily treated as the

employer. 4.The employees will become employees of the principal, subject to
the classifications of employees under Article 280 of the Labor Code.

9. If the legitimate Subcontractor cannot pay the wages of the employees it

engaged to perform the job or service, will the principal automatically become
the employer of such employees?
NO.
Under Article 106 of the Labor Code, a principal has two types of liability in relation to
the employees of the subcontractor. The first type of liability is limited, and is governed
by the first two paragraphs of Article 106. Thus, mere inability of the subcontractor to
pay wages will not automatically make the principal the direct employer. It will only make
the principal jointly and severally liable with the subcontractor for payment of the
employees' wages to the extent of the work performed under the contract.
The second type of liability, which arises from the third and fourth paragraphs of Article
106, is absolute and direct. This liability arises when there is labor-only contracting as
defined in Section 6 of the new DO. In such cases, the principal shall be responsible to
the workers in the same manner and extent as if it directly employed these workers.
10. Is the hiring practice of repeated "5-5-5" or "endo" workers covered by DO
18-A, S. 2011?
YES.
Section 7(A)[7] makes subcontracting a prohibited activity when it is done through
repeated hiring of workers for a 5 to 6 months employment contract under the same
employer or Service Agreement of the same duration
In case of violation, the Contractors Certificate of Registration can be cancelled, after
due process, and the worker becomes regular employee of the principal, and all benefits
due to him/her shall be the liability of the principal.
11. What do we mean by hiring practice of repeated "5-5-5" or "endo" workers
that are prohibited by DO 18-A, S. 2011?
The 5-5-5 or endo workers refers to the hiring practice that is deliberately resorted to
prevent workers from acquiring regular status by reason of length of service of at least 6
months and one day. Under a subcontracting arrangement, this is done through:
(a) repeated short-term arrangements (e.g., 5 months, 5 months, 5-5-5, or less) by
one principal through the same contractor, or under different contractors, or
(b) repeated short-term arrangements (e.g., 5 months, 5 months, 5-5-5, or less)
through a Service Agreement of short duration under the same contractor, or different
contractors.
Jurisprudence of repeated hiring is well-settled. Repeated hiring of the same workers
shows that he/she is performing functions that is usual and necessary to the trade or
business of the employer.
On the other hand, the 5-5-5 working arrangement that is not repeated has been
declared by the SC in the Purefoods Case in General Santos, as in violation of public
policy as it has been shown to have been resorted to prevent regular employment.
12. Will DO 18-A S. 2011, be able to address the issue of declining union
membership which has been attributed by labor groups to indirect
employment schemes such as subcontracting?

Section 8 provides that all contractors employees are entitled to all the rights and
privileges provided in the Labor Code, and set out in subparagraph (e) the right to selforganization, collective bargaining and peaceful concerted activities
Section 7, subcontracting is prohibited activity when it results to:(1) the termination or
reduction of regular employees and reduction of work hours or reduction or splitting of
the bargaining unit as provided in Section 7(A)[1]); and(2) unfair labor practice (interfere
with, restrain or coerce employees in the exercise of their rights to self-organization as
provided in Article 248 (c) of the Labor Code, as amended) as provided in Section 7(A)
[6].
13. Will it address the issue of violation of labor standards and occupational
health and safety standards by the subcontractors?
The new DO has improved on the existing enforcement and compliance mechanism.
Engagement of the tripartite partners in region-based tripartite monitoring team on the
observance of labor standards in contracting and subcontracting arrangement
Conduct of routine inspection regardless of the number of employees engaged by the
principal or by the contractor, excepted from the coverage of LSEF
The new DO also provides for an opt-out enforcement and compliance scheme.
Section 35, the principal and subcontractors may opt to enroll and participate in DOLE
programs on improving compliance with labor standards and OSH such as the KapatiranWISE-TAV Program and Incentivizing Compliance Program (ICP)
14. Is it "opt-out" enforcement and compliance scheme available to contracting
/subcontracting in specific industries?
YES.
Provisions of the new DO applies to contracting/ subcontracting arrangement in specific
industries, including those covered by separate regulations or issuances of the DOLE or
other government agency, unless expressly provided otherwise.
Construction Industry: it shall be covered by applicable provision of DO 18-A but continue
to be governed by DO 19, s. 1993; DO 13, s. 1998; and the DOLE-DPWH-DI.LG-DTI and
PCAB Memorandum of Agreement-Joint Administrative Order No. 1, Series of 2011
15. What will happen to the workers, either the regular employees who are
terminated due to company's resort to contracting/subcontracting or the
workers employed by the subcontractor after the expiration of the Service
Agreement?
For the contractors employees, DO 18-A provides that the E-E relationship is with the
contractor.
The workers it deployed to do the contract will continue to be his/her employees
regardless of the Service Agreement, unless the workers will opt to be separated after
every engagement and receive separation pay. (Section 2. Coverage and Section 13.
Effect of termination of employment)
There is also a provision on development of Financial Relief Program and Tripartite
Engagement on Co-regulation in Section 34 for workers in transition.
16. Will the substantial capital requirement of P3 Million be immediately
enforced on existing subcontractors? What is the effect of DO18-A on existing
registration and Service Agreements?

NO.
There is a period of compliance because the effectivity of the Certificates of Registration
acquired under DO 18, s. 2002, which has a life of 3 years, shall be respected until its
expiration. This is due to the Constitutional principle against impairment of contract.
17. What does non-impairment of existing contracts mean and why is this
necessary?
Section 38 of DO18-A provides that rights or benefits being enjoyed by the parties to
existing contracting and subcontracting arrangements shall not be impaired.
Contracts referred to are those contracts executed and already being implemented
before the effectivity of DO18-A. Obligations, rights and benefits of parties to any
subcontracting arrangement prior to the effectivity of DO18-A shall not be diminished.
Service Agreements entered into upon the effectivity of DO18-A (on 5 Dec. 2011) and
onwards will have to observe the requirements of the Rules on standard contracts.
18. What will happen to the registry of subcontractors established under
Department Order No. 18, Series 2002?
DOLE registry of subcontractors that was established under DO 18, s. 2002, shall be
respected until the expiration of the Certificates issued in accordance thereto.
New subcontractors or those who will renew their registration shall be covered by the
requirements of the DO18-A. The requirements for registration includes full disclosure
and payment of P25,000.00 registration or renewal fee.
19. How do we know whether the subcontractor is legitimate or not?
Must be independent an employer and complies with the following:
1.
2.
3.
4.
5.
6.
7.
8.
9.

Minimum capitalization requirement of at least P3 Million fully paid up

capital for all subcontractors whether corporation, partnership and cooperative;
and a net worth of at least P3 Million for single proprietorship
Proof of ownership or lease agreement on tools, equipment,
machineries and work premises
Payment of P25,000.00 registration fee
Proof of financial capacity to pay the wages and benefits of the workers
in every service contract using the Net Financial Contracting Capacity (NFCC)
formula in government procurement
Control over the performance of the work of the employee deployed or
assigned to render the contracted work or services.
Not engaged in labor-only contracting arrangement as provided in
Section 6
Not engaged in prohibited activities enumerated in Section 7
Observes the rights of the workers as provided in Section 89) Observes
the required contracts under Section 9
Not delisted from the registry of legitimate contractor/subcontractor

20. Is DO18-A applicable to manpower cooperative

YES.
Cooperatives may engage in subcontracting provided they comply with the requirements
on legitimate subcontracting under DO 18-A. What is prohibited is the use of
cooperatives to circumvent the law, and such practice is a prohibited activity that is
subject to the same sanctions under the DO.

21. Is the new DO applicable to Job Order workers in government or GOCC? On

cabo system?
NO.
Job Order employees directly hired by the government are receiving above the minimum
standards or 20% more, which is similar to the casual loading concept in Australia.
Employees of janitorial and security agencies are covered. YES, cabo system is covered
and it is clearly prohibited.
22. What about the workers in the media of broadcast industry, are they
covered?
NO.
The NCR Broadcast Industry Tripartite Council have a draft guidelines on the engagement
through the talent system. However if they are hired through a third party or there is a
middle man that negotiates and deploy them to the network, such arrangement may fall
under the subcontracting arrangement.
23. What is the extent of the security of tenure of a contractual employee
under a subcontracting arrangement?
The concept of security of tenure is hinged on an employers regulated right to hire
and fire an employee.
The Labor Code recognizes options to terminate the employment relationship by either
the employer or the employee. Termination of employment at the initiative of the
employer must be due to just or authorized causes and with due process. The two facets
of this legal provision are: (1) the legality of the act of the dismissal; and (2) the legality
in the manner of dismissal. The illegality of the act of dismissal constitutes discharge
without just or authorized cause; while illegality in the manner of dismissal is dismissal
without due process or notice requirement. (Articles 282, 283 and 284 of the Labor Code,
as amended)
A contractual employee works for the duration of the Service Agreement between the
principal and the contractor, unless the arrangement is divisible into phases for which
substantially different skills are required and this is made known to the employee at the
time of engagement.
24. What are the rights of a contractual employee? Is there a difference
between a regular employees and a contractual employee?
A contractors employees, whether deployed or assigned as reliever, seasonal, weekender, temporary, or promo jobbers, are entitled to all the rights and privileges as
provided in the Labor Code, to include:
(a) safe and healthful working conditions;
(b) labor standards such as service incentive leave, rest days, overtime pay, holiday pay,
13th month pay, and separation pay as may be provided in the Service Agreement or
under the Labor Code;
(c) retirement benefits under the SSS or retirement plans of the contractor, if there are
any;
(d) social security and welfare benefits;
(e) self-organization, collective bargaining and peaceful concerted activities; and (f)
security of tenure.

25. Is the separation benefits available to direct contractual workers of the

principal? what about the retirement benefits?
YES.
Direct contractual workers of the principal are entitled to separation benefits if so
provided in their contracts.
YES.
Direct contractual workers of the principal are entitled to retirement benefits under the
SSS scheme unless the employer has a better retirement package.
26. Is there a difference between a regular employee and a contractual
employee?
YES.
For one, the expiration of the employment engagement in contractual arrangement is
predetermined.
Wage rates and top of benefits are different as regular employees observed the
company pay scale while contractual engagement may or may not be based on the
company pay scale. However it should not be below the minimum standards.
27. How is tripartite engagement operationalized in the determination of
functions that can or cannot be subject of subcontracting
YES.
For one, the expiration of the employment engagement in contractual arrangement is
predetermined.
Wage rates and top of benefits are different as regular employees observed the
company pay scale while contractual engagement may or may not be based on the
company pay scale. However it should not be below the minimum standards.
28. What is the remedy of the worker against a subcontractor or principal who
violate the provisions of DO 18-A?
They can file a complaint for cancellation of the contractors registration before the DOLE
Regional Office. DO18-A provides for:
Grounds for cancellation of contractors certificate of registration
Summary procedure and periods for cancellation of certificate of registration.
Requires the principal, as the indirect employer or the user of the services of the
contractor, to observe the provisions of the Rules.
29. When is the effectivity of DO18-A?
5 December 2011
(15 days after its publication in the Philippine Star on 19 November 2011)