Q AND A on DOLE DEPARTMENT ORDER NO. 18-A, s.

2011

What is a legitimate subcontractor?

It is an independent employer who meets the following:

1) Minimum capitalization of at least P3 Million

 fully paid up capital for corporation, partnership and cooperative;
 net worth for single proprietorship
2) Proof of ownership or lease agreement on tools, equipment, machineries and work premises

3) Payment of P25,000.00 registration fee

4) Proof of financial capacity to pay the wages and benefits of its workers using the Net Financial
Contracting Capacity (NFCC) formula in government procurement
5) Control over the performance of the work of the employee deployed or assigned to render the
contracted work or services
6) Not engaged in labor-only contracting arrangement as provided in Section 6
Certificate of Bank Deposits
7) Not engaged in prohibited activities enumerated in Section 7
8) Observes the rights of the workers as provided in Section 8
9) Observes the required contracts under Section 9
10) Not delisted from the registry of legitimate contractor/subcontractor

What is the capital requirement for Corporations, Partnerships or Cooperatives?

Paid-up Capital: subscribed and fully-paid up capital stocks

Acceptable Proof:

1. audited financial statements

2. income tax return
3. SEC Certification of Capitalization
4. CDA Certification of Capitalization

EXCLUDE corporate assets or properties

What is the substantial capital requirement for single proprietors?

NET WORTH: Total Assets minus Total Liabilities

Acceptable Proof:

1. Audited financial statements

2. ncome tax return
I

3. BIR Certificate of title/proof of ownership of real property with assessed fair market value
4. Stock Certificate on its face value
5. Certificate of Bank Deposits
6. DTI Certificate of Capitalization

Is there a difference of legitimate subcontracting from labor-only contracting?

Legitimate subcontracting is allowed while labor-only contracting is not allowed.

Definition of labor-only contracting (LOC)?

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) 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) employees recruited, supplied or placed are performing activities directly related to the main business
of the principal; or
c) contractor does not exercise the right to control over the performance of the work of the employees.

Effect of labor-only-contracting?

1. The subcontractor will be treated as the agent of the principal, and representations by the
subcontractor to the employees will bind the principal.
2. The principal will become the employer as if it directly employed the workers, and will be responsible
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.

Difference between a subcontractor and a private recruitment and placement

agency(PRPA)?

PRPA merely recruits workers for placing them with an employer or company. It is not the employer of
the workers it recruited and placed.

A subcontractor directly undertakes a specific job or service for a principal, and employs its own workers.
The four-fold test of E-E relationship should be satisfied by the subcontractor in relation to the employees
it engages. The subcontractor is also referred to as independent contractor.

Is there a difference between an ordinary employer-employee relationship and

subcontracting?

In an ordinary ER-EE relationship, two parties involved are the employer (directly hires the employee),
and the employee.

In subcontracting, three parties are involved: the principal, the subcontractor, and the employees.

What If the legitimate Subcontractor cannot pay the wages of its employees?

A principal has two types of liability in relation to the employees of the subcontractor.

1. limited liability: The mere inability of the subcontractor to pay wages 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.
2. absolute & direct liability: Arises when there is labor-only contracting. The principal shall be
responsible to the workers in the same manner and extent as if it directly employed these workers.

What is the hiring practice of repeated "5-5-5" or "endo" workers that are prohibited by DO
18-A, S. 2011?

It is the hiring practice deliberately resorted to prevent workers from acquiring regular status done
through repeated short- term arrangements (e.g., “5 months, 5 months”, “5-5-5”, or less)
a) by one principal through the same contractor, or under different contractors, or
b) through a Service Agreement of short duration under the same contractor, or different contractors.
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 as a
violation of public policy as it has been shown to have been resorted to prevent regular employment.

Who are covered by DO18-A?

1. manpower service cooperatives
2. janitorial and security agencies

What are the rights of an employee of the contractor?

A contractor’s employees, whether deployed or assigned as reliever, seasonal, week-ender, temporary,

or promo jobbers, are entitled to all

(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.

Remedy of worker against a subcontractor or principal who violates the provisions of DO 18-
A?

They can file a complaint for cancellation of the contractor’s registration before the DOLE Regional
Office. DO18-A provides for grounds for cancellation of contractor’s certificate of registration, and the
procedure.

How will DO18-A eliminate the practice of contractors of “race to the bottom” when bidding
for service contracts?

It sets a standard administrative fee of at least ten percent (10%) to prevent the “race to the bottom”
competition to the detriment of workers’ wages and benefits.

The standard administrative cost is based on the total contract cost, and not the total contract price. It is
is derived by first computing the amount required for the payment of wage- and wage-related benefits
including employees‘social welfare benefits. Next, the standard administrative cost is obtained by
computing 10% of total contract cost. The resulting summary of the total contract cost PLUS the
standard administrative fee of 10% accounts for the total contract price. VAT and other taxes are NOT
included in total contract price.

If the Regional Wage Board issues a Wage Order at any time of a subsisting Service
Agreement, who is responsible for the resulting wage differentials?

The principal /client shall bear the cost of any required wage increases plus the standard 10%
administrative cost. But if the principal/client fails, the contractor is deemed jointly and severally liable.

DOLE Releases New Rules on Contracting and Subcontracting

Consistent with President Rodrigo Duterte’s campaign promise to end fixed-term employment, more commonly known as “endo”, the Department of
Labor and Employment (“DOLE”) launched a review of Department Order (“D.O.”) No. 18-A, the existing implementing rules and regulations on
contracting and subcontracting since 2011. In the interim, prior to the issuance of a new order, the DOLE released two issuances on 25 July 2016: (1) D.O.
No. 162, series of 2016, which suspends the registration of all new applicants as contractors and subcontractors under D.O. No. 18-A; and (2) Labor
Advisory No. 10, series of 2016, which grants to DOLE Regional Directors visitorial and investigative power under Article 128 of the Labor Code,
including the authority to declare the existence of labor-only contracting between the contractors and subcontractors.

On 16 March 2017, Secretary of Labor and Employment Hon. Silvestre H. Bello III signed and issued Department Order No. 174, series of 2017, as the
rules and regulations implementing Article 106 to 109 of the Labor Code on contracting and subcontracting, effectively superseding D.O. No. 18-A.
Among the notable changes are:

First, the requirement of substantial capital in paid-up capital stock or shares for corporations, partnerships and cooperatives, or in the net worth for single
proprietorship has been increased from Three Million Pesos (Php3,000,000.00) under D.O. No. 18-A to Five Million Pesos (Php5,000,000.00) under D.O.
No. 174.
Second, the elements of Labor-Only Contracting in Section 6 of D.O. No. 18-A have been substantially retained in Section 5 of D.O. No. 174, which now
provides:

“Section 5. Absolute Prohibition against Labor-only Contracting. Labor-only contracting, which is totally prohibited, refers to an arrangement where:

a)

i. The contractor or subcontractor does not have substantial capital, or

ii. The contractor or subcontractor does not have investments in the form of tools, equipment, machineries, supervision, work premises, among others,

and

iii. The contractor’s or subcontractor’s employees recruited and placed are performing activities which are directly related to the main business operation of
the principal;

or

b) The contractor or subcontractor does not exercise the right to control over the performance of the work of the employee.”

Section 5 of D.O. No. 174 is essentially a reiteration of the old rules in D.O. No. 18-A with the exception of the omitted phrase “regardless of whether such
job, work or service is to be performed or completed within or outside the premises of the principal” which forms part of the original first requirement.

Third, Section 8 of D.O. No. 174 added a list of requirements for a permissible contracting or subcontracting arrangement:

“Section 8. Permissible Contracting or Subcontracting Arrangements. Notwithstanding Sections 5 and 6 hereof, contracting or subcontracting shall only be
allowed if all the following circumstances concur:
a) The contractor or subcontractor is engaged in a distinct and independent business and undertakes to perform the job or work on its own responsibility,
according to its manner and method;

b) The contractor or subcontractor 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 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.”

Fourth, the element of registration as a requisite in legitimate contracting or subcontracting under Section 4 of D.O. No. 18-A has been omitted in the
requirements for permissible contracting and subcontracting arrangements under Section 8 of D.O. No. 174. However, the effect of failure or lack of
registration has been maintained from D.O. No. 18-A to Section 14 of D.O. No. 174. Like the old rules, failure to register under the Registry of Legitimate
Contractors shall give rise to the presumption that the contractor is engaged in labor-only contracting.
Lastly, procedural changes introduced in D.O. No. 174 include: requiring that the application for registration must be verified [Section 15]; raising
registration fees for contractors from Php25,000.00 to Php100,000.00 [Section 19]; shortening the validity of a certificate of registration from three (3)
years to two (2) years [Section 20]; and increasing the frequency of required reports to the DOLE Regional Office by contractors from an annual to a semi-
annual basis [Section 22].

D.O. No. 174, while superseding all the rules and regulations implementing Article 106 to 109 of the Labor Code, did not depart from the rules laid down
by its predecessor, D.O. No. 18-A. Moreover, like D.O. No. 18-A, D.O. No. 174 merely implements the provisions on contracting and subcontracting
under the Labor Code. Like any other administrative or implementing rule or regulation, D.O. No. 174 cannot go beyond or amend the law it seeks to
implement. Considering that the Labor Code does not prohibit legitimate job contracting, D.O. No. 174 cannot prohibit the same, but can only define what
is a legitimate job contracting and what is labor-only contracting within the parameters and standards set by the Labor Code. Furthermore, like any other
administrative or implementing rule or regulation, it may be amended, modified or superseded with another issuance from the Secretary of Labor and
Employment anytime. Whether the issuance of D.O. No. 174 will fulfill the President’s campaign promise to end contractualization remains to be seen.

Contracting and sub-contracting arrangements are commonplace in most business transactions. Instead of hiring their own messengers, janitors and security guards,
among others, entrepreneurs have learned the value of outsourcing these services to contractors. Truth be told, contracting out these jobs is actually more cost-efficient
in terms of time and money for the usual businessman. However, contracting arrangements are regulated by Philippine labor laws to ensure that these arrangements do
not result in the exploitation of contractual employees.
Last 14 November 2011, the Department of Labor & Employment (“DOLE”) issued Department Order No. 18-A, Series of 2011 (“DO 18-A”). Section 4 of DO 18-A
states that contracting or subcontracting shall be legitimate if all the following circumstances concur:
(a) The contractor is registered with DOLE and carries a distinct and independent business and undertakes to perform the job, work or service on its own
responsibility, according to its own manner and method, and free from 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 has substantial capital and/or investment; and
(c) The Service Agreement ensures compliance with all the rights and benefits under Labor Laws.
Furthermore, the contractor’s employees shall be entitled to all the rights and privileges as provided for in the Labor Code to include the following:
(a) Safe and healthful working conditions;
(b) Labor standards such as but not limited to 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 is any;
(d) Social security and welfare benefits;
(e) Self-organization, collective bargaining and peaceful concerted activities; and
(f) Security of tenure.
In fact, it is required that the Employment Contract between the Contractor and Employee include the following terms and conditions:
(a). The specific description of the job, work or service to be performed by the employee;
(b). The place of work and terms and conditions of employment, including a statement of the wage rate applicable to the individual employee; and
(c). The term or duration of employment that must be co-extensive with the Service Agreement or with the specific phase of work for which the employee is engaged.
A salient feature of DO 18-A is the mandatory registration of all contractors with the DOLE. A Certificate of Registration is good for 3 years. Failure to register shall
give rise to the presumption that the contractor is engaged in labor-only contracting, which is prohibited. Hence, it is strongly advised that contractors register with
DOLE, not only in compliance with DO 18-A but also as a preventive measure to avoid problems in the future concerning labor claims and cases filed by employees.