Only Congress can stop contractualization

Atty. Dodo Dulay

Atty. Dodo Dulay

ENDING contractualization has been the battle cry of labor groups in the Philippines. To this end, labor organizations have called on President Rodrigo Duterte to issue an executive order “that will prohibit all forms of contractualization and guarantee the security of tenure of all workers.” According to them, any form of contractualization denies workers their fundamental rights to stable employment, living wage, safe working environment, social protection benefits as well as their right to form or join trade unions and participate in collective bargaining.

But whether labor groups like it or not, contractualization is here to stay. Neither the President nor Labor Secretary Silvestre Bello 3rd has the authority or power to ban contractualization. That’s because the law itself, particularly the Labor Code of the Philippines, allows labor contractualization.

Here is what Article 106 of the Labor Code says about contractualization:

“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…

“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 short, our labor laws currently recognize contractualization as a valid arrangement between an employer and a contractor (or sub-contractor) that furnishes supplies or performs work for a certain price.

As Secretary Bello explained: “Based on the Labor Code, as amended, I have no power to prohibit all forms of contractualization and fixed-term employment. This matter is a function of legislation. While I have quasi-legislative powers, I cannot, through rules and regulations, amend or supplant existing provisions of law.”

What is prohibited under the law, however, is “labor-only contracting” which, in its present-day form, refers to the use by employers or contractors of the so-called “endo” (or end-of-contract) or “5-5-5” work arrangement. Under this scheme, an endo worker is hired and fired every five months so that the worker does not become a regular employee or need not be given the privileges of a regular employee.

To this end, the Department of Labor and Employment (DOLE) issued Department Order 174 to plug the loopholes used by companies to circumvent the provisions prohibiting labor-only contracting.

At first glance, Department Order174 (DO 174) does not differ much from its predecessor, Department Order 18-A. But a careful reading of the order reveals several significant changes.

For instance, DO 174 expanded the enumeration of illegal labor-only contracting arrangements, such as contracting out of work through an in-house cooperative, thus, apparently recognizing the proliferation of cooperatives engaged in contracting.

The department order likewise prohibits companies from requiring the contractor’s (or subcontractor’s) workers to perform functions which are being performed by regular employees. This is a big departure from the old department order (i.e. DO 18-A) because under the new rules, if the activity or service is already being performed by regular employees, they can no longer be outsourced to contractors, regardless of the good faith of the company and even if justified by exigencies of the business.

This provision, however, might run counter to the Supreme Court ruling that companies may validly exercise its management prerogative by availing of the services of an independent contractor to promote economy and efficiency in the business, regardless of whether the activity to be contracted out is peripheral or core in nature. But then again, that is a matter for the courts to decide.

Anticipating possible tactics to sidestep the prohibition against endo, DO 174 now includes a “catch-all” provision that would ban all “practices, schemes and employment arrangements designed to circumvent the right of workers to security of tenure.” This ensures that other illicit schemes preventing the regularization of workers can be easily exposed and stopped.

Totally prohibiting all forms of contractualization, however, is not only implausible under current legislation, it will also conflict with many business models recognized around the world. One such model is the outsourcing of services, where corporations contract out certain business processes to third-party service providers, such as BPOs and call centers, in order to reduce costs.

Were it not for this form of contractualization, the Philippines would not have been a global leader in the BPO industry, which generated revenues of $26 billion in 2016. Analysts predict that our BPO revenues will overtake OFW remittances by 2018.

As a think tank said, shouldn’t government prioritize the creation of better job opportunities for informal workers instead of pandering to anti-contractualization demands?


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