Labor Law: Title II Wages; Chapter III Payment of Wages; Arts. 106

Chapter III

PAYMENT OF WAGES

Arts. 106 - 110

Q: If my job contractor fails to pay the wages of his employees, am I, the job owner, equally liable?

Q: In contracting or sub-contracting arrangement, what are the requirements that are intended to protect the rights of the contractual employees?

Art. 106. 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.

In the event that the contractor or subcontractor fails to pay the wages

of his employees in accordance with this Code,

the employer shall be jointly and severally liable

with his contractor or subcontractor to such employees

to the extent of the work performed under the contract,

in the same manner and extent that

he is liable to employees directly employed by him.

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 such cases, the person or intermediary

shall be considered merely as an agent of the employer

who shall be responsible to the workers in the same manner

and extent as if the latter were directly employed by him.

Art. 107. Indirect employer.

The provisions of the immediately preceding article shall likewise apply to any person, partnership, association or corporation which, not being an employer, contracts with an independent contractor for the performance of any work, task, job or project.

Art. 108. Posting of bond.
An employer or indirect employer

may require the contractor or subcontractor

to furnish a bond equal to the cost of labor under contract,

on condition that the bond will answer for the wages due the employees

should the contractor or subcontractor, as the case may be, fail to pay the same.

Art. 109. Solidary liability.
The provisions of existing laws to the contrary notwithstanding,

every employer or indirect employer

shall be held responsible with his contractor or subcontractor

for any violation of any provision of this Code.

For purposes of determining the extent of their civil liability under this Chapter,

they shall be considered as direct employers.

Notes:

Articles 106 to 109 are the four articles comprising the labor law on contracting out a job or service.
These four articles do not answer many questions of details that arise from the contracting out arrangement.

Most of those details are found in "Implementing Rules and Regulations" (IRR) that the Department of Labor and Employment (DOLE) is required by the Code to issue, and in Supreme Court rulings.

Ever since the Labor Code came out in 1974, Articles 106 to 109 have never been changed, but the IRRs have been changed six times, the latest being by Department Order No. 174, dated March 16, 2017.

Employer-Employee Relationship in Contracting Arrangement

As a rule, contracting or outsourcing is allowed by law.
Hardly can a business produce and sell products or services without dealing with contractors or sub-contractors.

If "A," for example, is a law firm that needs janitorial or accounting services, "A" does not have to employ cleaners or accountants.
It may instead hire "B," a firm engaged in rendering janitorial or accounting services to various other firms.
By this labor contracting arrangement, called "outsourcing" in practice, "A" and "B" are able to concentrate their businesses in their respective areas of expertise.

It creates a trilateral relationship:

An employer-employee relationship between the contractor and the employees it hires to perform the contracted work, and
A contractual relationship (governed by the Civil Code) between the contractor and the principal or client that owns the work contracted out.

To the workers, the contractor is the direct employer immediately obligated under labor laws, while the principal is the indirect employer who ultimately is liable if the contractor default in its obligations to the workers.

In the early years of managerial capitalism – when business owners began to hire managers for their businesses – contracting jobs out was already in wide practice as an incident of plant operations and regarded as a management function.

As professional business management advances, recourse to contracting out has increased rather than decreased. Contracting and subcontracting grew as business grows. No business that wants to grow has everything it needs; therefore, job contracting is a business necessity.
It is also developmental as it encourages both specialization and competition, but it has to be emphasized that job contracting, because it is business, is not exempt from the laws, particularly the statutory conditions of employment, as well as the workers' constitutional rights to self-organization and security of the tenure.

A legitimate contractor (job contractor or independent contractor) is not necessarily a firm; it may be an individual.
Independent contractors often present themselves to possess unique skills, expertise or talent to distinguish them from ordinary employees. (Sonza, June 10 2004)

Sonza v. ABS-CBN G.R. No. 138051, June 10, 2004

Subject: Independent Contractor

In May 1994, ABS-CBN signed an Agreement with MJMDC, making MJMDC as the "AGENT" for Jay Sonza's exclusive services to ABS-CBN for radio and television hosting.
Jay Sonza's services included co-hosting for the Mel & Jay radio program and Mel & Jay television program.
In 1996, Jay Sonza wrote to ABS-CBN's President, resigning due to recent events and claiming violation of the Agreement.
Jay Sonza filed a complaint against ABS-CBN for unpaid salaries, separation pay, service incentive leave pay, 13th month pay, signing bonus, and travel allowance.
ABS-CBN filed a motion to dismiss, claiming no employer-employee relationship.

WoN a "talent" is an employee and not and independent contractor. NO.

Independent contractors often present themselves to possess unique skills, expertise or talent to distinguish them from ordinary employees. The specific selection and hiring of Jay Sonza because of his unique skills, talent and celebrity status not possessed by ordinary employees, is a circumstance indicative, but not conclusive, of an independent contractual relationship.

A legitimate contractor is not necessarily a firm; it may be an individual. Independent contractors often present themselves to possess unique skills, expertise or talent to distinguish them from ordinary employees.

Applying the control test to the present case, we find that Jay Sonza is not an employee but an independent contractor.

Proprietary Right

The contract out is a proprietary right.
The court said:

We recognize the proprietary right of SanMig to exercise an inherent management prerogative and its best business judgment to determine whether it should contract out the performance of some of its work to independent contractors. However, the rights of all workers to self-organization, collective bargaining and negotiations, and peaceful concerted activities, including the right to strike in accordance with law (Section 3, Article XIII, 1987 Constitution) equally call for recognition and protection. Those contending interests must be placed in proper perspective and equilibrium. (San Miguel Corp. Employees Union v. Bersamira, G.R. No. 87700 June 13, 1990)

In a Meralco case, the Supreme Court ruled that the employer cannot be compelled to consult with the employees before engaging the services of contractors:

The management cannot be denied the faculty are promoting efficiency and attaining economy by a study of what units are essential for its operation. It has the ultimate determination of whether services should be performed by its personnel or contracted outside agencies. While there should be mutual consideration, eventually the deference is to be paid to what management decides. Contracting out of services is an exercise of business management or management prerogative. Absent proof that management acted in malicious or arbitrary manner, the court will not interfere with the exercise of judgment by an employer. (MERALCO v. Quisumbing, G.R. No. 127598 February 22, 2000)

The San Miguel and Meralco cases are only two of numerous court rulings upholding the legality and business practicality of engaging a legitimate contractor.

San Miguel Corp. Employees Union v. Bersamira, G.R. No. 87700 June 13, 1990
Subject: Proprietary Right

San Miguel Corporation (SanMig) entered into contracts for merchandising services with independent contractors Lipercon and D'Rite. These contracts specified that the workers employed by the contractors were not SanMig's employees and no employer-employee relationship existed between them.
San Miguel Corporation Employees Union-PTWGO (Union) alleged a "labor-only" contracting situation regarding some Lipercon and D'Rite workers who had been continuously working for SanMig for extended periods. The Union demanded regularization of these workers' employment statuses, leading to a notice of strike for unfair labor practices, CBA violations, and union busting.
SanMig filed a Complaint for Injunction and Damages, seeking to prevent the Union from representing Lipercon and D'Rite workers, holding a strike vote, and staging strikes or demonstrations.

RTC: Issued a Temporary Restraining Order and Writ of Preliminary Injunction stating that the absence of an employer-employee relationship negated the existence of a labor dispute.

WoN the respondent Court correctly assumed jurisdiction over the present controversy and properly issued the Writ of Preliminary Injunction. NO.

We recognize the proprietary right of SanMig to exercise an inherent management prerogative and its best business judgment to determine whether it should contract out the performance of some of its work to independent contractors. However, the rights of all workers to self-organization, collective bargaining and negotiations, and peaceful concerted activities, including the right to strike in accordance with law (Section 3, Article XIII, 1987 Constitution) equally call for recognition and protection. Those contending interests must be placed in proper perspective and equilibrium.

The Court ruled in favor of the petitioners, stating that the controversy constituted a labor dispute since it involved terms and conditions of employment, regularization of employees, and issues which requires application of existing labor laws. The Court emphasized that labor disputes are not limited to employer-employee relationships and that issues regarding employment terms and representation fall within the scope of labor disputes.

MERALCO v. Quisumbing, G.R. No. 127598, February 22, 2000
Subject: Proprietary Right

In 1999, the Supreme Court directed the parties to execute a Collective Bargaining Agreement (CBA) incorporating the terms and conditions from the Secretary of Labor's orders, along with modifications including changes in wages and retroactivity of the CBA, among others.
The Secretary required consultation for contracting out services for six months or more.

WoN the added requirement of consultation imposed by the Secretary in cases of contracting out for six (6) months or more is valid. NO.

The Court held that hiring of workers is within the employer's inherent freedom to regulate and is a valid exercise of its management prerogative subject only to special laws and agreements on the matter and the fair standards of justice.

The management cannot be denied the faculty of promoting efficiency and attaining economy by a study of what units are essential for its operation. It has the ultimate determination of whether services should be performed by its personnel or contracted to outside agencies. While there should be mutual consultation, eventually deference is to be paid to what management decides. Contracting out of services is an exercise of business judgment or management prerogative. Absent proof that management acted in a malicious or arbitrary manner, the Court will not interfere with the exercise of judgment by an employer.

The law already sufficiently regulates this matter. Jurisprudence also provides adequate limitations, such that the employer must be motivated by good faith and the contracting out should not be resorted to circumvent the law or must not have been the result of malicious or arbitrary actions.

Contractor and Contracting Defined

"Job Contractor"

someone who

(a) carries on an independent business and undertakes the contract work on his own account under his own responsibility according to his own manner and method, free from the control and direction of his employer or principal in all matters connected with the performance of the work except as to the results thereof, and
(2) has substantial capital or investment in the form of tools, equipment, machineries, work premises, and other materials which are necessary in the conduct of his business. (Baguio, et.al v. NLRC, G.R. Nos. 79004-08, October 4, 1991)

This definition of job contractor or job contracting, adopted from American law, is already entrenched in Philippine jurisprudence. The substance or elements of the definition have been adopted repeatedly in Supreme Court decisions before and after the Labor Code was issued in 1974.
Because the definition stresses that a job contractor has an independent business, it is understandable why business practice and court decisions have been using "job contractor" and "independent contractor" interchangeably.
Contractor refers to any person or entity engaged in a legitimate contracting or subcontracting arrangement providing services for a specific job or undertaking farmed out by principal under a Service Agreement. (Department Order No. 174)

Baguio, et.al v. NLRC, G.R. Nos. 79004-08, October 4, 1991

Subject: Job Contractor, Liability

Feliciano Lupo, a building contractor, entered into a contract with General Milling Corporation (GMC) for construction work of an annex building inside the latter’s plant.
Lupo hired petitioners as carpenters, masons, or laborers for this project.
After Lupo terminated petitioners' services, they filed complaints against Lupo and GMC for unpaid wages, COLA differentials, bonus, and overtime pay.

LA: Found both Lupo and GMC jointly and severally liable to petitioners under Article 109 of the Labor Code.
NLRC First Division: Denied the appeal.
NLRC Third Division: Absolved GMC from any liability.
Petitioners argue GMC's joint and several liability with Lupo based on Article 106 of the Labor Code, but the court rules that "labor-only" contracting doesn't apply to this situation.

WoN GMC is joint and several liability with Lupo based on Article 106 of the Labor Code. YES

There is "job contracting" where (1) the contractor carries on an independent business and undertakes the contract work on his own account under his own responsibility according to his own manner and method, free from the control and direction of his employer or principal in all matters connected with the performance of the work except as to the results thereof; and (2) the contractor has substantial capital or investment in the form of tools, equipment, machineries, work premises, and other materials which are necessary in the conduct of his business.

In this case, the construction of an annex building in the plant has no relation to GMC's flour and feeds manufacturing business, so "labor-only" contracting doesn't apply, thus Article 106 is inapplicable.

Instead, "job contracting" exists. GMC, contracting Lupo for the annex building, is considered an "indirect employer" under Article 107, making GMC jointly and solidarily liable with Lupo for any Labor Code violations.

Article 108 mandates employers to require contractors to post a bond for unpaid wages. Since GMC didn't enforce this requirement with Lupo, GMC must pay Lupo's liabilities to the employees but can seek reimbursement from Lupo.

Labor Contracting

"Contracting" or "Subcontracting"

Refers to an arrangement whereby a principal agrees to farm out to a contractor the performance or completion of a specific job or work within a definite or predetermined period, regardless of whether such job or work is to be performed or completed within or outside the premises of the principal. (Department Order No. 174)
Legitimate labor contracting, by definition refers to job contracting.
If the arrangement is not legitimate contracting, the so-called contractor should not be called "contractor".

Qualifications of Labor Contractor (Department Order No. 174)

Permissible contracting or subcontracting arrangements shall only be allowed if all the following circumstances concur:

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 own manner and method;
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;
In performing the work farmed out, the contractor or subcontractor 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
The Service Agreement ensures compliance with all the rights and benefits for all the employees of the contractor or subcontractor under the labor laws.

"Substantial capital"

refers to paid-up capital stock/shares at least Five Million Pesos (P5,000,000.00) in the case of corporations, partnerships and cooperatives; in the case of single proprietorship, a net worth of at least Five Million Pesos (P5,000,000.00).

Independence

Legitimate contracting should be an independent business, operating freely from the client's control as regards the manner and method of accomplishing the contracted job except as regards the pre-agreed desired result.
Without this freedom or independence from the principal the arrangement is most likely not contracting but employment.

Employment, it may be recalled from comments in Article 82, is characterized by the hirer's control over the work performance of the hiree who, because of that control, is considered an employee.
Control over the manner or method of doing the work characterizes employment. In contrast, control only of the desired result of the work negates the status of being an employee.

An illustration of valid contracting in good faith or because of business exigencies is the case of Serrano v. Isetann (January 27, 2003).

The employer here abolished its security section whose main task was to catch shoplifters in the department store; subsequently, it contracted out the job to an outside security agency.
The Court upheld the abolition of the regular positions and their being contracted out.
Citing past decisions, the Court reiterated that the employer has the right to "promote efficiency and attain economy" and to determine whether services "should be performed by its personnel or contracted to outside agencies."
Unless it is proved that management acted in a malicious or arbitrary manner, the Court will not interfere with the exercise of judgment by an employer."

A contractor can be an entity or an individual person.

But it seems Department Order No. 174 contemplates an applicant for registration as "corporation, partnership, cooperative or a labor organization."

Serrano v. NLRC & Isetann, G.R. No. 117040 January 27, 2000
Subject: Valid Contracting Good Faith

Ruben Serrano was employed by Isetann Department Store as a security checker.
As a cost-cutting measure, Isetann decided to phase out its entire security section and engage the services of an independent security agency. Petitioner received a termination notice.
Petitioner filed a complaint alleging illegal dismissal, illegal layoff, unfair labor practice, underpayment of wages, nonpayment of salary, and overtime pay.

LA: Ruled in favor of petitioner, finding his dismissal illegal.
NLRC: Reversed the Labor Arbiter's decision, and considered Isetann's decision to phase out the security section and hire an independent security agency as a legitimate business decision, not subject to inquiry.

WoN the hiring of an independent security agency by Isetann to replace its current security section is a valid ground of dismissal. YES

The Court upheld the abolition of the regular positions and their being contracted out.

Citing past decisions, the Court reiterated that the employer has the right to "promote efficiency and attain economy" and to determine whether services "should be performed by its personnel or contracted to outside agencies."

Unless it is proved that management acted in a malicious or arbitrary manner, the Court will not interfere with the exercise of judgment by an employer.

Mandatory Registration

Department Order No. 174 makes the registration of legitimate contractors mandatory. Section 14 states:

Consistent with the authority of the Secretary of Labor and Employment to restrict or prohibit the contracting out of labor to protect the rights of workers, it shall be mandatory for all persons or entities acting as contractors to register with the Regional Office of the Department of Labor and Employment (DOLE) where it principally operates.
Failure to register shall give rise to the presumption that the contractor is engaged in labor-only contracting.

The applicant has to state the following:

number of regular workers and the total workforce
number of clients and have the personnel assigned to each client
description of the phases of the contract and the number of personnel in each phase. (See Sec. 15, D.O. 174)

The contractor is deemed registered on the date of issuance of the Certificate of Registration.

The certificate is valid for two years and unless earlier cancelled, renewable before it expires.
The certificate may not be renewed if SSS, PhilHealth, etc. or the other labor standards have been violated.

Indicative of DOLE's strict regulation of labor Contracting is the semi-annual reporting. The semi annual report must include the:

number of workers covered by each contract with a principal, and
proof of payment of the

Social Security System (SSS)
PAG-IBIG Fund,
PhilHealth,
Employees Compensation Commission (ECC), and
Bureau of Internal Revenue (BIR) remittances due to its employees

certified list of all cases filed against the contractor before the NLRC and DOLE. (See Sec. 22, D.O. 174)

Cancellation of Registration

Department Order No. 174 reiterates the strict provisions and cancellation of the contractor's registration.
Due Process ーample hearing and evidence ー must be observed before cancellation may be ordered, although the proceedings at the DOLE regional office shall be summary in each way.

The regional director may avail himself of all reasonable means to ascertain the facts, such as inspection or examination of informed persons.
He decides whether clarificatory hearings are needed but shall resolve the case within seven days from the receipt of the verified answer or counter affidavit.
Any motion for reconsideration will be treated as appeal.
The regional director's order is appealable to the DOLE Secretary.

The grounds for cancellation of registration are stated in

Sec. 23. Grounds for Cancellation of Registration:

The Regional Director shall, upon a verified complaint, cancel or revoke the registration of a contractor after due process, based on any of the following grounds:

Misrepresentation of facts in the application;
Submission of falsified or tampered application or supporting documents to the application for registration;
Non-submission of Service Agreement between the principal and the contractor when required to do so;
Non-submission of the required semi-annual report as provided in Section 22 (Semi-Annual reporting) thereof;
Final findings that the contractor has engaged in labor-only contracting and/or other illicit forms of employment arrangements as provided in Section 6 hereof;
Non-compliance with labor standards and working conditions;
Findings of violation of Section 10 (Rights of contractor's employees), and Section 11 (Required contracts);
Non-compliance with SSS, the HDMF, Pag-IBIG, PhilHealth, and ECC Laws.
Collecting any fees not authorized by law and other applicable rules and regulations; and
Violations of any provisions of the Labor Code.

Effect of Cancellation

A final order of cancellation shall divest the contractor of its legitimate status to engage in contracting/subcontracting.

Sec. 26(4). Effects of Cancellation of Registration:
The cancellation of the registration of the contractor for engaging in labor-only contracting or for violation of any of the provisions of these Rules involving a particular service agreement will not, however, impair the validity of existing legitimate job-contracting arrangements the contractor may have entered into with other principal prior to the cancellation of its registration. Any valid and subsisting Service Agreement shall be respected until its expiration; thereafter, contracting with a delisted contractor shall make the principal direct employer of all employees under the Service Agreement pursuant to Articles 106 and 109 of the Labor Code, as amended.

Rights of Contractor's Employees

The preceding and the current DOLE department orders prominently declare that the contractor's employees are entitled to all the rights and privileges of employees under the Labor Code, including the minimum labor standards, social security and welfare benefits, self-organization, and security of tenure.
The entitlements must be expressly assured in the employment contract between the contractor and his employees and in the service agreement between the contractor and the principal.
The Department Order No. 174 as did as the previous implementing rules, wants to stop the casualization or contractualization by which contractor's employees do not become regular employees but are terminated every five months or so when their "contract" ends.

The practice came to be known as "Endo" for "end of contract."
It has spread despite the Supreme Court's denunciation in 1997.

It bears stressing that the legitimate contract or service provider is an employer just like the big corporations. A contactor that hires workers is covered by the Labor Code, so also are the workers.
There is no basis in thinking that the contractor is not covered by the labor laws.

Ex: Employment Tenure

Just like employees in big corporations, the employees of contractors are covered by Book VI of the Labor Code.
They have the right to security of the tenure. They have the right to regular employment status. Regularly continuing jobs require regularly continuing, or permanent employment in theory.
The rules on employment termination applied them.
They have the right to "due process of law" which requires a valid legal cause and observance of valid procedure if their employment has to be terminated.

Sec. 10. Rights of Contractor’s/ Subcontractor’s Employees:

All contractor’s/subcontractor’s employees, shall be entitled to security of tenure and all the rights and privileges as provided for in the Labor Code, as amended, to include the following:

Safe and healthful working conditions;
Labor standards such as but not limited to service incentive leave, rest days, overtime pay, holiday pay, 13th month pay, and separation pay;
Retirement benefits under the SSS or retirement plans of the contractor/subcontractor;
Social security and welfare benefits; and
Self-organization, collective bargaining and peaceful concerted activities including the right to strike.

Sec. 11. Required Contracts under these Rules:

Employment contract between the contractor/subcontractor and its employees. Notwithstanding any oral or written stipulations to the contrary, the contract between the contractor/subcontractor and its employees shall be governed by the provisions of Articles 294 and 295 of the Labor Code, as amended, including the provisions on general labor standards. It shall include the following stipulations:

The specific description of the job or work to be performed by the employee; and
The place of work and terms and condition of employment, including a statement of the wage rate applicable to the individual employee. The contractor/subcontractor shall inform the employee of the foregoing stipulations in writing on or before the first day of his/her employment.

Service Agreement between the principal and the contractor. The Service Agreement shall include the following:

The specific description of the job or work being subcontracted, including its term or duration;
The place or work and terms and conditions governing the contracting arrangement, to include the agreed amount of the contracted job or work as well as the standard administrative fee of not less than ten percent (10%) of the total contract cost; and
A provision on the issuance of the bond/s as defined in Section 3(a) renewable every year.

Sec. 12. Effect of Violation of the Provisions on the Rights of Contractor’s Employees and Required Contracts:

A finding of violation of either Sections 10 or 11 hereof, shall render the principal the direct employer of the employees of the contractor or subcontractor, pursuant to Article 109 of the Labor Code, as amended.

Employment Termination; The Tenure of the Contractor's Employees

The tenure of the contractor's employees may end when the contract between the principal and the contractor ends upon completion of the contracted job or of the contracted phase of the job.
In that case, the employee is not entitled to separation pay, although he may receive bonus, retirement pay or other benefits from law or contract.

Sec. 13. Effect of Termination of Employment.:

Termination Before the Expiration of Service Agreement

The termination of employment of the contractor's/subcontractor's employee prior to the expiration of the Service Agreement shall be governed by Articles 297, 298 and 299 of the Labor Code.

Termination Due to Pre-termination of Service Agreement

In case the termination of employment is caused by the pre-termination of the Service Agreement not due to authorized causes under Article 298, the right of the contractor’s/subcontractor's employee to unpaid wages and other unpaid benefits including unremitted legal mandatory contributions, e.g., SSS, PhilHealth, Pag-IBIG, ECC, shall be borne by the party at fault, without prejudice to the solidary liability of the parties to the Service Agreement.

Termination Due to o Expiration of the Service Agreement or Completion of Job or Phase of Job

Where the termination results from the expiration of the Service Agreement, or from the completion of the phase of the job or work for which the employee is engaged, the latter may opt to wait for re-employment within three (3) months to resign and transfer to another contractor-employer. Failure of the contractor to provide new employment for the employee shall entitle the latter to payment of separation benefits as may be provided by law or the Service Agreement, whichever is higher, without prejudice to his/her entitlement to completion bonuses or other emoluments, including retirement benefits whenever applicable. The mere expiration of the Service Agreement shall not be deemed as a termination of employment of the contractor's/subcontractor’s employees who are regular employees of the latter.

Prohibitions: Labor-Only Contracting

The heart of the labor school differentiation between permissible and prohibited contracting arrangements is contained in the third and fourth paragraphs of Article 106.

These provisions in fact ー the whole group of four Articles 106 to 109 ー has not been amended by Congress in any way since they first came out in 1974.
But through the years, DOLE has formulated and reformulated the implementing rules at least six times.

According to Article 106, third paragraph, there can be distinctions between labor-only contracting and job contracting.

Furthermore, there can be differentiations "within this types of contracting."
In making the differentiations the DOLE Secretary may determine "who among the parties shall be considered the employer for purposes of the Labor Code to prevent any violation or circumvention of any provision of the Code."

Labor-Only Contracting: Labor Code Definition

Article 106, paragraph (4):

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 such cases, the person or intermediary shall be considered merely as an agent of the employer who shall be responsible to the workers in the same manner and extent as if the latter were directly employed by him.

Labor-Only Contracting: D.O. No. 174 Definition

Sec. 3(h):

“Labor-only contracting” refers to arrangement where the contractor or subcontractor merely recruits, supplies or places workers to perform a job or work for a principal, and the elements enumerated in Section 5 hereunder are present.

Sec. 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.

The two elements in the codal definition referring to capital/investment and to the kind of work directly related to principal business are adopted in the DOLE definition.
It adds a third element, the contractor does not exercise control over the performance of the work of the employee.

If the contractor does control this employee's performance of work, the contractor is legitimate, not a labor only contractor.
This is appropriate because the hallmark of being an independent contractor employer is the possession of control over the conduct and work performance of the employee. A contractor who possesses such control is indeed a contractor-employer. As such, all the obligations and rights of an employer under the labor laws are devolve upon him.

Example of Labor-only Contracting: Employees Posing as "Contractors"

Actual situations abound where people cease being employees to become contractors to their former employers.

Such change in relationship itself violates no law, and might even mean a win-win arrangement because the employer assists the employees to become intrapreneurs.
But sometimes, the shift from being employees to being contractors is merely a semblance and a scheme to end the employment relationship while still utilizing the workers' services without shouldering the employers obligations.
In such case, the court will unveil the scheme and declare it a labor-only contractor as illustrated in the Manila Water case (June 8 2004)

Manila Water Co Inc v. Pena, G.R. No. 158255, July 8, 2004

Subject: Independent Contractor

When the government-owned Metropolitan Waterworks and Sewerage System (MWSS) contracted the Manila Water Company (MWC) to manage the water distribution system in Metro Manila East Zone, the MWC absorbed some MWSS employees, but not the 121 collectors who were retained by MWC on contractual basis only.
A few months later, these collectors formed the Association Collectors Group, Inc., (ACGI) with which MWC entered into a contract to collect water charges. The the contract was terminated after about 14 months.
The collectors filed a complaint of illegal dismissal against MWC, which, for its part, argued that the employer was ACGI not MWC.

Is ACGI a legitimate contractor? No, it is a labor-only contractor applying the definition in D.O. No. 18-02 (now D.O. No. 18-A).

The court noted that:

ACGI does not have substantial capitalization or investment in the form of tools, equipment, etc., to qualify as an independent contractor.
The work of the private respondents was directly related to the principal business or operation of MWC.
ACGI did not carry on an independent business or undertake the performance of its service contract according to its own manner and method, free from the control and supervision of its principal, MWC.

MWC continued to issue memoranda on billing methods and distribution of books to the collectors; it required the workers to report daily; and MWC monitored strictly their attendance.
Although ACGI would ultimately discipline the erring workers, MWC will dictate what penalty to impose.

Considering the facts, the court concluded that ACGI was not an independent contractor. The court rejected MWC's argument that the former employees had become independent contractors.

More Prohibitions: Other Illicit Arrangements

In addition to Section 5 about Labor-only Contraction, D.O. No. 174 also prohibits the following for being contrary to the law or public policy:

Sec. 6. Other Illicit Forms of Employment Arrangements.

When the principal farms out work to a “Cabo”.
Contracting out of job or work through an in-house agency.
Contracting out of job or work through an in-house cooperative which merely supplies workers to the principal.
Contracting out of a job or work by reason of a strike or lockout whether actual or imminent.
Contracting out of a job or work being performed by union members and such will interfere with, restrain or coerce employees in the exercise of their rights to self-organization as provided in Article 259 of the Labor Code, as amended.
Requiring the contractor's/subcontractor's employees to perform functions which are currently being performed by the regular employees of the principal.
Requiring the contractor’s/subcontractor's employees to sign, as a precondition to employment or continued employment, an antedated resignation letter; a blank payroll; a waiver of labor standards including minimum wages and social or welfare benefits; or a quitclaim releasing the principal or contractor from liability as to payment of future claims; or require the employee to become member of a cooperative.
Repeated hiring by the contractor/subcontractor of employees under an employment contract of short duration.
Requiring employees under a contracting/subcontracting arrangement to sign a contract fixing the period of employment to a term shorter than the term of the Service Agreement, unless the contract is divisible into phases for which substantially different skills are required and this is made known to the employee at the time of engagement.
Such other practices, schemes or employment arrangements designed to circumvent the right of workers to security of tenure.

Sec. 3. Definition of terms.

“Cabo” — refers to a person or group of persons or to a labor group which, under the guise of a labor organization, cooperative or any entity, supplies workers to an employer, with or without any monetary or other consideration, whether in the capacity of an agent of the employer or as an ostensible independent contractor.

“In-house agency” — refers to a contractor which is owned, managed, or controlled directly or indirectly by the principal or one where the principal owns/represents any share of stock, and which operates solely or mainly for the principal.

“In-house cooperative” — refers to a cooperative which is managed, or controlled directly or indirectly by the principal or one where the principal or any of its officers owns/represents any equity or interest, and which operates solely or mainly for the principal.

Consequence of LOC or Other Prohibitions

Sec. 7. When principal is deemed the direct employer of the contractor’s or subcontractor’s employees.

In the event that there is a finding that the contractor or subcontractor is engaged in labor-only contracting under Section 5 other illicit forms of employment arrangements under Section 6 of these Rules, the principal shall be deemed the direct employer of the contractor's or subcontractor’s employees.

“Solidary liability” refers to the liability of the principal, pursuant to the provision of Article 109 of the Labor Code, as direct employer together with the contractor for any violation of any provision of the Labor Code.

It also refers to the liability of the principal, in the same manner and extent that he/she is liable to his/her direct employees, to the extent of the work performed under the contract when the contractor fails to pay the waged of his/her employees, as provided in Article 106 of the Labor Code, as amended.

The technical term “jointly and severally” in Article 106 means that the amount of liability of the contractor can also become the full liability of the principal or indirect employer;

thus, if the contractor fails to pay a P 90,000.00 payroll, the some amount of P 90,000.00 is demandable from the indirect employer for the work done for him by the contractor's workers.

The indirect employer cannot escape this liability even if, if it has paid the workers' wage rates in accordance with the contract with the contractor or agency.
The employees are not party to the contract. Labor standard laws such as Articles 106, 107 and 109 are enacted to help workers whose wages barely meet the cost of their basic needs. They are considered written in every contract, and stipulations that violate them are considered no written. (Rosewood Processing Inc., May 21 1998)
But the same Rosewood case has clarified that if the liability is in the nature of a penalty, such as back wages and separation pay because of a wrongful dismissal, the liability should be solely that of the contractor if there is no proof that the principal conspired with the contractor in committing the wrongful dismissal of the contractor's worker. If there is conspiracy, the act of one is the act of all.

Rosewood Processing Inc. v. NLRC, G.R. No. 116476-84, May 21 1998
Subject: Liability

The six complainants, employed as security guards filed a complaint for illegal dismissal, underpayment of wages, and nonpayment of various benefits against Veterans Philippine Scout Security Agency and/or Sergio Jamila IV.
Rosewood Processing Inc. was impleaded as a third-party respondent by the security agency.

LA: Ordered the respondents to pay complainants their monetary benefits holding petitioner Rosewood Processing Inc. jointly and severally liable with the security agency as the complainants' indirect employer under Articles 106, 107, and 109 of the Labor Code.
NLRC: Dismissed petitioner's appeal.

WoN Rosewood Processing Inc. is jointly and severally liable as an Indirect Employer. YES

The court clarified that the liability of the petitioner as an indirect employer is limited to the extent of work performed under the contract between the petitioner and the agency, holding the petitioner liable for wage differentials during the period when the complainants were actually under its employ.

The court exempted the petitioner from the payment of back wages and separation pay, as these liabilities have a punitive character and require evidence of the petitioner's involvement in the illegal dismissal. The security agency was found entirely liable, as it did not appeal from the decisions of the labor arbiter and the Respondent Commission.

The joint and several liability of the employer or principal was enacted to ensure compliance with the provisions of the Code, principally those on statutory minimum wage. The contractor or subcontractor is made liable by virtue of his or her status as a direct employer, and the principal as the indirect employer of the contractor's employees.

This liability facilitates, if not guarantees, payment of the workers' compensation, thus, giving the workers ample protection as mandated by the 1987 Constitution. This is not unduly burdensome to the employer. Should the indirect employer be constrained to pay the workers, it can recover whatever amount it had paid in accordance with the terms of the service contract between itself and the contractor.

Under the Labor Code, an employer is solidarily liable for legal wages due security guards for the period of time they were assigned to it by its contracted security agency. However, in the absence of proof that the employer itself committed the acts constitutive of illegal dismissal or conspired with the security agency in the performance of such acts, the employer shall not be liable for back wages and/or separation pay arising as a consequence of such unlawful termination.

Enforcement of Labor Standards and Working Conditions

Sec. 28. Enforcement of Labor Standards and Working Conditions.

Consistent with Article 128 of the Labor Code, as amended, the Regional Director through his/her duly authorized representatives, shall conduct routine inspection of establishments engaged in contracting arrangement regardless of the number of employees engaged by the principal or by the contractor. They shall have access to employer’s records and premises at any time of the day or night whenever work is being undertaken therein, and the right to copy therefrom, to question any employee and investigate any fact, condition or matter which may be necessary to determine violations or which may aid in the enforcement of the Labor Code and of any labor law, wage order, or rules and regulations issued pursuant thereto.

The findings of the duly authorized representative shall be referred to the Regional Director for appropriate action as provided for in Article 128, and shall be furnished the collective bargaining agent, if any.

Based on the visitorial and enforcement power of the Secretary of Labor and Employment in Article 128 (a), (b), (c), and (d), the Regional Director shall issue compliance orders to give effect to the labor standards provisions of the Labor Code other labor legislation, and these Rules.

Art. 128. Visitorial and enforcement power.

(a) The Secretary of Labor and Employment or his duly authorized representatives, including labor regulation officers, shall have access to employer’s records and premises at any time of the day or night whenever work is being undertaken therein, and the right to copy therefrom, to question any employee and investigate any fact, condition or matter which may be necessary to determine violations or which may aid in the enforcement of this Code and of any labor law, wage order or rules and regulations issued pursuant thereto.

(b) Notwithstanding the provisions of Articles 129 and 217 of this Code to the contrary, and in cases where the relationship of employer-employee still exists, the Secretary of Labor and Employment or his duly authorized representatives shall have the power to issue compliance orders to give effect to the labor standards provisions of this Code and other labor legislation based on the findings of labor employment and enforcement officers or industrial safety engineers made in the course of inspection. The Secretary or his duly authorized representatives shall issue writs of execution to the appropriate authority for the enforcement of their orders, except in cases where the employer contests the findings of the labor employment and enforcement officer and raises issues supported by documentary proofs which were not considered in the course of inspection. (As amended by Republic Act No. 7730, June 2, 1994).

(c) An order issued by the duly authorized representative of the Secretary of Labor and Employment under this Article may be appealed to the latter. In case said order involves a monetary award, an appeal by the employer may be perfected only upon the posting of a cash or surety bond issued by a reputable bonding company duly accredited by the Secretary of Labor and Employment in the amount equivalent to the monetary award in the order appealed from. (As amended by Republic Act No. 7730, June 2, 1994)

(d) The Secretary of Labor and Employment may likewise order stoppage of work or suspension of operations of any unit or department of an establishment when non-compliance with the law or implementing rules and regulations poses grave and imminent danger to the health and safety of workers in the workplace. Within twenty-four hours, a hearing shall be conducted to determine whether an order for the stoppage of work or suspension of operations shall be lifted or not. In case the violation is attributable to the fault of the employer, he shall pay the employees concerned their salaries or wages during the period of such stoppage of work or suspension of operation.

It shall be unlawful for any person or entity to obstruct, impede, delay or otherwise render ineffective the orders of the Secretary of Labor and Employment or his duly authorized representatives issued pursuant to the authority granted under this Article, and no inferior court or entity shall issue temporary or permanent injunction or restraining order or otherwise assume jurisdiction over any case involving the enforcement orders issued in accordance with this Article.

PEA Not a Labor Contractor and Vice-versa

Labor contracting, whether legitimate or labor-only, should not be confused with recruitment business.
A PEA ー Private Employment Agency ー is licensed to find and supply job applicants to individuals or entities who need people to do particular jobs. The job owners select from the applicants endorsed by the PEA. They become the employers of the applicants that they hire. At that point the PEA's role is done.
The PEA does not contract to do a job or project; it contracts only to search and supply people. A PEA, operating under Book I of the Labor Code is, therefore, not a labor contractor and not an employer covered by Articles 106-109 of Book III of the Code.
Accordingly, D.O. No. 18-A as well as D.O. No. 174, (Sec. 2) prohibits labor contractors from engaging in recruitment and placement activities defined in Article 13(b).And, conversely, a PEA cannot engage in labor contracting, whether the legitimate or the prohibited type. (Sec. 5[g], D.O. No. 141-14)

The reason for this two-way prohibition is explained in an advisory opinion of the DOLE Secretary on November 3 2015:

The proscription under DO No. 18-A and DO No. 141-14 [as well as D.O. No. 174] is intended to prevent circumvention on employer-employee relationship, liabilities on wages and other labor benefits to employees by availing of dual personality as PEA and contractor. As a contractor, it could avoid employer-employee relationship by simply invoking that it engaged workers as a recruitment agency, thereby escaping its joint and solidary liability with its principal. On the other hand, the entity as recruitment agency may invoke its D.O. No. 18-A registration and claim employer-employee relationship to deny workers right to regularization of employment with the principal.

Cooperative as Labor Contractor

Q: Who can be a contractor?

As already mentioned, an independent contractor may be an individual person or an organization.
Of the latter, as mentioned in Sec. 15 of D.O. No. 174, it may be a "corporation, partnership, cooperative or union". Whichever the form, the entity must be duly registered with the appropriate government agency:

Corporation or partnership ー Securities and Exchange Commission;
Cooperative ー Cooperative Development Authority; and
Union ー DOLE.
If any of this organization engages in labor contracting, it must comply with D.O. No. 174, particularly its requirement of registration with the DOLE. Nonregistration creates the presumption that the purported contractor is engaged in labor-only contracting.

In the cases of San Miguel Corporation v. Aballa, G.R. No. 149011, June 28, 2005, and in DOLE Philippine v. Esteva, G.R. No. 161115, November 30, 2006...

The court found that the cooperatives in those cases were labor-only contractors because they did not qualify as adequately capitalized independent businesses. Neither were they DOLE-registered contractors, coupled with the fact that the supervision and control over the workers were exercised by the clients (San Miguel Corporation and DOLE Philippines) and by the cooperatives.
Such absence of control and independent business indicated that the cooperatives mere agents or conduits in hiring the workers. Thus, they were declared labor-only contractors and their client principals became the employers of the workers.

Entirely different is the Supreme Court decision in the case of AsiaPro, a large cooperative that deploys workers so companies such as Stanfilco in Mindanao.

The case started with the Social Security Commission required Asiapro to register with the SSS, but the latter argued that those workers were not employees because they were "shareholders" of the cooperative, which, therefore, could not be considered as employer.
The Supreme Court applying the four-fold test declared that employer-employee relationship exists between the cooperative and its shareholder members.
In other words, the cooperative can be a contractor, and, where it qualifies as a legitimate contractor, it can be the employer of the workers, hence, can be compelled to register with the SSS.

San Miguel Corporation v. Aballa, G.R. No. 149011, June 28, 2005
Subject: Labor-only Contractor and Cooperative

In 1993, San Miguel Corporation (SMC) and Sunflower Multi-Purpose Cooperative (Sunflower) entered into a one-year Contract of Services to provide messengerial/janitorial, shrimp harvesting and cold storage services for SMC. The contract specified no employer-employee relationship between SMC and Sunflower or its members.
In 1995, workers filed a complaint seeking regular employment status and benefits. SMC closed its Bacolod Shrimp Processing Plant in September 1995.

LA: Ruled in favor of SMC, stating Sunflower was an independent contractor.
NLRC: Reversed NLRC decision, considering Sunflower as an agent of SMC, facilitating its manpower requirements.

WoN respondents are employees of SMC. YES

The language of a contract is not, however, determinative of the parties’ relationship; rather it is the totality of the facts and surrounding circumstances of the case.

The court ruled that Sunflower did not have substantial capital or investment in the form of tools, equipment, machineries, work premises, and other materials to qualify as an independent contractor. The court noted that all the necessary equipment, facilities, and tools used by the workers were owned and provided by SMC, the principal employer.

Moreover, Sunflower did not have an independent business and catered exclusively to SMC.

Private respondents were performing tasks directly related to SMC's business and should be considered regular employees entitled to benefits and rights accorded to regular employment.

DOLE Philippine v. Esteva, G.R. No. 161115, November 30, 2006
Subject: Labor-only Contractor and Cooperative

In 1993, Dole Philippines, Inc. and Cannery Multi-Purpose Cooperative (CAMPCO), entered into a Service Contract, where CAMPCO members provided services to Dole. Although the contract was initially for six months, it was extended or renewed without a written agreement.
DOLE's Regional Office found CAMPCO engaged in labor-only contracting, leading to a cease and desist order affirmed by DOLE Undersecretary Trajano. Despite the order, CAMPCO and others continued operations, leading DOLE to issue a Writ of Execution in 1999.
Respondents, who started working for Dole through CAMPCO in 1993-1994, filed a Complaint in 1996 alleging illegal dismissal and claiming regular employment status and wage differentials.

LA: Ruled in favor of Dole, stating CAMPCO was not engaged in labor-only contracting and respondents were not regular employees.
NLRC: Affirmed the decision. CAMPCO's substantial capital was cited as evidence of legitimate job contracting.
CA: Ruled CAMPCO did not qualify as an independent job contractor, emphasizing the need for independent business conduct, not just substantial capital investment. CAMPCO's lack of independence and Dole's control indicated labor-only contracting.

WoN CAPCO is engaged in the prohibited act of labor-only contracting. YES

The finding by the DOLE Secretary's authorized representatives that CAMPCO was a labor-only contractor is conclusive and cannot be deviated from. While some factors suggest an independent contractor relationship between petitioner and CAMPCO (e.g., CAMPCO selecting members to work, payment arrangements), other factors indicate a labor-only contracting arrangement such as the lack of substantial capital, sole reliance on petitioner, and petitioner's control over CAMPCO members' work and assignments.

Although petitioner touts the multi-million pesos assets of CAMPCO, it does well to remember that such were amassed in the years following its establishment. In 1993, when CAMPCO was established and the Service Contract between petitioner and CAMPCO was entered into, CAMPCO only had ₱6,600.00 paid-up capital, which could hardly be considered substantial. It only managed to increase its capitalization and assets in the succeeding years by continually and defiantly engaging in what had been declared by authorized DOLE officials as labor-only contracting.

CAMPCO did not operate independently from petitioner but was established solely to provide services to petitioner during peak seasons, with petitioner as its only client. CAMPCO did not perform specific or special jobs but supplied manpower as needed by petitioner, indicating labor-only contracting activities.

Republic v. Asiapro Cooperative, G.R. No. 172101, November 23, 2007
Subject: Labor-only Contractor and Cooperative

Asiapro Cooperative entered service contracts with Stanfilco, providing services, and generating income from these contracts. Asiapro's owners-members sought Social Security System (SSS) coverage as self-employed individuals due to their cooperative status.
SSS, however, claimed Asiapro was an employer supplying workers to Stanfilco, demanding Asiapro to register as an employer and cover its owners-members under SSS.
Asiapro asserted no employer-employee relationship existed. It claimed that the rights and obligations of its owners-members are derived from their Membership Agreements, By-Laws, and Cooperative Code, not from an employment relationship.

WoN employer-employee relationship existed between Asiapro and its owners-members. YES

The Supreme Court applying the four-fold test declared that employer-employee relationship exists between the cooperative and its shareholder members.

The cooperative had exclusive discretion in selecting and engaging its owners-members and team leaders for assignments at Stanfilco. The stipends or shares in the service surplus given to owners-members were considered wages. These payments constituted compensation for services rendered to Stanfilco, making them equivalent to wages. The cooperative held the authority to investigate, discipline, and remove owners-members and their team leaders working at Stanfilco. The cooperative exercised sole control over the manner and methods of performing services under the Service Contracts with Stanfilco. Furthermore, it bore complete responsibility for its owners-members, team leaders, and other representatives at Stanfilco.

The existence of an employer-employee relationship cannot be negated by expressly repudiating it in a contract, when the terms and surrounding circumstances show otherwise. In other words, the cooperative can be a contractor, and, where it qualifies as a legitimate contractor, it can be the employer of the workers, hence, can be compelled to register with the SSS.

Summary and Some Questions

Job contracting＝legal

also called independent contracting
An arrangement commonly done by business firms worldwide since modern commerce and industrialization begun.
It is a business necessity because a business firm does not own or possess all the materials, equipment, knowledge and skills it needs from conception to operation, from innovation to liquidation of the business
To contract out, is an is an avoidable, concomitant of a progressing or active enterprise.
Thus, independent contracting is long established legal arrangement under Philippine civil, commercial and labor laws.

Labor-only contracting＝prohibited

Labor-only contracting is introduced in our Labor Code of 1974.
It is a scheme attempting to show the semblance of job contracting but actually is lacking in its defining attributes, such as independence of the contractor's business from that of the contractee, adequate capital, and exercise of some specialized knowledge or skills, or access to a specialized method, equipment or other advantages, and most importantly, control-supervision of the job and the workers.
Lacking this attributes, the so-called contractor is just a party to a scheme mainly aimed at avoiding the legal obligations of an employer, particularly the payment of wages.
Detesting the scheme, the Labor Code imposes the civil liability on both the true employer (the alleged contractee) and the unqualified contractor.

The differentiation between legal job contracting and illegal labor-only contracting is comprised of two aspects:

The essence of the arrangement, and
The attributes or lack of attributes of the contractor.

The First Difference: The Substance or Essence of the Arrangement

Job contracting

It refers to an arrangement whereby a principal agrees to farm out to a contractor the performance or completion of a specific job or work within a definite or predetermined period, regardless of whether such job or work is to be performed or completed within or outside the premises of the principal. (Sec. 3(c), D.O. No. 174)

Labor-only contracting

It refers to arrangement where the contractor or subcontractor merely recruits, supplies or places workers to perform a job or work for a principal, and the elements enumerated in Section 5 are present. (Sec. 3(h), D.O. No. 174)
These "elements" or qualifications of a labor-only contractor are enumerated below. If the arrangement is not "merely to recruit, supply, or place workers," there is no labor-only contracting.

The Second Difference: The Attributes of the Contractor

Job contracting

The contractor:

is engaged in a distinct and independent business; he undertakes perform the contracted job on its own responsibility, according to its own manner and method;
has substantial capital to do the job on his own account, manner and method, and has investments in tools, equipment, machinery and supervision; that is, he has his own means to operate his business and pay his workers;
is free from the control and direction of the principal in all matters connected with the performance of the work except as to the results thereto;
the contractor has a Service Agreement with the principal that ensures compliance with all the rights and benefits for all the contractor's employees under the labor laws. (Sec. 8, D.O. No. 174)

Labor-only contracting

The contractor:

does not have substantial capital, or
does not have investments in tools, equipment, machineries, supervision, work premises, among others; and
the contractor's employees recruited and placed are performing activities which are directly related to the main business operation of the principal; or

The contractor does not exercise the right to control the performance of the work of the employee. (Sec. 5, D.O. No. 174)

The existence of employer-employee relationship must be proved by adequate evidence and determined through examination of facts. The relationship must be demonstrated, not presumed, and its existence should be declared categorically before the powers under Article 128 may be exercised. (South Cotabato Communications Corp. v. Hon. P. Sto. Tomas et al., June 15, 2016)

South Cotabato Communications Corp. v. Hon. P. Sto. Tomas et al., June 15, 2016 | Visitorial and Enforcement Power

The Department of Labor and Employment (DOLE) conducted an inspection at DXCP Radio Station, owned by South Cotabato Communications Corporation, and found violations of labor standards provisions, including underpayment of wages and non-remittance of SSS contributions.
The DOLE issued a Notice of Inspection Result, directing the corporation to correct the violations but petitioners failed to comply. A Summary Investigation was scheduled, but petitioners did not appear. Another hearing was set, but their counsel's secretary requested a reset, which was denied.
The DOLE Regional Director ordered petitioners to pay the total amount of P759,752 to the affected employees.
Petitioners appealed to the Secretary of Labor, claiming denial of due process and lack of evidence of an employer-employee relationship.

Secretary of Labor: Affirmed the DOLE Regional Director's findings and dismissed the appeal.
CA: Upheld the Secretary of Labor's decision, stating that petitioners' failure to present evidence was due to negligence.

WoN the CA erred in affirming the Secretary of Labor's decision despite the absence of evidence proving the employer-employee relationship. YES

The Regional Director merely noted the discovery of violations of labor standards provisions in the course of inspection of the DXCP premises. No such categorical determination was made on the existence of an employer-employee relationship utilizing any of the guidelines set forth. In a word, the Regional Director had presumed, not demonstrated, the existence of the relationship. Of particular note is the DOLE'S failure to show that petitioners, thus, exercised control over private respondents' conduct in the workplace.

The existence of employer-employee relationship must be proved by adequate evidence and determined through examination of facts. The relationship must be demonstrated, not presumed, and its existence should be declared categorically before the powers under Article 128 may be exercised.

The new Administration issued in March 2017, DOLE D.O. No. 174, viewed as fulfillment of the election campaign promise to end "contractualization."

This refers essentially to temporary employment that ends when the period fixed in the contract endsーor "ENDO."

Sec. 4. Regulation of Contracting or Subcontracting.

The Secretary of Labor and Employment shall regulate contracting and subcontracting arrangement by absolutely prohibiting labor-only contracting, and restricting job contracting allowed under the provisions of the Labor Code, as amended.

1987 Constitution:

Art. II, Sec. 10

The State promote social justice in all phases of national development.

Art. XIII, Sec. 2

The promotion of social justice shall include the commitment to create economic opportunities based on freedom of initiative and self-reliance.

Questions:

May an implementing rule restrict or prohibit a long-established proprietary right?
Why restrict job contracting?
Is D.O. No. 174 truly pro-labor?
Why must a Filipino be a multi-millionaire to qualify as a job contractor?
Is this regulation constitutional?
Does it boost employment and business ventures?
Does it improve the country's competitiveness?
Does D.O. No. 174 disregard these constitutional constitutional commands?

Art. 110. Worker preference in case of bankruptcy.
In the event of bankruptcy or liquidation of an employer’s business,

his workers shall enjoy first preference

as regards their wages and other monetary claims,

any provisions of law to the contrary notwithstanding.

Such unpaid wages and monetary claims

shall be paid in full before claims of the government

and other creditors may be paid.

(As amended by Section 1, Republic Act No. 6715, March 21, 1989)

Notes:

A declaration of bankruptcy or a judicial liquidation must take place before the worker's preference may be enforced.

This Article and its implementing rule are of no use without a formal declaration of bankruptcy or a liquidation order.

Liquidation is what happens when a corporation terminates its corporate existence: it settles and closes its affairs by disposing of its assets and paying off its debts, including claims of its employees.
What Article 110 establishes is not a lien, but a preference of credit in favor of employees. This simply means that during bankruptcy, insolvency or liquidation proceedings involving the properties of the employer, the employees' unpaid wages will be satisfied ahead of other claims. Judicial liquidation is the proper venue for the enforcement of a creditor's preferential right such as that established in Article 110. (Development Bank, November 28, 1989)

Development Bank of the Philippines v. Secretary of Labor, G.R. No. 79351, November 28, 1989
Subject: Labor Preference, Lien

Private respondents filed a complaint for illegal dismissal, unfair labor practices, illegal salary deductions, and violation of minimum wage laws against Riverside Mills Corporation (RMC).
RMC was ordered to pay backwages and separation benefits to private respondents. A writ of execution was issued but returned unserved and unsatisfied, as RMC's premises had been padlocked and foreclosed by Development Bank of the Philippines (DBP) due to RMC's loan default.
Private respondents filed a motion requesting the delivery of RMC's properties in DBP's possession for proper disposition, citing Article 110 of the Labor Code. The motion was granted stating that Article 110 supported their preferential lien.
DBP filed a motion for reconsideration, arguing that Article 110 did not apply because the properties had been foreclosed, sold, and delivered to third parties, and there were no bankruptcy or insolvency proceedings against RMC.

Undersecretary of Labor and Employment: Denied DBP's motion for reconsideration.

WoN by virtue of Article 110 of the Labor Code, an "automatic first lien" was created in favor of private respondents on RMC properties. NO

It is clear from the wording of the law that the preferential right accorded to employees and workers under Article 110 may be invoked only during bankruptcy or judicial liquidation proceedings against the employer. The law is unequivocal and admits of no other construction. Article 110 of the Labor Code may not be invoked by employees or workers in the absence of a formal declaration of bankruptcy or a judicial liquidation order of RMC.

What Article 110 of the Labor Code establishes is not a lien, but a preference of credit in favor of employees. This simply means that during bankruptcy, insolvency or liquidation proceedings involving the existing properties of the employer, the employees have the advantage of having their unpaid wages satisfied ahead of certain claims which may be proved therein.

Unlike a lien, a preference of credit does not create in favor of the preferred creditor a charge or proprietary interest upon any particular property of the debtor. Neither does it vest as a matter of course upon the mere accrual of a money claim against the debtor.

Republic v. Peralta, G.R. No. L-56568 May 20, 1987
Subject: Separation Pay

In the voluntary insolvency proceedings of Quality Tobacco Corporation, various creditors filed claims, including the USTC Association of Employees and Workers Union-PTGWO USTC and the Federacion de la Industria Tabaquera y Otros Trabajadores de Filipinas ("FOITAF") for separation pay awarded by the National Labor Relations Commission.

CFI-Manila: Ruled in favor of the Unions' claims for separation pay, giving preference to these claims over the claims of the Bureau of Internal Revenue for tobacco inspection fees and the Bureau of Customs for customs duties and taxes. The trial court based its decision on Article 110 of the Labor Code, which prioritizes workers' claims for wages in cases of bankruptcy or liquidation of an employer's business.
Solicitor General: Contested this ruling, arguing that separation pay is not included within the definition of "wages" but a form of "penalty of damage" against the employer and should not enjoy priority over tax claims.

WoN the term "wages," in the Article 110 of the Labor Code, include the separation pay. YES

In the case of Philippine Commercial and Industrial Bank (PCIB) vs. National Mines and Allied Workers Union, separation pay was considered part of "wages" under Article 110 of the Labor Code.

The court held that for the specific purposes of Article 110, separation pay is reasonably regarded as forming part of the remuneration or other money benefits accruing to employees or workers by reason of their having previously rendered services to their employer.

The court categorizes credits in insolvency into three general categories: special preferred credits, ordinary preferred credits, and common credits.

Special preferred credits, listed in Articles 2241 and 2242 of the Civil Code, include taxes, duties, and fees due to the State or any subdivision thereof, and enjoy the highest priority.
Ordinary preferred credits, listed in Article 2244, include claims for unpaid wages not covered by special preferred credits. These claims are subordinate to taxes and other special preferred credits.

The court clarifies that claims for unpaid wages, including separation pay, do not constitute liens on the employer's property but are considered ordinary preferred credits under Article 2244.

Article 110 of the Labor Code modified the order of preference established in Article 2244 (2). Specifically, it removed the one-year limitation on claims for unpaid wages and giving first priority to claims for unpaid wages of laborers or workers of the insolvent employer.

The court directs the trial court to determine whether the insolvent has inventories of processed or manufactured tobacco products. If so, these inventories must first satisfy the claim of the Bureau of Internal Revenue for unpaid tobacco inspection fees, and the remaining value will be subject to the claims of the Unions for separation pay. If no inventories exist, the Unions' claims will be paid out of the insolvent's "free property" as modified by Article 110 of the Labor Code.

Development Bank of the Philippines v. NLRC and Ang, G.R. No. 108031 March 1, 1995
Subject: Declaration of Bankruptcy, Judicial Liquidation

Leonor A. Ang worked for Tropical Philippines Wood Industries, Inc. (TPWII) from 1977 to 1986.
In 1983, TPWII faced financial issues, leading to the foreclosure of its properties by petitioner Development Bank of the Philippines. In 1986, TPWII ceased operations and Ang was verbally terminated.
Ang filed a complaint seeking separation pay, 13th-month pay, vacation and sick leave pay, salaries, and allowances from TPWII and Development Bank of the Philippines.
LA: Found TPWII primarily liable for separation pay and vacation and sick leave pay. Development Bank of the Philippines was held subsidiarily liable if TPWII failed to pay.
NLRC: Affirmed the LA.

WoN the declaration of bankruptcy or judicial liquidation required before the worker's preference may be invoked under Art. 110 of the Labor Code. YES

A declaration of bankruptcy or a judicial liquidation must be present before the worker's preference may be enforced. Thus, Article 110 of the Labor Code and its implementing rule cannot be invoked by the respondents in this case absent a formal declaration of bankruptcy or a liquidation order

The 1989 amendment of Article 110 expanded the concept of "worker preference" to cover not only unpaid wages but also other monetary claims to which even claims of the Government must be deemed subordinate. Although the terms "declaration" (of bankruptcy) or "judicial" (liquidation) have been notably eliminated, this Court did not alter its original position that the right to preference given to workers under Art. 110 cannot exist in any effective way prior to the time of its presentation in distribution proceedings.

In the present case, there is as yet no declaration of bankruptcy nor judicial liquidation of TPWII. Hence, it would be premature to enforce the worker's preference.

Barayoga v. Asset Privatization Trust, G.R. No. 160073, October 24, 2005
Subject: Principle of Absorption

Bisudeco-Philsucor Corfarm Workers Union is composed of workers of Bicolandia Sugar Development Corporation (BISUDECO).
BISUDECO contracted the services of Philippine Sugar Corporation (Philsucor) to take over the management of the sugar plantation and milling operation.
Asset Privatization Trust, a public trust created to take title to and manage non-performing assets of the Philippine government, acquired the mortgage credits of BISUDECO from Philippine National Bank.
BISUDECO’s assets were eventually foreclosed and the properties were sold at a public auction to APT. APT later transferred the assets to Bicol-Agro-Industrial Cooperative (BAPCI), which took over the sugar milling operations.
The Union filed a complaint for unfair labor practice, illegal dismissal, illegal deduction, and underpayment of wages and other labor standard benefits.

LA: Ruled in favor of the workers, ordering APT to pay mandated employment benefits.
NLRC: Affirmed APT’s liability for the workers’ money claims but ruled that APT was not liable for unfair labor practice and illegal dismissal.
CA: Ruled that APT was not liable for the workers’ claims as there was no employer-employee relationship between APT and the workers.

WoN the APT is liable for petitioners’ monetary claims, including back wages. NO

APT, as a mere transferee of mortgage credit and later as a purchaser in a public auction, cannot be held liable for the workers’ claims against BISUDECO. APT's liabilities were not automatically assumed from BISUDECO.

Labor contracts like collective bargaining agreements are not enforceable against the transferee (APT) unless expressly assumed. The principle of absorption does not obligate a bona fide buyer or transferee to absorb the selling company’s employees. The purchasing company may give preference to reemploy qualified separated employees for reasons of public policy and social justice.

APT’s lien on BISUDECO’s mortgaged assets is a special preferred lien that must be satisfied first before the claims of the workers. Worker’s preference under Article 110 of the Labor Code does not constitute a lien on the property in favor of workers.

The Court clarified that the ruling does not reverse or rule upon the workers’ entitlement to back wages and other unpaid benefits from their previous employer, BISUDECO. The decision only absolves APT from liability in this case.

Rubberworld Inc v. NLRC, G.R. No. 126773 April 14, 1999
Subject: Rehabilitation Proceedings

Rubberworld Philippines, Inc., a domestic corporation engaged in manufacturing footwear, bags and garments, filed a petition for suspension of payments and prayed for the approval of the proposed rehabilitation plan with the Securities and Exchange Commission (SEC).
The SEC ordered the creation of a management committee and the suspension of all actions for claims against Rubberworld.
Private respondents, claiming to be employees of Rubberworld, filed complaints for illegal dismissal, unfair labor practice, damages and payment of separation pay, among others.
Rubberworld moved to suspend these labor cases based on the SEC order.

LA: Denied the motion.
NLRC: Sustained the rulings of the LA.

WoN NLRC erred in affirming the order of Labor Arbiter denying petitioners' motion to suspend proceedings despite the Order of the Securities and Exchange Commission. YES

The Court ruled in favor of Rubberworld, stating that the SEC's suspension order, under PD 902-A, automatically stays all actions for claims against a corporation upon the appointment of a management committee or rehabilitation receiver. This suspension applies without exceptions.

The purpose of the automatic stay is to allow the management committee or rehabilitation receiver to effectively exercise its powers without interference, thereby facilitating the rehabilitation of the corporation.

The Court clarified that the preference given to workers under Article 110 of the Labor Code applies only in insolvency or judicial liquidation proceedings, not in rehabilitation cases like this one.

The purpose of rehabilitation proceedings is precisely to enable the company to gain a new lease on life and thereby allow creditors to be paid their claims from its earnings. In insolvency proceedings, on the other hand, the company stops operating, and the claims of creditors are satisfied from the assets of the insolvent corporation. The present case involves the rehabilitation, not the liquidation, of petitioner-corporation. Hence, the preference of credit granted to workers or employees under Article 110 of the Labor Code is not applicable.

Art. 111. Attorney’s fees.
In cases of unlawful withholding of wages,

the culpable party may be assessed

attorney’s fees equivalent to ten percent of the amount of wages recovered.

It shall be unlawful for any person

to demand or accept,

in any judicial or administrative proceedings

for the recovery of wages,

attorney’s fees which exceed ten percent of the amount of wages recovered.

Notes:

The 10% attorney's fee provided for in Article 111 is the maximum; any amount less than that may be awarded as the circumstances of the case may warrant. (Sebuguero v. NLRC, G.R. No. 115394, September 27, 1995)
But this Article does not mean to limit the award of attorney's fees to cases of unlawful withholding of wages only. Even in an award of death benefits, 10% attorney's fees is allowable. What this article prohibits is attorney's fees exceeding 10% of the wages or benefits recovered. (Heirs of Aniban v. NLRC, G.R. No. 116354, December 4, 1997)

Sebuguero v. NLRC, G.R. No. 115394, September 27, 1995 | Attorney's Fees

The petitioners, who were among the 38 regular employees of GTI Sportswear Corporation, were given "temporary lay-off" notices due to alleged lack of work and heavy losses.
The employees filed complaints for illegal dismissal, unfair labor practice, underpayment of wages, and non-payment of benefits.
GTI denied the claim of illegal dismissal and asserted that it was its prerogative to lay-off its employees temporarily for a period not exceeding six months to prevent losses due to lack of work or job orders from abroad.

LA: Found GTI liable for constructive dismissal and ordered GTI to pay backwages, separation pay, 13th-month pay, and attorney's fees.
NLRC: Concurred with the findings of the Labor Arbiter that there was a valid lay-off of the petitioners due to lack of work but deleted the awards for backwages, 13th-month pay, and attorney's fees, and directed payment of separation pay to the employees.

WoN petitioners are entitled to an award for attorney's fees. YES

The petitioners are entitled to an award for attorney's fees pursuant to paragraph 7, Article 2208 of the Civil Code which must, however, be reasonable. The award of P120,618.87, which is equivalent to ten percent (10%) of the amounts recovered, as attorney's fees should be reduced to P 25,000.00, an amount we find to be reasonable.

The ten percent (10%) attorney's fees provided for in Article 111 of the Labor Code and Section 11, Rule VIII, Book III of the Implementing Rules is the maximum; hence, any amount less than that may be awarded as the circumstances of the case may warrant.

18. Heirs of Aniban v. NLRC, G.R. No. 116354, December 4, 1997 | Attorney's Fees

Reynaldo Aniban was employed as a radio operator on the vessel "Kassel" by Philippine Transmarine Carriers, Inc., acting on behalf of its foreign principal Norwegian Ship Management A/S. He died due to myocardial infarction during his employment period, leaving behind a pregnant wife and three minor children.
The POEA's Standard Employment Contract stated that in case of a seaman's death during the contract term, the employer should pay beneficiaries US $13,000.00 for officers, including radio operators.
An additional claim was made under the Collective Bargaining Agreement (CBA), which promised compensation for death caused by an occupational injury or disease. The CBA granted US $30,000.00 in additional death benefits, plus US $8,000.00 to each child under 18, up to a maximum of US $24,000.00.
POEA: Ruled in favor of Aniban's heirs, considering myocardial infarction as an occupational disease due to the pressure and strain faced by a radio operator on board.
NLRC: Denied the claim, arguing that the Employees Compensation Commission (ECC) had jurisdiction over the case. NLRC also deleted the award of Attorney's fees on the ground that there was no unlawful withholding of wages.

WoN the NLRC erred in deleting the award of Attorney's fees on the ground that there was no unlawful withholding of wages. YES

Art. 111 of the Labor Code does not limit the award of attorney's fees to cases of unlawful withholding of wages only. What it explicitly prohibits is the award of attorney's fees which exceed 10% of the amount of wages recovered.

Thus, under the circumstances, attorney's fees are recoverable for the services rendered by petitioner's counsel to compel Aniban's employer to pay its monetary obligations under the CBA. However the amount of P50,000.00 claimed as attorneys' fees in this case is the reasonable compensation based on the records and not the maximum 10% of the total award as granted by POEA. The reduction of unreasonable attorney's fees is within our regulatory powers.

Note: The Supreme Court affirmed the POEA's jurisdiction, stating that the ECC's jurisdiction applies only when the State Insurance Fund's liability is in question. As for myocardial infarction, the court upheld the POEA's decision, considering the nature of the job and the emotional strain faced by seamen.

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Labor Law: Title II Wages; Chapter III Payment of Wages; Arts. 106 - 111

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