Are new rules on labour contracting worth the wait?

By Ma Clarissa Excelsis S Villanueva, ACCRA Law Offices
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Finally, the long wait is over. After almost nine months of numerous dialogues and consultations, the Department of Labour and Employment (DOLE) secretary Silvestre Bello III issued Department Order (DO) No. 174, series of 2017. It sets out the new rules implementing articles 106 to 109 of the Labour Code, replacing DO 18-A, series of 2011. The new order became effective on 2 April, 2017.

Ma-Clarissa-Excelsis-S-Villanueva
Ma Clarissa Excelsis S Villanueva
Junior Associate
ACCRA Law Offices

At first reading, it appears that DO 174 did not deviate to a great extent from DO 18-A. It would seem that it simply borrowed the provisions of the old order and tweaked it a little to adjust to current conditions. For instance, DO 174 no longer provides for a Net Financial Contracting Capacity (NFCC), nor does it require that the same be included in service agreements.

The required substantial capitalization of contractors was increased from at least P3 million (about US$60,000) to at least P5 million. The registration and renewal fee was also increased, to P100,000 from P25,000, and in addition the certificate of registration must now be effective for only two years.

Banking on the Philippine president’s vow to stop “contractualization” and the “endo” (end of contract), labour groups had high hopes that the new order would contain a total prohibition of all forms of contractualization. But as Bello recognized, the DOLE secretary has no power to do so because that is a function of the legislature. In short, the DOLE secretary can only regulate, but not totally prohibit, contracting. Nonetheless, some of the changes introduced by DO 174 are worth noting. They may appear innocent at first, but there seems to be more to them than meets the eye.

For instance, DO 174 expanded DO 18 on enumeration of illicit employment arrangements. Other arrangements declared prohibited by DO 174 are: contracting out of work through an in-house co-operative, thus apparently recognizing the proliferation of co-operatives engaged in contracting; requiring a contractor’s/subcontractor’s employees to perform functions that are currently performed by regular employees; and other schemes meant to circumvent security of tenure.

While other prohibited arrangements under DO 18-A, other than labour-only contracting, are qualified by the phrase “not done in good faith and not justified by the exigencies of the business”, the other illicit forms of employment arrangements under DO 174 were unqualifiedly declared as prohibited for being contrary to law or public policy.

The strict and literal interpretation of section 6(f) on contracting out of regular functions will lead to the conclusion that as long as the functions are currently being performed by regular employees, they can no longer be outsourced to contractors, regardless of the good faith of the company and the presence of any business exigencies that may justify one’s resort to contracting.

This interpretation, however, seems to contradict the Supreme Court’s ruling in: De Ocampo v NLRC; Asian Alcohol v NLRC; Serrano v NLRC; and Aliviado v P&G. These cases reveal that it is a valid exercise of management prerogative to avail 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.

The author believes that the prohibition under section 6(f) should not be interpreted in a strict and absolute manner, and there are three main reasons for this. First, article 106 of the Labour Code does not distinguish as to the kind of services that can be contracted out. It only mentions “performance of work” without any distinction as to whether such work is peripheral or core in nature.

As such, DO 174, which supposedly implements the same, must also not make any distinction. Needless to say, an administrative issuance cannot extend nor amend a legislative enactment.

Second, the definition of labour-only contracting under the Labour Code effectively recognizes that even core functions or services can be contracted out. Even if the contracted services are directly related to the business of the principal, an entity may still be deemed legitimate and not a labour-only contractor if it has substantial capitalization and exercises control over its employees.

Finally, we must consider the policy behind the issuance of DO 174: to prevent the displacement of workers and to avoid employers from resorting to contractualization. If we are to strictly apply the prohibition then, this might just aggravate the problem of contracting in the country, because employers will no longer regularize positions, preferring to just contract them out altogether.

Such a situation will definitely not guarantee industrial peace and prosperity for the Philippines in the long run.

Ma Clarissa Excelsis S Villanueva is a junior associate at ACCRA Law Offices

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