In the Philippine labor landscape, the termination of a service agreement between a principal (the client) and a manpower agency (the contractor) triggers a complex web of legal obligations. Because the Philippines follows a strong pro-labor policy, the dissolution of this business relationship does not merely end a contract; it activates specific liabilities under the Labor Code and prevailing jurisprudence.
I. The Nature of the Relationship
To understand liability, one must distinguish between Legitimate Job Contracting and Labor-Only Contracting.
- Legitimate Job Contracting: Regulated by DOLE Department Order No. 174 (Series of 2017). The agency is the employer.
- Labor-Only Contracting: Prohibited by law. If the agency lacks substantial capital or control, the principal is deemed the direct employer, and termination of the agency agreement could be viewed as a direct dismissal of the workers.
II. Solidary Liability (The "Deep Pocket" Rule)
The most critical legal implication of terminating a manpower agency is Solidary Liability. Under Articles 106 to 109 of the Labor Code, the principal is jointly and severally liable with the contractor for any violation of the Labor Code, specifically regarding:
- Unpaid wages.
- Statutory benefits (13th-month pay, holiday pay, etc.).
- Sinking fund/remittances for SSS, PhilHealth, and Pag-IBIG.
Note: Even if the contract between the principal and the agency has ended, the principal remains liable for claims that accrued during the period the agency's employees were deployed to the principal.
III. Security of Tenure and the "Floating Status"
When a principal terminates the contract with a manpower agency, the employees are not automatically terminated from their employment with the agency.
- The Six-Month Rule: Employees placed in "floating status" (temporary off-detail) must be reassigned by the agency within six (6) months.
- Constructive Dismissal: If the agency fails to provide a new assignment after six months, or if the new assignment involves a significant demotion in rank or pay, the employee is considered constructively dismissed. The agency becomes liable for separation pay and backwages.
- Redundancy: If the agency loses its only client (the principal) and cannot find alternative placements, it may terminate the employees based on redundancy or retrenchment, provided it pays the required separation pay (usually one month's salary or one-half month's salary for every year of service, whichever is higher).
IV. Obligations of the Principal upon Termination
To mitigate legal risks, a principal terminating an agency agreement must ensure the following:
| Action Item | Legal Basis / Implication |
|---|---|
| Notice Period | Follow the "Notice of Termination" clause in the Service Agreement to avoid breach of contract suits. |
| Liquidation of Claims | Ensure the agency has paid all deployed workers before releasing the final retention billing. |
| Quitclaims | While workers often sign quitclaims, Philippine courts scrutinize these. A quitclaim does not absolve the principal if the settlement is unconscionably low. |
| Evidence of Payment | The principal should demand proof of SSS/PhilHealth/Pag-IBIG remittances for the duration of the contract. |
V. Liability for Illegal Dismissal
If the principal terminates the agency contract and prematurely bars the workers from entering the premises without the agency providing a substitute site, the workers may file a case for Illegal Dismissal.
If the court finds that "Labor-Only Contracting" existed, the principal is treated as the employer. Consequently, the termination of the agency contract is seen as a dismissal of the workers without Just or Authorized Cause, leading to:
- Full Backwages.
- Reinstatement (or Separation Pay in lieu of reinstatement).
- Moral and Exemplary Damages (if malice is proven).
- Attorney's Fees (10% of the total award).
VI. The "Indemnity Clause"
Most service agreements include an Indemnity Clause, where the agency promises to "hold the principal free and harmless" from any labor claims. While this is valid between the agency and the principal, it cannot be used as a defense against the workers. The principal must still pay the workers if the agency fails to do so, though the principal may later sue the agency for reimbursement based on this clause.