In the Philippine legal landscape, the relationship between employers, contractors, and employees is governed by a complex web of statutes, primarily the Labor Code of the Philippines and various Department Orders (D.O.) issued by the Department of Labor and Employment (DOLE). Understanding the legality of labor subcontracting requires a sharp distinction between permissible job contracting and prohibited "Labor-Only" contracting.

I. The Trilateral Relationship

Unlike a standard employer-employee bond, subcontracting involves a trilateral relationship among three parties:

The Principal: The entity that decides to farm out a specific job, work, or service.
The Contractor: The independent entity that undertakes the performance of the job for the principal.
The Contractual Employees: The individuals hired by the contractor to perform the specific job.

In a legal arrangement, the contractor is the actual employer of the workers, not the principal.

II. Legitimate Job Contracting (Permissible)

Under DOLE Department Order No. 174 (Series of 2017), subcontracting is considered legal and legitimate only if the contractor meets the following cumulative criteria:

Substantial Capital or Investment: The contractor must have "substantial capital," currently defined as at least Five Million Pesos (₱5,000,000.00) in paid-up capital or net worth. Alternatively, they must possess investments in the form of tools, equipment, or machineries necessary to perform the job.
Distinct and Independent Business: The contractor must carry on an independent business and undertake the performance of the job on its own responsibility, according to its own manner and method.
Free from Principal’s Control: The contractor must exercise control over the performance of the employees' work. The principal may only control the result or the end-product, not the means and methods used to achieve it.
DOLE Registration: The contractor must be duly registered under D.O. 174.

III. The Prohibition: Labor-Only Contracting

Labor-Only Contracting (LOC) is strictly prohibited and is considered a "paper" arrangement designed to circumvent labor laws. It exists when:

The contractor does not have substantial capital or investments in tools and equipment; OR
The workers recruited by the contractor are performing activities which are directly related to the main business of the principal; AND
The contractor does not exercise the right to control over the performance of the work of the employees.

Legal Consequences of Labor-Only Contracting:

Employer Status: The contractor is considered merely an agent of the principal. By legal fiction, the principal becomes the direct employer of the contractual workers.
Regularization: The workers are deemed regular employees of the principal from the day they started, entitled to all benefits, security of tenure, and labor standards provided by law.
Solidary Liability: Both the principal and the contractor are solidarily liable for any violation of the Labor Code, including unpaid wages and benefits.

IV. Prohibited Practices under D.O. 174

Beyond the definition of Labor-Only Contracting, the law specifically forbids certain schemes:

"Endo" (End of Contract) and 5-5-5: Repeatedly hiring workers for short durations (less than six months) to prevent them from attaining regular status.
Cabo System: A person or group that, under the guise of a labor organization, supplies workers to an employer.
In-house Agency: A contractor managed or owned by the principal that supplies workers solely to that principal.
Contracting out jobs of regular employees: Replacing regular employees with contractual ones if it results in the termination or reduction of benefits of the former.

V. Role of Manpower Providers

In the Philippines, "manpower providers" often operate as contractors. For their role to be legal, they must transition from being mere "suppliers of people" to "providers of services."

Service Agreement: There must be a written contract between the principal and the contractor specifying the job to be performed and its duration.
Employment Contract: There must be a written contract between the contractor and the worker, outlining terms of employment, benefits (SSS, PhilHealth, Pag-IBIG), and the specific site of assignment.

VI. The "Control Test"

The Supreme Court of the Philippines consistently applies the Four-Fold Test to determine the existence of an employer-employee relationship:

The selection and engagement of the employee.
The payment of wages.
The power of dismissal.
The power of control (The most important factor).

If the principal exercises the power of control—dictating not just what shall be done, but how it shall be done—the relationship is deemed direct employment, regardless of any written subcontracting agreement.

Summary Table: Legitimate vs. Illegal Contracting

Feature	Legitimate Job Contracting	Labor-Only Contracting (Illegal)
Capital	Substantial (Min. ₱5M)	Insufficient or None
Control	Contractor controls means/methods	Principal controls means/methods
Tools/Equip.	Provided by Contractor	Provided by Principal
Nature of Work	Specific job/service	Core/Main business of Principal
Direct Employer	The Contractor	The Principal (by law)