In the Philippine labor landscape, the relationship between a principal employer, a contractor, and the deployed workers is governed by a complex web of statutes and jurisprudence. At the heart of this complexity lies the distinction between permissible job contracting and prohibited labor-only contracting.
The question of whether a subcontractor can legally perform "core functions" of a principal employer is one of the most litigated issues in labor law, primarily because it determines whether an employer-employee relationship exists between the principal and the contractor’s employees.
1. The Statutory Framework: Articles 106 to 109
The Labor Code of the Philippines, specifically Articles 106 to 109, provides the foundation. These provisions are further clarified by Department Order No. 174, Series of 2017 (D.O. 174-17) issued by the Department of Labor and Employment (DOLE).
Permissible Job Contracting
For a subcontracting arrangement to be legal, the contractor must:
- Be engaged in a distinct and independent business.
- Have substantial capital (at least ₱5 million in paid-up capital/net worth) OR investment in the form of tools, equipment, and machineries.
- Exercise the right of control over the performance of the work.
- Ensure the arrangement does not fall under "Labor-Only Contracting."
2. The Prohibition: Labor-Only Contracting
Under Philippine law, "Labor-Only Contracting" is strictly prohibited. It occurs when a contractor merely recruits and supplies workers to a principal. A key indicator of this illegal practice is when the contractor's employees perform activities which are directly related to the main business of the principal.
The "Core Function" Test
Historically, if a worker performed a task that was necessary or desirable to the usual business of the employer, they were considered a regular employee. However, modern jurisprudence and D.O. 174-17 have nuanced this.
A subcontractor cannot legally perform core functions if the following conditions are present:
- The contractor does not have substantial capital or investments.
- The workers recruited are performing activities directly related to the principal’s main business.
- The contractor does not exercise the right of control over the performance of the work (i.e., the principal gives the direct orders on how the work is done).
3. Can "Core Functions" Ever Be Subcontracted?
The short answer is: It is highly risky.
While the law does not explicitly list "core functions" as un-contractible, the Supreme Court has often used the "nature of the work" as a primary gauge. If a manufacturing company subcontracts the actual assembly line workers (the core of their business), the court is likely to view the contractor as a mere agent of the principal.
However, the Supreme Court has also clarified that the "directly related" test is not the sole factor. Even if the work is directly related to the business, the arrangement may still be valid if the contractor has substantial capital and exercises independent control.
Note: Even with substantial capital, if the principal employer exercises direct control over the "means and methods" of the contractor's employees, it is deemed labor-only contracting.
4. Specific Prohibitions under D.O. 174-17
To prevent the erosion of workers' right to security of tenure, the following acts are prohibited:
- Cabo System: A person or group acting as a "labor group" without being a legitimate business.
- Contracting out of work to "In-house" agencies: Subcontracting to a company owned or managed by the principal.
- Contracting out of work being performed by Union members: If the subcontracting is intended to interfere with the right to self-organization.
- Contracting out of work through "5-5-5" or "Endo": Repeated hiring of workers for short durations to avoid regularization.
5. Consequences of Illegal Subcontracting
If a subcontractor is found to be performing core functions under a "Labor-Only" arrangement, the legal consequences are severe for the principal employer:
| Feature | Consequence |
|---|---|
| Employer Status | The principal is deemed the direct employer of the contractor’s workers. |
| Regularization | The workers are considered regular employees of the principal from day one. |
| Liability | The principal and contractor are solidarily liable for all wages and benefits. |
| Security of Tenure | Workers cannot be terminated except for just or authorized causes under the Labor Code. |
6. The "Right of Control" Test
This is the most crucial benchmark. In determining the legality of the arrangement, the courts look at who:
- Selects and engages the employees.
- Pays their wages.
- Has the power to dismiss them.
- Has the power to control their conduct (the "Means and Methods" test).
If the principal employer dictates the minute-by-minute actions of the subcontractor’s employees who are performing core tasks, the arrangement is legally indefensible.
Summary of Legal Standing
In the Philippine context, while the law allows for flexibility in business operations, it prioritizes the Constitutional mandate to protect labor. Subcontracting "core functions" is generally viewed with suspicion by the DOLE and the Judiciary. To remain legal, such an arrangement must strictly prove the contractor’s financial independence and, most importantly, the contractor’s total management and control over its workforce, independent of the principal’s daily operations.