“In labor contracts, the nature of employment of a worker is prescribed by law, regardless of what the contract and the parties present it to be. Employment contracts are not ordinary contracts because they are imbued with public interest.” (Citations omitted.) (Ditiangkin v. Lazada E-services Philippines, Inc., G.R. No. 246892 (2022))

Meanwhile, jurisprudence provides that the existence of an employer-employee relationship cannot be negated by a contract because a person’s employment status is defined by law and not subject to stipulation between the parties.

It is important to determine whether an individual is contracted as an employee or merely as an independent contractor. The Labor Code governs the former, while the Civil Code governs the latter. As to liability, in case of permissible job contracting, the principal is liable with regard to the employee of the independent contractor in a limited sense, i.e., the former is liable only for the unpaid wages of the latter to the extent of the work performed. Here, the principal, in return, may seek reimbursement from the independent contractor. On the other hand, in case of prohibited job contracting (labor-only contracting), the principal is considered the direct employer er of the contractor’s employees, and the contractor is only an agent of the principal. In this case, there is an employer-employee relationship between the principal and the contractor’s alleged employees. Thus, the principal becomes liable to the employees as provided for under the Labor Code. 

The distinctions between legitimate and prohibited job contracting are discussed below.

1. Legitimate Job Contracting

Department Order (D.O.) No. 174-17 implements the provision of the Labor Code with regard to job contracting, specifically Articles 106 – 109. Section 8 of the said D.O. provides for the elements of a legitimate contracting/subcontracting which are:

1. In performing the work farmed out, the contractor or subcontractor is free from the control and/or discretion of the principal in all matters connected with the performance of the work except as to the result thereto;
2. 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 method;
3. 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;

Substantial capital refers to paid-up capital stock/shares at least PHP 5 million in the case of corporations, partnerships, and cooperatives, and at least PHP 5 million net worth in the case of single proprietorship. Substantial capital and investment in tools, equipment, etc. “should be treated as two distinct and separate requirements in determining whether there is permissible contracting or subcontracting arrangement.” (Neri v. National Labor Relations Commission, G.R. No. 97008-09 (1993))

4. The Service Agreement ensures compliance with all the rights and benefits for all the employees of the contractor or subcontractor under the labor laws (D.O. No. 174-17, § 8); and

5. The individual/corporation is registered.

A company’s registration with the Department of Labor and Employment gives rise to a disputable presumption that its operations are legitimate (Barretto v. Amber Golden Pot Restaurant, G.R. Nos. 254596-97 (2021)). Note that the absence of any of the above-mentioned requisites makes it a prohibited labor-only contracting. (PSBA-Manila v. NLRC, G.R. No. 114143 (1996))

Permissible contracting or subcontracting is governed by a trilateral relationship wherein the principal engages the contractor's services. In turn, the contractor hires workers to accomplish the work for the principal. (Fuji Television, Inc. v. Espiritu, G.R. No. 204944-45 (2014))

2. Prohibited Labor-only Contracting

Although Article 106, paragraph 4 of the Labor Code defines labor-only contracting, it is D.O. No. 174-17 which expressly prohibits the same. Thus, there is an absolute prohibition against labor-only contracting when:  

1. a. The contractor or subcontractor does not have substantial capital, or investments in the form of tools, equipment, machineries, supervision, work premises, among others; and

2. The contractor or subcontractor’s employees recruited and placed are performing activities which are directly related to the main business operation of the principal; or

2. The contractor or subcontractor does not exercise the right to control over the performance of the work of the employee (D.O. No. 174-17, § 5).

Note that there is labor-only contracting even if only one of the two elements above is present. (Coca-cola Bottlers Phils., Inc. v. Agito, G.R. No. 179546 (2009))

3. Recent Jurisprudence

In Ditiangkin v. Lazada E-services Philippines, Inc., the Court explained:

Our laws and jurisprudence recognize two types of contractors—legitimate job contractors and independent contractors who possess unique skills and talent.

Article 106 of the Labor Code governs legitimate job contractors and subcontractors. [x x x] Section 8 of DOLE DO No. 174-2017 lays down the conditions for permissible contracting or subcontracting.

The second type of independent contractor consists of individuals who possess unique skills and talents which set them apart from the ordinary employees and whose means and methods of work are free from the control of the employer. Examples can include a columnist who was hired because of her talent, skill, experience, and feminist standpoint, a basketball referee who has special skills and independent judgment, and a masiador or sentenciador who had expertise in cockfight gambling. In these instances, there is no trilateral relationship but a bilateral relationship because the independent contractors are directly engaged by the principal.

With this type of contracting, there is no employer-employee relationship between an independent contractor and the principal, and their contracts are governed by the Civil Code. When the status of the employment is in dispute, the employer bears the burden to prove that the workers are independent contractors rather than regular employees. (Citations omitted.)

[I]n distinguishing between permissible job contracting and prohibited labor-only contracting, the totality of the facts and the surrounding circumstances of the case are to be considered, each case to be determined by its own facts, and all the features of the relationship assessed. (Citation omitted) (Ortiz v. Forever Richsons Trading Corporation, G.R. No. 238289 (2021))

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