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ISSUES SURROUNDING

“CONTRACTUALIZATION” AND “CASUALIZATION”

Atty. Vicente Leogardo, Jr.

Director General, ECOP

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This document is circulated for the participants of the Special ECOP MGM and should NOT be used forcommercial presentation purposes partially or in its entirety without EXPRESSED permission from the AuthorAtty. Vicente Leogardo, Jr. or HRManagement & Business Solutions Inc.

Genesis

1. “Contractualization” and “casualization” are correlative

terms not found in the English dictionary coined by

Kilusan Mayo Uno in derision of, and objection to,

the contracting out of work by employers on one hand

and of short term and temporary employment on the

other.

2. The principal objection of KMU and other populists to

“contractualization” and “casualization” is that both

are allegedly violative of security of tenure

guaranteed by the Constitution.

3. “Contractualization” that involves contracting out work

to independent contractors is founded in law and

practice (Art. 106, Labor Code; Sec. 4, D. O. No. 18-A)

4. What is prohibited is “labor-only contracting” (Sec. 6, D.

O. No. 18-A) 2

Genesis (2)

5. With respect to “casualization” there is basis for

objection to the practice of hiring regular workers for

short term employment of usually 5 months, tagged

as “endo” or “5-5-5”, which is violative of security of

tenure.

6. Otherwise, objections to all the exceptions to regular

employment prescribed by Art. 294[280] of the Labor

have no legal basis.

7. Those who strongly object to both forms of

employment would suppress if not outlaw legitimate

job contracting and prohibit any kind of temporary

employment.

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Genesis (3)

8. This fixation is manifested in numerous bills

containing these prohibitions and requiring

employers to directly hire workers on regular basis

whether temporary, casual, contractual or fixed term.

Types of Employment Involved

1. Pursuant to Art. 294[280] of the Labor Code,

employees performing activities which are usually

necessary or desirable in the employer’s usual

business or trade can either be regular, project or

seasonal employees, while, as a general rule, those

performing activities not usually necessary or

desirable in the employer’s usual business or trade

are casual employees.

2. Art. 106 also provides for the contracting out of

employees employed by independent contractors

“Contractor’s employees includes on employed by a

contractor to perform or complete a job, work or service

pursuant to a Service Agreement with a principal (Sec. 3

[e], D. O. No. 18-A)5

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Types of Employment Involved (2)

3. Fixed term/fixed period employment: not covered by

Art. 280[294] and is subject exclusively to the will of

the parties ((Pakistan International Airlines Corporation vs. Ople,

etc., et al., 190 SCRA 90; ; Brent School Inc. vs. Zamora, et., et al.,

181 SCRA)

Differs from project and seasonal employment whose

completion is determined by the duration and period

of the activity, not by free choice of the parties (Brent

School, Inc. vs. Zamora, 181 SCRA 702)

Basic Principles Underlying “Contractualization”

1. “Contractualization” which involves contracting out

work to independent contractors is an exercise of

management prerogative and business judgment.

2. Such prerogative is not only acknowledged in Art. 106

of the Labor Code, but is premised on the

constitutional right of employers to property.

a) “It is the propriety right of San Miguel to exercise an

inherent prerogative and its best business judgment to

determine whether it should contract out performance of

some if its work to independent contractors.” (San Miguel

Corporation Employees Union-PTGWO vs. Bersamira, et al., 186

SCRA 495-505)

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Basic Principles Underlying “Contractualization” (2)

b) “As we have previously held, the company can determine

in its best business judgment whether it should contract

out the performance of some of its work for as long as

the employer is motivated by good faith, and the

contracting out must not have been resorted to

circumvent the law or must not have been the result of

malicious or arbitrary action.” (Temic Automotive

Philippines, Inc. vs. Temic Automotive Philippines, Inc.

Employees Union-FFW, G.R. No. 186965, December 23, 2009.

c) “The unilateral action of the employer in contracting out

of part of its distribution functions is a valid exercise of

management prerogative. (San Miguel Brewery Sales Force

Union [PTGWO] vs. Hon. Blas F. Ople, et al.,170 SCRA 25-28)

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“Contractualization” Is Integral to Doing Business

1. In the world of business, almost every organization

contracts out or outsources services and products as

a matter of exigency and cost-effectiveness.

2. Typically, the function being contracted out is

considered non-core to the business. An insurance

company, for example, might outsource its janitorial

and landscaping operations to firms that specialize in

those types of work since they are not integral to

insurance or strategic to the business.

3. Outlawing “contractualization” would not only be

violative of the constitutional rights of employer, but

also disastrous to business and the economy.

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“Contractualization” vis-à-vis Outsourcing

1. It appears that there is a failure of populist prejudice

against “contractualization” to connect contracting out

with outsourcing. While contracting is perceived by

militant labor and populists as an evil, there has not

been a peep from them against outsourcing.

2. Globally, outsourcing is understood as contracting

another company or person to do a particular function,

process or service which is typically non-core to the

business (SOURCINGmag.com; VENTURE UUTSOURCE ;

Computer Desktop Encyclopedia; Investment Dictionary; Financial &

Investment Dictionary; Small Business Encyclopedia; Wikipedia; etc.

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“Contractualization” vis-à-vis Outsourcing (2)

3. The official definition also does not differentiate:

“Outsourcing (or contracting out) - is the delegation of non-

core operations or jobs from internal production within a

business to an external entity (such as a subcontractor) that

specializes in that operation. Outsourcing is done to save

money, improve quality, or free company resources for

other activities. Outsourcing was first done in the data-

processing industry and has spread to areas, including

telemessaging and call centers” (2008 ASPBI Business Process

Outsourcing [BPO] Activities, NSO)

4. The critical difference is that the outsourcing industry

both here and abroad, rejects the application of

trilateral relationship


5. Contracting out under Art. 106 creates a trilateral

relationship by and between the employer as the

principal, the contractor and the latter’s employees in

relation to the principal (Sec. 3 [m], Department Order No. 18-

A, Series of 2011).

6. The trilateral relationship becomes operative when the

contractor fails to pay wages of his employees in

accordance with law by making the principal jointly

and severally liable with the contractor (Art. 106; Sec. 5,

D. O. No. 18-A)).

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7. In the 1990s as a result of explosive advances in ICT,

outsourcing expanded to online business processes

or as it is now termed, business process outsourcing

(BPO) where firms can outsource their business

processes to companies on the other side of the

planet.

8. Call centers have led the pack of BPO services in the

Philippines in terms of growth

9. Based IBM's Global Locations Trend Annual Report,

the Philippines has overtaken India as the global

leader in business support functions and “voice”

services.


10. As of 2014, BPOs direct contributions to the

economy were as follows:

a) 1.1M direct employment (2% of overall

employment)

b) $18.4B in revenue for 2014 (6% of GDP)

c) 700 BPO companies and global in-house centers

serving North America, Asia, and Europe

11. The umbrella organization of BPOs, BPAP, is a

member of ECOP.

12. Many BPO employees are contractual employees in

the sense that their terms are based on the service

contract.

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13. ECOP pointed out to DOLE that inasmuch as the

trilateral relationship which is an essential element of

contracting out under the Labor Code does not apply

to BPOs, there was danger that regulatory agencies

and quasi-judicial agencies in justiciable cases

would subject them to coverage under D. O. 18-A.

14. Accordingly, on March 13, 2012, the DOLE Secretary

issued Department Circular No. 01, Series of 2012,

excluding BPOs and the construction industry from

coverage of D. O. 18-A.

Basic Principles Underlying “Casualization”

1. “Casualization” is understood as the exception to

regular employment:

“. . . where the employment has been fixed for a specific

project or undertaking the completion or termination of

which has been determined at the time of the engagement

of the employee or where the work or service to be

performed is seasonal in nature and the employment is

for the duration of the season (Art. 294[280], Labor Code)

2. Regular employment involves performance of

activities which are usually necessary or desirable in

the usual business or trade of the employer for an

indefinite period (Art. 293[279], Labor Code)

3. Subjecting regular employment to “casualization” is

illegal and subject to sanctions 16

“Contractualization” and “Casualization” Covered

By Security of Tenure

1. Security of tenure is guaranteed by the Constitution

(Article XIII, Social Justice And Human Rights, Labor Sec. 3) and

implemented by the Labor Code (Art. 279)

“Our Constitution, statutes and jurisprudence uniformly

guarantee to every to every employee or worker tenurial

security. What this means is that an employer shall not

dismiss an employee except for just or authorized cause

and only after due process is observed. Thus, for an

employee’s dismissal to be valid, the employer must meet

these basic requirements of: (1) just or authorized cause

(which constitutes the substantive aspect of a valid

dismissal); and (2) observance of due process (the

procedural aspect (Baguio Central University vs. Ignacio Gallente

G. R. No. 188267, Dec. 2, 2013) 17

“Contractualization” and “Casualization” Covered

By Security of Tenure (2)

2. All types of employment under “Contractualization”

and “Casualization” cannot be pre-terminated except

for just cause (Art. 296[282], Labor Code) , authorized

cause (Art. 297[283]) or disease (Art. 298[284])

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Types of Employment Characteristics

Regular 1. Indefinite period

2. May be preceded by probationary

employment as prequalification to regular

employment

3. Can only be terminated by the modes of

termination under the Labor Code

4. Activities directly related, except casual

employment that has been regularized as

long as activity lasts

Non-Regular

1. Seasonal; project

2. Casual not exceeding 1 year

3. Contractual (D. O. No. 18-02)

4. Fixed term

Definite period or temporary; pre-termination

based on just or authorized cause

1. May or may not be directly related;

2. Not directly related

3. Directly related

4. May or not be directly related

The accepted taxonomy of employment in accordance with law,

jurisprudence and practice is as follows:

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