LABOR CONTRACTING ARRANGEMENTSArticles 106-109 of the Labor Code

An arrangement whereby a principal (indirect employer) agrees to farm out with a contractor or subcontractor the performance or completion of a specific job, work or service, within a definite or pre-determined period, regardless of whether such job is to be performed within or outside the premises of the principalLegitimate Job Contracting

Contract for specific job, work or service, between the principal and the contractor/ subcontractorContract of employment between the contractor/ subcontractor and the hired workers

In legitimate job contracting, no employer-employee relationship exists between the employees of the job contractor and the principal employer. Relationships under a Legitimate Job Contracting Arrangement

The principal employer becomes jointly and severally liable with the job contractor for the payment of the employees' wages only whenever the contractor fails to pay the same. In such case, the law creates an employer-employee relationship between the principal employer and the job contractor's employees for a LIMITED PURPOSE, that is, to ensure that the employees are paid their wages.

In effect

An arrangement where the contractor or subcontractor merely recruits, supplies or places workers to perform a job, work or service for a principal, who is deemed the actual employer of the workers.Labor-only Contracting

There is no apparent employer-employee relationship between the principal and the workersPrecludes the employee from acquiring regular status, the work being done on a periodic basis with the same employee being juggled from one employment contract to another; hiring and re-hiring workers over a period of time without considering them as regular employees

How?

toss the poor workers from one job contractor to another, make them go through endless applications, lining up, paperwork, documentation, and physical examinations; make them sign five- or ten-month-only job contracts, yet re-hire them after brief "rest periods," but not after requiring them to go through the whole application and selection process once again; prepare and have them sign waivers, quitclaims, and the like; refuse to issue them identification cards, receipts or any other concrete proof of employment or documentary proof of payment of their salaries; fail to enroll them for entitlement to social security and other benefits; give them positions, titles or designations that connote short-term employment.

Setting up of shell or dummy companies: the mother company avoids the employer-employee relations, and is thus shielded from liability from employee claims in case of illegal dismissal, closure, unfair labor practices and the like. In those instances, the poor employees, finding the shell or dummy company to be without assets, often end up confused and without recourse as to whom to run after. They sue the mother company which conveniently sets up the defense of absence of employer-employee relations.

The contractor or subcontractor does not have substantial capital or investment which relates to the job, work or service to be performed;The employees recruited, supplied or placed by such contractor or subcontractor are performing activities which are directly related to the main business of the principal;The contractor does not exercise the right to control the performance of the work of the contractual employeeTESTS:

Jolli-Mac Restaurant Company (Jolli-Mac) owns and operates the largest food chain in the country. It engaged Matiyaga Manpower Services, Inc. (MMSI), a job contractor registered with the Department of Labor and Employment, to provide its restaurants the necessary personnel, consisting of cashiers, motorcycle delivery boys and food servers, in its operations. The Service Agreement warrants, among others, that MMSI has a paid- up capital of P2,000,000.00; that it would train and determine the qualification and fitness of all personnel to be assigned to Jolli- Mac; that it would provide these personnel with proper Jolli-Mac uniforms; and that it is exclusively responsible to these personnel for their respective salaries and all other mandatory statutory benefits. After the contract was signed, it was revealed, based on research conducted, that MMSI had no other clients except Jolli- Mac, and one of its major owners was a member of the Board of Directors of Jolli-Mac.Illustrative Examples

A golf and country club outsourced the jobs in its food and beverage department and offered the affected employees an early retirement package of 1 months pay for each year of service. The employees who accepted the package executed quitclaims. Thereafter, employees of a service contractor performed their jobs. Subsequently, the management contracted with other job contractors to provide other services like the maintenance of physical facilities, golf operations, and administrative and support services. Some of the separated employees who signed quitclaims later filed complaints for illegal dismissal.Illustrative Examples

Reach-All, a marketing firm with operating capital of P100,000, supplied sales persons to pharmaceutical companies to promote their products in hospitals and doctors' offices. Reach-All trained these sales persons in the art of selling but it is the client companies that taught them the pharmacological qualities of their products. Reach-Alls roving supervisors monitored, assessed, and supervised their work performance. Reach-All directly paid their salaries out of contractor's fees it received.Illustrative Examples

In labor-only contracting, an employer-employee relationship is created by law between the principal employer and the employees of the labor-only contractor. In this case, the labor-only contractor is considered merely an agent of the principal employer. The principal employer is responsible to the employees of the labor-only contractor as if such employees had been directly employed by the principal employer. The principal employer therefore becomes solidarily liable with the labor-only contractor for all the rightful claims of the employees.

In short, the legitimate job contractor provides services while the labor-only contractor provides only manpower. The legitimate job contractor undertakes to perform a specific job for the principal employer while the labor-only contractor merely provides the personnel to work for the principal employer.

PERMISSIBLE/ LEGITIMATEJOB CONTRACTINGLABOR ONLY CONTRACTINGPROVIDES SERVICESPROVIDES MANPOWERTECHNICALLY, NO ER-EE RELATIONSHIPTHERE IS ER-EE RELATIONSHIPLIABILITY OF PRINCIPAL LIMITED TO UNPAID WAGESPRINCIPAL IS LIABLE FOR ALL CLAIMS DUE THE EMPLOYEE

Article 108Failure of the principal to require the contractor to post a bond should not be construed as a waiver on its part to seek reimbursement from the contractor for the amount paid to the employeesRight to reimbursement