DO 174: Better deals for labor but still no end to endo

On March 19, 2017, the Department of Labor and Employment (DOLE) released Department Order No. 174, series of 2017 (D.O. 174), laying down its new regulations governing contracting and subcontracting arrangements. 

The new DO superseded DOLE DO No. 18-A (D.O. 18-A), which had been the governing rule on labor contractualization since 2011. 

According to Labor Secretary Silvestre Bello, the new DO was intended to put closure on the issues surrounding the various forms of contractual arrangements and end-of-contract schemes that came about in relation to the then existing DO 18-A. 

Salient Features of DO 174

Among the salient features of D.O. 174 is its absolute prohibition on “labor-only” contracting. 

Under the new policy, “labor-only" contracting refers to an arrangement where the contractor who supplies workers to a principal does not have substantial capital or investment, and the workers recruited and placed by such person are performing activities which are directly related to the main business operation of the principal. 

There is also labor-only contracting when the contractor does not exercise control over the performance of the work of the employee.  

This prohibition on “labor-only” contracting is not novel to D.O. 174 as the same is also found in D.O. 18-A. 

A significant change, however, is that under the old policy, “labor-only” contracting also includes arrangement where the workers recruited and placed by the labor-only contractor are performing activities which are necessary and desirable to the business of the principal.  This has been removed in the definition of “labor-only” contracting in the new policy. 

Aside from this, the new policy also changed the definition of substantial capital of contractors from paid-up capital stock/ net worth of at least P3,000,000.00 to P5,000,000.00.  

D.O. 174 likewise prohibits the following:

• farming out of work to a “cabo”;
• contracting out of work from an in-house agency or an in-house cooperative;
• contracting out of work due to a strike or lockout;
• contracting out of work performed by union members, with the end of interfering with or restraining the employees’ right to self-organization;
• requiring contractor’s employees to perform jobs that are being done by regular employees of the principal company;
• requiring contractor’s employees to sign, as a precondition to employment or continued employment, an antedated resignation letter, blank payroll, waiver of labor standards and benefits, or quitclaim in favor of the principal or contractor, or require the employee to be member of a cooperative;
• repeated hiring by the contractor of employees under employment contract of short duration;
• requiring employees to sign a contract with a term shorter than the contractor’s contract period with the principal company; and
• such other practices and schemes designed to circumvent an employee’s security of tenure.

Good faith no longer a factor

Another significant change introduced by D.O. 174 is the removal of good faith and exigencies of the business as grounds to justify the above acts.  

It is to be noted that under the old policy, the above acts are prohibited only when not done in good faith and not justified by the exigencies of the business (although it could be argued that good faith is incompatible with some of the acts).  

Under the new policy, good faith or business exigencies appear to be non-factors.

Streamlined terms of contract

D.O. 174 also streamlined the terms and conditions required to be included in the contract between the contractor and employee as well as in the contract between the contractor and principal. 

For example, the term or duration of employment of the contractor need not be specified in the employment contract.  This is a required stipulation under D.O. 18-A.
 
All contractors are required to register with the DOLE.  The new DO, however, shortened the validity of the certificate of registration of contractors from three years to two years and increases the registration fee from P25,000.00 to P100,000.00. 

Registration of contractors may be cancelled or revoked in case of misrepresentation of facts in the application, non-submission of service agreement and required semi-annual report, final findings that the contractor has engaged in labor-only contracting, non-compliance with labor standards, among other grounds. 

Significantly, under D.O. 174, violation of any provision of the Labor Code is also a ground for cancellation of a contractor’s certificate of registration.

Separation benefits

Another new requirement found in D.O. 174 is the payment of separation benefits to employees who are not re-deployed by the contractor within three months from the expiration of the service agreement or from the completion of the phase of the job or work for which the employee is engaged.

This creates an obligation on the part of the contractor to provide new employment to their employees even after expiration of the service agreement with its principal.

While the new DO has introduced reforms on the government’s policy on contractualization, it does not, however, prohibit all forms of contractualization of employees. 

Indeed, it merely regulates contracting and sub-contracting in the Philippines.

Katrine Paula V. Suyat, , an associate at Gatmaytan Yap Patacsil Gutierrez & Protacio Law Offices, currently teaches Criminal Law, Statutory Construction, and Legal Research and Legal Writing at San Beda College of Law- Mendiola. She was admitted to the Philippine Bar in 2014 after placing seventh (7th) in the 2013 Philippine Bar Examinations.