In the Philippines, a business owner may engage people to perform work either by entering into employment relationships or by contracting out the work to be performed.

On the one hand, a business owner may forge employment relationships with employees, on a regular, casual, project, seasonal, probationary, or fixed-term basis depending on the business requirements. Employees enjoy the constitutional right of security of tenure and may not be dismissed except for just or authorised causes.

On the other hand, a business owner may opt to farm out the work to a contractor under a contracting arrangement. In such a case, the contractor hires its own employees to perform the work farmed out. However, not all contracting arrangements are valid. Under the present law, labour-only contracting is prohibited. Such a prohibited arrangement is present where:
a) The contractor does not have substantial capital or investment AND the contractor’s employees are performing activities which are directly related to the main business operation of the principal;or
b) The contractor does not exercise control over the performance of the work of its employees.

Significantly, the Labour Code governs employment relationships and contracting arrangements. Due to the public’s renewed clamour to put a stop to prohibited forms of employment relationships and contracting arrangements—particularly so regarding recurring five (5) month contracts of employment meant to circumvent the onset of regular status after six (6) months and thus security of tenure—the government vowed to put a stop to “Endo” (end of contract) dismissals, in most cases arbitrarily determined by unscrupulous employers. Although these arrangements are clearly illegal under present law, the legislature saw it fit to tighten the rules not only on employment rules but also on contracting arrangements to readily stamp out labour-only contracting. Thus, our lawmakers recently decided to revisit the relevant provisions of the Labour Code. This led to the emergence of Senate Bill No. 1826 (SB 1826), or the bill on the Security of Tenure and End of Endo Act of 2018, which proposed several changes in the Labour Code provisions on employment relationships and contracting arrangements. 

Our congressmen adopted en toto SB 1826 in May this year, which is a bill that now just requires the signature of the President. In anticipation of his signature, we present hereunder the significant changes in the rules on employment and contracting arrangements.

Significant changes in the rules on employment 
SB 1826 appears to abandon the concept of casual employment. Accordingly, all employees, except project and seasonal employees, should now be deemed regular, upon passing a six (6) month probation period. Project and seasonal employees shall have the rights of regular employees for the duration of the project or season, as the case may be. 

Fixed-term employment was previously upheld by the Supreme Court as legitimate although it is not expressly provided for in the Labour Code. It is still not mentioned under SB 1826. Such kind of employment, however, should remain valid, as it is based generally on the Civil Code, which is another law altogether. In fact, both the Labour Code and SB 1826 do not mention anything about fixed-term employment. 

On the matter of termination of employment, business owners who separate employees based on authorised causes are now required to submit proof of the existence of the authorised cause and the payment of separation pay during the one (1) month notice period. With this, SB 1826 appears to bring back the old discredited requirement of “clearance to terminate” for authorised cause separations.

Significant changes in the rules on contracting arrangements
One of the controversial changes under SB 1826 is the introduction of a new definition of labour-only contracting, specifically through a seemingly innocuous change of the conjunction “AND” to “OR”. The projected new law defines labour-only contracting as an arrangement where:
1) The contractor does not have substantial capital or investment; OR
2) The contractor’s employees recruited and placed are performing activities which are directly related to the main business operation of the principal; or
3) The contractor does not exercise control over the performance of the work of the employees recruited and placed.

The new definition implies that a contractor can no longer engage in the business of providing workers who will perform activities directly related to the main business of the principal, even if such contractor has sufficient capital or investment. With this definition, business owners would appear to be precluded from engaging the services of legitimate contracting companies for activities directly related to their businesses. Significantly, this may result in the closure of legitimate contracting companies and the deterrence of local and foreign investors, who may find the new definition as unduly restrictive of the right to conduct a legitimate business.

Significantly, the second test above poses the problem of delineating which activities are directly related to the main business operation of the principal from those that are not. To deal with this, SB 1826 grants the appropriate Industry Tripartite Council, or in default thereof, the Secretary of Labor and Employment (DOLE Secretary) in consultation with the National Tri-partite Industrial Peace Council (NTIPC), the power to determine whether or not an activity is directly related to the main business operation of the principal. As SB 1826 does not provide any limitation or standard in making the de-termination, it would appear that the Industry Tripartite Council and DOLE Secretary, with the NTIPC, possess a very wide discretion in exercising the said function.

SB 1826 also provides new requirements for licensing job contractors. These three (3) are worthy of note:
1) The job contractor must prove that it is an expert or specialist in the work farmed out, by showing, among others, that it employs the necessary competent professionals or skilled workers or that it has a proven track record in such field of specialisation.
2) The job contractor must also prove that it has the financial capacity to carry on its contracting business based on relevant factors, such as the number of its employees and the nature of its business. Notably, this is a separate requirement from the equired paid-up capital or net worth of five million Pesos.
3) The job contractor must likewise prove that it has the tools and equipment which are reasonably necessary to perform the job contracted out, as opposed to the current requirement of a mere general provision of tools and equipment.

There are significant changes under SB 1826. These will certainly mark a new era for contracting arrangements and employment relationships. It will also change the landscape of the Philippine workforce as we know it. However, whether these changes strike a balance between the ever-conflicting interests of management and labour—we shall have to wait and see.

Emerico O. De Guzman
Managing Partner
Emerico O. De Guzman, the Managing Partner of ACCRALAW, was Head of the Firm’s Labour and Employment Department from 2008-2014. He advised top multinational corporations from various industries on their concerns relating to employment and related litigation. He assists clients with their contracting arrangements, conduct of compliance audits, and resolution of disciplinary cases. He handles the litigation of termination disputes and employment related claims. He authored several legal papers published in various international publications. In 2006, he was President of the Personnel Management Association of the Philippines (PMAP). He was later appointed as an employer representative to the National Tripartite Industrial Peace Council (NTIPC). In 2014, he was elected President of the Philippine Bar Association (PBA) for 2014-2015. In 2018, he was appointed co-chair of the Legal Practice Committee at the Inter-Pacific Bar Association (IPBA). In 2019, he became chair of the Human Capital Committee of the Management Association of the Philippines (MAP).

Clarence Darrow C. Valdecantos
Managing Partner
Clarence Darrow C. Valdecantos is the Head of the Labour and Employment Department at ACCRALAW. He focuses his practice on different areas of labour and employment laws, which include money claims and termination disputes; labour litigation; voluntary arbitration cases; certification elections; social security cases; overseas employment; collective bargaining negotiations; preventive mediation/conciliation of labour disputes, strikes and lockouts; union representation issues; conduct of administrative investigations; employee grievances; formulation of employee code of conduct/policies; conduct of labour audits; and implementation of corporate mergers and acquisitions. He has advised senior management teams, boards of directors, and key officers of various multinational and domestic corporations on the legal aspects of employment-related projects and undertakings. Mr. Valdecantos is the representative of ACCRALAW to the People Management Association of the Philippines (PMAP) and the IT and Business Process Association of the Philippines (IBPAP).