In order to reduce operational costs and avoid liabilities, a business outsources a work to an independent contractor. This is referred to aslegitimate job contracting or outsourcing, wherein a principal farms out to an independent contractor or a subcontractor a particular job, work, service, or project, within a definite or predetermined period, regardless of whether they are to be performed or completed within or outside the premises of the principal.[1] There is no employer-employee relationship between the principal and the independent contractor or subcontractor.

A person is considered engaged in legitimate job contracting or subcontracting once all the following conditions are present:[2]

  • The contractor or subcontractor carries on a distinct and independent business and undertakes to perform the job, work or service on its own account and under its own responsibility according to its own manner and method, and free from the control and direction of the principal in all matters connected with the performance of the work except as to the results thereof;[3]
  • The contractor or subcontractor has substantial capital or investment; and
  • The agreement between the principal and contractor or subcontractor assures the contractual employees entitlement to all labor and occupational safety and health standards, free exercise of the right to self-organization, security of tenure, and social welfare benefits.[4] 

Best Legal Practices:

Exercise right to outsource in good faith and with due regard to rights of employees – Outsourcing is a business strategy designed to lower operational costs, lessen oversight and management, and avoid liabilities. Thus, the right to outsource as an aspect of management prerogative must be exercised in good faith and with due regard to the rights of the employees.

If either one of the requirements listed above is missing, a person is not engaged in legitimate job contracting. Instead, the person is deemed to be doing engaged in the unlawful and prohibited act of labor-only contracting, whereby the person supplying workers to an employer does not have substantial capital or investment in the form of tools, equipment, machineries, work premises, among others, and the workers recruited and placed by such person are performing activities which are directly related to the principal business of such employer.[5] Simply, in labor-only contracting, the contractor or subcontractor merely recruits, supplies, or places workers to perform a job, work or service for a principal.[6]

Best Legal Practices:

Execute an employment contract for new hires prior to starting work – Considering that labor law and employment contracts are interpreted in favor of labor in case of doubt, the employer should require newly hired employees to execute a well-crafted employment contract prior to starting work. This will clearly set the parameters of employment, as well as the status of the employee whether he/she is a regular, probationary, casual, project, fixed-term, or seasonal.

In this set-up, the person or intermediary is considered merely as an agent of the employer resulting in the latter being responsible to the workers as if they were his own.[7]

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[1] Sasan, Jr. v. National Labor Relations Commission 4th Division, G.R. No. 176240, 17 October 2008, cited in Polyfoam-RGC International, Corporation, et al., v. Edgardo Concepcion, G.R. No. 13 June 2012.

[2] Ibid.

[3] Ibid.

[4] Ibid.

[5] LABOR CODE. Paragraph 4, Article 106.

[6] Id at 30.

[7] LABOR CODE. Paragraph 2, Article 106.