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Labor contracting per se is not illegal; labor-only contacting is.

It is justified when it us undertaken in order to effectuate more economic and

efficient methods of production(Asian Alcohol 1999) or as part of a companys
cost-saving program (De-ocampo).

What can be contracted out?

Core or non-core
Core function-yes, if it is required by exigencies of operation and acting in
good faith. Outsource from a specialized contractor.

Labor-only contracting remains a prohibited activity; elements

1. Lack of substantial capital AND
Effect of labor-only contracting
-the statute itself implies or establishes an ee-er relationship between the employer
( the owner of the project) and the employees of the labor-only contractor, for a
comprehensive purpose: to prevent any violation or circumvention of any provision
of the Labor Code.
-the law further treats the labor-only contractor as an agent
-In effect, contractors employees are considered regular employees of the principal,
who are entitled to all the benefits and rights appurtenant to a regular employment,
from the date of their employment with the contractor if they perform activities
directly related to the principal business of the company.

Definition; contracting arrangement- see 18-A

One whereby a principal agrees to put out or farm out with a contractor the
performance or completion of a specific job, work or service within a definite
or predetermined period, regardless of whether such job, work or service is to
be performed or completed within or outside the premises of the principal.
Badges of control; if the principal
o Trains
o Recruits
o Hires
o Monitor the activities or performance of job of employees
o Makes the work schedule of the contractual workers
o Principal cannot require employees to render overtime, it should be the
o Contractor must have substantial capital.
D.O 18 v. D.O 18-A
18-A, applies to cooperatives (sec. 2)
o If cooperative offers services to a principal, there is a presumption that
they are engaged in labor only contracting


Prohibits contractors and subcontractors from engaging in recruitment

and placement activities. (Sec.2)
Defines contractors employee Sec. 3
Includes regular employees of the contractor. (e.g. administrative staff)

Contractors employees
Contractual employees-job, work or service pursuant ot a service agreement
Non contractual employees- not dependent on the existence of a principal.

Defines Net financial contracting capacity (Sec 3 g)

To determine contractors financial capacity; NFCC must be higher or
equal to the total contact cost.
Principal may include government agencies and GOCCs
Defines substantial capital
PH3M paid up capital stock-corp. partnership,coop
3M, net worth-single proprietor.
Registration as contractor
o Mandatory
o Failure ti register gives rise to presumption of labor-only
o DOLE regional office where the applicant principally operates
Central registry
9 Grounds for cancellation
o Misrepresentation of facts in application
o Submission of falsified or tampered application or supporting
o Findings of violation of Rigths of contractors employees
o Non-compliance with sss, hdmf, pag-ibig, and ecc
o Collect fees not authorized by law
o DOLE regional office
Complaint-10 day period
No motion for recon with sec of labor.
Motion for recon shall be treated as appeal
Divest the contractor of legitimate status upon finality of order of
Ground t deny application fore renewal of registration
When principal is deemed direct employer; solidacy liability
-in case of finding of labor-only contracting by a competent
-DOLE in case of inspection
-labor arbiter

In case of commission of prohibited activities


Does not cover private recruitment and placement agencies

Defines contractual employee
Silent on net financial contracting capacity
Art 97(b) defines employer
Defines substancial capital or investment
But does not specify amount
Grounds for cancellation
4 gr

Jurisdiction of labor arbiter

Other jurisdiction
128 and 129-regional director; sec of labor CA
278 g-voluntary arbitrator
Labor arbiter art 269 ; secretary/Dole

SENA office