DOLE PRIMER ON CONTRACTING AND
SUBCONTRACTING Effects of Department Order
No. 3, Series of 2001
1. WHAT IS CONTRACTING AND SUBCONTRACTING?
There is contracting or subcontracting when an
employer, referred to as the principal, farms out the
performance of a part of its business to another,
referred to as the contractor or subcontractor. For
the purpose of undertaking the principal's business
that is farmed out, the contractor or subcontractor
then employs its own employees.
Contracting and subcontracting are synonymous
under Philippine labor law. The term that is more
commonly used is subcontracting.
2. IN THE EMPLOYMENT OF WORKERS, IS THERE
A DIFFERENCE BETWEEN AN ORDINARY
EMPLOYER-EMPLOYEE RELATIONSHIP AND
SUBCONTRACTING?
Yes. In an ordinary employer-employee relationship,
there are only two parties involved - the employer
and the employee. This relationship is established
through a four-fold test, under which the employer:
a. Directly exercises control and supervision over the
employee not only as to the results of the work but
also as to the means employed to attain this result;
b. Has the power to select and hire the employee;
c. Has the obligation to pay the employees his or her
wages and other benefits.
The power of control is the most important factor in
determining the existence of an employer-employee
relationship. The employer need not actually exercise
this power. It is enough that the employer retains the
right to exercise this power. It is enough that the
employer retains the right to exercise it as it may
deem necessary or appropriate.
In subcontracting, there are three parties involved:
a. The principal which decides to farm out a job or
service to a subcontractor.
b. The subcontractor which has the capacity to
independently undertake the performance of the job
or service; and
c. The employees engaged by the subcontractor to
accomplish the job or service
In subcontracting, the four-fold test of employer-
employee relationship should be satisfied by the
subcontractor in relation to the employees it engages
to accomplish the subcontracted job or service. In
such cases, the subcontractor is also referred to as
independent contractor.
If the four-fold test is satisfied not by the
subcontractor but by the principal, the principal then
becomes the employer of the employees engaged to
accomplish the job or service. What exists is not
subcontracting but a direct employer-employee
relationship between the principal and the
employees.
3. IS THERE A DIFFERENCE BETWEEN A
SUBCONTRACTOR AND A PRIVATE RECRUITMENT
AND PLACEMENT AGENCY (PRPA)?
Yes. A subcontractor directly undertakes a specific
job or service for a principal, and for this purpose,
employs its own workers. A PRPA cannot be a
subcontractor. It simply recruits workers for the
purpose of placing them with another employer so
that the workers recruited will not become the
PRPA's employees.
A subcontractor is governed by the laws and rules
enumerated under Question # 4 below. A PRPA is
governed by Articles 25 to 39 of the Labor Code and
the rules implementing these articles.
A subcontractor does not need authority from the
Department of Labor and Employment (DOLE) to
undertake a subcontracted job or service. A PRPA
needs an authority or license from DOLE to legally
undertake a recruitment and placement activities.
4. WHAT LAW OR RULES GOVERN SUBCONTRACTING?
The basic law governing subcontracting is the Labor
Code, particularly Articles 106 to 109. These
provisions prescribe the conditions for regulating
subcontracting and the rights and obligations of
parties to this arrangement. There was also a set of
rules implementing Articles 106 to 109, known as
Department Order No. 10, issued by DOLE in 1997.
However, D. O. No. 10 was revoked by DOLE on 08
May 2001 through another order, D. O. No. 3, Series of
2001. D. O. No. 3 took effect on 29 May 2001.
With the revocation of D. O. No. 10, the following laws
and rules will apply in addition to Articles 106 to 109
of the Labor Code:
a. Article 248 (c) which disallows contracting out of
services or functions being performed by union
members when such will interfere with, restrain or
coerce employees in the exercise of their rights to
self-organization;
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b. Article 280. which classifies employees into
regular, project or seasonal employees;
c. Article 2180 of the Civil Code, under which the
principal, in a civil suit for damages instituted by an
injured person, can be held liable for any negligent
acts of the employees of a labor-only contractor;
d. Republic Act No. 5487 and its implementing rules,
which regulate the operation of security agencies;
e. Jurisprudence interpreting the foregoing laws;
f. D. O. No. 3;
g. D. O. No. 19, Series of 1993, for subcontracting
arrangements in the construction industry; and
h. Contractual stipulations provided these are not in
conflict with Labor Code provisions, jurisprudence,
and D. O. Nos. 3 and 19.
5. ASIDE FROM REVOKING D. O. NO. 10, WHAT
ARE THE IMPORTANT FEATURES OF D. O. NO. 3?
The following are the important features of D. O.
No. 3.
a. It prohibits labor-only contracting;
b. It recognizes the continuing validity of contracts
entered into when D. O. No. 10 was still in force;
c. It is a temporary measure;
d. It sets the process and mechanism, which is
through consultations through the Tripartite
Industrial Peace Council, by which a new set of rules
shall be formulated.
6. DOES D. O. NO. 3 RENDER SUBCONTRACTING
ILLEGAL?
No, provided the requirements for legitimate
subcontracting are satisfied and the prohibition
against labor-only subcontracting is observed.
7. WHAT IS LEGITIMATE SUBCONTRACTING?
Neither the Labor Code nor D. O. No. 3 has a
definition of legitimate subcontracting.
However, while D. O. No. 3 rendered D. O. No. 10
ineffective, existing jurisprudence still provides
definitive guidance. In two recent cases decided by
the Supreme Court (Vinoy v. National Labor Relations
Commission, G.R. No. 126586, 02 February 2000, and
Lim v. National Labor Relations Commission, G.R. No.
124630, 19 February 1999), the definition of
legitimate subcontracting in D. O. No. 10 is favorably
cited as follows:
Contracting shall be legitimate if the following
conditions concur:
a. 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;
b. the contractor or subcontractor has substantial
capital or investment;
c. The agreement between the principal and the
contractor or subcontractor assures the contractual
employees entitlement to all occupational safety and
health standards, free exercise of the right to self
organization, security of tenure, and social and
welfare benefits.
8. WHAT IS SUBSTANTIAL CAPITAL? IS
SUBSTANTIAL CAPITAL SUFFICIENT TO
ESTABLISH LEGITIMATE SUBCONTRACTING?
Substantial capital refers to such investment, whether
in the form of money, facilities, tools, equipment,
machineries, work premises, or subscribed capital
stock that would indicate the subcontractor's
capacity to undertake the subcontracted work or
service independently. For example, a subcontractor
with a capital stock of P1 Million which is fully
subscribed and paid for has been deemed by the
Supreme Court to be a highly capitalized venture
which satisfies the requirement of substantial capital.
Where a subcontractor is highly capitalized, the
Supreme Court has held that it need not show
evidence that it has investment in the form of tools,
equipment, machineries, work premises, among
others, to be considered legitimate. However, it is still
necessary for it to show that it has the capacity to be
an independent contractor, That is, it can undertake
the performance of the contract according to its own
manner and method, free from the supervision of the
principal in all matters except as to the results of the
work.
9. IS LEGITIMATE SUBCONTRACTING DIFFERENT
FROM LABOR-ONLY CONTRACTING? HOW IS
LABOR-ONLY CONTRACTING DEFINED?
Yes, legitimate subcontracting is different from labor-
only contracting because the former is allowed and
the latter is illegal and prohibited.
Section 2 of D. O. No. 3 states that there is labor-only
contracting where the contractor or subcontractor
merely recruits, supplies or places workers to
perform a job, work or service for a principal, and the
following elements are present:
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a. The contractor or subcontractor does not have
substantial capital or investment to actually perform
the job, work or service under its own account and
responsibility; and
b. The employees recruited, supplied or placed by
such contractor or subcontractors are performing
activities directly related to the main business of the
principal.
10. WHAT IS THE BASIS OF THE STATE IN
PROHIBITING LABOR-ONLY CONTRACTING?
WHAT IS THE OBJECTIVE OF THE PROHIBITION?
The bases of the State in prohibiting labor-only
contracting are:chanroblesvirtuallawlibrary
a. The Constitution, which mandates that the State
shall protect labor and promote its welfare, and shall
guarantee basic labor rights including just and
humane terms and conditions of employment and the
right to self-organization.
b. Article 106 of the Labor Code, which allows the
Secretary of Labor to distinguish between labor-only
contracting and job contracting to prevent any
violation or circumvention of the Labor Code.
The objective of the State in prohibiting labor-only
contracting is to ensure that labor laws are followed
and to prevent exploitation of workers. A labor-only
contractor is one which presents itself as an
employer even if it does not have capital to run a
business or capacity to ensure that its workers are
paid their wages and other benefits as prescribed by
law. As such, it cannot independently undertake to
perform a subcontracted job or service. To allow a
labor-only contractor to operate is to give it an
opportunity to circumvent the law and to exploit
workers.
D. O. No. 3 is not the first regulation to prohibit labor-
only contracting. The prohibition was embodied in
the original rules implementing Articles 106 to 109
issued right after the Labor Code took effect in 1974.
D. O. No. 10 also contained a similar prohibition. D. O.
No. 3 merely reiterates the prohibition.
11. D. O. NO. 10 ENUMERATED ACTIVITIES
PERMITTED FOR SUBCONTRACTING. NOW THAT
IT HAS BEEN REVOKED, DOES THIS MEAN THAT
SUCH ACTIVITIES MAY NO LONGER BE
SUBCONTRACTED?
Not necessarily. These activities may still be
subcontracted provided (a) the laws and rules under
Question # 4 are observed; and (b) the conditions for
legitimate contracting under Question # 7 and the
prohibition against labor-only contracting under
Question # 9 are met.
12. D. O. NO. 10 ENUMERATED PROHIBITED
ACTIVITIES. NOW THAT IT HAS BEEN REVOKED,
ARE THERE STILL ANY PROHIBITED
SUBCONTRACTING ARRANGEMENTS?
Yes. Expressly prohibited are (a) labor-only
contracting as defined in D. O. No. 3; and (b)
contracting out of services being performed by union
members when such will interfere with, restrain or
coerce employees in the exercise of their right to self-
organization under Article 248 (c) of the Labor Code.
13. WHAT WILL BE THE EFFECT OF A LABOR-
ONLY CONTRACTING ARRANGEMENT?
The following are the effects:
a. The subcontractor will be treated as the agent of
the principal. Since the act of an agent is the act of the
principal, representations made by the subcontractor
to the employees will bind the principal.
b. The principal will become the employer as if it
directly employed the workers engaged to undertake
the subcontracted job or service. It will be
responsible to them for all their entitlements and
benefits under the labor laws.
c. The principal and the subcontractor will be
solidarily treated as the employer.
d. The employees will become employees of the
principal, subject to the classifications of employees
under Article 28 of the Labor Code.
If the labor-only contracting activity is undertaken by
a legitimate labor organization, a petition for
cancellation of union registration may be filed against
it, pursuant to Article 239(e).
14. IF A LEGITIMATE SUBCONTRACTOR CANNOT
PAY THE WAGES OF THE EMPLOYEES IT ENGAGED
TO PERFORM THE JOB OR SERVICE, WILL THE
PRINCIPAL AUTOMATICALLY BECOME THE
EMPLOYER OF SUCH EMPLOYEES?
No. Under Article 106, a principal has two types of
liability in relation to the employees of the
subcontractor. The first type of liability is limited, and
is governed by the first two paragraphs of Article
106. Thus, mere inability of the subcontractor to pay
wages will not automatically make the principal the
direct employer. It will only make the principal
jointly and severally liable with the subcontractor for
payment of the employees' wages to the extent of the
work performed under the contract.
The second type of liability, which arises from the
third and fourth paragraphs of Article 106, is absolute
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and direct. This liability arises when there is labor-
only contracting as defined in D. O. No. 3. In such
cases, the principal shall be responsible to the
workers in the same manner and extent as if it
directly employed these workers.
15. WHAT DOES NON-IMPAIRMENT OF EXISTING
CONTRACTS MEAN AND WHY IS THIS NECESSARY?
Section 3 of D. O. No. 3 states that rights or benefits
enjoyed by parties in contracts executed prior to D. O.
No. 3 shall not be impaired. The contracts referred to
are those contracts executed and already being
implemented before D. O. No. 3 took effect on 29 May
2001. Accordingly, the obligations, rights and benefits
or parties to any subcontracting arrangement prior to
the effectivity of D. O. No. 3 shall not be diminished,
subject to Articles 106 to 109 of the Labor Code, and
jurisprudence. The non-impairment provision in D. O.
No. 3 is derived from the Constitutional principle
against non-impairment of contracts.
16. UNDER D. O. NO. 10, THERE WAS A REGISTRY
OF SUBCONTRACTORS ESTABLISHED IN DOLE.
WHAT IS THE EFFECT OF REVOCATION ON THIS
REGISTRY?
D. O. No. 3 abolished the DOLE registry of
subcontractors. Thus, there is no more requirement
for subcontractors to register in DOLE.
NO. 3?
D. O No. 10 was revoked in its entirety by D. O. No. 3.
Thus, D. O. No. 10 itself can no longer be cited as an
implementing guideline of the Labor Code provisions
on security of tenure and dismissal of employees.
However, the provisions of D. O. No. 10 on security of
tenure and dismissal are identical with the provisions
of Rule XXIII, D. O. No. 9, series of 1997. These
provisions of D. O. No. 9 are not affected by D. O. No.
3, and, therefore, remain in force relative to security
of tenure and employee dismissal.
18. AFTER THE REVOCATION OF D. O. NO. 10, ARE
THERE PLANS FOR THE FORMULATION OF NEW
GUIDELINES TO IMPLEMENT ARTICLES 106 TO
109?
Yes. D. O. No. 10 was revoked to give government,
workers and employers an opportunity to formulate
a new set of rules that is more responsive to current
employment arrangements and more acceptable to
all concerned. Accordingly, Section 4 of D. O. No. 3
mandates that new guidelines shall be formulated by
DOLE upon prior consultations with all sectors
concerned, particularly the Tripartite Industrial
Peace Council (TIPC) established under Executive
Order No. 49, series of 1998.

The purpose of the DOLE registry of subcontractors is

specific. If a subcontractor enrolls in this registry, it
enjoys the presumption that it is engaged in
legitimate subcontracting. The burden of proving that
it is an illegitimate or an illegal subcontractor will
then be on the person claiming it. With the
revocation, there is no more difference between
DOLE-registered subcontractors and those that are
not.
Abolition of the DOLE registry, however, does not
mean that a subcontractor will no longer register at
all. A subcontractor must still follow the registration
or licensing procedures required in other applicable
laws. For example, a corporation or cooperative
which seeks to operate as a subcontractor should still
register with the Securities and Exchange
Commission or the Cooperative Development
Authority, as the case may be. Likewise, the abolition
of the DOLE registry does not exempt a subcontractor
from
the licensing or permit requirements administered by
relevant regulatory agencies.

17. D. O. NO. 10 CONTAINED PROVISIONS ON

SECURITY OF TENURE AND PROCEDURES FOR
DISMISSAL. HAVE THESE BEEN REVOKED BY D. O.
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ARTICLE 106. Contractor or subcontractor.
Whenever an employer enters into a contract
with another person
- for the performance of the formers
work,
- the employees of the contractor and of
the latters subcontractor, if any, shall be
paid in accordance with the provisions of
this Code.
In the event that the contractor or subcontractor
- fails to pay the wages of his employees in
accordance with this Code,
- the employer shall be jointly and
severally liable with his contractor or
subcontractor to such employees
- to the extent of the work performed
under the contract, in the same manner
and extent that he is liable to employees
directly employed by him.
The Secretary of Labor and Employment may,
- by appropriate regulations,
- restrict or prohibit the contracting-out of
labor to protect the rights of workers
established under this Code.
- In so prohibiting or restricting,
- he may make appropriate distinctions
between labor-only contracting and job
contracting
- as well as differentiations within these
types of contracting
- and determine who among the parties
involved shall be considered the
employer for purposes of this Code,
- to prevent any violation or
circumvention of any provision of this
Code.
There is labor-only contracting where
- 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.
- In such cases,
- the person or intermediary
- shall be considered merely as an agent
- of the employer who shall be responsible
to the workers
- in the same manner and extent as if the
latter were directly employed by him.
ARTICLE 107. Indirect employer.
The provisions of the immediately preceding
article
- shall likewise apply to
- any person,
- partnership,
- association or
- corporation
- which, not being an employer,
- contracts with an independent
contractor
- for the performance of any work, task,
job or project.
ARTICLE 108. Posting of bond.
An employer or indirect employer
- may require the contractor or
subcontractor
- to furnish a bond
- equal to the cost of labor under contract,
- on condition that the bond
- will answer for the wages due the
employees
- should the contractor or subcontractor,
as the case may be,
- fail to pay the same.
ARTICLE 109. Solidary liability.
The provisions of existing laws to the contrary
notwithstanding,
- every employer or indirect employer
- shall be held responsible with his
contractor or subcontractor
- for any violation of any provision of this
Code.
- For purposes of determining the extent
of their civil liability
- under this Chapter,
- they shall be considered as direct
employers.
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