SOME NOTES ON

CONTRACTING OUT
(2018)

1. Concept/Definition

Contracting out ( also known in business jargon as outsourcing) is a business solution whereby
certain company functions are assigned to outside service providers rather than performed in-
house. It is management prerogative to farm out any of its activities, regardless of whether such
activity is peripheral or core in nature. However, in order for such outsourcing to be valid, it must be
made to an independent contractor because the current labor rules expressly prohibit labor-only
contracting (Alviado vs Procter & Gamble, G.R. No. 160506, 09 March 2010). The most common
examples, in both government and private sectors, is the outsourcing of security services and
janitorial services.

Contracting out in labor law involves three (3) parties: the principal ( client), the service
contractor, and the contractor's personnel deployed to the principal.

In legitimate contracting out ( sanctioned by Arts. 106-109 of the Labor Code), what is
outsourced or farmed out is a specific service, job, or function and not the mere deployment of
personnel. The latter is labor-only contracting, which is supply of labor or manpower only. The
job/independent contractor is supposed to carry out an independent business as indicated by
having substantial capital and investment in equipment necessary to discharge the job. It must
also have control over the means and methods of carrying out the contracted services,
including control over its deployed personnel.

2. Indicators of Job Contracting & Labor-Only Contracting

SC decisions show that it utilizes several factors in determining if the outsourcing is legitimate
or not. In distinguishing between permissible job contracting and prohibited labor-only
contracting, the totality of the facts and the surrounding circumstances of the case are to be
considered.(San Miguel Corporation vs Semillano, GR No. 16425, 05 July 2010). It may even be
the case that a contractor may be found to be a job contractor in one case (e.g.,for janitorial
services) , and a labor-only contractor in another case ( e.,g., supply of production workers to a
manufacturing company). Each case therefore must be judged on the peculiar circumstances
obtaining in every situation.

The main indictors appear to be:

 Substantial capital - Substantial capital refers to capitalization used in the performance or

completion of the job, work or service contracted out (Alviado vs Procter & Gamble, GR No.
160506,09 March 2010). The SC has not set an absolute figure for what it considers
substantial capital for a job contractor, but it measures the same against the type of
work which the contractor is obligated to perform for the principal. (Coca Cola Bottlers
vs Agito, GR 179546, 13 Feb 2009).

 Investment in tools and equipment - The tools, equipment, machineries, and supplies
must refer to those actually and directly used by the contractor in the performance or
completion of the identifiable service or job (eg. trucks for a logistics company), and
does not refer merely the usual office equipment and supplies (like tables, chairs, and

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 computers) necessary for adminstrative and other support functions (San Miguel
Corporation vs Semillano, GR No. 16425, 05 July 2010).

 Specified job, task, or service- . The contrating out arrangement should involve the
farm out of an identifiable job, work, or service for the principal (eg., security or
janitorial job) , and not merely the enumeration of certain kinds of personnel ( e.g.,
extra/ temporary/casual employees or production operators, helpers, etc). Coca Cola
Bottlers vs Agito, GR 179546, 13 Feb 2009.

 Control- This is essentially the same concept of control as element of the four-fold test
used to determine employer-employee relationship. The principal/client may set the
kinds, standards, and parameters of the output of the contracted service but the
contractor must retain the power to control the means and methods by which the job
is to be accomplished. (Vinoyavs NLRC, G.R. No. 126586, 02 February 2000). The
contractor must undertake the contract work on its account, under its own
responsibility, according to its own manner and method, free from the control and
direction of its principal in all matters connected with the performance of the work
except as to the results thereof.

This would mean control over the work performance and conduct of the employees
assigned to the principal. Control over the employees are manifested in various
aspects, including supervison of their work performance ( schedules, assignments,
quality control) and enforcement of discipline. An independent job contractor, which
is answerable to the principal only for the results of a certain work, job, or service need
not guarantee to said principal the daily attendance of the workers assigned to the
latter. An independent job contractor has the discretion over the pace at which the
work is performed, the number of employees required to complete the same, and the
work schedule which its employees need to follow.(Coca Cola Bottlers vsAgito, GR
179546, 13 Feb 2009).

The mere presence within the premises of a supervisor from the contractor does not
necessarily mean that it has control over its members, and that it is an independent
contractor. Other circumstances indicate LOC: the deployed personnel had to undergo
instructions and pass the training provided by the principal's officer ; it was the
principal which determined and prepared the work assignments of the deployed
personnel; the deployed peronel worked alongside regular employees performing
identical jobs.(Dole Philippines vs NLRC, G.R. No. 16115, 30 November 2006)

Similar to the issue on existence of employer-employee relationship, the principle of

control is often decsive in LOC issues. It is the power to control which is the most
crucial and most determinative factor, so important, in fact, that, the other elements
may even be disregarded ( Alilin vs Petron, GR No. 177592, 09 June 2014)

Other indicators include:

 DOLE Registration- The DOLE certificate having been issued by a public officer, it carries
with it the presumption that it was issued in the regular performance of official
duty. But it is not a conclusive presumption. It could be disregarded if the facts indicate
LOC .(Coca Cola Bottlers vsAgito, GR 179546, 13 Feb 2009).

 Service contracts- The character of the business, whether as labor-only contractor or as

a job contractor, is determined by the criteria set by statute and the parties cannot

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 dictate by the mere expedience of a unilateral declaration in a contract the character of
their business.( Petron vs Caberte, G.R. No. 182255, 15 June 2015). Note that the
deployed emplyees are NOT parties to service contracts, and therefore the same are
not binding on them.

 Existence of roster of clients - The existence of a roster of clients may help prove the
status of an independent contractor , since this indicates an independent business. But
the absence of other clients will strongy indicate LOC (San Miguel Corporation vs
Semillano, GR No. 16425, 05 July 2010)

3. Consequence of LOC finding:

If a contractor is found to be an LOC, the personnel deployed to the concerned principal will be
deemed employees of such principal (and therefor entitled to all rights including security of
tenure).The deployed personnel can demand regularization, and even benefits under a CBA ( if
one exists in the principal company). In short, there is employer-employee relationship
between the principal and the deployed personnel.

If the contractor is judged a job/independent contractor, the liability of the principal to the
personnel deployed by the contractor would be limited to the payment of salaries ( including
legislated wage increases) and benefits like 13th month pay and SIL pay under the outsourcing
contract ( it cannot go beyond the contract period, either prior to or subsequent to its end) and
only when the contractor has defaulted on such legal obligation. The principal's recourse would
be to seek reimbursment from the contractor.

In cases of illegal dismissal, the job contractor cannot be held liable for back wages and
separation pay (Rose Wood Processing vs NLRC, GR No. 116476-84, 21 May 1998).

4. Relation to the Endo Issue:

“Endo” refers to illegitimate fixed term employment arrangements ( “555”). It could exist
independent of the LOC issue (i.e., an employer like MY San Biscuits could directly hire
personnel on 5-month contracts, renewable for another 5 months after a brief interval). In the
vast majority of cases however, endo is prevalent in labor-only contracting (i.e., the agency
assigns deployed personnel to particular principals for a fixed term only, and then transfers
them other principals on a similar fixed term basis). Nonetheless, there are also LOC agencies
which regularize their deployed personnel and assign them to specific clients for the entire
duration of the outsourcing contract. PPFALLAR JR. SSCRLaw