This document defines contracting and subcontracting as an arrangement where a principal outsources a job to a contractor within a set time period, whether completed on or off the principal's premises. It establishes guidelines for contractual relationships and protections for contractual employees, including enforcing labor standards, social security benefits, and the right to organize. Labor-only contracting is prohibited, and the principal can be held jointly liable with the contractor for violations of labor laws.

1. CONTRACTING
AND
SUBCONTRACTING

2. Definition of Terms:
• Contracting or Subcontracting – refers to an arrangement
whereby the principal agrees to farm out a job, work or service
to a contractor/subcontractor within a definite period of time
regardless whether the job is completed within or outside the
premises of the principal.
• Contractor/Subcontractor – any person or entity engaged in a
legitimate contracting or subcontracting arrangement.

3. •Contractual employee – employed by a contractor or
subcontractor to perform or complete a job, work or service
pursuant to an arrangement between the contractor and the
principal.
* Principal – any employer who puts out a job, service to a
contractor.

4. Guiding Principle:
Contracting and subcontracting arrangements are
allowed by law and are subject to regulation for the promotion
of employment and the observance of the rights of workers to
just and humane conditions of work, security of tenure, self-
organization, and collective bargaining. Labor-only is
definitely prohibited.
Coverage:
The rules are applicable to all parties of contracting and
subcontracting where employer-employee relationship
exists.

5. Trilateral Relationship
There should be 3 parties involved in the
arrangement – the principal which farms out
a job or service to the
contractor/subcontractor; the
contractor/subcontractor which has the
capacity to independently perform the job or
service; and the contractual employees who
will perform the job or service.

6. Prohibitions against Labor-Only Contracting
(Article 106)
Labor-only contracting shall refer to an arrangement where
the contractor or subcontractor merely recruits and
supplies workers to perform a job for a principal and
these elements are present:
(1) Contractor or subcontractor does not have the substantial
capital or investment which relates to the job to be
performed by the employees hired.
(2) Contractor does not exercise the right to control over the
working performance of the contractual employees.
Right to control implies determining means and
manner of the contractual employee in achieving the
job.

7. Prohibitions
(1) Contracting out a job which is not justified by the
urgent or immediate need of the company/business
and the same results in the termination of regular
employees and reduction of work hours or splitting of
the bargaining unit.
(2) Contracting out of work with a “cabo.” “Cabo” refers
to a person or group of persons or to a labor group
which in the guise of a labor organization, supplies
workers to an employer, with or w/o monetary or
order of consideration whether in the capacity of an
agent of the employer.
(3) Taking advantage of the economic situation or lack of
bargaining strength of the contractual employee or
undermining his security of tenure or basic rights or
avoiding the provisions of regular employment in
instances like :

8. a) Assigning tasks or job to the contractual employees
which are currently performed by regular employees of
the principal or contractor.
b) Requiring the contractual employee to sign, as a
precondition to employment, antedated resignation, a
blank payroll, waiver of labor standards including
minimum wages and social/welfare benefits, or a
quitclaim releasing the principal or contractor from any
liability to future claims
c) Requiring to sign a contract fixing the period of
employment to a term shorter than the contracting
agreement between the principal and the contractor,
unless the last contract is divided into phases in which
different skill are requires. Nevertheless, It should be
known at the time of engagement.

9. (4) Contracting out of a job, work or service through an in-
house agency in which the contractor supplying the labor is
managed, controlled or owned by the principal.
(5) Contracting out a job by reason of a strike or lockout.
(6) Contracting out a job, work or service being performed by
union members when such will interfere with the exercise of
their rights to self-organization.

10. Existence of an Employer-Employee
Relationship (Article 109)
The contractor shall be considered the employer of
the contractual employees. The principal shall be
solidarily liable with the contractor in the event of
any violation of any provision of the Labor Code
i.e failure to pay wages. The principal shall be
deemed the employer of the contractual employee
in the ff. cases:
a. Where there is labor-only contracting or
b. Where the contracting arrangement falls within the
Prohibitions.

11. Rights of Contractual Employees:
• Safe and healthful working conditions
• Labor standards such as service incentive leave, rest days,
overtime pay, holiday pay, 13th month pay and separation
pay
• Social Security and welfare benefits
• Self-organization, collective bargaining and peaceful
concerted action
• Security of tenure

12. Contract between Contractor and
Subcontractor and Contractual
Employee
The contract between contractor/subcontractor shall be in the
ff. terms:
a) The specific description of the job, work or service to be
performed by the contractual employee.
b) The place of work and terms and conditions of
employment, including a statement of the wage rate
applicable to the individual contractual employee.
c) The term or duration of employment.

13. Effect of Termination of Contractual
Employment
In cases of termination of employment prior to the
expiration of the contract between the principal
and the contractor/subcontractor, the right of the
contractual employee to separation pay or other
related benefits shall be governed by the applicable
laws and jurisprudence on termination of
employment. When the contract of the principal
and contractor has ended with the completion of
the contractual employee’s job, the employee shall
not be entitled to a separation pay but will be given
completion bonuses.

14. Enforcement of Labor Standards and
Working Conditions
The Regional Director through his duly authorized representatives
shall:
a) Have the authority to conduct routine inspection of
establishments engaged in contracting/subcontracting.
b) Have access to employer’s records and premises at any
time of the day or night whenever work is being
undertaken therein.
c) Right to question any employee and investigate any fact or
matters necessary to determine violations in the
enforcement of the Labor code.