Summary of Laws on Job Contracting and Labor-Only Contracting (ENDO)

Under the general rule set our in the first and second paragraphs of Article 106, an employer who enters into a contract with a contractor for the performance of work for the employer, does not thereby create an employer-employee relationship between himself and the employees of the contractor. Thus, the employees of the contractor remain the contractor's employees and his alone. When a contractor fails to pay the wages of his employees in accordance with the Labor Code, the employer who contracted out the job to the contractor becomes jointly and severally liable with his contractor to the employees of the latter "to the extent of the work performed under the contract" as if such employer were the employer of the contractor's employees. The law itself, in other words, establishes an employer-employee relationship between the employer and the job contractor's employees for a limited purpose, i.e., in order to ensure that the latter get paid the wages due to them.(G.R. No. L-66598, December 19, 1986)

In order to be considered as a job contractor it is enough that a contractor has substantial capital. In other words, once substantial capital is established it is no longer necessary for the contractor to show evidence that it has investment in the form of tools, equipment, machineries, work premises, among others. The rational for this is that Article 106 of the Labor Code does not require that the contractor possess both substantial capital and investment in the form of tools, equipment, machineries, work premises, among others. (G.R. No. 97008-09, July 23, 1993)

It was not enough to show substantial capitalization or investment in the form of tools, equipment, machinery and work premises, etc., to be considered an independent contractor. In fact, jurisprudential holdings were to the effect that in determining the existence of an independent contractor relationship, several factors may be considered, such as, but not necessarily confined to, whether the contractor was carrying on an independent business; the nature and extent of the work; the skill required; the term and duration of the relationship; the right to assign the performance of specified pieces of work; the control and supervision of the workers; the power of the employer with respect to the hiring, firing and payment of the workers of the contractor; the control of the premises; the duty to supply premises, tools, appliances, materials and labor; and the mode, manner and terms of payment. (G.R. No. 126586, February 2, 2000)

The test to determine the existence of independent contractorship is whether one claiming to be an independent contractor has contracted to do the work according to his own methods and without being subject to the control of the employer, except only to the results of the work.

In legitimate job contracting, the law creates an employer-employee relationship for a limited purpose, i.e., to ensure that the employees are paid their wages. The principal employer becomes jointly and severally liable with the job contractor only for the payment of the employees' wages whenever the contractor fails to pay the same. Other than that, the principal employer is not responsible for any claim made by the employees. (G.R. No. 154715, December 11, 2003)

The first two paragraphs of Article 106 set the general rule that a principal is permitted by law to engage the services of a contractor for the performance of a particular job, but the principal, nevertheless, becomes solidarily liable with the contractor for the wages of the contractor's employees. The third paragraph of Article 106, however, empowers the Secretary of Labor to make distinctions between permissible job contracting and "labor-only" contracting, which is a prohibited act further defined under the last paragraph. A finding that a contractor is a "labor-only" contractor is equivalent to declaring that there is an employer-employee relationship between the principal and the employees of the supposed contractor, and the "labor-only" contractor is considered as a mere agent of the principal, the real employer.(G.R. No. 159668, March 7, 2008; G.R. No. 157656, November 11, 2005; G.R. Nos. 79004-08, October 4, 1991)
This trilateral relationship under a legitimate job contracting is different from the relationship in a labor-only contracting situation because in the latter, the contractor simply becomes an agent of the principal; either directly or through the agent, the principal then controls the results as well as the means and manner of achieving the desired results. In other words, the party who would have been the principal in a legitimate job contracting relationship and who has no direct relationship with the contractor's employees simply becomes the employer in the labor-only contracting situation with direct supervision and control over the contracted employees.

The law allows contracting and subcontracting involving services but closely regulates these activities for the protection of workers. Thus, an employer can contract out part of its operations, provided it complies with the limits and standards provided in the Code and in its implementing rules. (G.R. No. 184977, December 7, 2009)

Clearly, the law and its implementing rules allow contracting arrangements for the performance of specific jobs, works or services. Indeed, 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. (G.R. No. 160506, March 9, 2010)

"Where 'labor-only' contracting exists, the Labor Code itself establishes an employer-employee relationship between the employer and the employees of the 'labor-only' contractor." The statute establishes this relationship for a comprehensive purpose: to prevent a circumvention of labor laws. The contractor is considered merely an agent of the principal employer and the latter is responsible to the employees of the labor-only contractor as if such employees had been directly employed by the principal employer (G.R. No. 160506, March 9, 2010)

The job of forwarding . . . consists not only of a single activity but of several services that complement one another and can best be viewed as one whole process involving a package of services. These services include packing, loading, materials handling and support clerical activities, all of which are directed at the transport of company goods, usually to foreign destinations.

It is in the appreciation of these forwarder services as one whole package of inter-related services that we discern a basic misunderstanding that results in the error of equating the functions of the forwarders' employees with those of regular rank-and-file employees of the company. A clerical job, for example, may similarly involve typing and paper pushing activities and may be done on the same company products that the forwarders' employees and company employees may work on, but these similarities do not necessarily mean that all these employees work for the company. The regular company employees, to be sure, work for the company under its supervision and control, but forwarder employees work for the forwarder in the forwarder's own operation that is itself a contracted work from the company. The company controls its employees in the means, method and results of their work, in the same manner that the forwarder controls its own employees in the means, manner and results of their work. Complications and confusion result because the company at the same time controls the forwarder in the results of the latter's work, without controlling however the means and manner of the forwarder employees' work. (G.R. No. 186965, December 23, 2009)

[I]n Azucena's The Labor Code with Comments and Cases, there are three parties in a legitimate contracting relationship, namely: the principal, the contractor, and the contractor's employees. In this trilateral relationship, the principal controls the contractor and his employees with respect to the ultimate results or output of the contract; the contractor, on the other hand, controls his employees with respect, not only to the results to be obtained, but with respect to the means and manner of achieving this result. This pervasive control by the contractor over its employees results in an employer-employee relationship between them. (G.R. No. 184977, December 7, 2009)

This trilateral relationship under a legitimate job contracting is different from the relationship in a labor-only contracting situation because in the latter, the contractor simply becomes an agent of the principal; either directly or through the agent, the principal then controls the results as well as the means and manner of achieving the desired results. In other words, the party who would have been the principal in a legitimate job contracting relationship and who has no direct relationship with the contractor's employees, simply becomes the employer in the labor-only contracting situation with direct supervision and control over the contracted employees. As Azucena astutely observed: in labor-contracting, there is really no contracting and no contractor; there is only the employer's representative who gathers and supplies people for the employer; labor-contracting is therefore a misnomer. (G.R. No. 184977, December 7, 2009)