On December 4, 2011, Department of Labor and Employment (DOLE) Department Order No. 18-A (D.O. 18-A), the new Rules Implementing Articles 106 to 109 of the Labor Code of the Philippines, on contracting out of services, became effective.
Contracting is defined as an arrangement whereby a principal agrees to put out or farm out with a contractor the performance or completion of a specific job 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.
Among the more important and substantive developments under D.O. 18-A are the following:
- Coverage – it covers a trilateral arrangement among the principal, the contractor and the latter’s employees. It does not cover the following: a) an individual who is himself an independent contractor; b) the vendor-vendee relationship for entire business processes; c) information technology-enabled services involving entire business processes, e.g. business process outsourcing (BPO), knowledge process outsourcing, legal process outsourcing, hardware and/or software support, medical transcription, animation services, back office operations/support; and d) contractors licensed by the Philippine Contractors Accreditation Board (PCAB) in the construction industry.
- In-house Agency – the definition of an in-house agency was expanded to refer to a contractor which is owned, managed, or controlled directly or indirectly by the principal or one where the principal owns/represents any share of stock, and which operates solely or mainly for the principal. It is prohibited to engage the services of an in-house agency.
- Capitalization/Financial Capacity of Contractors – the concept of “Net Financial Contracting Capacity (NFCC)” was introduced, which refers to the formula to determine the financial capacity of the contractor. NFCC is the current assets minus current liabilities multiplied by K, which stands for contract duration equivalent to: 10 for one year or less; 15 for more than one (1) year up to two (2) years; and 20 for more than two (2) years, minus the value of all outstanding or ongoing projects including the contracts to be started.
“Substantial capital” refers to paid-up capital stocks/shares of at least Three Million Pesos (P3,000,000.00) in the case of corporations, partnerships and cooperatives; and at least 3M Pesos for single proprietorship.
- Labor-only contracting – this is prohibited. It refers to an arrangement where: (a) the contractor does not have substantial capital or investments in the form of tools, equipment, machineries, work premises, among others, and the employees recruited and placed are performing activities which are usually necessary or desirable to the operation of the company, or directly related to the main business of the principal 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; or (b) The contractor does not exercise the right to control over the performance of the work of the employee.
- Service Fee – it is at least 10 percent of the total contract cost.
- Registration – it is mandatory for contractors to register with the DOLE, the failure of which shall give rise to the presumption that the contractor is a labor-only contractor.
- Prohibited Activities – the Order expanded the list of prohibited acts.
- Service Agreement – D.O. 18-A enumerated what should be the contents of a Service Agreement and provided a template for the same.
Prior to the issuance of D.O. 18-A, the coverage was not clear, especially with respect to BPOs. As the Philippines is one of the fastest growing destinations for BPO companies, the issuance of D.O. 18-A is part of the over-all effort to entice investors in this industry. Also, before D.O. 18-A, there were no hard and fast rules in determining whether a contractor is substantially capitalised. Complaints were decided on a case to case basis.
On the whole, the issuance of D.O. 18-A is a welcome development for both management and labour as it tries to clarify issues and concerns regarding the contracting out of services. The purpose of the order is to protect the rights of contractual workers, even as it also seeks to eliminate illegitimate contractors, thereby assuring employers that they deal only with independent and legitimate contractors.
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