CHANGES TO THE RULES ON LEGITIMATE CONTRACTING UNDER D.O. 174-17

A FIRST LOOK AT DEPARTMENT ORDER NO. 174-17 IMPLEMENTING ARTICLES 106 TO 109 OF THE LABOR CODE

  1. SUBSTANTIAL CAPITAL (Section 3 (l))
  • Substantial Capital has been increased to paid-up capital stock/shares of 5 Million Pesos for corporations, partnerships and cooperatives; in the case of single proprietorship, a net worth of at least 5 Million Pesos

 

  1. ENHANCED MEANING OF LABOR-ONLY CONTRACTING (Section 5)
  • Labor-only contracting has two (2) kinds: (a) where there is lack of substantial capital or investment and the contractor’s employees are performing activities directly related to the main business of the principal; and (b) where the contractor has no power of control over its workers.
  • The first kind has been clarified by the new D.O. so that once it is proven that the contractor has substantial capital, there is no need for it to prove substantial investment. This is consistent with the Neri

Labor-only contracting refers to an arrangement where:

a) i. The contractor or subcontractor does not have substantial capital, or

ii. The contractor or subcontractor does not have investments in the form of tools, equipment, machineries, supervision, work premises, among others,

and

iii.  The contractor’s or subcontractor’s employees recruited and placed are performing activities which are directly related to the main business operation of the principal;

or

b) The contractor or subcontractor does not exercise the right to control over the performance of the work of the employee.

 

  1. OTHER ILLICIT FORMS OF EMPLOYMENT ARRANGEMENTS (Section 6)
  • the new D.O. 174-17 removes the qualifying phrase “when justified by the exigencies of the business,” hence, all of these activities are now absolutely prohibited, no exceptions
  • absolutely prohibits requiring the contractor’s or subcontractor’s employees to perform functions which are currently being performed by the regular employees of the principal

 

  1. NEW MEANING OF PERMISSIBLE CONTRACTING OR SUBCONTRACTING ARRANGEMENTS (Section 8)

Underlined the words or phrases which changes the meaning:

  • The contractor or subcontractor is engaged in a distinct and independent business and undertakes to perform the job or work on its own responsibility, according to its own manner and method;
  • The contractor subcontractor has substantial capital to carry out the job farmed out by the principal on his account, manner and method, investment in the form of tools, equipment, machinery and supervision;
  • In performing the work farmed out, the contractor or subcontractor is free from the control and/or direction of the principal in all matters connected with the performance of the work except as to the result thereto; and
  • The Service Agreement ensures compliance with all the rights and benefits for all the employees of the contractor subcontractor under the labor laws.

 

  1. NEW D.O. REMOVES THE PROVISION THAT THE CONTRACTOR’S EMPLOYEES ARE CO-TERMINUS WITH THE SERVICE AGREEMENT (Section 11)
  • new D.O. removes “co-terminus” employment contracts between contractors and employees

 

  1. EFFECT OF VIOLATION OF THE PROVISIONS ON THE RIGHTS OF CONTRACTOR’S EMPLOYEES AND REQUIRED CONTRACTS (Section 12)
  • this is totally new provision

 

  1. EFFECT OF TERMINATION OF EMPLOYMENT (Section 13)
  • termination of employment of contractor’s employees prior to the expiration of the Service Agreement shall be governed by Articles 297, 298 and 299 of the Labor Code (authorized causes of termination of employment)
  • pre-termination not due to authorized cause, the party at fault will pay the affected workers’ unpaid wages and other unpaid benefits, including unremitted legal mandatory contributions (but their liability is solidary)
  • mere expiration of the Service Agreement shall not be deemed termination of employment
  • after expiration of the Service Agreement, employee has 3 months to decide whether to resign or be reassigned; failure to reassign employee within 3 months entitles him to separation benefits

 

  1. REGISTRATION and RENEWAL FEES (Sections 19 and 21)
  • new D.O. raises the amount of registration fee to Php100,000.00 pesos.
  • Renewal fee is also Php100,000.00 pesos.

 

  1. VALIDITY OF CERTIFICATE OF REGISTRATION (Section 20)

– reduced the validity to two (2) years

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