Short answer. Yes, it is one of the key factors. If your agency lacks substantial capital or investment in tools, equipment, or work premises, and you perform activities directly related to the client's principal business, the arrangement can be treated as labor-only contracting, with the agency considered merely an agent of the client.
What the law says
There is "labor-only" contracting where the person supplying workers to an employer does not have substantial capital or investment in the form of tools, equipment, machineries, work premises, among others, and the workers recruited and placed by such person are performing activities which are directly related to the principal business of such employer.
Labor Code, Article 106 — Contractor Or Subcontractor. Read the full provision →
Two conditions define labor-only contracting together
Article 106 defines labor-only contracting around two elements that go together: the supplier of workers lacking substantial capital or investment in tools, equipment, machinery, or work premises, and the workers performing activities directly related to the principal business of the client. Neither element alone is what the article describes — it is the combination that defines this kind of arrangement.
Why the connection to the client's main business matters
Work that is directly related to the principal business of the client points toward the agency functioning less like an independent business supplying a distinct service, and more like a conduit supplying labor for the client's own core operations. Article 106 treats this closeness to the client's main business as a meaningful sign of the underlying nature of the arrangement, alongside the capital question.
What happens when labor-only contracting is found
If an arrangement fits this description, Article 106 states that the person or intermediary shall be considered merely as an agent of the employer, who is then responsible to the workers in the same manner and extent as if the latter were directly employed by him. In effect, the client company takes on the responsibilities of a direct employer rather than the arrangement being treated as genuine contracting.
This is separate from the wage-payment liability rule
Article 106 also makes an employer jointly and severally liable with a contractor or subcontractor for unpaid wages, up to the extent of the work performed, regardless of whether the arrangement is labor-only contracting. That wage-liability rule applies more broadly to contracting arrangements generally; the labor-only classification described above is a distinct question about how the underlying relationship itself is characterized, with real consequences that reach well beyond the narrower question of unpaid wages alone.
The client does not have to be your direct employer to be covered
This framework is not limited to companies that are technically the workers' employer. A separate provision extends the same rules to any person, partnership, association, or corporation that, without itself being an employer, contracts with an independent contractor for work to be performed — treated the same way an actual employer would be. And more broadly, an employer or indirect employer found responsible under this chapter is held solidarily liable with the contractor or subcontractor for violations of the Labor Code, and is treated as a direct employer for purposes of that civil liability.