Quick answer

Contracting or subcontracting of work is allowed in the Philippines, but the law sharply distinguishes legitimate job contracting from prohibited labor-only contracting, because the classification determines who the real employer is. Legitimate (permissible) job contracting exists when a contractor carries on a distinct and independent business and undertakes to perform the job on its own account and responsibility, according to its own manner and method, free from the control of the principal except as to the results; and the contractor has substantial capital or investment in tools, equipment, and the like, and the workers it deploys are performing activities directly related to the contractor's own business. In legitimate contracting, the contractor is the employer of its workers, and the principal's liability is generally solidary only for the workers' wages in case the contractor fails to pay. Labor-only contracting, which is prohibited, exists where the contractor merely supplies workers to an employer and either does not have substantial capital or investment, and the workers perform activities directly related to the principal's main business; or does not exercise the right to control the performance of the work. Where labor-only contracting is found, the law creates an employer-employee relationship between the principal and the contractor's workers, treating the principal as the direct employer of those workers, who are then generally deemed regular employees of the principal, and the labor-only contractor is treated as a mere agent of the principal. The 'right of control' and the presence of 'substantial capital' are the key tests. So legitimate contracting is allowed and keeps the contractor as employer, while labor-only contracting is banned and makes the principal the true employer of the workers.

The Crucial Distinction

Contracting is allowed, but the law distinguishes legitimate job contracting from prohibited labor-only contracting, because it determines who the real employer is.

Legitimate Job Contracting

The contractor runs a distinct, independent business, performs the job on its own account and method (free from the principal's control as to means), and has substantial capital/investment. Here the contractor is the employer; the principal is solidarily liable only for wages if the contractor fails to pay.

Labor-Only Contracting (Prohibited)

Exists where the contractor merely supplies workers and lacks substantial capital (workers doing the principal's main business), or does not control the work. The law then makes the principal the direct employer, the workers become its regular employees, and the contractor is a mere agent.

Practical Takeaways

Frequently Asked Questions

What is the difference between legitimate and labor-only contracting? In legitimate job contracting, the contractor runs an independent business with substantial capital and controls the work, and is the employer of its workers. In labor-only contracting, prohibited by law, the contractor merely supplies workers without substantial capital or control.

What happens if labor-only contracting is found? The law creates an employer-employee relationship between the principal and the contractor's workers. The principal becomes the direct employer, the workers are generally deemed its regular employees, and the contractor is treated as a mere agent.

What are the tests for legitimate contracting? That the contractor carries on a distinct and independent business, has substantial capital or investment, performs the work on its own account and method free from the principal's control except as to results, and its workers do activities related to the contractor's own business.

Is the principal ever liable in legitimate contracting? Yes, but generally in a limited way. In legitimate contracting, the principal is solidarily liable with the contractor for the workers' wages if the contractor fails to pay them.

This commentary is for general informational purposes only and does not constitute legal advice. For guidance specific to your situation, please consult a licensed attorney.

If you have questions about your rights or options under Philippine law, our firm is available to assist. You may reach us via Viber or WhatsApp, call us at 0995 433 5550, or send an email to vivasnobles@gmail.com. We look forward to hearing from you.