Legitimate contracting versus labor-only contracting under the Labor Code

The line between a legitimate contracting arrangement and 'labor-only' contracting is one of the most consequential distinctions in Philippine labor law. If the arrangement is legitimate, the contractor is the employer of the workers and the principal deals with the contractor at arm's length. If the arrangement is labor-only, the contractor is treated as a mere supplier of workers, the principal is treated as the direct employer of those workers, and every obligation the Labor Code puts on an employer — wages, benefits, security of tenure, statutory contributions — falls on the principal. This page explains how the Labor Code draws the line and how solidary liability follows either way.

1. Start with Article 106: the general rule and the definition of labor-only contracting

   Article 106 of the Labor Code provides that whenever an employer enters into a contract with another person for the performance of the former's work, the employees of the contractor and of any subcontractor shall be paid in accordance with the Code. If the contractor or subcontractor fails to pay wages, the employer becomes jointly and severally liable with the contractor to the extent of the work performed under the contract, in the same manner and extent that the employer is liable to its own employees. The same article also defines 'labor-only' contracting as the situation where the person supplying workers to an employer does not have substantial capital or investment in the form of tools, equipment, machineries or work premises, and the workers recruited and placed are performing activities directly related to the principal business of the employer. Where labor-only contracting is found, the person or intermediary is treated as merely an agent of the employer, who is responsible to the workers in the same manner and extent as if the workers were directly employed.

   Presidential Decree No. 442, the Labor Code of the Philippines (as originally enacted 1974, amended), Article 106. Read the source →

2. Article 107 pulls in the indirect employer

   Article 107 of the Labor Code extends the reach of Article 106 to any person, partnership, association or corporation which, not being an employer, contracts with an independent contractor for the performance of any work, task, job or project. The 'indirect employer' concept prevents a principal from avoiding wage liability by inserting a layer between itself and the workers on site. The indirect employer's obligations track the direct-employer obligations that Article 106 imposes, and the principal cannot walk away from unpaid wages by pointing at the contractor.

   Presidential Decree No. 442, the Labor Code of the Philippines (as originally enacted 1974, amended), Article 107. Read the source →

3. Article 108 lets the principal require a bond

   Article 108 of the Labor Code allows an employer or indirect employer to require the contractor or subcontractor to furnish a bond equal to the cost of labor under the contract, on the condition that the bond will answer for the wages due the employees should the contractor fail to pay. The bond is a protective mechanism the principal may build into the service contract itself; it does not replace the joint-and-several liability that Articles 106, 107 and 109 impose, but it gives the principal a source of recourse if the contractor defaults.

   Presidential Decree No. 442, the Labor Code of the Philippines (as originally enacted 1974, amended), Article 108. Read the source →

4. Article 109: solidary liability is the default, not the exception

   Article 109 of the Labor Code makes every employer or indirect employer responsible with the contractor or subcontractor for any violation of any provision of the Code — and, for purposes of determining the extent of their civil liability, they are considered direct employers. The consequence is practical: a worker who is unpaid does not have to pursue only the contractor; the principal is on the same hook. That is why 'we outsourced this to a manpower agency' is not a defence to a wage or benefit claim, whether the arrangement is legitimate contracting or labor-only.

   Presidential Decree No. 442, the Labor Code of the Philippines (as originally enacted 1974, amended), Article 109. Read the source →

5. How the two-part labor-only test is applied in practice

   Article 106 of the Labor Code frames the labor-only test in two elements that have to co-exist: the intermediary lacks substantial capital or investment in tools, equipment, machineries and work premises; and the workers placed with the principal are performing activities directly related to the principal's main business. Where both are present, the principal is treated as the employer. Where neither is present — that is, where the contractor has real capital and equipment, and either performs a job distinct from the principal's core business or exercises actual control over its workers — the arrangement is legitimate. The test is Article 106 first; every implementing rule the Secretary of Labor and Employment issues under this Article traces back to that statutory text.

   Presidential Decree No. 442, the Labor Code of the Philippines (as originally enacted 1974, amended), Article 106. Read the source →