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OUTSOURCING AGREEMENTSHOW TO LEGALLY CONTRACT OUT WORK
©2015, Atty. Jericho B. del Puerto. All rights reserved. For permissions to use this material, send a request to this e-mail address: [email protected]
“”
Outsourcing is a valid and legal business strategy.
- ATTY. JERICHO B. DEL PUERTO
Business Lawyer & Legal ConsultantJDP Consulting Ltd. Co.
Business Law ProfessorSan Beda Graduate School of Business
Book Author, Legal Aspects of BusinessCentral Books Publishing
What is outsourcing?
Legitimate job contracting or subcontracting refers to “an arrangement whereby a principal agrees to put out or farm out
with the contractor or subcontractor the performance or completion of a specific job, work, 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.”
Babas v. Lorenzo Shipping Corporation, G.R. No. 186091, 15 December 2010
Outsourcing = legitimate job contracting
What is the basis foroutsourcing?
The right to outsource is a valid exercise of
business judgment or management prerogative.
Courts are prohibited from interfering with business judgment unless otherwise allowed by law.
BPI Employees Union-Davao City-FUBU v. Bank of the Philippine Islands, G.R. No. 174912, 24 July 2013
Outsourcing is valid only to anIndependent Contractor
“The law and its implementing rules allow contracting arrangements for the performance of specific jobs, works or services. Indeed, it is management prerogative to farm out any of its activities, regardless of whether such activity is peripheral or core in nature. However, in order for such outsourcing to be valid, it must be made to an independent contractor because the current labor rules expressly prohibit labor-only contracting.”
Digital Telecommunications Philippines v. Digitel Employees Union, G.R. No. 184903-04, 10 October 2012
What are the requirements for an independent contractor?
Independent
The contractor carries on a distinct and independent business and undertakes the contract work on his account under his own responsibility according to his own manner and method, free from the control and direction of his employer or principal in all matters connected with the performance of his work except as to the results thereof.
Substantial Capital
The contractor has substantial capital or investment in the form of tools, equipment, and machinery necessary in the conduct of its business.
Labor rights
The agreement between the principal and the contractor or subcontractor assures the contractual employees' entitlement to all labor and occupational safety and health standards, free exercise of the right to self-organization, security of tenure, and social welfare benefits.
How do you know if one is an independent contractor?
The test of independent contractorship is “whether one claiming to be an independent contractor has contracted to do the work
according to his own methods and without being subject to the control of the employer, except only as to the results of the work.”
Polyfoam-RGC International Corporation v. Concepcion, G.R. No. 172349, 13 June 2012.
What if those requirements are not followed?
If the requirements for legitimate job contracting are not met, then there is a labor-only contracting set-up.
NB: It is the contractor, not its employees, who have the burden of proof that it has substantial capital, investment, and tool to engage in job contracting.
Coca-Cola Bottlers Phils. v. Agito, G.R. No. 179546, 13 February 2009
What is labor-only contracting?
Labor-only contracting refers to “an arrangement where the contractor or subcontractor merely recruits, supplies or places
workers to perform a job, work or service for a principal, and any of the [labor-only contracting] elements are present.”
Labor law expressly prohibits labor-only contracting.
OMNIBUS RULES IMPLEMETING THE LABOR CODE, Section 5, Rule VIII-A, Book III; See also Digital Telecommunications Philippines v. Digitel Employees Union, G.R. No. 184903-04, 10 October 2012
What are the elements of labor-only contracting?
No substantial capital The contractor or
subcontractor does not have substantial capital or investment to actually perform the job, work, or service under its own account and responsibility
Activities on main business The employees recruited,
supplied, or placed by such contractor or subcontractor perform activities which are directly related to the main business of the principal.
What are the consequences for labor-only contracting?
Solidary liability Principal and labor-only
contractor are solidarily liable for the latter’s employees "to the extent of the work performed under the contract, in the same manner and extent that [the principal] is liable to employees directly employed by [them]."
Agency relationship The labor-only contractor will
be considered merely as an agent of the principal.
How do you avoid such liabilities?
Management should observe best legal practices to avoid such consequences and liabilities.
Best legal practices are best practices with legal compliance. For employment, they are sourced from labor laws, rules & regulations,
jurisprudence, and best practices.
What are these best legal practices for outsourcing?
In General
Avoid control over the work.
Ensure that the independent contractor has a legitimate business, sufficient capital and workforce, and has a good track record.
Stipulate on no employer-employment relationship.
Pay the service fees of the independent contractors.
Require a performance bond to cover for employment-related liabilities.
1. Avoid control over work
“The control test is the most important test our courts apply in distinguishing an employee from an independent contractor. This test is based on the extent of control the hirer exercises over a worker. The greater the supervision and control the hirer exercises, the more likely the worker is deemed an employee. The converse holds true as well – the less control the hirer exercises, the more likely the worker is considered an independent contractor.”
Never exercise control over the means and methods of the work.
Provide guidelines regarding the work and results in the contract.
Sonza v. ABS-CBN Broadcasting Corporation, G.R. No. 138051, 10 June 2004.
2. Independent contractor has to have a legitimate business
“The contractor or subcontractor carries on a distinct and independent business and undertakes to perform the job, work or service on its own account and under its own responsibility according to its own manner and method, and free from the control and direction of the principal in all matters connected with the performance of the work except as to the results thereof.”
The independent contractor must have a distinct and independent business.
If the independent contractor is one person, he/she may either be a talent or a professional who conducts his/her own business.
If the independent contractor has employees, he/she should have a business that can support such workforce.
Sasan, Sr. v. NLRC, G.R. No. 176240, 17 October 2008.
3. Stipulate on no employer-employment relationship
“Individuals with special skills, expertise or talent enjoy the freedom to offer their services as independent contractors. The right to life and livelihood guarantees this freedom to contract as independent contractors. The right of labor to security of tenure cannot operate to deprive an individual, possessed with special skills, expertise and talent, of his right to contract as an independent contractor. An individual like an artist or talent has a right to render his services without any one controlling the means and methods by which he performs his art or craft.”
Clearly and expressly stipulate in the agreement that there is no employer-employment relationship.
Require representations and declarations as to special skills, expertise, and talent.
Sonza v. ABS-CBN Broadcasting Corporation, G.R. No. 138051, 10 June 2004.
4. Pay the service fees of the independent contractors
“In legitimate job contracting, an independent contractor undertakes to perform work on its own account, under its own responsibility and according to its own manner and method, free from the control and direction of the principal. No employment relationship arises between its employees and the principal. Consequently, the said employees can claim separation pay only from the independent contractor, and not from the principal.”
Service fees, not wages, are paid to contractors.
No government contributions, such as SSS, Philhealth, or Pag-IBIG.
Philippine Airlines, Inc. v. NLRC, Asuncion, G.R. No. 125792, 09 November 1998.
5. Require performance bond
“In the event that the contractor or subcontractor fails to pay the wages of his employees in accordance with this Code, the employer shall be jointly and severally liable with his contractor or subcontractor to such employees to the extent of the work performed under the contract, in the same manner and extent that he is liable to employees directly employed by him. ”
Require a performance bond to cover for employment-related liabilities.
In the alternative, agree to a deposit or other form of security for the same purpose.
LABOR CODE, Article 106.
Have there been cases when outsourcing was the
issue in labor cases?
Yes, there are numerous Supreme Court Decisions or Jurisprudence wherein company policies were used either for or against the
employer.
Jurisprudence or Supreme Court Decisions…
GENERAL The presumption is
that a contractor is a labor-only contractor unless such contractor overcomes the burden of proving that it has substantial capital, investment, tools and the like.
- 7K Corporation v. NLRC, Corona, G.R. No. 148490, 22 November 2006
IN FAVOR
A contractor which had P1M capital stock subscribed and paid for was considered an independent contractor.
- Neri v. NLRC, Far East Bank & Trust Company, G.R. No. 97008-09, 23 July 1993
AGAINST
A contractor without substantial capital and its employees doing work related to main business of principal was considered a labor-only contractor.
- Coca-Cola Bottlers Phils. v. Agito, G.R. No. 179546, 13 February 2009
“”
Outsourcing should be made to an independent contractor.
- ATTY. JERICHO B. DEL PUERTO
For more information, contact:
JDP CONSULTING LTD. CO.Call: (+632) 479-5405, Fax: (+632) 479-5401Mobile: (+63) 917-622-0124E-mail: [email protected]: www.jdpconsulting.ph
You may also want to visit:
www.legalaspects.phBusiness Laws & Best Legal Practices
©2015, Atty. Jericho B. del Puerto. All rights reserved. For permissions to use this material, send a request to this e-mail address: [email protected]
