Separation pay for contracted labor

Dear PAO,

I am an employee of an agency deployed in a company to which the former has a contract with.

Accordingly, the contract of employer-agency will not be renewed by the company where I am deployed.

Apparently, all of us deployed employees will be absorbed by the incoming agency.

My question is, are we entitled to separation pay since our employment with our present employer-agency will end? Can the principal be liable in the future should the deployed employees, who will eventually be absorbed by the incoming agency, waive the payment of separation pay? If we are entitled to separation pay, how much will be the computation?

J.A. Ligaton

Dear J.A. Ligaton,

Contracting is the agreement whereby a principal agrees with a 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 preformed, or completed within or outside the premises of the principal.

There are two kinds of contractors under the law, the labor-only contractor and the job contractor.
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 persons are performing activities which are directly related to the principal business of such employer. In such cases, the person or intermediary shall be considered merely as an agent of the employer who shall be responsible to the workers in the same manner and extent as if the latter were directly employed by him (Article 105, Labor Code). On the other hand, the Supreme Court in a case (Baguio, et.al. vs. NLRC, 202 SCRA 1565) defined a “job contractor” as someone who carries on an independent business and undertakes the contracted work on his own 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 the work as to the results thereof and who has substantial capital or investment in the form of tools, equipment, machineries, work premises and other materials necessary to conduct the business.

The distinction between a labor-only contractor and a job contractor lies on the fact that the contractor in a labor-only contracting is merely considered as the agent of the employer, who is deemed responsible to the employees to the extent that the latter are its employees. Based on your narration of facts, it is safe to assume that your agency is only a labor-only contractor. From the definition of a labor-only contractor, the workers recruited and placed by the contractor are performing activities, which are directly related to the principal business of the employer. The fact that the new employment agency will absorb you and your co-employees as their employees indicates the fact that your present agency is a labor-only contractor and thus it is not considered as your employer.

Prescinding from the foregoing, we do not see any reason why the said agency should give you a separation pay. Besides, a separation pay is an amount paid to employees who were terminated from their employment because of authorized causes such as, automation, redundancy, retrenchment, closure, or cessation of business of the employer or when the employee has been found to be suffering from an illness which may be prejudicial to that of the employee’s health or to his other co-employees. The separation pay serves as a financial assistance to the employee whose employment has been terminated beyond his control or without fault of his own.

Clearly, in your case it was the contract with the agency, which was not renewed by the employer. It was the agency, which lost an income because of the non renewal of its contract with the principal employer. However, despite the non renewal of the contract, all of you who were initially deployed by the said agency will be absorbed by the incoming agency. Your employment then had not been terminated and there was no ground to warrant the award of a separation pay.

We opted not to discuss further the amount of separation pay you will be receiving and who will be liable to give the same because of the premise that you are not entitled to a separation pay.
We hope that we were able to address your query. –PERSIDA ACOSTA, Manila Times

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