DOLE issues Department Circular clarifying the scope of application of the New Rules on Contracting and Sub-Contracting

Cruz Marcelo & Tenefrancia, Jun 23, 2017

On 13 June 2017, the Department of Labor and Employment (“DOLE”) issued Department Circular No. 01, Series of 2017 (“D.C. No. 1”) clarifying the scope and application of Department Order No. 174, Series of 2017 (“D.O. No. 174”), otherwise known as the Rules Implementing Articles 106 to 109 of the Labor Code. D.O. No. 174, which was issued last 16 March 2017, effectively superseded D.O. No. 18-A setting the new rules and regulations on contracting and subcontracting.

Notably, D.C. No. 1 clarified and further refined the applicability of D.O. No. 174 as to industry, contractual relationship, and as to persons.

Applicability as to Industry

First, D.C. No. 1 clarifies that D.O. No. 174 does not apply to business entities engaged in Business Process Outsourcing (“BPO”), Legal Process Outsourcing (“LPO”), and Knowledge Process Outsourcing (“KPO”). DOLE clarified that D.O. No. 174 does not contemplate information-technology services which involve an entire business process.

Second, D.C. No. 1 clarifies that D.O. No. 174 does not apply and govern on contracting or subcontracting arrangements in the construction industry which shall continue to be governed by the following:

D.O. No 19, Series of 1993 (Guidelines Governing the Employment of Workers in the Construction Industry);

D.O. No. 13, Series of 1998 (Guidelines Governing the Occupational Safety and Health in the Construction Industry); and

DOLE-DPWH-DILG-DTI and PCAB Memorandum of Agreement-Joint Administrative Order Series of 2011 dealing with coordination and harmonization of policies concerning occupational safety and health in the said industry.

As regards the issue of registration of contractors, the Philippine Contractors Accreditation Board (“PCAB”), pursuant to regulatory powers granted by Presidential Decree No. 1746, Series of 1980, registers all types of contractors and ensures their compliance with DOLE issuances. Thus, contractors licensed by PCAB are not required to register under D.O. No. 174 unless they are also engaged in other contracting or subcontracting arrangements not related to the construction industry. Findings of violation/s of labor or occupational health and safety standards, such shall be coordinated with the PCAB for appropriate action, which may include cancellation/suspension of the violating contractor’s license.

Third, D.C. No. 1 clarifies that D.O. No. 174 is only applicable and relevant to the private security industry insofar as it requires these private security agencies to comply with the registration requirements under D.O. No. 174.

D.C. No. 1 clarifies that contracting or subcontracting arrangements in the private security industry shall be governed by Department Order No. 150, Series of 2016 (Revised Guidelines Governing the Employment and Working Conditions of Security Guards and other Private Security Personnel in the Private Security Industry).

Applicability as to Contractual Relationship

D.C. No. 1 clarifies that D.O. No. 174 does not cover contractual relationships which do not bear the “trilateral relationship” distinct in contracting and subcontracting arrangements. Thus, D.O. No. 174 does not contemplate applicability over contracts of sale or purchase, contract of lease, contract of carriage, contract growing/growership agreement, toll manufacturing, contract of management, operation and maintenance and such other contracts governed by the Civil Code of the Philippines and other special laws.

Applicability as to Persons

D.C. No. 1 clarifies that D.O. 174 does not cover contracting out of work to professionals or individuals with distinctive skills/talents provided that they perform the job or work for the principal.

Analysis

It was imperative on the part of DOLE to issue a clarification as the issuance of D.O. No. 174 sent chilling effect to the employers as DOLE, through its Regional Offices, intensified their inspection and assessment on entities pursuant to the campaign promise of President Rodrigo Duterte to end contractualization. Easy target on these inspections and assessments are the BPOs or in common parlance the “Call Centers”. These BPOs are known for providing support services or business processes for corporations based domestically or abroad.

Even under Articles 106 to 109 of the Labor Code, the services provided by these BPOs or Call Centers fall under legitimate job contracting which is not prohibited. What is prohibited is engaging in contracting and subcontracting for the purpose of circumventing labor standards and preventing the workers to have security of tenure. The BPOs or Call Centers became the subject of inspection and assessment because during heavy or peak season, they engage contractors to provide them with manpower to augment their regular workforce. These workers are employees of the contractors but are deployed in the sites of the principals and more often than not, receive instructions, being evaluated and even subjected to disciplinary action by the principals. These circumstances usually lead to a finding of the existence of prohibited labor-only contracting.

However, with the issuance of D.C. No. 1, some quarters within DOLE are even taking the position that an arrangement wherein these BPOs, LPOs and KPOs engage contractors to supply them workers during heavy or peak season is still not covered and is exempted from the application of D.O. No. 174. It remains to be seen if DOLE will cease and back off from inspecting and assessing these BPOs, LPOs and KPOs including their contractors as the Labor Sector may find D.C. No. 1 a step backward and contrary to the campaign promise of the President.