DEPT. ORDER NO.

18-02

Rules Implementing Articles
106 to 109 of the Labor
Code, as Amended
Guiding Principles
Contracting and subcontracting arrangements are expressly
allowed by law and are subject to regulation for the promotion
of employment and the observance of the rights of workers to
just and humane conditions of work, security of tenure, self-
organization, and collective bargaining.

Laboronly contracting as defined herein shall be prohibited.
Coverage
These rules shall apply to all parties of contracting and
subcontracting arrangements where employer-employee
relationship exists.

Placement activities through private recruitment and place-
ment agencies as governed by Articles 25 to 39 of the Labor
Code are not covered by these rules.
Trilateral Relationship in
Contracting Arrangements
There are three parties involved in contracting arrangements :
The Principal which decides to farm out a job or service to, a
Contractor or sub-contractor which has the capacity to
independently undertake the performance of the job, work
or service , and the Contractual workers engaged by the
Contractor or subcontractor to accomplish the job, work
or service .
Labor - Only Contracting
LOC shall refer to an arrangement where the contractor or
subcontractor merely recruits, supplies or places workers to
perform a job, work or service for a principal, any of the
following elements are present :

1. Contractor or subcontractor does not have substantial capital
or investment to undertake the job, work or service and the
employees recruited/supplied are performing activities which
are directly related to the main business of the principal ;
2. Contractor does not exercise the right to control over the
performance of the work of the contractual employee.
Substantial Capital or
Investment
Refers to capital stocks and subscribed capitalization in the
case of corporations, tools, equipment, implements, machineries
and work premises, actually and directly used by the contractor
or subcontractor in the performance or completion of the job,
work or service contracted out.
Prohibitions
a. Contracting out of a job, work or service when not done in good
faith, not justified by the exigencies of the business, and the same
results in the termination of regular employees and reduction of
work hours or reduction or splitting of the bargaining unit ;

b. Contracting out of work with a cabo ;

c. Taking undue advantage of the economic situation or lack of
bargaining strength of a contractual employee, or undermining
his security of tenure or basic rights, or circumventing the
provisions of regular employment ;
Prohibitions
d. Contracting out of job, work or service through an inhouse
agency ;

e. Contracting out of a job, work or service directly related to
the business or operation of the principal by reason of a
strike or lockout whether actual or imminent ;

f. Contracting out of a job, work or service being performed by
Union members when such will interfere with, restrain or
coerce employees in the exercise of their rights to self-
organization.
Existence of an Employer-
Employee relationship
The contractor /subcontractor shall be considered the employer of
the contractual employees for purposes of enforcing the provisions
of the labor code and other social legislation.

The principal , however, shall be solidarily liable with the contractor
in the event of any violation of any provision of the labor code
including the failure to pay wages.
Existence of an Employer-
Employee relationship
When principal deemed the employer of the contractual
employees

1. Where there is labor-only contracting ; or

2. Where the contracting arrangement falls within the
prohibited activities enumerated
Rights of Contractual
Employees
1. Safe and healthful working conditions ;
2. Labor standards such as service incentive leave, rest days,
Overtime pay, holiday pay ; 13
th
month pay and separation
pay ;
3. Social security and welfare benefits ;
4. Self-organization, collective bargaining and peaceful
concerted actions ; and
5. Security of tenure.
Contracts
Contracts between the contractor/subcontractor and the
contractual employee shall be in writing and shall include
the following terms and conditions :

1. The specific description of the job, work or service to be
performed by the contractual employee ;
2. The place of work and terms and conditions of employment,
including a statement of the wage rate applicable to the
individual contractual employees ;
3. The term or duration of employment, which shall be
co-extensive with the contract of the principal and sub-
contractor, or with the specific phase for which the
contractual employee is engaged
Termination of Contractual
Employment
In cases of termination of employment prior to the expiration
of the contract between the principal and the contractor or
subcontractor, the right of the contractual employee to separation
pay or other related benefits shall be governed by the applicable
laws and jurisprudence on termination of employment,
Registration of Contractors
or Subcontractors
Consistent with the authority of the Secretary of Labor and
Employment to restrict or prohibit the contracting out of labor
through appropriate regulations, a registration system to govern
contracting arrangements and to be implemented by the
Regional Offices .

Failure to register shall give rise to the presumption that the
Contractor is engaged in labor-only contracting .
Duty to produce copy of
contract
The principal or contractor or subcontractor shall be under an
obligation to produce a copy of the contract between the
principal and the contractor in the ordinary course of inspection,
or when directed to do so by the Regional Director or his
authorized representative.

A copy of the contract between the contractual employee and
the contractor shall be furnished the certified bargaining
agent, if there is any.
Annual reporting of
registered contractors
The contractor shall submit in triplicate its annual report using
a prescribed form to the appropriate Regional Office not later
than the 15
th
of January of the following year and shall include:

1. List of contracts entered with the principal during the period;
2. The number of workers covered by each contract ;
3. A sworn undertaking that the benefits from the SSS, HDMF,
ECC , and remittances to the BIR due its contractual
employees have been made during the subject period .


De-listing of contractors or
subcontractors
Subject to due process, the Regional Director shall cancel the
registration of contractors or subcontractors based on any of
the following grounds :

1. Non-submission of contracts between the principal and
contractor or subcontractor when required to do so ;
2. Non-submission of annual reports ;
3. Findings through arbitration that the contractor or
subcontractor has engaged in labor-only contracting and
the prohibited activities ; and
4. Non-compliance with labor standards and working conditions.

Renewal of Registration
All registered contractors or subcontractors may apply for
renewal of registration every three years, and for this purpose
the TIPCs as created under EO 49 shall serve as the oversight
committee to verify and monitor the following :

1. Engaging in allowable contracting activities ;

2. Compliance with administrative reporting requirements.