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Career Advice

Prohibitions to Contractual Employment in the Philippines

By Krisha Maclang on July 7, 2015

As we’ve discussed in a previous article, there should be nothing to fear with contractual employment. Philippine law has placed measures that assure contractual employees humane working conditions and other workers’ rights. As long as your employer abides by the law, you shouldn’t have to worry about your working conditions.

We want to shed more light on the legal provisions of Department Order No.18-A, which extensively covers the legal principles governing contracting and subcontracting arrangements. This article will focus on Section 6 and Section 7 of the Department Order, which is all about the prohibitions to contractual employment.

Here are the prohibitions to contractual employment in the Philippines, explained.

Section 6

Under Section 6, labor-only contracting is prohibited. Labor-only contracting is defined by the following elements:

  • The contractor or subcontractor does not have substantial capital or investments in the form of tools, equipment, machineries, work premises, among others and the employees recruited and placed are performing activities which are usually necessary or desirable to the operation of the company, or directly related to the main business of the principal 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; or
  • The contractor does not exercise the right to control over the performance of the work of the employee.

In layman’s terms, this section defines labor-only contracting as a set-up where a labor supplier or recruiter supplies workers to a principal employer but without the necessary tools or enough funds to perform services for the principal. The workers would then perform services that are essential to the business of the principal but the contractor cannot control or supervise the work of the employee.

This set-up necessitates the use of the labor supplier as a “cabo” or middle man to handle the supply of workers to the principal, and at the same time, help the principal avoid responsibility of managing employees.

Employees are then left with the cabo, who doesn’t have a direct hand or funds to shoulder the costs of workers’ wages and benefits. This is to prevent an employer-employee relationship between principal and contract employee, which lets the principal avoid any direct responsibility for manpower and its subsequent labor cost.

This arrangement benefits the principal because they are able to benefit from shabby treatment of contractual employees and they don’t have to bear any responsibility for them.

Section 7

Other prohibitions in a contractual employment arrangement:

Contracting out of jobs, works or services when not done in good faith and not justified by the exigencies of the business such as the following:

  • Contracting out of jobs, works or services when the same results in the termination or reduction of work hours or reduction or splitting of the bargaining unit.

    • The hiring of contractual employees should in no way result in the loss of employment, reduction of work hours or the dissolving of an existing union or bargaining unit. Employment under such terms undermines the rights of the employees belonging to the union or bargaining unit.
  • Contracting out work with a “cabo”
    • As previously mentioned, the use of a middle man or cabo in employing contractual employees is illegal because it incapacitates the contractual employee’s right to be managed humanely and compensated fairly by the principal because they are isolated from the employer-employee relationship.
  • Taking undue advantage of the economic situation or lack of bargaining strength of the contractor’s employees, or undermining their security of tenure or basic rights, or circumventing the provisions of regular employment, in any of the following instances:
    • A common illegal practice in contractual employment in the Philippines is the principals’ abuse of their employees’ economic status. They may threaten their employees’ basic rights or security of tenure or maybe find a loophole wherein they don’t have to grant regular employment to contractual employees under the following terms:
  1. Requiring them to perform functions which are currently being performed by the regular employees of the principal;  It is illegal to require you to perform work that is similar to work being done by a regular employee. It is not fair to employ you under different conditions if you are doing the exact same type of work but don’t get the same benefits.
  2. Requiring them to sign, as a precondition to employment or continued employment, an antedated resignation letter; a blank payroll; a waiver of labor standards including minimum wages and social or welfare benefits; or a quitclaim releasing the principal, contractor or from any liability as to payment of future claims. It is also illegal to ask you, as a condition for employment or job security, to sign a resignation later, a blank payroll, to ask you to waive basic rights such as minimum wages or social/ welfare benefits, or a quitclaim releasing the principal or contractor from any liability. Any action they will undertake to force you to give up your rights or your claim for any liability in exchange for employment is illegal.
  1. Contracting out of a job, work or service through an in-house agency. The use of an in-house agency risks the existence of a cabo as the agency functions as a subcontractor that supplies labor only to the principal employer.
  2. Contracting out of a job, work or service that is necessary or desirable or directly related to the business or operation of the principal by reason of a strike or lockout whether actual or imminent. Hiring contractual employees for work that is essential to the business of the principal employer because of a strike or lockout by unions or bargaining units infringes upon the union’s rights as employees.
  3. 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 as provided by Art. 248 (c) of the Labor Code, as amended. The right to self-organization or to join unions and protests is protected by Philippine law. It is illegal to contract out a job that is performed by union members if it will serve to censor their freedoms or inhibit them from exercising their rights to self-organization.
  4. Repeated hiring of employees under an employment contract of short duration or under a Service Agreement or short duration with the same or different contractors, which circumvents the Labor Code provisions of Security of Tenure. The department order assures security of tenure as one of the rights of contractual employees. Hiring contractual employees repeatedly for a short period or under a service agreement or short duration with the same or different contractors is an illegal loophole designed to cheat employees out of benefits and job security.
  5. Requiring employees under a subcontracting arrangement to sign a contract fixing the period of employment to a term shorter than the term of the Service Agreement, unless the contract is divisible into phases for which substantially different skills are required and this is made known to the employee at the time of engagement. Your employment contract should coincide with the term of the Service Agreement. It is illegal for an employer to force you to sign a contract which fixes your employment to a shorter period. The only exception is if the contract is divisible into phases where substantially different skills are needed per phase and this has been made clear to the contractual employee.
  6. Refusal to provide a copy of the Service Agreement and the employment contracts between the contractor and the employees deployed to work in the bargaining unit of the principal’s certified bargaining agent to the sole and exclusive bargaining agent (SEBA). Principal employers should provide a copy of the service agreement and employee contracts to not only its contractual employees but also to the SEBA or appointed representative of the bargaining unit.
  7. Engaging or maintaining by the principal of subcontracted employees in excess of those provided for in the Collective Bargaining Agreement (CBA) or as set by the Industry Tripartite Council (ITC).
    • A collective bargaining agreement is a written agreement entered into by an employer and a trade union establishing the terms and conditions of the principal’s employment with regard to pay rate, work hours and other relevant conditions. An Industry Tripartite Council ensures that employers and workers are represented by policy-making entities of the government. The council may, from time to time, convene to discuss the adoption of policies that will promote industrial peace and social justice in the face of economic development. Therefore, the CBA and ITC serves to legally regulate working conditions for both employers and employees. If a principal employer employs contractual employees in excess of what is deemed allowable by the ITC and the CBA between employer and trade union, they are hereby breaking the law.

Contracting out of jobs, works or services analogous, to the above when not done in good faith, and not done by the exigencies of the business.

  • Contracting out of jobs or services similar to the above instances, when not done in good faith, is prohibited by the department order.


As you can see, the Labor Code department order covers a pretty wide range of situations that limit the possible abuse of power or use of loopholes by principal employers not only for contractual employees but for unions as well.

While we do reiterate that you shouldn’t have to be afraid of contractual employment, we do encourage you to peruse the legal guidelines provided for this type of employment.

*Please note that while this article aims to give its readers an overview of the terms of contractual employment, it doesn’t replace legal counsel. For case-specific concerns or further help, please consult a lawyer or the Department of Labor and Employment.