Contractualization: Which meaning do we mean?

Contractualizaton is a term not found in the Labor Code and not even in the rules and regulations issued by DOLE. Contractualization therefore has no official or standard definition. The loud public talk to ban contractualization suggests the need to be clear about its different meanings. One meaning is “endo” or end of contract. The other is “deceptive contractorship”. Both are difficult to handle because a wrong action against them can harm business. And what harms business ultimately harms labor by way of withheld investments and decreased job opportunities.
The announced plan to ban contractualization has merits if it means enforcement of the Supreme Court ruling in 1997 in a case involving a well-known food manufacturing company. The ruling struck down as “contrary to public policy” the company’s practice of employing workers batch-by-batch; each batch stays for only five months, to be replaced by the next five-month batch. A quick way to explain this is by quoting from the book Everyone’s Labor Code:

“The court  emphasized that fixed-term employment will not be considered valid, where, from the circumstances, it is apparent that periods have been imposed to preclude acquisition of tenurial security by the employee. If it is shown that that is the purpose of the contract, then it will be declared null and void from the beginning or ab initio. Such periods should be struck down or disregarded as contrary to public policy…”

Following this summarization of the Supreme Court ruling, the author explains: “What [this court ruling] struck down immediately is the all-too-common practice of hiring operating personnel batch-by-batch, each batch under a five-month contract. At the end of the period, the workers will be replaced by the next five-month employees because of “E.O.C.” (end of contract or “endo”). The ruling has the effect (hopefully) of making “5-5-5” and “E.O.C.” things of the past in numerous workplaces.” (2012 edition, p.327; 2015 edition, p. 329)

Unfortunately, after the court’s ruling came out on December 12, 1997, contractualization (a term coined and popularized probably by workers) did not stop. Rather, it spread and multiplied. As far as I know, no DOLE advisory has been issued to inform or to warn employers and employees about the court’s declaration of nullity of the “endo” scheme. And  I am not sure whether the labor inspectors (now called LLCO – labor law compliance officer) have been alerted or instructed to enforce the ruling. Note that the ruling was issued nineteen years ago.

“Endo” is an abusive or corrupted use of the law. But hiring of employees on temporary basis is not altogether illegal where such kind of hiring is really needed by the business. The law allows employment in a project with pre-agreed termination date as well as seasonal employment, and fixed-period employment. Even the hiring of temporary replacements of striking employees is allowed.

The other meaning of contractualization is in the form of “deceptive contractorship”. It is done by hiring a person and making him/her work as an employee but treating him/her as a “contractor”.

A contractor is not an employee and therefore not covered by the Labor Code. Employee status, on the other hand, puts the worker under the Labor Code’s protective umbrella. Supervision or control of the manner, means and details of work execution and even of the worker’s conduct at the workplace, is the hallmark of an employment relationship. By considering an employee as a contractor, the hirer is able to evade the obligations of an employer, such as the SSS registration, payment of Labor Code employment benefits, e.g., holiday pay, 13th month pay, etc.

But contractorship in contrast to employment is not necessarily wrong. Contractorship is often a legitimate pursuit of a particular line of business. The contractor should be government-registered, adequately capitalized to operate independently, and capable of supervising its employees who render a particular line of work to client-contractees. That is the essence of independent contractorship. The contractor, as employer, and its workers, as its employees, are covered by the Labor Code. All the obligations of an employer are on the shoulders of the contractor because a legitimate contractor is himself/itself an employer.

The problem is that there are people who hire people but label them as “contractors” although in fact they are employees. The worker, badly in need of a job, has no choice, but to sign a contractorship contract. In effect, the employee becomes “contractual”.  This is “deceptive contractorship”. It is as reprehensible as the “endo contractualization” but much harder to delineate. To draw the dividing line between employment relationship and contractorship is not at all easy. The difficult task has “bedevilled” the court for decades.

Deceptive contractorship should not be mistaken for independent contractorship which is perfectly legal. This is entrepreneurship, protected and supported by law. It promotes specialization and competition. Striking against deceptive contractorship might mistakely dampen or kill entrepreneurism. (This unwanted damage is the reason, incidentally, why the law on so-called “labor-only contracting” is ill-conceived and retrogressive. It invalidates a two-way business contract and forcibly makes the client-contractee the employer of the contractor’s employees.)

In the 1800s entrepreneural enterprises – small and medium contractors and subcontractors – brought America to the road to progress. Rather than discouraging and punishing small contractors, we should help them grow.

Let us define our terms and be very careful about what we want to happen – and what should not happen.
The writer teaches labor law and has authored five books on the subject. Email: [email protected]