Gray areas in Dole Order 174

Finally, after several false starts, the Department of Labor and Employment (Dole) issued Department Order No. 174 which aims to fulfill President Duterte’s campaign promise to eliminate “endo” or illegal job contracting.

Although the business sector was generally amenable to the order, it warned of loss of jobs in small and medium enterprises that might not be in a position to comply with it.

The militant labor organizations said the order fell short of their expectations and only legitimized a decades-old arrangement that deprives the workers of their right to security of tenure and financial stability.

Except for the provisions on prohibited contracting or subcontracting practices, the order is a virtual primer on the registration and regulation of labor contractors.

Among others, the contractor is required to have “substantial capital to carry out the job farmed out by the principal on his account, manner and method, investment in the form of tools, equipment, machinery and supervision.”

If the contractor is a corporation, partnership or cooperative, “substantial capital” means at least P5 million in paid-up capital stock or shares. If it is a single proprietorship, its net worth should be at least P5 million.

No explanation has been given for the P5 million floor. It is reasonable to assume that the said amount is considered sufficient for the contractors to meet the obligation to pay their employees’ employment benefits, e.g., service incentive leave, 13th month pay and, in case the service agreement is terminated for any reason, severance pay.

But the order is unclear about the time frame for the P5 million. Should it be present only at the time the service agreement with the principal is entered into? Or should it subsist during the life of the agreement?

Let us assume the contractor has a paid-up capital or net worth of P5 million on the day it signed the service agreement, but six months later, due to mismanagement, its resources are dissipated and it is forced to borrow P1 million to maintain its operations.

Does the contractor cease to be a legitimate contractor and become a labor-only contractor that is prohibited by the order? Is failure to maintain the minimum capital requirement a justifiable ground for the principal to cancel the service agreement?

The latter situation could be problematic to the principal because the order states that in a labor-only contracting arrangement, the principal shall be deemed the direct employer of the contractor’s employees and therefore liable for the payment of their employment benefits.

If the P5 million is for the benefit or protection of the contractor’s employees, then it should be in place for as long as the agreement is in effect and should not be treated as an introductory requirement.

Otherwise, it would be easy for fly-by-night contractors to register as legitimate contractors by simply presenting a bank certificate showing that the said amount has been deposited as paid-up capital, but the money is withdrawn after the certificate of registration has been issued.

The order also failed to address an issue that is closely related to job contracting—outsourcing or the practice of contracting out to third parties certain activities that are not considered “core” business but are beneficial or advantageous to the business entity.

Unlike the common method of labor contracting where the contracted employees work in the principal’s premises, the subject activities in outsourcing are performed elsewhere or in the work area of a third party.

For example, a company that manufactures consumer products decides, as a cost-cutting measure, to let go of its regular employees who encode sales transactions and collect payments from customers, and passes on those activities to a company that specializes in sales recording and credit and collection services.

Will this action be considered a form of labor contracting and therefore covered by the order? Or will it be treated in the same manner that security and janitorial services are allowed to be outsourced to security guard and maintenance service companies?

A lot of issues still have to be resolved in the effort to meet President Duterte’s campaign promise.

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