Will ending contractualization be bad for business?

Promising to end contractualization or 5-6 month work contracts in his first 100 days in office was a hallmark of President Rodrigo Duterte’s campaign.

So much so that during his first few days as President, he immediately gave instructions to the Department of Labor and Employment to abolish “endo” or end-contract as it is more popularly known.

There was an almost immediate and widespread reaction from the business sector.

Many asserted that ending contractualization will spell disaster for business and the Philippine economy.

Just last year, the Philippine Institute for Development Studies released a paper authored by Vicente Paqueo and Aniceto Orbeta issuing grave warnings about how ending temporary employment contracts or TECs will not only hurt business but argued that it is not even favored by workers affected by it.

But are these doom and gloom warnings really warranted? Will ending contractualization and providing more secure and permanent jobs to a significant percentage of the Philippine labor sector spell disaster for our economy?

For the purposes of this article, we are using the term contractualization or “endo” to mean work that is limited to 5-6 months contracts that do not provide statutory benefits and security of tenure.

Proponents of TECs argue that contractualization is necessary because not all work is needed year round as in the case of seasonal workers in agriculture or when there is a temporary surge in business which requires additional workers.

Although it is true that there are types of work that are seasonal, what we are seeing in the Philippine business context is that this argument is being applied even in positions that are needed all year round.

When our company, Human Nature, first ventured into retail distribution, we were faced with the choice of employing manpower agencies or hiring our own merchandisers.

We quickly learned that in this industry, merchandisers are only on five- month contracts, after which they are let go and re-hired or let go altogether to find work somewhere else.

Given the existing practices in this industry, we decided to hire our own merchandisers knowing that they are integral to the success of our retail business.

Because our merchandisers are regularized, we are able to train them better. We don’t have to incur the cost of training new workers every five months which impacts our business positively.

They are also able to build better relationships with our retail partners and are more confident to make decisions on the floor because of their experience.

Another industry where we believe that contractualization should be limited and more strictly regulated is in the manufacturing sector.

When we first opened our cosmetic manufacturing facility, we were surprised to find out that many of our applicants had been contractual for years. Peds was one of our most experienced production workers operating complicated machines, measuring raw materials and following detailed and quite complex manufacturing instructions on his own.

Prior to joining Human Nature, he had been on six-month contracts for the past 14 years with other companies without getting regularized or receiving any of the basic benefits.

His job, like many other jobs in the manufacturing sector, is needed all year round and requires technical skills and experience.

Without him and the likes of him, we wouldn’t have the quality products that are the lifeblood of the company and it is only right that we show appreciation for the value that he provides.

Common arguments

High cost of regularizing employees. Many from the anti-endo camp argue that many businesses will die if government mandates that contractualization be abolished.

They say it will hit the small and medium sized enterprises and many of them will not be able to afford regularizing employees.

First of all, truly viable and sustainable businesses should have a clear path towardregularization with the costs of full time employment factored into their operating expenses.

Salaries and taxes should be part of operating expenses and any business person worth his salt should be able to factor in those costs and still be profitable over time.

Low productivity of regularized employees. Another common argument against regularizing staff, which I often hear from business owners, is that employees turn lazy and only deliver the bare minimum once they are regularized.

Even if we base these conclusions on human weakness, there are ways to ensure employee performance.

What has worked really well for us is having an evolved and involved human resources team.

I say evolved and involved because they aren’t just concerned with the usual HR functions such as compensation and benefits but have extended their services to teaching life skills and providing counseling services to our people.

As a social enterprise with a majority of the staff coming from disadvantaged backgrounds, Human Nature currently has 10 full time HR staff for our 433 employees, which gives us a ratio more than double that of the setup of a traditional for-profit businesses. Some might argue this is not cost effective but we have seen the investment pay off in the productivity of our staff.

The accuracy hit rate for our warehouse team is 99.85 percent which is at par or even higher than many warehouses in the UK where my co-founder first had logistics operations. Because of a strict but compassionate manager who exercises tough love on his team supported by a highly involved and innovative HR team, the warehouse staff has been hitting their targets and showing high productivity which has helped make our company profitable for the past eight years.

Five months is enough time for a worker to do well in his job. Another common belief among employers is that within five months, a worker should be able to do well in his job and no longer make any mistake.

As a social enterprise, we deliberately hire people from the low-skilled, marginalized sectors not because that kind of labor is cheap but because we want to provide dignified work and opportunities to those among us who need it most.

On average, based on our experience for the past eight years, it takes about eight months for the truly stellar performers to achieve proficiency in their tasks while the normal recruits take one to two years to truly shine.

The quality of education and training in our country is still not at the level to make our people job-ready even among those who graduate from college.

Given that the majority of the workforce only achieve high school level leaves us with low-skilled workers.

While the government is still trying to solve this training and job-readiness gap, we have taken it upon ourselves to do the bridging and train our people to become productive contributors to society.

Management prerogative to terminate underperforming employees. Many employers complain that regularized employees are almost impossible to fire given the conditions of termination in the Labor Code of the Philippines.

But when you look closely at what the law says, it is very easy to comply with the conditions of firing for as long as there is just cause or authorized cause and for as long as procedural due process is observed.

This again points to having a good HR team or the business owner having the knowledge and conscientiousness to follow the law.

When employees know that the company cares about them and their welfare and that the employer genuinely wants them to do well, they give the best of themselves and go over and beyond the call of duty in order to help the company succeed.

Job opportunities for low-skilled workers will be gone if TECs are abolished. Perhaps one of the strongest arguments for maintaining the status quo is that the majority of Philippine workers who are low-skilled will be out of jobs when this model is abolished.

In reality, the need for workers will still remain the same. It is just the relationship between employers and workers that will change.

There are already models that are an improvement to the current system (no tenure and no benefits) with more progressive manpower agencies employing their workers that are seconded to their client companies full-time, providing them security and benefits.

In this model, companies do not have to absorb the overhead costs of additional people but the workers are also provided with secure employment from their agencies.

The bolder move would be for companies themselves to employ the people that they need to fill in permanent positions year-round and provide the robust human resource support that low-skilled workers need in order to develop.

Unique challenges

Another major point being put forward by the proponents of temporary employment contracts in industries such as retail merchandising and manufacturing is that the practice filters out workers who do not make the cut.

And since the Philippines has such a massive pool of low-skilled, cheap labor, contractualization basically legitimizes having a disposable workforce that allows business owners to keep their labor costs rock-bottom low.

Economists further assert that contractual arrangements will create the most jobs and address unemployment, a sentiment echoed by many business owners who say that inclusive growth can be achieved through job creation regardless of the quality of those jobs.

But not all jobs are created equal and temporary employment contracts in positions that are needed all year round and are integral to business are in a way a form of legal exploitation or an extractive economic practice meant to benefit only the business owners.

To be very honest, it is not easy to employ low-skilled workers or anyone from the poor which is why I understand why many business owners prefer not to take them on permanently.

The poor often have a limiting mindset of what they can and cannot do, they lack self-confidence and initiative, they have a low sense of quality and mediocre standards and often allow personal problems to affect their performance at work. Having said all these, our experience has shown that if we, as business owners are genuinely sincere about promoting inclusive growth, we need to take on these challenges that come with hiring from the poor and take responsibility of developing them from low-skilled, unproductive workers to highly skilled, valuable and contributing members not just to our company but to our society as a whole.

One will be surprised to find that achieving this would be the most fulfilling goal of all and the ripple effects to the economy would be one of shared and sustainable prosperity for all.

If we really want to build a middle class in the Philippines, that middle class can only come from the people who are poor today.

That Human Nature has managed to move hundreds of workers from abject poverty to the new middle class by regularizing them and giving them real hope proves that the only thing to fear, is fear itself.