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Issues Pertinent to DO 18-A, "The New Rules on Contracting and Sub-Contracting Arrangements"

BusinessWorld, through Atty. Neptali B. Salvanera, raised several issues and questions arising from DO 18-A, “The New Rules on Contracting and Sub-Contracting Arrangements.”

DO 18-A was issued by the Department of Labor and Employment (DOLE) on November 14, 2011 and became effective on December 4, 2011. The Order was an offshoot of the series of deliberations conducted by a trilateral body composed of the government (represented by DOLE), employers and employees. More than a year since it has taken effect, several labor groups still claim that the supposed role of DO 18-A in banning unfair employment is nothing but “an empty promise.”

In his article, Atty. Salvanera raised issues on 1) substantial capitalization/NFCC/service fee; 2) benefits of contractual employees; 3) registration with the DOLE and submission of requirements; 4) cooperatives; 5) in-house agencies and a lot more to revisit the provisions of the Order and establish why there is a need for the legislature to address the issues identified.

Below is the article of the lawmaker, published today, December 12, 2012, on p.4/S1 of BusinessWorld:

Source: BusinessWorld

New Rules on Contracting Arrangements

Pursuant to Article 5 in relation to Articles 106-109 of the Labor Code of the Philippines, the Secretary of the Department of Labor and Employment (DOLE), Rosalinda Baldoz, issued on November 14, 2011 Department Order No. 180A (DO 18-A) or the New Rules on Contracting and Sub-Contracting Arrangements, which became effective on December 4, 2011 following its publication on November 19, 2011 in a newspaper of general circulation. DO 18-A superseded Department Order No. 18-02, the old rules on contracting.

DO 18-A was a product of deliberations conducted by a trilateral body composed of the government, through the DOLE, the employer and employee representatives. It was basically a response to the clamor of labor and management alike for the government to come up with rules defining and protecting the rights of workers in a contracting arrangement and eliminating the so-called fly-by-night contractors.

The laudable purpose of DO 18-A, notwithstanding, there are several issues and questions arising from the Order that need to be tackled and addressed, as follows:

This is by far the most legitimate and pressing concern of contractors under DO 18-A. Prior to the issuance of DO 18-A, there were no fixed rules in determining whether a contractor is substantially capitalized or not. The determination is made on a case to case basis, depending on the circumstances of each case. For instance, in the 1993 case of Neri vs. NLRC, et al (GR Nos. 97008-09, July 23, 1993), the Supreme Court declared as adequate capitalization P1 million which were fully subscribed and paid for.

However, DO 18-A fixed the required capitalization of at least P3 million paid-up capital stocks/shares in the case of corporations, and a net worth of at least P3 million for single proprietorship. Also, DO 18-A requires contractors to show their contracting capacity. The Net Financial Contracting Capacity or NFCC, which refers to the formula to determine the financial capacity of the contractor to carry out the job, work or services sought to be undertaken under a service agreement, must be equal to the total contract cost. Thus, if the contract cost is P10 million, then the NFCC should at least be P10 million also. DO 18-A likewise fixed the administrative fee to be paid to the contractor at 10% of the total contract cost.

Given the stringent requirements on capitalization, it would not be uncommon to see contractors having problems with meeting the required capitalization and NFCC. On the other hand, principals may also be prejudiced because they will be paying an increased service fee of 10%.

DO 18-A assures the contractual employees of the minimum labor standard benefits under the Labor Code, such as service incentive leave, rest days, overtime pay. In addition, they are now entitled to separation pay and retirement benefits. Contractual employees are further assured of their right to self-organization, collective bargaining and peaceful concerted action; and the right to security of tenure, and these should be stated in the service agreement.

This should not be an issue because even without DO 18-A, contractual employees are, by law, entitled to the foregoing benefits and rights. On a practical note, however, contractors now are constrained to comply with the law and more often than not, the cost is passed on to the principal. For example, the grant of separation pay and retirement pay to the contractual employees will necessarily increase the expense of the contractor which it will pass on to the principal.

It is now mandatory for contractors to register with the DOLE and the requirements are stringent. For instance, contractors are required to submit the list of clients, proof of compliance with the capitalization requirement, and certified listing of facilities, equipment, tools, etc. owned or leased.

The objective of the DOLE in requiring strict compliance with the requirements, which is to eliminate the so-called fly-by-night contractors, is laudable; however, even legitimate contractors may find themselves in a difficult situation complying with the capitalization requirements.

One of the more contentious issues when it comes to cooperatives is the legal issue of whether or not the personnel to be assigned by cooperatives to their clients are either employees or just members (i.e. self-employed). Cooperatives have cited two policy guidelines issued by the Cooperative Development Authority (CDA), i.e., Memorandum Circular No. 2011-24, Series of 2011, otherwise known as the Policy Guidelines for Workers Cooperatives, and Policy Guidelines for Job Contracting/Sub-Contracting Workers of Service Cooperative and Multi-Purpose Cooperative with Job Contracting/Sub-Contracting Operation, to justify their position that their members are considered as self-employed.

It must be noted in this regard that DO 18-A requires the compliance by the contractor with labor standard benefits, including the requirements under the SSS, PhilHealthh and Pag-IBIG laws. The question is, how can cooperatives comply when they treat their members as sel-employed? The answer appears to be in the Policy Guidelines for Job Contracting/Sub-Contracting Workers of Service Cooperative and Multi-Purpose Cooperative with Job Contracting/Sub-Contracting Operation, under Section 9 thereof which provides that “labor standards as defined by the Labor Code shall (be) deemed complied with if the compensation and benefits under peculiar nomenclatures validly adopted under a cooperative’s by-laws and policies, duly paid to deployed member-workers are equivalent or superior in value than those in the Labor Code.”

The definition of an in-house agency was expanded to refer to a contractor which is owned, managed, or controlled directly or indirectly by the principal or one where the principal owns/represents any share of stock, and which operates solely or mainly for the principal.

While Section 7 of DO 18-A enumerates as one of the prohibitions the engagement of an in-house agency, please note that Section 7 starts with this sentence: “Contracting out of jobs, works or services when not done in good faith and not justified by the exigencies of the business.” Does this mean now that the prohibition is not absolute as it may allow the engagement of an in-house agency when it is done in good faith and justified by business exigencies? If this is the interpretation, then all the other enumerated prohibitions in Section 7 may be allowed as long as there is good faith.

There are a number of legal issues arising from DO 18-A. For example, the definition of labor-only contractor has been expanded with the addition of the phrase “usually necessary or desirable to the operation of the company” which, by jurisprudence, is broader than “directly related to the main business of the principal.” Also, if and when the existing service contracts expire but the certificate of registration still exists, does it mean that since DO 18-A respects the validity of existing certificates then the parties to a contracting arrangement can just extend the service contract to coincide with the expiration of the certificate of registration?

Notwithstanding the foregoing and other issues, on the whole, the issuance of DO 18-A is a welcome development for both management and labor as it tries to clarify issues and concerns regarding contracting out of services. The purpose is to protect the rights of contractual workers even as it also seeks to eliminate illegitimate contractors and thereby assuring employers that they deal only with independent and legitimate contractors.

The question, though, remains: What should be done? It is settled that unless and until DO 18-A is declared unconstitutional, it remains valid and enforceable. Thus, for companies that deal with contractors, the issuance of DO 18-A makes it necessary for them to conduct legal audit and review their existing arrangements with their contractors to determine if the same comply with the new rules. This requires the review of the documentary requirements, e.g. Service Contracts, financial capacity of contractors, employment contracts of employees, etc., as well as the actual implementation of the contracts at the plant level. On top of that, given the issues discussed above, they should be able to formulate or devise ways to address such issues without running afoul of the law.




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