Contractualization or labor contractualization is the replacing of regular workers with temporary
workers who receive lower wages with no or less benefits. These temporary workers are also known as
sometimes called contractuals, trainees, apprentices, helpers, casuals, piece raters, agency-hired, and
project employees, among others. They do the work of regular workers for a specified and limited period
of time, usually less than six months. The work they do is “desirable and necessary” for the company’s
survival, but they never become regular employees even if they get rehired repeatedly under new
contracts.
Contractualization of labor is a strongly debated issue in the Philippines. It was recently thrust into the
limelight when regular employees of Philippine Airlines (PAL) were terminated with an offer to be re-hired
again through sub-contractors.
These realities inspired the authors to conduct a qualitative study that explored the perception and
understanding of different social groups on contractualization. Data were gathered through interviews with
fourhuman resources supervisors of the contracting companies, four administrators of contracting
agencies, and eight blue-collar contractual workers (security guards, maintenance personnel and
janitors).
Results revealed varying perspectives on contractualization and issues arising from this employment
scheme.
While contractual employment is allowed under Article 106 of the Labor Code of the Philippines, this
clause has been used and abused over time and led to the contractualization of labor.
According to the International Labor Organization (ILO), the traditional pattern of employment
relationship, or standard employment relationship has, for many years, been that of full-time work, under
a contract of employment for unlimited duration, with a single employer, and protected against unjustified
dismissal. But in the 1980s, new patterns of employment have emerged, perhaps improperly known as
atypical employment. They include, but are not limited to, part-time work, fixed-term contracts of
employment and the so-called triangular employment relationships. Typically in triangular employment,
workers are taken on by an employer with the purpose of being posted with a third party known as a user
enterprise. Moreover, a growing number of arrangements for work or services that traditionally were
concluded within the scope of a contract of employment are now concluded beyond that scope; they
belong to a category of so-called contractual arrangements though such a terminology may be somewhat
misleading. Legally speaking, workers within these arrangements are not employees.
Of late, precarious employment is the term used to describe the employment condition that is not
standard or non-regular. Precarious employment has include: outsourcing, contracting-out or
subcontracting; casualization, contractualization or fixed-term contracts; use of labor agencies or laboronly hiring; hiring of temporary or contingent workers; abusive use of seasonal and probationary
employment and traineeships; and “self-employment” and independent contractors.
Available literature shows that the trend of contractualization became evident in the mid1970s with the
setting up of export processing zones by former President Ferdinand Marcos. Today, these export
processing zones are better known as economic zones and technology parks. Up to this day, such are
considered investors’ haven give the investment perks, which include tax holidays and other perks.
The prevalence of contractualization became extensive with the issuance of Department of Labor and
Employment (DOLE) Order No. 10 in 1997, which relaxed the rules on contracting or subcontracting. But
the same DOLE order paved the way to using of contracting or subcontracting as disguise for labor-only
contracting. DOLE Order No. 10 was repealed through DOLE Order No. 3 issued in 2001 only to be
restored in 2002 through DOLE Order No. 18.
Contractualization is not a unique case in the Philippines. It is also prevalent in other countries.
Contractualization has evolved and assumed different names but the bottomline remains the same:
Workers find no security in terms of tenure and benefits, among others, in the job.
The premise as mandated by the law is this: It is legitimate contracting or subcontracting if the contractor
or subcontractor has substantial capital or investment such as corporations, tools, equipment, implement,
machineries, uniforms, protective gear, or safety devices actually used in the performance of the job,
work or service contracted out. It is the prohibited “labor-only” contracting when the person supplying the
workers to an employer does not have the substantial capital or investment in the form of tools,
equipment, machineries, work premises, among others, and the workers recruited and placed by such
person are performing activities which are directly related to the principal business of such employer.
In simpler terms, it is contractual employment when a principal (employer/company owner) hires the
services of security guards of a security agency to maintain peace and security of the company. In this
case, the contractor is the security agency while the security guards are the employees, not of the
company owner but of the security agency. In this case, the security agency provides the manpower and
guns (tools) of the security guards and maintaining peace and quiet is not directly the business or main
purpose of the company but is still essential and related to the operations of the company.
It is labor-only contracting if the contractor or agency will only deploy workers to perform services that are
directly related to the company’s nature of business.
Overtime, contractual employment has been used as a guise for labor-only contracting that led to the
contractualization of labor. Anecdotal evidence in technology parks and economic zones show that the
common trend is this: companies offer their regular workers attractive early retirement package and then
the same regular workers will be rehired to perform the same work but this time on a minimum wage and
as contractuals. This way, the company will be freed of obligations to allocate for their benefits and
headaches like strikes and union organization. Oftentimes, they hire these workers for three to five
months to do away with the six-month requirement of probationary employment, after which the worker
will have to be regularize if the law will be followed. To avoid technicality, the workers are given reprieve
of several months until they can be hired again. In effect, these workers became “regular” contractuals.
According to the Asia-Pacific Research Network, in 2000, 20 branches of SM, the biggest retail trade
store in the country, 92 percent of the workers are either direct hired or concessionaire hired contractuals.
To date, SM branches have mushroomed to 40. This means that in 10 years, SM branches have doubled
and by the doubling of the number of branches alone, one can deduce that its hired workers have
presumably doubled too and so is the number of contractual. This has been the practice in retail business
such as SM, Robinsons and Rustan’s, and companies engaged in semiconductors and electronics,
garments, retail/mall and manufacturing in general. The case of Philippine Airlines]] is also a case of
contactualization where the regular pilots were offered an early retirement package and would then be
rehired with lower salaries and less benefits as pilots of AirPhil Express, which is a sister company of
PAL.
To date, this trend on contractualization has spread to business process outsourcing with 208,316 nonregular workers or close to one-third of the total 731, 548 workers in all industries. In 2008, DOLE through
the Bureau of Employment Labor and Statistics conducted a survey. The survey indicated that some 25
percent of the total workers fall under the non-regular worker category such as probationary worker,
casual worker, contractual/project-based workers, seasonal worker and apprentice/learner.
Contractualization of labor is favorable to the employers in more ways than one:
1. Union and strikes are prevented as workers as strictly they are not employees of the employer or
principal. A five-month or less contract also does not give the employees a chance to organize.
2. Contractual workers replaced retrenched regular workers.
3. Most of the contractual workers do not have benefits such as PhilHealth and SSS.
4. Contractualization further depresses the already very low wages of workers. 4/10 respondents
revealed that they are paid below the mandated minimum wage. From this income, they spend
as much as P500 up to P1,000 in application requirements. They also have to pay for the cost of
their uniforms and other work paraphernalia.
5. Contractuals cannot refuse overtime work which during the peak season means staying beyond
until 10 p.m., though the labour code prohibits this as inhuman practice.
6. Contractualization brings down the workers’ self-esteem. As a whole, management looks down
on workers but their biggest contempt is reserved for contractual.
7. It nurtures and reinforces the already prevailing culture of docility and subservience that have
been inherited from the feudal-patriarchal culture introduced by Spanish colonizers.
Contractual employment (contracting or subcontracting) vs. laboronly contracting
Contractual employment is legitimate under the following circumstances :
1. The contractor or subcontractor carries on a distinct and independent business and undertakes to
perform the job, work or service on its own account and under its own responsibility, according to
its own manner and method, and free from the control and direction of the principal in all matters
connected with the performance of the work except as to the results thereof.
2. The contractor or subcontractor has substantial capital or investment. Substantial capital or
investment" refers to the adequacy of resources actually and directly used by the contractor or
subcontractor in the performance or completion of the job, work or service contracted out. It may
refer to capital stocks and subscribed capitalization in the case of corporations, tools, equipment,
implement, machineries, uniforms, protective gear, or safety devices actually used in the
performance of the job, work or service contracted out. It likewise includes operating costs,
administrative costs such as training and overhead costs, and such expenses as are necessary
to enable the contractor or subcontractor to exercise control, supervision or direction over its
employees in all aspects of performing or completing the job, service or work contracted out.
3. The agreement between the principal and contractor or subcontractor assures the contractual
employees' entitlement to all labor and occupational safety and health standards, free exercise of
the right to self-organization, security of tenure, and social and welfare benefits.
4. The principal may engage the services of a contractor or subcontractor for the performance of
any of the following:
1. Works or services temporarily or occasionally needed to meet abnormal increase in the
demand of products or services, provided that the normal production capacity or regular
workforce of the principal cannot reasonably cope with such demands;
2. Works or services temporarily or occasionally needed by the principal for undertakings
requiring expert or highly technical personnel to improve the management or operations
of an enterprise;
3. Services temporarily needed for the introduction or promotion of new products, only for
the duration of the introductory or promotional period;
4. Works or services not directly related or not integral to the main business or operation of
the principal, including casual work, janitorial, security, landscaping, and messengerial
services, and work not related to manufacturing processes in manufacturing
establishments;
5. Services involving the public display of manufacturers' products which do not involve the
act of selling or issuance of receipts or invoices;
6. Specialized works involving the use of some particular, unusual or peculiar skills,
expertise, tools or equipment the performance of which is beyond the competence of the
regular workforce or production capacity of the principal; and
7. Unless a reliever system is in place among the regular workforce, substitute services for
absent regular employees, provided that the period of service shall be coextensive with
the period of absence and the same is made clear to the substitute employee at the time
of engagement.
Oftentimes, contractual employment is just being used as disguise for labor-only contracting. Labor-only
contracting is prohibited under the law. Labor-only contracting is the condition of employment under the
following circumstances:
1. The contractor or subcontractor does not have substantial capital or investment to actually
perform the job, work or service under its own account and responsibility.
2. The employees recruited, supplied or placed by such contractor or subcontractor are performing
activities which are directly related to the main business of the principal but not performing
activities of the main business.
3. An in-house agency is present. In-house agency refers to a contractor or subcontractor engaged
in the supply of labor which is owned, managed or controlled by the principal; and operates
solely for the principal owning, managing or controlling it.
Moreover, the following are also prohibited by the Labor Code:
1. Contracting out of work which will either displace employees of the principal from their jobs or
reduce their regular work hours;
2. Contracting out of work with a cabo. Cabo refers to a person or group of persons or to a labor
group which, in the guise of a labor organization, supplies workers to an employer, with or
without any monetary or other consideration whether in the capacity of an agent of the employer
or as an ostensible independent contractor.
3. Taking undue advantage of the economic situation of lack of bargaining strength of the
contractual employee, or undermining his security of tenure or basic rights, or circumventing the
provisions of regular employment, in any of the following instances; and
4. Requiring the contractual employee to perform functions which are currently being performed by
the regular employees of the principal or of the contractor or subcontractor;
5. Entailing the employee 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
subcontractor from any liability as to payment of future claims; and
6. Entailing the employee to sign a contract fixing the period of employment to a term shorter than
the term of the contract between the principal and the contractor or subcontractor, unless the
latter 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.
7. Contracting out of a job, work or service through an in-house agency as defined in the Code.
8. Contracting out of a job, work or service directly related to the business or operation of the
principal by reason of a strike or lockout whether actual or imminent; and
9. Contracting out of job, work or service when not justified by the exigencies of the business and
the same results in the reduction or splitting of the bargaining unit.
The aforementioned will constitute unfair labor practice. Section 8 of DOLE Order No. 10 (series of 1987)
explains unfair labor practice as contracting out of a job, work or service being performed by union
members that will interfere with, restrain or coerce employees in the exercise of their rights to selforganization shall be unlawful and shall constitute unfair labor practice.
Perspectives
Companies and the contracting agencies described contractualization as a means to promote cost efficiency and a
way to avoid having labor unions. The contracting agencies also view contractualization as a means to provide
services to companies. Therefore it is their duty to ensure that specifications requested or imposed by the company
are strictly adhered to.
Contractual workers, on the other hand, view contractualization as a means to diminish their control on their working
condition and environment. Although this perception greatly lowers their job satisfaction and motivation as
employees, they feel helpless and incapable of changing their situation. They are also unsure as to who or which
institution can help change their plight and take care of their well-being as employees.
The human resources (HR) practitioners clearly stated in the interviews that the contractual workers are not their
employees, all employee- or labor-related concerns and issues must be dealt with by the agency. However, the
agencies also claim that they are not their employees since they only serve as a go-between.
The issue of which organization should look after the welfare of contractual workers is highlighted even more if it
involves fly-by-night agencies that do not have sufficient capital or resources. Both HR practitioners and worker
interviewees emphasized that such agencies make the employment conditions worse for contractual employees.
As this study shows, the varying perspectives on contractualization affect the working condition, environment,
satisfaction and motivation of contractual employees. Given the growing prevalence of contractual employment in the
country not only among blue-collar but professional employees as well, there seems to be a need for concrete
interventions that can help this marginalized sector in Philippine society.
According to the Bureau of Labor and Employment Statistics, as of 2010 there were 850,085 non-regular workers
employed in companies with 20 or more workers. Majority of these workers—30.3 percent are in the services sector,
such as real estate and business-process outsourcing, while the manufacturing sector accounts for 23.8 percent.
Labor contractualization became widespread starting in 1989 with the implementation of Republic Act 6715. This
revision of the Labor Code has been strengthened by the Department of Labor and Employment’s Department Order
18-A, issued in 2011, which allows contractualization as an arrangement between a principal (any public or private
company) and a contractor to farm out a specific work or service that should be completed “within a definite or
predetermined period... within or outside the premises of the principal.”
When employers resort to contractualization, they justify it by saying that they would go out of business since they are
unable to match the compensation and benefits that larger companies can afford. For small companies, hiring
contractuals makes sense since their wages are usually lower than those of regular employees.
But the workers have legitimate reasons to oppose contractualization.
Contractuals are usually given lower wages than regular ones. Workers settle for what is available, even though their
wages may not be enough to cover their families’ needs and daily cost of living.
Contractuals do not receive the benefits regular workers get by law, such as the 13th month pay, sick leaves and
vacation leaves, among others.
A wage increase for contract workers can come in the form of allowances, which means it is not included in the
computation of overtime pay and 13th month pay. Contractuals are also tied to higher quotas by management, but
cannot do anything because their contracts can be rescinded and they could find themselves jobless and without any
source of income.
The scheme also prevents the establishment of unions in companies, even if the law recognizes the workers’ rights to
organize such groups.
Paying workers much less so that a company can survive may be acceptable in some instances, but contracting labor
and paying them a pittance so that a company reaps big profits is not.
In fact, contractualization is an anti-poor policy that should not be encouraged at all by the government. While it may
be good for business, it is bad for the lower classes in society as it undermines their right to stable jobs and decent
wages.
POSITVE SIDE OF CONTRACTUALIZATION
-enormous savings that one company makes to replace the regular workers with the temporary workers
who will receive small salary
She announced that the department has issued a new policy that would provide better working conditions and
protection for an estimated 200,000 contractual workers in more than 2,600 companies nationwide.
Baldoz said that the labor department is set to implement the new policy on December 5 among companies
that engage in contracting and sub-contracting.
“This will address the clamor of the labor sector to clarify government policy on contractual employment so that
they could be assured this will not be used to circumvent the compliance of employers to labor standards,”
Baldoz said in a press conference on Tuesday at DOLE’s head office in Manila.
Department Order 18-A series 2011 would provide clear rules on contracting and subcontracting, stopping the
abuses against non-regular workers.
“Amid the global phenomenon of contractualization, we will promote job generation, professionalize contracting
and subcontracting arrangements, and weed out the fly-by-night contractors and subcontractors. It will also end
short-term employment schemes like ‘endo’ [for end of contract] or 5-5-5 [five-month work duration],” the labor
chief explained.
According to the new order, non-regular workers would be entitled to benefits provided under the Labor Code
such as 13th month pay and overtime pay as well asretirement benefits.
They will also be entitled to Social Security System, Pag-IBIG, and Philhealth benefits. Their right to selforganize or negotiate a collective bargaining agreement is also specified in the new order.
The new order will also impose stricter requirements for contractors, subcontractors, and cooperatives to
ensure only qualified companies will be able to operate.
Qualified companies are those with at least P3-million in paid-up capital to operate, own tools and work
premises to deliver their services, have an employer-employee relationship with their workers, include a
mandatory 10-percent administrative fee in their service contracts, and pay P25,000 registration fee.
Companies that will not comply with these requirements will have their license to operate terminated, she
added.
Collective Bargaining Agreements (CBAs) are spearheaded by legitimate and representative labor unions. These
unions are organized by regular employees – as part of their rights. Employees join unions whose leaders represent
them. Unions act as the workers’ voice as collective efforts induce better management and greater productivity by
reducing labor turnover, enhancing worker morale and cooperation, negotiating more efficient workplace, resolving
grievances, and influencing management into better efficiency. i. With the massive trend towards contractualized
labor – which is characterized by less benefits, fragile security and tenure, lower overhead, and occurrences of high
attrition – the easy shift from cheap markets to cheaper ones is in no way favorable to non-regular employees. As
seen in face of economic instabilities, it has been easy to remove contractual employees be it in the enterprise
level or macroeconomic level – and this phenomenon appears to be ubiquitous across the globe. An interesting case
would be the Philippine garment industry ii, wherein the subcontracting system facilitated workforce downsizing by
half. In fact, from the common 6-month contracts, some companies have even shortened tenures to a mere 3
months. The case of Shoe Mart (SM) is perhaps one of the best - and most notorious – examples to illustrate why
labor unions in the Philippines are hard to pull up and maintain as employees change every now and then. The
effects of which to union’s cause and the affectivity of their methodstowards bargaining render the sustainability of
their battle-cry as practically nil. The exercise of employee rights then becomes futile, much more pointless to fight
for.
Logistics- and finances-wise, one incentive offered by contractual labor is the attractive figures: the least
possible funds for the most cost-efficient manpower.
Contractual staff usually pay less tax and get paid more right? A person earning 35k as a regular will
earn about 50k as a contractual staff. The benefits you get is understandably less and the job
security is minimal to none, so at the very least the financial compensation should be big. I think this
option should only be considered if you have a fallback source of income such as a business or an
investment, or if you have no other options.