Contracting Arrangements in the Philippines

The reputation of the Philippines in delivering excellent services has led to its frequent selection by foreign entities for outsourcing. To gain deeper insights about contracting arrangements, this article aims to discuss regulations governing contracting arrangements in the Philippines.

What is a contracting arrangement?

Under the prevailing regulations, contracting or subcontracting refers to an arrangement whereby a principal agrees to farm out to a contractor the performance or completion of a specific job or work within a definite or predetermined period, regardless of whether such job or work is to be performed or completed within or outside the premises of the principal.

What are the types of contracting arrangements?

Currently, there are two (2) recognized contracting arrangements, to wit:

1. Permissible Contracting; and
2. Labor-only Contracting (Absolutely Prohibited)

What is a Permissible Contracting Arrangement?

Permissible Contracting is one that is considered compliant with the regulations due to the existence of the following compliance requirements:

1. The contractor or subcontractor has substantial capital (at least ₱5,000,000.00) and investment in the form of tools, equipment, machineries, among others;
2. The contractor’s or subcontractor’s employees recruited and placed are performing activities which are not directly related to the main business operation of the principal; and
3. The contractor or subcontractor exercises the right to control over the performance of the work of the employee.
4. The contractor or subcontractor is engaged in a distinct and independent business and undertakes to perform the job or work on its own responsibility, according to its own manner and method;
5. There is a Service Agreement that ensures compliance with all the rights and benefits for all the employees of the contractor or subcontractor under the labor laws.

What is labor-only contracting?

1. Contractor Has No Substantial Capital
   1. The contractor or subcontractor does not have substantial capital, or
   2. The contractor or subcontractor does not have investments in the form of tools, equipment, machineries, supervision, work premises, among others,
   3. The contractor’s or subcontractor’s employees recruited and placed are performing activities which are directly related to the main business operation of the principal; or
2. The contractor or subcontractor does not exercise the right to control over the performance of the work of the employee.

Who are Exempted from the DOLE’s Contracting Regulations?

1. IT-enabled services involving an entire or specific business process such as Business Process Outsourcing (BPO), Legal Process Outsourcing (LPO), and other similar services.
2. Construction industry which falls under the licensing of the Philippine Contractors Accreditation Board (PCAB) is also exempted as it is governed by a separate set of rules and regulations.
3. Private Security Agencies also fall under a separate set of rules and regulations (DO No. 150, series of 2016).
4. Contractual relationships such as contracts of sale, contracts of lease, contracts of carriage, contracts of growing, toll manufacturing contracts, contracts of management, operation and maintenance contracts and other similar contracts governed by the Civil Code and other laws are also not covered.
5. Finally, contracting out of a job or work to a professional or individual with unique skills and talents who performs work for the principal are also not covered.

Know More About Contracting Arrangements

Businesses seeking to outsource services in the Philippines must be informed of the regulations governing contracting arrangements. This is crucial to ensure compliance with laws protecting the rights of the engaged workforce. Should you seek further information and advice on contracting arrangements, you may reach out to law firms for assistance.