This content is from: Local Insights

Philippines: Stricter contracting arrangements

Private enterprises, including foreign-invested companies, rely on contracting arrangements to optimise their business by farming out work for tasks which could be more efficiently carried out by third parties. A contracting arrangement exists when an entity, known as the principal, farms out work to a contractor. The work is carried out by the contractor's employees who are governed by employment contracts with the contractor.

On March 16 2017, the Philippine government issued Department of Labour and Employment (DoLE) Department Order No 174-17 which implements a stricter policy in relation to contracting arrangements. Before the new DoLE regulation, contracting arrangements were already regulated. In particular, labour-only contracting was already prohibited and solidary liability was ascribed to the principal and the contractor in favour of the contractor's employees to the extent of the work performed in the contract.

With the new DoLE regulation, a stricter and more comprehensive framework for regulating contracting arrangements is imposed particularly: (a) an increase in the substantial capital requirement for contractors from PHP3 million ($57,700 approximately) to PHP5 million; (b) a decrease in the period of validity of the contractor's certificate of registration from three years to two years; (c) a reduction of the number of days provided to hear and resolve petitions for cancellation/revocation of licences to expedite proceedings; (d) a prohibition on the reapplication of contractors whose registration has been cancelled, even under a different name; and (e) an addition of a catch-all provision to the list of illicit employment arrangements.

The new DoLE regulation prescribes the minimum terms to be stated in a service agreement, which includes a provision on the issuance of a bond, equal to the cost of labour under the contract, renewable every year. It likewise provides that in cases where there is a pre-termination of the service agreement not due to any of the authorised causes under the Labour Code, leading to the termination of the contractors' employees, the employees' right to unpaid wages, benefits and legal mandatory contributions will be borne by the party at fault, without prejudice to the solidary liability of the principal and contractor under the service agreement.

Nevertheless, despite the stricter regulations on contracting arrangements, investors in the country's thriving business process outsourcing sector should note that the new regulations will not be applicable to information technology-enabled services involving an entire or specific business process, including but not limited to business process outsourcing.

Alejandro Alfonso E NavarroRaquel Wealth A Taguian

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