Permissible job contracting setup
To cut down on labor costs, it is common practice for some companies to get employees from employment agencies or outsource some of their business activities.
In this arrangement, the company’s financial obligation is limited to the agreed contract price with the job contractor. It does not have to pay premium contributions for compulsory social security, health and housing coverage that accompany regular employment.
If the contractor does not have substantial capital or investment in the form of tools and equipment and the employees it places in the company perform activities that are directly related to the principal business of the employer, the setup is considered “labor-only” contracting, which the law prohibits.
Those employees would then be considered as regular employees of the company and shall be entitled to all the rights and privileges that accrue to that status.
But this rule does not apply if the contractor meets the following criterion: (a) the work of the employee is performed in accordance with the contractor’s manner and method; (b) it has substantial capital or investment in the form of tools and equipment; (c) the work of the employee is free from the control or direction of the company except as to its result; and (d) the agreement between the contractor and the company ensures compliance with all the rights and benefits for the employees under the labor laws.
The interpretation of this criteria was, among other issues, the subject of a recent decision of the Supreme Court in the case of “Sanyo Seiki vs. Leonil Amago, et. al.” that applies to companies that have job placement arrangements with employment agencies.
In a nutshell, the case involves a complaint for illegal dismissal and payment of unpaid benefits filed by employees placed by a registered job contractor.
The court said the job contractor checked all the boxes as a legitimate and independent job contractor, including that criterion relating to the company’s control of the work of the employees, which is often cited as the most critical indicator of regular employment status.
The rule of thumb on this issue is that if a person for whom services are performed can control the result of the work and the manner and means to accomplish it, an employer-employee relationship exists between the two.
In the instant case, it was shown that a supervisor of the contractor monitored the performance of the employees at the company’s premises on a daily basis.
This led the court to declare that “… the absence of the element of control on Sanyo engenders the conclusion that the concerned workers were not its employees.
“Said workers did not present any iota of evidence to prove that Sanyo exercised control over them at any point in time. Instead, they used the wrong yardstick to merely invoking the necessity and desirability of the nature of the work.”
The latter argument did not fly because the court, relying on an earlier memorandum of the Department of Labor and Employment, said “…there is a clear and categorical recognition of the employer’s management prerogative to contract our activities which are necessary of desirable to the main business of the employer as long as it done in good faith and justified by the exigencies of the business.”
Thus, companies may, for example, abolish their security and maintenance departments and have the tasks earlier assigned to them performed or outsourced to third parties that have the proper expertise and equipment.
The job contractor’s supervisor, who stood between the employees and the company, played a critical role in the court’s determination of the respective liabilities of the job contractor and the company to the complainants.
Without him, the company would have found itself in more serious financial trouble. Sometimes, in law, little things can mean a lot.
For comments, please send your email to raul.palabrica@inquirer.net
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