Labor only contracting is prohibited by law. If a company hires a labor only contractor, the company will be considered the employer of the employees of the contractor.
When is there labor-only contracting? Article 106 of the Labor Code of the Philippines defines “labor-only” contracting as follows:
There is “labor-only” contracting where the person supplying workers to an employer does not have 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 such cases, the person or intermediary shall be considered merely as an agent of the employer who shall be responsible to the workers in the same manner and extent as if the latter were directly employed by him.
Under the rules and regulations implementing the Labor Code, labor-only contracting is an arrangement where the contractor or subcontractor merely recruits, supplies or places workers to perform a job, work or service for a principal, and ANY of the following elements are present:
(i)The contractor or subcontractor does not have substantial capital or investment which relates to the job, work or service to be performed and 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; OR
(ii) [T]he contractor does not exercise the right to control over the performance of the work of the contractual employee.
In Aliviado vs. Procter and Gamble Phils., Inc., G.R. No. 160506, June 6, 2011, the Supreme Court emphasized that the “control test” (i.e., item ii above) is only one of the factors that will be considered in determining whether there is labor-only contracting. The existence of any one of the above factors would be sufficient.
With respect to what is “substantial capital”, the Court stated that “substantial capital refers to capitalization used in the performance or completion of the job, work or service contracted out. . .” Here, the Court ruled that SAPS, a contractor, did not meet the substantial capital requirement. The Court stated:
SAPS – having a paid-in capital of only
P31,250 – has no substantial capital. SAPS’ lack of substantial capital is underlined by the records which show that its payroll for its merchandisers alone for one month would already total P44,561.00. It has 6-month contracts with P&G. Yet SAPS failed to show that it could complete the 6-month contracts using its own capital and investment. Its capital is not even sufficient for one month’s payroll. SAPS failed to show that its paid-in capital of P31,250.00 is sufficient for the period required for it to generate [the] needed revenue to sustain its operations independently. Substantial capital refers to capitalization used in the performance or completion of the job, work or service contracted out. In the present case, SAPS failed to show substantial capital.