Philippine Labor Code Outsourcing
Definition
Philippine Labor Code Outsourcing
Philippine labor code outsourcing describes what Articles 106 to 109 of the Labor Code require when a company has another firm supply workers or services. The principal can be made solidarily liable, which is the provision that decides most disputes.
The Labor Code predates the outsourcing industry by decades and still governs it.
Four articles carry almost all of the weight, and they are short enough to read in full before signing anything.
Their combined effect is counterintuitive to foreign buyers — engaging a contractor creates a relationship with that contractor’s workers whether you want one or not.
Key takeaways
- Articles 106 to 109 govern contracting and subcontracting relationships.
- A principal is jointly and severally liable where a contractor fails to pay wages.
- Labour-only contracting makes the intermediary a mere agent of the principal.
- The indirect employer concept extends these duties beyond formal employers.
How it works
Article 106 sets the liability rule. Where an employer contracts with another for the performance of its work, the contractor’s employees must be paid under the Code, and the employer is jointly and severally liable if the contractor fails to pay wages.
Labour-only contracting is defined in the same article — it exists where the supplier lacks substantial capital or equipment and the workers perform activities directly related to the principal’s main business.
The consequence of that finding is severe. The intermediary is treated as a mere agent of the employer, which makes the principal the employer of the workers in practice.
| Article | What it establishes |
|---|---|
| 106 | Joint and several liability for wages, and the labour-only contracting test |
| 107 | The indirect employer, extending the rule beyond formal employers |
| 108 | The employer’s power to require a bond covering labour costs |
| 109 | Solidary responsibility for any violation of the Code |
Article 107 widens the net. It applies the same rules to any person or corporation that, not being an employer, contracts with an independent contractor for the performance of work.
The articles are implemented by department order. The current rules require a contractor to hold a certificate of registration from the labour department alongside substantial capital and its own equipment.
Article 109 then removes the escape routes — every employer or indirect employer is held responsible with its contractor or subcontractor for any violation of any provision of the Code.
Examples
Disputes here rarely turn on the contract’s wording and almost always on the facts of the arrangement. Each case here was resolved by reading the statute rather than trusting the summary.
A client engages a contractor whose only asset is its workforce. The contractor lacks substantial capital, and the arrangement meets the labour-only test on its face.
A provider fails to pay a month of wages before closing. The principal is jointly and severally liable for those wages regardless of having paid the provider in full.
A company contracts out work that is directly related to its main business. Directness is one limb of the test, and it makes the rest of the analysis matter far more.
A foreign buyer assumes its contract’s independent contractor clause settles the question. Philippine tribunals look at substance, and the clause carries little weight against the facts.
Related terms
Philippine contracting vocabulary is technical, and the wrong term leads to the wrong conclusion. The definitions below are short on purpose, because the distinctions are what matter.
- Philippine labor code: the statute itself, beyond the contracting articles.
- Contractualization and endo: the political controversy these articles sit inside.
- Department of Labor and Employment (DOLE): the agency that implements these articles by department order.
- Staff leasing: the model most exposed to a labour-only finding.
- Employer of record (EOR): the arrangement designed to make employer identity explicit.
- Philippines BPO: the sector these rules are applied to most often.
- Business process outsourcing (BPO): the wider category the articles reach.
FAQ
What does solidary liability mean here?
The principal and the contractor are each fully liable for the obligation. A worker can pursue either one for the whole amount.
What is labour-only contracting?
An arrangement where the supplier lacks substantial capital or equipment and the workers perform activities directly related to the principal’s business.
What happens if an arrangement is labour-only?
The intermediary is treated as the principal’s agent, and the principal is treated as the employer of the workers.
Does an independent contractor clause protect us?
Not by itself. The analysis follows the substance of the arrangement rather than the label the parties chose.
Who is an indirect employer?
Any person or corporation that contracts with an independent contractor for work, even though it is not the workers’ formal employer.
Can we require a bond from a contractor?
Yes. Article 108 allows an employer to require a bond equal to the labour cost under the contract.
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