Job Contracting 101

May 01, 2016

THE LAST debate of Presidential candidates brought up the so-called “contractual- ization” issue. Unfortunately, nobody showed a deep understanding of the issue. Instead, the candidates committed to stop the practice, in an attempt to woe the workers’ votes.

Changing environment

When I was young and silly, wealth means physical things – land, factories, inventories, precious stones, buildings, equipment, warehouses, etc. With innovations in information and communication technology (ICT), new sources of wealth emerged – ideas, information, and relationships.

The business of doing business has dramatically evolved due to ICT advances. In the past, you manufacture what you sell, and you hire a “permanent” workforce to make, deliver and sell your products. For some time, markets did not change and the permanent employees could cope with market demands. Then, the market changed and became more merciless and unforgiving. The market today dictates whether businessmen would have a business and employees would have jobs. To remain competitive, businesses adjust to market whims. Today, many businessmen sell or market products they didn’t make. Some just make products, and have others deliver, market, and sell their products. Car manufacturers simply assemble car parts made by several parts makers who deliver these parts “just in time” for assembly. Many large companies split business activities and get other organizations and individuals to perform these activities in a more cost-effective way.

Businesses now focus on their core business. If you’re a manufacturer, excel in manufacturing. The logistics , warehousing, materials management, marketing, and related highly-desirable services can be outsourced or contracted out to job contractors who are experts in their own line. As a manufacturer, you need service buses to ferry your employees to and from your factory, provide decent food for their meals , and provide appropriate working clothes or uniforms. But, your business remains to be manufacturing, not bus service, uniform, or canteen business. To be competitive, you need to focus on manufacturing and let the experts provide you with these other necessary services.

Legitimate job contracting

In the Philippines, and in many parts of the world, businesses hire temporary employees for the non-core business processes. Job contractors operate inside or outside of the principal’s premises, depending on what is best for the principal.

There exists a trilateral relationship among the principal, the job contractor and the employees of the job contractor. For as long as the contract between the principal and the job contractor exists, the employees of the job contractor are secure in their jobs. For economic reasons or due to their own fault, employees could lose their jobs. As long as the job contracting arrangement follows the government rules (DO 18-A), employees have ample security of tenure.

The Labor Code of the Philippines recognizes job contracting as a legal and legitimate business practice. Articles 106 to 109 regulate job contracting in the Philippines. What is not allowed is “labor-only contracting.” DOLE’s Department Order No. 18-A serves as the implementing rules and regulations on job contracting. The DO 18-A has made the rules more stringent in the Philippines. Indonesia, Vietnam and other ASEAN economies allow casual or non-standard employment for two to three years.

Job creationp

As we write, job contracting in the Philippines has helped create employment for job applicants that would otherwise not qualify for jobs in large multinationals. Large multinationals contract out their non-core activities to legitimate contractors that must secure a certificate of compliance (COCs) from the Department of Labor and Employment (DOLE), otherwise the multinationals would not be granted their own DOLE COCs.

Job contractors in the Philippines belong to a few organizations. The more notable ones are PALSCON (Philippine Association of Local Service Contractors, Inc.) and the ULSC (Union of Labor Service Contractors). Both are recognized by the Department of Labor and Employment as compliant with DO 18-A rules and regulations.

PALSCON, under newly elected President Rhoda Caliwara, has 220 members that deploy 400,000 employees with their principals. According to PALSCON immediate past president Butch Guerrero, “The Boston Consulting Group estimates that job contracting has helped 61 million workers worldwide gain access to the labor market. In the Philippines alone, contractual workers exceeded 600,000 in 2014. The number is estimated to increase to 1 million in 2016.”

Caliwara added, “PALSCON does not abuse Filipino workers. We extend to them benefits such as SSS, Philhealth, PAG-IBIG, and 13th month pay, as mandated by law. We also observe the minimum wages set by DOLE.”

Guerrero explained, “DO 18-A practically outlawed the so-called ‘5-5-5′ system. Employees deployed with our principals are co-terminus with our contract, and they don’t get terminated after five months. The DOLE Order has also set higher standards in registration, capitalization, health and safety of the workers. The 22,000 registered service contractors in 2010 were reduced to 5,000 in 2015as a result of higher DOLE standards. We at PALSCON also weed out fly-by-night contractors.”

The ULSC is a group of cooperatives engaged in job contracting. In support of DOLE Secretary Rosalinda Baldoz’ labor law compliance system (LLCS), I have personally committed to help her police the ranks of cooperatives doing job contracting. The ULSC started with 15 member cooperatives and in its first year, was recognized by the Cooperative Development Authority (CDA) as an “Outstanding Partner of CDA” during the 100th anniversary celebration of the cooperative movement in the Philippines last October 2015. There are approximately 400,000 service providers deployed by various cooperatives with their principals today. One of ULSC’s member cooperatives is perhaps the biggest remitter of SSS premiums, with 65,000 employees. Service providers deployed with principals are the cooperative’s regular employees, with full benefits, including retirement pay.

Strictly speaking, the whole of the BPO industry with some 1.2 million employees today is a contractual arrangement between principals and the BPO companies. The BPO industry contributes tremendously to GDP growth. I doubt if government is willing to disband the BPOs, PALSCON and the cooperatives that help create jobs for the Filipinos. 5-5-5 and ENDO Perhaps, 5-5-5 is the real issue. In the Philippines, probationary employment must not exceed six months. Some businesses (e.g., malls) directly hire people for five months and terminate them after the peaks months – enrolment and Christmas. This practice has a derogatory label – 5-5-5 or ENDO (END Of contract).

I have two suggestions: Outsource abnormal bagging, cashiering, “promo-dising,” or selling activities during peak months to job contractors who can redeploy their employees to other principals during lean months. Alternatively, principals can hire them as “regular seasonal workers” with pay and benefits pro-rated according to actual days/months worked.

On May 4, 2016, the Employers Confederation of the Philippines and PALSCON will hold a special forum, where former DOLE USec Josephus Jimenez, and PALSON’s IPP Butch Guerrero will expound on “Understanding the Real Issues on Contractualization and Casualization” at the Auditorium in St. Lukes Taguig.


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