Beware of labor-only contracting

There may indeed be more fun in the Philippines but, lately, the business sector has expressed some grave apprehensions on the increasing risks arising from the hiring of contractual workers in the light of two major developments in the labor front, namely: First, there have been some supposedly alarming Supreme Court decisions making it more difficult for management to outsource some of their operations. This is driven by that baseless fear of adverse rulings by the labor tribunals and the judicial authorities.  Second, the industrial and business leaders are quite concerned by DOLE’s issuance of Department Order No 18-A, which allegedly limits management’s flexibility in managing its human resources.

It would appear that company presidents, CEOs, COOs and business operations managers will be better advised nowadays, if they stay away from what has always been demonized, and that is the reprehensible practice of labor contracting. The Labor Code, as early as in 1974, has already nullified this notorious practice by some fly-by-night middlemen, who make a fast buck at the expense of the sweats and tears of workers. These middlemen are harshly referred to as “cabo” and their practices have long been considered as illegal, immoral and callous, being vestiges of the long outlawed slave trade and involuntary servitude. There is nothing new to this law. But the High Court and the DOLE have recently given it more impetus.

The Supreme Court defined labor-only contracting as that prohibited act, by which a labor supplier, merely recruits and supplies workers only, without any tool or equipment, or sufficient capital to perform services for a principal employer. The workers recruited would then perform activities that are directly related to the main business of the principal. This scheme has been designed to shield the principal from employer-employee relationship, and the save it from the higher costs of having to maintain a bigger manpower and a higher labor cost. At the end of the day, the workers are left with a ‘’cabo’’ or a labor-only contractor that has no adequate funds to shoulder the financial cost of wages and benefits.

Vis-a-vis this highly vulnerable position of the workers, the sovereign people have issued a constitutional mandate upon the state, to afford full protection to labor. The Labor Code, particularly, its Articles 106 to 109, DO 18-A and labor jurisprudence are among the body of protective mechanisms to help the working class. Lately, the Supreme Court, in at least two landmark decisions, has further strengthened the mantle of state protection against the evils of labor-only contracting. In the Lorenzo Shipping Corporation case (GR 186091), promulgated on 15 December 2011, the High Court reiterated the law’s very   strict abhorrence of labor-only contracting.

The agency, whose workers provided Lorenzo with maintenance and repairs, as well as inspection services of its container vans, was found to have no tool and equipment, no work premises and office. The agency relied only on the resources of Lorenzo, albeit the use thereof was covered by a lease agreement. It was also found to have no independent business. Lorenzo was the agency’s only client. More importantly, its workers were performing regular functions being performed by Lorenzo’s regular employees. Accordingly, the arrangement was deemed a labor-only contracting scheme, thus an illegal one.

Therefore, Lorenzo was declared as the true employer of the agency workers, and the shipping company was ordered to reinstate all workers, without loss of seniority rights, as well as to pay them full back wages, inclusive of allowances and other benefits, computed from the day of illegal dismissal to the day of their actual reinstatement. Their earnings elsewhere during the pendency of the illegal dismissal were not allowed to be deducted from their back wages. This was a major, major debacle to the management of both Lorenzo and the agency. And this is sending jitters to the whole business community.

Earlier, in the case of Procter & Gamble (GR 160506) decided by the Supreme Court on 10 March 2010 and 6 June 2011, the High Court awarded moral damages, in addition to full back wages, to hundreds of workers, whose agency was likewise held guilty of both labor-only contracting and illegal dismissal. The award reportedly amounted to almost P300 Million. These decisions, along with DOLE’s issuance of Dept. Order No. 18-A, are unwittingly being interpreted as anti-business. Nothing could be farther from the truth.

If we really think it over, these are nothing but protection for the vulnerable sectors of the labor force. Protection to labor is not necessarily an oppression of capital. It is merely the government trying to balance their respective strength. For without balance, the state’s foundation can become shaky and vulnerable to the socio-economic tremors that can endanger the whole nation. Parties to the social compact, including employers and employees, must contribute their respective sacrifices, in order to preserve the whole republic.