CHANGES ON THE RULES ON LEGITIMATE CONTRACTING

UNDER DEPARTMENT ORDER NO. 174-17

1. SUBSTANTIAL CAPITAL (Section 3 (l))

- Substantial Capital has been increased to paid-up capital

stock/shares of 5 Million Pesos for corporations, partnerships
and cooperatives; in the case of single proprietorship, a net
worth of at least 5 Million Pesos

2. ENHANCED MEANING OF LABOR-ONLY CONTRACTING

(Section 5)

- Labor-only contracting has two (2) kinds: (a) where there is

lack of substantial capital or investment and the contractors
employees are performing activities directly related to the
main business of the principal; and (b) where the contractor
has no power of control over its workers.

- The first kind has been clarified by the new D.O. so that once
it is proven that the contractor has substantial capital, there is
no need for it to prove substantial investment. This is
consistent with the Neri case.

Labor-only contracting refers to an arrangement where:

a) i. The contractor or subcontractor does not have substantial

capital, or

ii. The contractor or subcontractor does not have investments

in the form of tools, equipment, machineries, supervision,
work premises, among others,

and

iii. The contractors or subcontractors employees recruited

and placed are performing activities which are directly related
to the main business operation of the principal;

or

b) The contractor or subcontractor does not exercise the right to

control over the performance of the work of the employee.
3. OTHER ILLICIT FORMS OF EMPLOYMENT ARRANGEMENTS
(Section 6)

- the new D.O. 174-17 removes the qualifying phrase when

justified by the exigencies of the business, hence, all of these
activities are now absolutely prohibited, no exceptions

- absolutely prohibits requiring the contractors or

subcontractors employees to perform functions which are
currently being performed by the regular employees of the
principal

4. NEW MEANING OF PERMISSIBLE CONTRACTING OR

SUBCONTRACTING ARRANGEMENTS (Section 8)

Underlined the words or phrases which changes the meaning:

a) The contractor or subcontractor is engaged in a distinct and

independent business and undertakes to perform the job or
work on its own responsibility, according to its own manner
and method;

b) The contractor subcontractor has substantial capital to carry

out the job farmed out by the principal on his account,
manner and method, investment in the form of tools,
equipment, machinery and supervision;

c) In performing the work farmed out, the contractor or

subcontractor is free from the control and/or direction of the
principal in all matters connected with the performance of the
work except as to the result thereto; and

d) The Service Agreement ensures compliance with all the rights

and benefits for all the employees of the contractor
subcontractor under the labor laws.

5. NEW D.O. REMOVES THE PROVISION THAT THE

CONTRACTORS EMPLOYEES ARE CO-TERMINUS WITH THE
SERVICE AGREEMENT (Section 11)

- new D.O. removes co-terminus employment contracts

between contractors and employees
6. EFFECT OF VIOLATION OF THE PROVISIONS ON THE
RIGHTS OF CONTRACTORS EMPLOYEES AND REQUIRED
CONTRACTS (Section 12)

- this is totally new provision

7. EFFECT OF TERMINATION OF EMPLOYMENT (Section 13)

- termination of employment of contractors employees prior to

the expiration of the Service Agreement shall be governed by
Articles 297, 298 and 299 of the Labor Code (authorized
causes of termination of employment)

- pre-termination not due to authorized cause, the party at fault

will pay the affected workers unpaid wages and other unpaid
benefits, including unremitted legal mandatory contributions
(but their liability is solidary)

- mere expiration of the Service Agreement shall not be

deemed termination of employment

- after expiration of the Service Agreement, employee has 3

months to decide whether to resign or be reassigned; failure
to reassign employee within 3 months entitles him to
separation benefits

8. REGISTRATION and RENEWAL FEES (Sections 19 and 21)

- new D.O. raises the amount of registration fee to

Php100,000.00 pesos.

- Renewal fee is also Php100,000.00 pesos.

9. VALIDITY OF CERTIFICATE OF REGISTRATION (Section 20)

- reduced the validity to two (2) years