(1) Outsourcing of core positions and peripheral positions

Section 5. Prohibition against labor-only contracting. Labor-only contracting is hereby declared prohibited. For this
purpose, labor-only contracting shall refer to 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.

The foregoing provisions shall be without prejudice to the application of Article 248 (c) of the Labor Code, as
amended.

"Substantial capital or investment" refers to capital stocks and subscribed capitalization in the case of corporations,
tools, equipment, implements, machineries and work premises, actually and directly used by the contractor or
subcontractor in the performance or completion of the job, work or service contracted out.

The "right to control" shall refer to the right reserved to the person for whom the services of the contractual workers
are performed, to determine not only the end to be achieved, but also the manner and means to be used in reaching
that end.

x x x x (Underscoring supplied.)

Clearly, the law and its implementing rules allow contracting arrangements for the performance of specific jobs, works
or services. Indeed, it is management prerogative to farm out any of its activities, regardless of whether such activity
is peripheral or core in nature. However, in order for such outsourcing to be valid, it must be made to an independent
contractor because the current labor rules expressly prohibit labor-only contracting.

To emphasize, there is labor-only contracting when the contractor or sub-contractor merely recruits, supplies or
places workers to perform a job, work or service for a principal25 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) The contractor does not exercise the right to control over the performance of the work of the contractual employee.
(Underscoring supplied)

(2) Waiver of employer-employee relationship, for independent contracting

In Sasan, Sr. v. National Labor Relations Commission 4th Division,[41] the Court distinguished permissible job
contracting or subcontracting from labor-only contracting, to wit:

Permissible job contracting or subcontracting refers to an arrangement whereby a principal

agrees to put out or farm out to a contractor or subcontractor the performance or completion of a
specific job, work or service within a definite or predetermined period, regardless of whether such
job, work or service is to be performed or completed within or outside the premises of the principal. A
person is considered engaged in legitimate job contracting or subcontracting if the following
conditions concur:

(a) The contractor or subcontractor carries on a distinct and independent business

and undertakes to perform the job, work or service on its own account and under its
own responsibility according to its own manner and method, and free from the control
and direction of the principal in all matters connected with the performance of the work
except as to the results thereof;

(b) The contractor or subcontractor has substantial capital or investment; and

 (c) The agreement between the principal and contractor or subcontractor assures the
contractual employees entitlement to all labor and occupational safety and health
standards, free exercise of the right to self-organization, security of tenure, and social
and welfare benefits.

In contrast, labor-only contracting, a prohibited act, is an arrangement where the contractor

or subcontractor merely recruits, supplies or places workers to perform a job, work or service for a
principal. In labor-only contracting, the following elements are present:

(a) The contractor or subcontractor does not have substantial capital or investment
to actually perform the job, work or service under its own account and responsibility;
and

(b) 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.[42]

The test of independent contractorship is whether one claiming to be an independent contractor has contracted
to do the work according to his own methods and without being subject to the control of the employer, except only as
to the results of the work.

(3) Fixed term, examples of employment

It went on to say that, “Under Article 280 of the Labor Code the applicable test to determine whether an employment
should be considered regular or non-regular is the reasonable connection between the particular activity performed
by the employee in relation to the usual business or trade of the employer.”

However, the High Court also pointed out that employment which requires performance of usual and desirable
functions, and does not exceed one year, does not always result in regular employment. This is where the concept of
fixed-term employment comes in:

“Under the Civil Code, fixed-term employment contracts are not limited, as they are under the present Labor Code, to
those by nature seasonal or for specific projects with predetermined dates of completion; they also include those to
which the parties by free choice have assigned a specific date of termination….The decisive determinant in term
employment is the day certain agreed upon by the parties for the commencement and termination of their
employment relationship, a day certain being understood to be that which much necessarily come, although it may
not be known when.”

Does this mean that fixed-term employment contracts are always valid, provided they are entered into knowingly and
voluntarily? No. In the case under consideration the Supreme Court emphasized that fixed-term employment
contracts are the exception rather than the general rule, and are valid only under certain circumstances. Citing its
earlier decision in Brent School v. Zamora (G.R. No. 48494, 5 February 1990, 181 SCRA 702) the Court identified
several circumstances wherein a fixed-term is an essential and natural appurtenance:

“Some familiar examples may be cited of employment contracts which may be neither for seasonal work nor for
specific projects, but to which a fixed term is an essential and natural appurtenance: overseas employment contracts,
for one, to which, whatever the nature of the engagement, the concept of regular employment with all that it implies
does not appear ever to have been applied, Article 280 of the Labor Code notwithstanding; also appointments to the
positions of dean, assistant dean, college secretary, principal, and other administrative offices in educational
institutions, which are by practice or tradition rotated among the faculty members, and where fixed terms are a
necessity without which no reasonable rotation would be possible. Similarly, despite the provisions of Article 280,
Policy Instructions No. 8 of the Minister of Labor implicitly recognize that certain company officials may be elected for
what would amount to fixed periods, at the expiration of which they would have to stand down, in providing that these
officials, “x x may lose their jobs as president, executive vice-president or vice president, etc. because the
stockholders or the board of directors for one reason or another did not reelect them.”

The Court also mentioned the fact that in the same Brent case, it issued “a stern admonition that where, from the
circumstances, it is apparent that the period was imposed to preclude the acquisition of tenurial security by the
employee, then it should be struck down as being contrary to law, morals, good customs, public order and public
policy.”