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DOLE Issues Department Circular Clarifying the

Scope of Application of the New Rules on
Contracting and Sub-Contracting
  (http://cruzmarcelo.com/2017/07/26/cruz-marcelo-
(http://cruzmarcelo.com/2017/06/07/minimum- tenefrancia-wins-corporate-name-suit-world-electricalmech-
public-ownership-increased-to-20/) system-management-wesm-inc/)

On 13 June 2017, the Department of Labor and Employment (“DOLE”) issued Department Circular No. 01, Series of 2017
(“D.C. No. 1”) clarifying the scope and application of Department Order No. 174, Series of 2017 (“D.O. No. 174”),
otherwise known as the Rules Implementing Articles 106 to 109 of the Labor Code. D.O. No. 174, which was issued last
16 March 2017, effectively superseded D.O. No. 18-A setting the new rules and regulations on contracting and
subcontracting.

Notably, D.C. No. 1 clarified and further refined the applicability of D.O. No. 174 as to industry, contractual relationship,
and as to persons.

Applicability as to Industry
First, D.C. No. 1 clarifies that D.O. No. 174 does not apply to business entities engaged in Business Process Outsourcing
(“BPO”), Legal Process Outsourcing (“LPO”), and Knowledge Process Outsourcing (“KPO”). DOLE clarified that D.O. No.
174 does not contemplate information-technology services which involve an entire business process.

Second, D.C. No. 1 clarifies that D.O. No. 174 does not apply and govern on contracting or subcontracting arrangements
in the construction industry which shall continue to be governed by the following:

1. D.O. No 19, Series of 1993 (Guidelines Governing the Employment of Workers in the Construction Industry);
2. D.O. No. 13, Series of 1998 (Guidelines Governing the Occupational Safety and Health in the Construction Industry);
and
3. DOLE-DPWH-DILG-DTI and PCAB Memorandum of Agreement-Joint Administrative Order Series of 2011 dealing with
coordination and harmonization of policies concerning occupational safety and health in the said industry.

As regards the issue of registration of contractors, the Philippine Contractors Accreditation Board (“PCAB”), pursuant to
regulatory powers granted by Presidential Decree No. 1746, Series of 1980, registers all types of contractors and
ensures their compliance with DOLE issuances. Thus, contractors licensed by PCAB are not required to register under
D.O. No. 174 unless they are also engaged in other contracting or subcontracting arrangements not related to the
construction industry. Findings of violation/s of labor or occupational health and safety standards, such shall be
coordinated with the PCAB for appropriate action, which may include cancellation/suspension of the violating
contractor’s license.

Third, D.C. No. 1 clarifies that D.O. No. 174 is only applicable and relevant to the private security industry insofar as it
requires these private security agencies to comply with the registration requirements under D O No 174
requires these private security agencies to comply with the registration requirements under D.O. No. 174.

D.C. No. 1 clarifies that contracting or subcontracting arrangements in the private security industry shall be governed by
Department Order No. 150, Series of 2016 (Revised Guidelines Governing the Employment and Working Conditions of
Security Guards and other Private Security Personnel in the Private Security Industry).

Applicability as to Contractual Relationship

D.C. No. 1 clarifies that D.O. No. 174 does not cover contractual relationships which do not bear the “trilateral
relationship” distinct in contracting and subcontracting arrangements. Thus, D.O. No. 174 does not contemplate
applicability over contracts of sale or purchase, contract of lease, contract of carriage, contract growing/growership
agreement, toll manufacturing, contract of management, operation and maintenance and such other contracts governed
by the Civil Code of the Philippines and other special laws.

Applicability as to Persons
D.C. No. 1 clarifies that D.O. 174 does not cover contracting out of work to professionals or individuals with distinctive
skills/talents provided that they perform the job or work for the principal.

Analysis
It was imperative on the part of DOLE to issue a clarification as the issuance of D.O. No. 174 sent chilling effect to the
employers as DOLE, through its Regional Offices, intensified their inspection and assessment on entities pursuant to the
campaign promise of President Rodrigo Duterte to end contractualization. Easy target on these inspections and
assessments are the BPOs or in common parlance the “Call Centers”. These BPOs are known for providing support
services or business processes for corporations based domestically or abroad.

Even under Articles 106 to 109 of the Labor Code, the services provided by these BPOs or Call Centers fall under
legitimate job contracting which is not prohibited. What is prohibited is engaging in contracting and subcontracting for
the purpose of circumventing labor standards and preventing the workers to have security of tenure. The BPOs or Call
Centers became the subject of inspection and assessment because during heavy or peak season, they engage
contractors to provide them with manpower to augment their regular workforce. These workers are employees of the
contractors but are deployed in the sites of the principals and more often than not, receive instructions, being evaluated
and even subjected to disciplinary action by the principals. These circumstances usually lead to a finding of the
existence of prohibited labor-only contracting.

However, with the issuance of D.C. No. 1, some quarters within DOLE are even taking the position that an arrangement
wherein these BPOs, LPOs and KPOs engage contractors to supply them workers during heavy or peak season is still
not covered and is exempted from the application of D.O. No. 174. It remains to be seen if DOLE will cease and back off
from inspecting and assessing these BPOs, LPOs and KPOs including their contractors as the Labor Sector may find
D.C. No. 1 a step backward and contrary to the campaign promise of the President.

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