DEPARTMENT ORDER NO.

18 - 02
(Series of 2002)

RULES IMPLEMENTING ARTICLES 106 TO 109

OF THE LABOR CODE, AS AMENDED

By virtue of the power vested in the Secretary of Labor and Employment under
Articles 5 (Rule-making) and 106 (Contractor or Subcontractor) of the Labor Code of
the Philippines, as amended, the following regulations governing contracting and
subcontracting arrangements are hereby issued:chanroblesvirtuallawlibrary
Section 1. Guiding principles. - Contracting and subcontracting arrangements are
expressly allowed by law and are subject to regulation for the promotion of
employment and the observance of the rights of workers to just and humane
conditions of work, security of tenure, self-organization, and collective bargaining.
Labor-only contracting as defined herein shall be prohibited.
Section 2Coverage. - These Rules shall apply to all parties of contracting and
subcontracting arrangements where employer-employee relationship exists.
Placement activities through private recruitment and placement agencies as
governed by Articles 25 to 39 of the Labor Code are not covered by these Rules.
Section 3. Trilateral Relationship in Contracting Arrangements. - In legitimate
contracting, there exists a trilateral relationship under which there is a contract for a
specific job, work or service between the principal and the contractor or
subcontractor, and a contract of employment between the contractor or
subcontractor and its workers. Hence, there are three parties involved in these
arrangements, the principal which decides to farm out a job or service to a
contractor or subcontractor, the contractor or subcontractor which has the capacity
to independently undertake the performance of the job, work or service, and the
contractual workers engaged by the contractor or subcontractor to accomplish the
job work or service.
Section 4. Definition of Basic Terms. - The following terms as used in these Rules,
shall mean:chanroblesvirtuallawlibrary
(a) "Contracting" or "subcontracting" refers to an arrangement whereby a principal
agrees to put out or farm out with 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.

(b) "Contractor or subcontractor" refers to any person or entity engaged in a

legitimate contracting or subcontracting arrangement.
(c) "Contractual employee" includes one employed by a contractor or subcontractor
to perform or complete a job, work or service pursuant to an arrangement between
the latter and a principal.
(d) "Principal" refers to any employer who puts out or farms out a job, service or
work to a contractor or subcontractor.
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:chanroblesvirtuallawlibrary
(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.
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.
Section 6. Prohibitions. - Notwithstanding Section 5 of these Rules, the following are
hereby declared prohibited for being contrary to law or public
policy:chanroblesvirtuallawlibrary
(a) Contracting out of a job, work or service when not done in good faith and not
justified by the exigencies of the business and the same results in the termination of
regular employees and reduction of work hours or reduction or splitting of the
bargaining unit;

(b) Contracting out of work with a "cabo" as defined in Section 1 (ii), Rule I, Book V
of these Rules. "Cabo" refers to a person or group of persons or to a labor group
which, in the guise of a labor organization, supplies workers to an employer, with or
without any monetary or other consideration whether in the capacity of an agent of
the employer or as an ostensible independent contractor;
(c) Taking undue advantage of the economic situation or lack of bargaining strength
of the contractual employee, or undermining his security of tenure or basic rights,
or circumventing the provisions of regular employment, in any of the following
instances:chanroblesvirtuallawlibrary
(i) In addition to his assigned functions, requiring the contractual employee to
perform functions which are currently being performed by the regular employees of
the principal or of the contractor or subcontractor;
(ii) Requiring him to sign, as a precondition to employment or continued
employment, an antedated resignation letter; a blank payroll; a waiver of labor
standards including minimum wages and social or welfare benefits; or a quitclaim
releasing the principal, contractor or subcontractor from any liability as to payment
of future claims; and
(iii) Requiring him to sign a contract fixing the period of employment to a term
shorter than the term of the contract between the principal and the contractor or
subcontractor, unless the latter contract is divisible into phases for which
substantially different skills are required and this is made known to the employee at
the time of engagement;
(d) Contracting out of a job, work or service through an in-house agency which
refers to a contractor or subcontractor engaged in the supply of labor which is
owned, managed or controlled by the principal and which operates solely for the
principal;
(e) Contracting out of a job, work or service directly related to the business or
operation of the principal by reason of a strike or lockout whether actual or
imminent;
(f) Contracting out of a job, work or service being performed by union members
when such will interfere with, restrain or coerce employees in the exercise of their
rights to self organization as provided in Art. 248 (c) of the Labor Code, as
amended.
Section 7. Existence of an employer-employee relationship. - The contractor or
subcontractor shall be considered the employer of the contractual employee for
purposes of enforcing the provisions of the Labor Code and other social legislation.
The principal, however, shall be solidarily liable with the contractor in the event of
any violation of any provision of the Labor Code, including the failure to pay wages.

The principal shall be deemed the employer of the contractual employee in any of
the following cases as declared by a competent
authority:chanroblesvirtuallawlibrary
(a) where there is labor-only contracting; or
(b) where the contracting arrangement falls within the prohibitions provided in
Section 6 (Prohibitions) hereof.
Section 8. Rights of Contractual Employees. - Consistent with Section 7 of these
Rules, the contractual employee shall be entitled to all the rights and privileges due
a regular employee as provided for in the Labor Code, as amended, to include the
following:chanroblesvirtuallawlibrary
(a) Safe and healthful working conditions;
(b) Labor standards such as service incentive leave, rest days, overtime pay,
holiday pay, 13th month pay and separation pay;
(c) Social security and welfare benefits;
(d) Self-organization, collective bargaining and peaceful concerted action; and
(e) Security of tenure.
Section 9. Contract between contractor or subcontractor and contractual employee.
- Notwithstanding oral or written stipulations to the contrary, the contract between
the contractor or subcontractor and the contractual employee, which shall be in
writing, shall include the following terms and conditions:chanroblesvirtuallawlibrary
(a) The specific description of the job, work or service to be performed by the
contractual employee;
(b) The place of work and terms and conditions of employment, including a
statement of the wage rate applicable to the individual contractual employee; and
(c) The term or duration of employment, which shall be coextensive with the
contract of the principal and subcontractor, or with the specific phase for which the
contractual employee is engaged, as the case may be.
The contractor or subcontractor shall inform the contractual employee of the
foregoing terms and conditions on or before the first day of his employment.
Section 10. Effect of Termination of Contractual Employment. - In cases of
termination of employment prior to the expiration of the contract between the
principal and the contractor or subcontractor, the right of the contractual employee
to separation pay or other related benefits shall be governed by the applicable laws
and jurisprudence on termination of employment.

Where the termination results from the expiration of the contract between the
principal and the contractor or subcontractor, or from the completion of the phase
of the job, work or service for which the contractual employee is engaged, the latter
shall not be entitled to separation pay. However, this shall be without prejudice to
completion bonuses or other emoluments, including retirement pay as may be
provided by law or in the contract between the principal and the contractor or
subcontractor.
Section 11. Registration of Contractors or Subcontractors. - Consistent with the
authority of the Secretary of Labor and Employment to restrict or prohibit the
contracting out of labor through appropriate regulations, a registration system to
govern contracting arrangements and to be implemented by the Regional Offices is
hereby established.
The registration of contractors and subcontractors shall be necessary for purposes
of establishing an effective labor market information and monitoring.
Failure to register shall give rise to the presumption that the contractor is engaged
in labor-only contracting.
Section 12. Requirements for registration. - A contractor or subcontractor shall be
listed in the registry of contractors and subcontractors upon completion of an
application form to be provided by the DOLE. The applicant contractor or
subcontractor shall provide in the application form the following
information:chanroblesvirtuallawlibrary
(a) The name and business address of the applicant and the area or areas where it
seeks to operate;
(b) The names and addresses of officers, if the applicant is a corporation,
partnership, cooperative or union;
(c) The nature of the applicant's business and the industry or industries where the
applicant seeks to operate;
(d) The number of regular workers; the list of clients, if any; the number of
personnel assigned to each client, if any and the services provided to the client;
(e) The description of the phases of the contract and the number of employees
covered in each phase, where appropriate; and
(f) A copy of audited financial statements if the applicant is a corporation,
partnership, cooperative or a union, or copy of the latest ITR if the applicant is a
sole proprietorship.
The application shall be supported by:chanroblesvirtuallawlibrary

(a) A certified copy of a certificate of registration of firm or business name from the
Securities and Exchange Commission (SEC), Department of Trade and Industry
(DTI), Cooperative Development Authority (CDA), or from the DOLE if the applicant
is a union; and
(b) A certified copy of the license or business permit issued by the local government
unit or units where the contractor or subcontractor operates.
The application shall be verified and shall include an undertaking that the contractor
or subcontractor shall abide by all applicable labor laws and regulations.
Section 13. Filing and processing of applications. - The application and its supporting
documents shall be filed in triplicate in the Regional Offices where the applicant
principally operates. No application for registration shall be accepted unless all the
foregoing requirements are complied with. The contractor or subcontractor shall be
deemed registered upon payment of a registration fee of P100.00 to the Regional
Office.
Where all the supporting documents have been submitted, the Regional Office shall
deny or approve the application within seven (7) working days after its filing.
Upon registration, the Regional Office shall return one set of the duly-stamped
application documents to the applicant, retain one set for its file, and transmit the
remaining set to the Bureau of Local Employment. The Bureau shall devise the
necessary forms for the expeditious processing of all applications for registration.
Section 14. Duty to produce copy of contract between the principal and the
contractor or subcontractor. - The principal or the contractor or subcontractor shall
be under an obligation to produce a copy of the contract between the principal and
the contractor in the ordinary course of inspection. The contractor shall likewise be
under an obligation to produce a copy of the contract of employment of the
contractual worker when directed to do so by the Regional Director or his authorized
representative.
A copy of the contract between the contractual employee and the contractor or
subcontractor shall be furnished the certified bargaining agent, if there is any.
Section 15. Annual Reporting of Registered Contractors. - The contractor or
subcontractor shall submit in triplicate its annual report using a prescribed form to
the appropriate Regional Office not later than the 15th of January of the following
year. The report shall include:chanroblesvirtuallawlibrary
(a) A list of contracts entered with the principal during the subject reporting period;
(b) The number of workers covered by each contract with the principal;

(c) A sworn undertaking that the benefits from the Social Security System (SSS), the
Home Development Mutual Fund (HDMF), PhilHealth, Employees Compensation
Commission (ECC), and remittances to the Bureau of Internal Revenue (BIR) due its
contractual employees have been made during the subject reporting period.
The Regional Office shall return one set of the duly-stamped report to the contractor
or subcontractor, retain one set for its file, and transmit the remaining set to the
Bureau of Local Employment within five (5) days from receipt thereof.
Section 16. Delisting of contractors or subcontractors. - Subject to due process, the
Regional Director shall cancel the registration of contractors or subcontractors
based on any of the following grounds:chanroblesvirtuallawlibrary
(a) Non-submission of contracts between the principal and the contractor or
subcontractor when required to do so;
(b) Non-submission of annual report;
(c) Findings through arbitration that the contractor or subcontractor has engaged in
labor-only contracting and the prohibited activities as provided in Section 6
(Prohibitions) hereof; and
(d) Non-compliance with labor standards and working conditions.
Section 17. Renewal of registration of contractors or subcontractors. - All registered
contractors or subcontractors may apply for renewal of registration every three
years. For this purpose, the Tripartite Industrial Peace Council (TIPC) as created
under Executive Order No. 49, shall serve as the oversight committee to verify and
monitor the following:chanroblesvirtuallawlibrary
(a) Engaging in allowable contracting activities; and
(b) Compliance with administrative reporting requirements.
Section 18. Enforcement of Labor Standards and Working Conditions. - Consistent
with Article 128 (Visitorial and Enforcement Power) of the Labor Code, as amended,
the Regional Director through his duly authorized representatives, including labor
regulation officers shall have the authority to conduct routine inspection of
establishments engaged in contracting or subcontracting and shall have access to
employer's records and premises at any time of the day or night whenever work is
being undertaken therein, and the right to copy therefrom, to question any
employee and investigate any fact, condition or matter which may be necessary to
determine violations or which may aid in the enforcement of the Labor Code and of
any labor law, wage order, or rules and regulations issued pursuant thereto.

The findings of the duly authorized representative shall be referred to the Regional
Director for appropriate action as provided for in Article 128, and shall be furnished
the collective bargaining agent, if any.
Based on the visitorial and enforcement power of the Secretary of Labor and
Employment in Article 128 (a), (b), (c) and (d), the Regional Director shall issue
compliance orders to give effect to the labor standards provisions of the Labor
Code, other labor legislation and these guidelines.
Section 19. Solidary liability. - The principal shall be deemed as the direct employer
of the contractual employees and therefore, solidarily liable with the contractor or
subcontractor for whatever monetary claims the contractual employees may have
against the former in the case of violations as provided for in Sections 5 (Labor-Only
contracting), 6 (Prohibitions), 8 (Rights of Contractual Employees) and 16 (Delisting)
of these Rules. In addition, the principal shall also be solidarily liable in case the
contract between the principal and contractor or subcontractor is preterminated for
reasons not attributable to the fault of the contractor or subcontractor.
Section 20. Supersession. - All rules and regulations issued by the Secretary of
Labor and Employment inconsistent with the provisions of this Rule are hereby
superseded. Contracting or subcontracting arrangements in the construction
industry, under the licensing coverage of the PCAB and shall not include
shipbuilding and ship repairing works, however, shall continue to be governed by
Department Order No. 19, series of 1993.
Section 21. Effectivity. - This Order shall be effective fifteen (15) days after
completion of its publication in two (2) newspapers of general circulation.

Manila, Philippines, 21 February 2002.

PATRICIA A. STO. TOMAS

Secretary