NEW ERA UNIVERSITY COLLEGE OF LAW

LABOR LAW REVIEW

Under Atty. Jose-Antonio T. Aliling
1st Semester, AY 2014-2015

Handout No. 04
Prescribed Reading


DEPARTMENT ORDER NO. 3, Series of 2001:
Its implications on working arrangements/varied forms of employment, and available
legal remedies.*
By Dean Antonio H. Abad, Jr.

Department Order No. 3, Series of 2001, entitled: Revoking Department Order
No. 10 of 1997 and continuing to prohibit labor-only contracting, signed by DOLE
Secretary Patricia A. Sto. Tomas on 08 May 2001, revoked the rules implementing
Articles 106 to 109 of Book III of the Labor Code. The revocation effectively curtailed
several flexible working relations under Section 6 of D.O. #10, and, consequently, it
would appear that some contracting and outsourcing arrangements are no longer
legitimate modes of employment relation. However, the situation thus created is not
beyond legal remedy.

At this juncture, let us take a look at these provisions of Section 6, D.O. #10,
which were revoked by D.O. #3. Under the revoked Order, the permissible contracting
or subcontracting services that a principal may engage a contractor or subcontractor to
perform were the following:

1. Works or services temporarily or occasionally needed to meet
abnormal increase in the demand of products or services, provided that the normal
production capacity or regular workforce of the principal cannot reasonably cope
with such demands.

This contemplates of a circumstance where the regular workforce of the
company cannot cope with the increase demand for its products or services and there is
a need to hire additional employees to help the company for the duration of the
situation.

Does it mean that just because D.O. #10 was revoked by D.O. #3 that the
company has no more remedy? There is a remedy.

If the increase in the demand of the products or services is seasonal in character,
e.g. it comes every Christmas season, then the Company can hire seasonal employees.
This is allowed under Article 280 of the Labor Code where the work or service is
seasonal in nature and the employment is for the duration of the season. In this
instance, the employment legally ends upon completion of the season. (PNOC-
Exploration Corporation vs. NLRC, 164 SCRA 501.)

However, in the event the increase in the demand of the products or services is
not seasonal, the Company may hire the required employees under a contract
of temporary employment on a fixed term basis.
Fixed term employment contracts are lawful as held by our Supreme Court en
banc in the case of Brent School vs. Zamora, 181 SCRA 702. Term employment has not
been outlawed by the Labor Code.

A stipulation in employment contracts providing for term employment or
fixed period employment are valid when the period was agreed upon knowingly,
and voluntarily by the parties without force, duress or improper pressure exerted on
the employee; and when such stipulations were not designed to circumvent the laws on
security of tenure.

A contract of employment for a definite period terminates by its own terms at
the end of such period.

The decisive determinant in term employment should not be the activities that
the employee is called upon to perform but the day certain agreed upon by the parties
for the commencement and the termination of their employment relation.

Hence, non-renewal of an appointment for a definite and renewable period does
not involve dismissal but an expiration of term. (Felix Buenaseda vs. NLRC, 240 SCRA
139.)

However, contracts of employment for a fixed term should not be used in order
to prevent an employee from ever becoming regular or permanent thus precluding
security of tenure.

Where from the circumstances it is apparent that periods have been imposed to
preclude acquisition of tenurial security by the employees, they should be struck down
or/disregarded as contrary to public policy. (Cielo vs. NLRC, 193 SCRA 410.)

The critical consideration in determining its validity is the presence or absence
of a substantial indication that the period specified in the employment agreement was
designed to circumvent the security of tenure of regular employees. Hence, if the net
effect of the agreement is to render the employment basically at the pleasure of the
employer thus intended to prevent security of tenure from accruing in favor of
the employees even during the specified period, then it is unlawful. (Pakistan
International Airlines Corp. vs. Ople, 190 SCRA 90.)

2. Works or services temporarily or occasionally needed by the principal
for undertakings requiring expert or highly technical personnel to improve the
management or operations of an enterprise.

3. Specialized works involving the use of some particular, usual or
peculiar skills, expertise, tools or equipment the performance of which is beyond the
competence of the regular workforce or production capacity of the principal.

These two working arrangements under the provisions of the revoked D.O. #10,
contemplates of a situation where highly technical services requiring special expertise
or equipment are needed by the company in the operation of its enterprise.

In the light of D.O. #3, what can the company do?

The company can hire an independent contractor to perform special services.

In the case of Kimberly vs. Drilon (185 SCRA 191), it was held that the Court has
already taken judicial notice of the general practice adopted in several government and
private institutions and industries of hiring independent contractors to perform special
services. These services may even include technical and other specific services such as
those performed by radio/telex operators. While these services may be considered
directly related to the principal business of the company, nevertheless, they are not
necessary in the conduct of the principal business of the company. What is important is
that the duties being performed by these employees are not independent and integral
steps in or aspects of the essential operations of the company.

In any case, these highly technical personnel can also be hired under a fixed
term employment contract.

4. Services temporarily needed for the introduction or promotion of new
products, only for the duration of the introductory or promotional period.

5. Services involving the public display of manufacturers products
which does not involve the act of selling or issuance of receipts or invoices.

These two permissible contracting or subcontracting working arrangements
under D.O. #10 came about as a consequence of the promulgation by the Supreme
Court of its Decision in Tabas, et al. vs. California Manufacturing Company, Inc., et al. (169
SCRA 497).

In this particular case, the Supreme Court held that the contractor was not
engaged in job-contracting but in labor-only contracting because of the following
considerations:
a) The contractor which is engaged in manpower services merely
contracted out labor in favor of California Manufacturing. As a placement
agency, it had simply supplied California with the manpower using its premises
and equipment. In other words, the contractor merely provided California with
workers to pursue its business.
b) The workers placed by the contractor were performing activities
which were directly related to the business of California. They were
charged with the promotion or sale of the products of California in the
different sales outlets in Metro Manila including the task of price tagging,
an activity that is an integral part of the manufacturing process. In other
words, the workers were engaged in an activity which is related to the
day-to-day operations of California.
The question that may be asked in this connection is: If you are a manufacturer
and you want to promote a new product for a limited period, or you want to display
your products in some sales outlets, what can you possibly do without incurring the
risk of having these workers promoting your products from being declared as
your employees? These are the things you can do:
Firstly, you can hire a promotions firm to promote your products under a
specific contract for a limited period.
In the words of the Supreme Court itself: It would have been different, we
believe, had (the Contractor) been discretely a promotions firm, and that California had
hired it to perform the latters merchandising activity. For then, (the Contractor) would
have been truly the employer of its employees, and California, its client. The client, in
that case, would have been a mere patron, and not an employer. The employees would
not in that event be unlike waiters, who, although at the service of customers, are not
the latters employees, but of the restaurant.

Secondly, you can hire the services of workers to promote your products as
project employees under a contract which is co-terminus with the promotion period.

The basic issue to be considered here is whether or not these workers hired to
promote the products can properly be characterized as project employees. In the
consideration of this issue, it is important to clearly understand the meaning and scope
of the word project

In the case of ALU-TUCP vs. NLRC (234 SCRA 678), it was held that the term
Project in the realm of business and industry can refer to a particular job or
undertaking that is within the regular or usual business of the employer, but which is
distinct and separate, and identifiable as such, from the undertaking of the company.
Such job or undertaking begins and ends at determined or determinable times. Taken
within this context, the workers hired to promote the products of a company can
properly be denominated as project employees.

Project employees are those workers hired (1) for a specific project or
undertaking, and (2) the completion or termination of such project has been
determined at the time of the engagement of the employee. The principal test for
determining whether particular employees are project employees as distinguished
from regular employees is whether or not the project employees were assigned to
carry out a specific project or undertaking, the duration and scope of which were
specified at the time theemployees were engaged for that project. (Philex Mining Corp.
vs. NLRC, 312 SCRA 199.)

Hence, it is necessary that the workers must have been informed that they are to
be assigned to a specific project or undertaking. And they must likewise be informed
about the duration and scope of such project or undertaking at the time of their
engagement.

It has been held that the length of service of a project employee is not the
controlling test of employment tenure but whether or not the employment has been
fixed for a specific project or undertaking the completion of which has been determined
at the time of the engagement of the employee. (Hilario Rada vs. NLRC, 136 SCRA 674.)

By reason of the fact that the services of project employees are co-terminus with
the project, their employment may be terminated upon the end or completion of the
project for which they were hired. (ALU-TUCP vs. NLRC, supra.) Upon completion of
the project, the company cannot be required to maintain them in the payroll. (Luis de
Ocampo vs. NLRC, 186 SCRA 360.) Otherwise, if their services are not terminated and
their employment is extended long after the supposed project had been finished, the
workers are removed from the scope of project employees and they shall be considered
as regular employees. (Phesco, Inc. vs. NLRC, 239 SCRA 446; Audion Electric Co. vs.
NLRC, 308 SCRA 340.)
Considering that the workers were employed as project employees, the
company should submit a report of termination to the nearest public employment office
everytime their employment is terminated due to completion of each project. (Ochoco
vs. NLRC, 120 SCRA 774; Philippine National Construction Corporation vs. NLRC, 174
SCRA 191; Magante vs. NLRC, 188 SCRA 21; Aurora Land Projects Corp. vs. NLRC, 266
SCRA 48.)

Policy Instruction No. 20 of the Department of Labor is explicit that employers
of project employees are not exempted from the submission of termination report. The
Supreme Court has consistently held that failure of the employer to file termination
reports after every project completion with the nearest public employment office is an
indication that the worker was not and is not a project employee. Department Order
No. 19 superseding Policy Instruction No. 20 expressly provides that the report of
termination is one of the indications of project employment. (Audion Electric Co. vs.
NLRC, supra.) As a matter of fact, it has been held that this reporting requirement is
mandatory in character. (Aurora Land Projects Corp. vs. NLRC, supra.)

After the termination of employment of the project employees, the company
need not pay them any separation pay. Pursuant to the provisions of Policy Instruction
No. 20, project employees are not entitled to termination pay if they are terminated as a
result of the completion of the project or any phase thereof in which they are employed,
regardless of the number of projects in which they have been employed. (Ricardo
Fernandez vs. NRLC, 203 SCRA 460.)
In all event, what is important in project employment is to observe the common
basic requisite that the designation of the workers as project employees and their
assignment to a specific project, are effected and implemented in good faith, and not
merely as a means of evading otherwise applicable requirements of labor laws. (ALU-
TUCP vs. NLRC, supra.)

6. Works or services not directly related or not integral to the main
business or operation of the principal, including casual work, janitorial, security,
landscaping, and messengerial services, and work not related to manufacturing
processes in manufacturing establishments.

Article 280 of the Labor Code treats casual employment vis--vis regular,
seasonal and project employments. These matters were succinctly explained by the
Supreme Court in the case of Mercado vs. NLRC (201 SCRA 332).

"Article 280. Regular and Casual Employment. - The
provisions of written agreement to the contrary notwithstanding
and regardless of the oral agreement of the parties, an employment
shall be deemed to be regular where the employee has been engaged
to perform activities which are usually necessary or desirable in the
usual business or trade of the employer, except where the
employment has been fixed for a specific project or undertaking the
completion or termination of which has been determined at the time
of the engagement of the employee or where the work or services to
be performed is seasonal in nature and the employment is for the
duration of the season.

An employment shall be deemed to be casual if it is not
covered by the preceding paragraph: Provided, That, any employee
who has rendered at least one year of service, whether such service
is continuous or broken, shall be considered a regular employee
with respect to the activity in which he is employed and his
employment shall continue while such actually exists.

The first paragraph answers the question of who are regular employees. It states
that, regardless of any written or oral agreement to the contrary, an employee is
deemed regular where he is engaged in necessary or desirable activities in the usual
business or trade of the employer, except for project employees.

A project employee has been defined to be one whose employment has been
fixed for a specified project or undertaking, the completion or termination of which has
been determined at the time of the engagement of the employee, or where the work or
service to be performed is seasonal in nature and the employment is for the duration of
the season (PNCC vs. NLRC, 174 SCRA 191.)

The second paragraph of Art. 280 demarcates as "casual" employees, all
other employees who do not fall under the definition of the preceding paragraph. The
provision, in said second paragraph, deems as regular employees those
"casual" employees who have rendered at least one year of service regardless of the fact
that such service may be continuous or broken.

The provision is applicable only to the employees who are deemed "casuals" but
not to the "project" employees nor the regular employees treated in paragraph one of
Art. 280.

The provisions of Department Order No. 3 notwithstanding, the Labor Code and
jurisprudence on the matter consider janitorial, security, landscaping and messengerial
services, as well as work not directly related or not integral to the principal business of
the company, as proper subjects of job-contracting. What is prohibited by law is labor-
only contracting.

The pertinent provision of Article 106 of the Labor Code provides as follows:
There is labor-only contracting where the person supplying
workers to an employer does not have substantial capital or
investment in the form of tools, equipment, machineries, work
premises, among others, and the workers recruited and placed by
such person are performing activities which are directly related to
the principal business of such employer. In such cases, the person
or intermediary shall be considered merely as an agent of the
employer who shall be responsible to the workers in the same
manner and extent as if the latter were directly employed by him.

When is there labor-only contracting? Section 2 of D.O. #3, provides as
follows:
Section 2. Prohibition against labor-only contracting. Labor-
only contracting is hereby declared prohibited. There is labor-only
contracting where the contractor or subcontractor merely recruits,
supplies or places workers to perform a job, work or service for a
principal, and 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.

When is there job contracting?

There is "job contracting" where (1) the contractor carries on an independent
business and undertakes the contract work on his own account under his own
responsibility according to his own manner and method, free from the control and
direct of his employer or principal in all matters connected with the performance of the
work except as to the results thereof; and (2) the contractor has substantial capital or
investment in the form of tools, equipment, machineries, work premises, and other
materials which are necessary in the conduct of his business. (Baguio, et al. vs. NLRC,
202 SCRA 465.)

A finding that a contractor is a "labor-only" contractor is equivalent to declaring
that there is an employer-employee relationship between the company and
the employees of the "labor-only" contractor (Associated Anglo-American Tobacco Corp. vs.
Clave, 189 SCRA 127; Industrial Timber Corp. vs. NLRC, 169 SCRA 341). This is because
the "labor-only" contractor is considered as a mere agent of an employer. In contrast, in
"job contracting," no employer-employee relationship exists between the company and
the employees of the contractor. The company is not the direct employer but merely an
indirect employer, by operation of law, of the contractor's employees. Consequently,
the company is jointly and severally liable with the contractor with respect to the
money claims of the contractor's employees pursuant to Article 109 of the Labor Code.
However, failure of the company to require the contractor to post a bond in
accordance with Article 108 of the Labor Code, the company must answer for whatever
liabilities the contractor may have incurred to his employees; without prejudice on the
part of the company to seek reimbursement from the contractor.
7. Unless a reliever system is in place among the regular workforce,
substitute services for absent regularemployees, provided that the period of service
shall be coextensive with the period of absence and the same is made clear to the
substitute employee at the time of engagement. The phrase absent
regular employees includes those who are serving suspensions or other disciplinary
measures not amounting to termination of employment meted out by the principal,
but excludes those on strike where all the formal requisites for the legality of the
strike have been prima facie complied with based on the records filed with the
National Conciliation and Mediation Board.
The above revoked provisions under D.O. #10 can be divided into two (2)
parts. First part is with reference to substitute service for absent regular employees;
and the second part is with reference to substitute service for employees on strike.
On the first part: This substitute service for absent regular employees can
easily be remedied by entering into a contract of employment for a fixed term for a
limited period. The substitute worker should be informed of the circumstances of his
employment; and once so informed, he can be said to have voluntarily and knowingly
agreed to be employed temporarily and only for a short period of time.
The fact that the substitute worker will be required to render services usually
necessary or desirable in the operation of the company will not in any way impair the
validity of the contractual nature of the substitute workers contract of employment
which specifically stipulated that the employment is only temporary in nature and just
for a fixed limited period of time. (Phil. Village Hotel vs. NLRC, 230 SCRA 423.) This is
so because, as adverted to earlier, the decisive determinant in term of employment is
the day certain agreed upon by the parties for the commencement and termination of
their employment relationship, and not that the employee is called upon to perform
activities which are necessary or desirable in the operations of the business of the
company.

On the second part: As a general rule, it is an unfair labor practice for an
employer to hire workers in order to take the place of employees who are on strike.
However, in at least one (1) instance, this general rule admits of an exception.

It does not necessarily follow that just because all formal requisites for the
validity of the strike have been complied with that this concerted action will remain
legal and valid up to the very end of the strike. There is no guarantee that lawful
means would always be used in carrying out the strike. If the strike is attended by acts
of violence, coercion and intimidation, it can be declared illegal notwithstanding
compliance with all formal requisites for its validity. Moreover, defiance of an
assumption or certification order issued by the Secretary of Labor will render the strike
illegal. An assumption or certification order is executory in character and
automatically results in a return-to-work order, whether or not a corresponding order
is issued by the Secretary of Labor. A strike that is undertaken despite the issuance of
an assumption or certification order becomes a prohibited activity and thus illegal,
pursuant to the second paragraph of Article 264 of the Labor Code. In such a case, the
union officers and members, as a result, are deemed to have lost their employment
status for having knowingly participated in an illegal act. (Union of FiliproEmployees vs.
Nestle Philippines, 192 SCRA 396.) With or without D.O. #10, and even in the light of
D.O. #3, these union officers and members can immediately be replaced by new hirees
or employees. And it has been held that this replacement by reason of violation of a
return-to-work order does not require a hearing. (Free Telephone Workers Union vs.
PLDT, 133 SCRA, 663,678.)

Thus far, we have considered the different contracting or subcontracting
services which have been revoked by D.O. #3 and what can possibly be done legally to
remedy the situation. Our discussion is, or course, without prejudice to the provisions
of Section 3 of D.O. #3, as follows:
Section 3. Non-impairment of existing contracts: Non-
diminution of benefits. Subject to the provisions of Articles 106 to
109 of the Labor Code, as amended, the applicable provisions of the
Civil Code and existing jurisprudence, nothing herein shall impair
the rights or diminish the benefits being enjoyed by parties to
existing contracting or subcontracting arrangements.

D.O. #10 was promulgated for flexibility of working arrangements in order to
increase efficiency and streamline operations which are deemed essential for every
business to grow in an atmosphere of free competition. It is certainly hoped that D.O.
#3 will not unmake the business-friendly labor environment and curtail the growth
of business and investments in the arena of global competition.

- END -

* Delivered on 26 June 2001 at the Institute of Labor Relations, University of the
Philippines Law Center, Diliman, Quezon City.