Contractor or employee: how the DOLE test applies to offshore teams

This is the question that arrives late. A company engages three Philippine engineers as contractors, embeds them in a squad, gives them a laptop image, a stand-up at nine and a sprint board, and eighteen months later asks what its exposure is. The answer does not depend on the heading at the top of the agreement. It depends on what the arrangement actually looks like.

Nothing here is legal advice, and a real arrangement should be reviewed by Philippine counsel. What follows is the shape of the test, so you can tell in advance whether you have a question worth asking one.

The control question

Philippine jurisprudence tests an employment relationship on four elements: who selected and engaged the worker, who pays the wage, who holds the power of dismissal, and who controls the work. The fourth is the one that decides most cases, and it is narrower than it sounds — not control over the result, which every client has, but control over the means and method by which the result is reached.

Translated into the things an engineering organisation does every day, the control questions are roughly:

• Who sets the hours, and are they your hours?
• Who supplies the laptop, the accounts, the environment?
• Who decides how the work is done — your architecture review, your definition of done, your code standards?
• Who handles performance: your manager, your one-to-ones, your improvement plan?
• Is the person doing work that is part of your core business, alongside your own staff, indefinitely?

A genuine contractor is engaged for an outcome and left to reach it. If your honest answer to most of those is "us", you do not have a contractor, whatever the invoice says.

Where labor-only contracting begins

Article 106 of the Labor Code deals with the supplier side of this, and Department Order 174, issued on 15 March 2017, is the current implementing rule. Section 4 is blunt: the Secretary of Labor shall regulate contracting by absolutely prohibiting labor-only contracting.

Section 5 defines it. An arrangement is labor-only contracting where the contractor does not have substantial capital, or does not have investments in tools, equipment, machinery, supervision or work premises, and the workers it places are performing activities directly related to the principal's main business — or, independently of all that, where the contractor does not exercise the right of control over the performance of the work.

That second limb is the one that catches offshore staffing. A supplier who recruits people, places them into your squad and then has no involvement in how the work is done is not contracting out a job. It is supplying labour, and the arrangement is prohibited regardless of how well capitalised the supplier is.

What D.O. 174 fixed in numbers

The order replaced D.O. 18-A and put hard thresholds behind words that had been argued over for years.

• Substantial capital is defined as paid-up capital stock or shares of at least ₱5,000,000 for corporations, partnerships and cooperatives, or a net worth of at least ₱5,000,000 for a sole proprietorship.
• Registration is mandatory. Every contractor must register with the DOLE Regional Office where it principally operates, and failure to register gives rise to the presumption that the contractor is engaged in labor-only contracting.
• A certificate runs two years, with renewal to be applied for thirty days before expiry.
• Permissible contracting requires all of four conditions: the contractor runs a distinct and independent business, has substantial capital and investment in tools and supervision, is free from the principal's control except as to the result, and has a service agreement that secures the workers' statutory rights and benefits.

Section 6 adds a list of arrangements prohibited outright, several of which are worth reading against your own practice: contracting out work being performed by your regular employees, repeated hiring on short-duration contracts, and requiring workers to sign waivers or antedated resignation letters as a condition of engagement.

What it means if the finding goes against you

Two consequences, and they are not symmetrical with the money saved.

Section 7: where there is a finding of labor-only contracting, the principal is deemed the direct employer of the contractor's employees. Not a client, not a beneficiary — the employer, with everything that implies about security of tenure and the statutory benefits that should have been accruing.

Section 9: principal and contractor are solidarily liable for violations of the Labor Code, including the failure to pay wages, to the extent of the work performed. Solidary means a worker can recover the whole amount from you, and your recourse against the supplier is your own problem to pursue.

What we do about it

Our position is the uninteresting one, which is why we are comfortable publishing it. If you want to direct an engineer's hours, tools and method — and for someone embedded in your squad you almost always do — then the honest structure is employment, with the statutory contributions and the 13th month carried where they belong. We price roles that way, and our cost benchmarks are fully loaded for the same reason.

The arrangement that gets companies into trouble is rarely the one that was designed to. It is the pilot engagement that was genuinely project-shaped in month one, and had become a permanent team by month twenty, with the month-one paperwork still in the drawer. Re-read the agreement whenever the work changes shape. That is the whole of the practical advice.