Contractual Workers In The Philippines | Who Are They
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In this legal discourse, we shall tackle contractual workers in the Philippines. As defined in Art. 1305 of the Civil Code, a contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service. This very definition is what people think and believe in entering into any contractual engagements or agreements.

Now that we already mapped out the essence of what a contract is, in a nutshell. The question before us is what are contractual workers? Apparently, they are workers who are bound by their contracts. However, it may technically refer to fixed-period employment to be performed within an agreed period in a contractual term.

It must be noted though that employment arrangement, not being a fixed period one, is also a contract. However, in the latter, security of tenure is protected by law. 

What does the contract state then? Before a person enters a contract, in the eyes of the law, he or she is bound and obligated to know the contents and scope of his or her contract. As a general rule, the courts are not at liberty to ignore the freedom of the parties to agree on such terms and conditions, as long as they are not contrary to law, morals, good customs, public order or public policy.

Workers aim for stability and permanency in work. Who would have wanted short-lived jobs and easy-peasy “end of contract” engagements? If only they have the liberty to choose from and without the mouth and stomach to consider.

Therefore, contractual workers are those hired under a fixed term contract and maybe stripped of the benefits that regular workers or employees enjoy. This is a prevalent practice in various industries the Philippines. This is, otherwise, called contractualization.

Contractualization | Contractual Workers in the Philippines

Contractualization is well defined as the practice of hiring employees who will render their services for a finite amount of time, usually, for a few months only. This is still a prevalent practice among various industries in the Philippines because it allows companies to maintain their revenues with a very cheap labor fees.

These cheap labor fees are received by workers who are rendering services with all their might just for a living. Contractualization has also been coined as the “5-5-5” practice because the employee is terminated after 5 months otherwise when she reaches her 6th-month, she will be evaluated, and if she meets the standards, then, she must be regularized unless she is not qualified, as mandated by law.

Thus, this should be the proper practice:

Article 296.1 [formerly known as Article 2812] Probationary Employment. – Probationary employment shall not exceed six (6) months from the date the employee started working, unless it is covered by an apprenticeship agreement stipulating a longer period. The services of an employee who has been engaged on a probationary basis may be terminated for a just cause or when he fails to qualify as a regular employee in accordance with reasonable standards made known by the employer to the employee at the time of his engagement. An employee who is allowed to work after a probationary period shall be considered a regular employee.3

Stating it otherwise, Article 296 of the Labor Code of the Philippines states that that those who continue to work after the probationary period of six (6) months must be regularized and must be given benefits such as paid leaves, medical insurance, and security of tenure for a secured livelihood.

The labor provision was supposed to protect workers or employees. However, different companies among various industries managed to find loopholes and set aside the spirit of the provision for cheaper labor fees and to maintain their towering revenues by outsourcing workers from different manpower agencies.

The business sector is thriving while the workers are set aside and exploited. Workers should have a security of tenure for a just and secured livelihood.

No less than the 1987 Constitution provides for the provision in support of labor, promotion of the state and welfare of the workers, other labor standards and labor relations concerning the rights of the workers. For example, the constitutional provisions under Article II of the Constitution below:


“Section 9. The State shall promote a just and dynamic social order that will ensure the prosperity and independence of the nation and free the people from poverty through policies that provide adequate social services, promote full employment, a rising standard of living, and an improved quality of life for all.5

“Section 10. The State shall promote social justice in all phases of national development.6

“Section 18. The State affirms labor as a primary social economic force. It shall protect the rights of workers and promote their welfare.7

“Section 20. The State recognizes the indispensable role of the private sector, encourages private enterprise, and provides incentives to needed investments.8

The above-mentioned constitutional provisions under Article II are clearly in support of labor and in the promotion of social justice. These provisions are used as guidelines which shed understanding for all departments of the government.

Nevertheless, these provisions are not self-executing provisions ready for enforcement through courts. Hence, there must be a law enforcing the said provisions.

In the present, there is still no good law prohibiting contractualization in the country.  Previously, Department of Labor and Employment (DOLE) issued Department Order No. 174 Series of 2017 which pertains to the Rules Implementing amendments to Articles 106 to 109 of the Labor Code.

It declares labor-only contracting or subcontracting as illegal. Meaning, contracting labor through an independent contractor is still allowed by law; yet, it is subject to regulation in order to promote the welfare and rights of workers.

On the othet hand, labor-only contracting is prohibited. This just proved the never-ending problem of contractualization in the Philippines. This undermines the security of tenure of an employee; who otherwise, should be entitled and protected under the law, and even by the State Policies, as mentioned.

Is hiring contractual employees allowed in the Philippines? 

Hiring a contractual employee is still allowed in the Philippines. The Supreme Court has validated this. Hence:

Contracts of employment for a fixed term are not unlawful unless it is apparent from the circumstances that the periods have been imposed to circumvent the laws on security of tenure. The case of Pure Foods Corporation v. NLRC laid down the criteria of a valid fixed-term employment, to wit:9

1. The fixed period of employment was knowingly and voluntarily agreed upon by the parties without any force, duress, or improper pressure being brought to bear upon the employee and absent any other circumstances vitiating his consent; or10

2. It satisfactorily appears that the employer and the employee dealt with each other on more or less equal terms with no moral dominance exercised by the former or the latter.10

Labor Only Contacting | Prohibited

Department of Labor and Employment (DOLE) issued Department Order No. 174 series of 2017,11 implementing the amendments to Articles 106 to 10912 of the Labor Code where it declares that labor-only contracting or subcontracting as illegal.

The guiding principles under the said order states that contracting and subcontracting arrangements are allowed by law. Yet, they are subject to regulation for the promotion of employment and the observance of the rights of workers to just and humane conditions, security of tenure, self-organization, and collective bargaining.

Labor-only contracting as defined shall be prohibited.

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.13

In the present, even though the said order has been implemented by DOLE, there are still loopholes therein where different companies have managed to circumvent the law.

Clearly, the said order only covers labor-only contracting which means that it only covers companies that purely have contractual employees.

It means that, if a certain business or a mall has regular employees, such as managers or associates, they can still employ people on a contractual basis because they do not have purely contractual employees.

Hence, contractualization is still a prevalent practice and contractual employees are still undeniably allowed.

Are contractual employees entitled to SSS?

Contractual employees are entitled to SSS. They are still considered employees, perforce, can be covered by the SSS Law or Republic Act [RA] No. 11199.14

Coverage in the SSS shall be compulsory upon all employees including kasambahays or domestic workers not over sixty (60) years of age and their employers: Provided, That any benefit already earned by the employees under private benefit plans existing at the time of the approval of this Act shall not be discontinued, reduced or otherwise impaired x x x . . .15

Under Section 8 (j) of Republic Act No. 11199 or the Social Security Act of 2018, it states that, as to the purposes of the act, Employment shall mean – Any service performed by an employee for his employer except:16

  • Services where there is no employer-employee relationship in accordance with existing labor laws, rules, regulations and jurisprudence;17
  • Service performed in the employ of the Philippine Government or instrumentality or agency thereof;17
  • Service performed in the employ of a foreign government or international organization, or their wholly-owned instrumentality: Provided, however, That this exemption notwithstanding, any foreign government, international organization or their wholly owned instrumentality employing workers in the Philippines or employing Filipinos outside of the Philippines, may enter into an agreement with the Philippine Government for the inclusion of such employees in the SSS except those already covered by their respective civil service retirement systems: Provided, further, That the terms of such agreement shall conform with the provisions of this Act on coverage and amount of payment of contributions and benefits: Provided, finally, That the provisions of this Act shall be supplementary to any such agreement; and17
  • Such other services performed by temporary and other employees which may be excluded by regulation of the Commission. Employees of bona fide independent contractors shall not be deemed employees of the employer engaging the service of said contractors.17

Government Job Order (JO) and Contractual Employees | Self-Employed Professionals

If a worker falls with any of this exceptions, then he can register under the KaltaSSS-Collect Program, where JOs and contractual workers will be registered as self-employed professionals while government agencies are responsible to remit their monthly premiums to SSS through automatic salary deduction scheme.18

Regular remittance of SSS contributions will give them various benefits like sickness, maternity, disability, unemployment, and retirement, while their legal beneficiaries can avail themselves of the death and funeral benefits upon the member’s death.

They are also qualified to benefit from various SSS loan privileges such as salary, housing, educational, calamity, as well as pension loans for retiree-pensioners. The goal is to extend meaningful social security protection to job order and contractual government workers.

Consequently, the Social Security System (SSS) launched the KaltaSSS-Collect Program in 2013. The pension fund has forged partnerships with national government agencies, GOCCs, LGUs, SUCs and LWDs by signing Memorandum of Agreements (MOAs).

Are contractual employees entitled to 13th month pay?

Contractual employees are entitled to receive 13th month pay.

Under Section 8 of DOLE Department Order No. 18-A, as pointed out in D.O. No. 174, the rights of contractual employees are now fully protected under the law. All contractual employees, whether deployed or assigned as a reliever, seasonal, weekender, or temporary one shall be entitled to all the rights and privileges provided under the Labor Code including the 13th-month pay.19

Contractual employees are coined as persons employed by a contractor to perform or complete a job, work, or service under a service agreement. It may be for a definite or predetermined amount of time.20

Hence, contractual employees are indeed entitled to receive 13th-month pay with all the rights and privileges mandated under the Labor Code. With respect to this specific benefit, contractual employees should not be treated differently from regular employees.

Jurisprudence dictates that they are bound to receive it and they cannot be deprived of such right. Thus, different companies from among various sectors should know and follow the law as stated under the Labor Code and pay their employees irrespective of type, whether contractual, even as a reliever, seasonal or a temporary one, their 13th month pay accordingly.

The 13th-month pay mandated by Presidential Decree (P.D.) No. 851 represents an additional income based on wage but not part of the wage. It is equivalent to one-twelfth (1/12) of the total basic salary earned by an employee within a calendar year. All rank-and-file employees, regardless of their designation or employment status and irrespective of the method by which their wages are paid, are entitled to this benefit, provided that they have worked for at least one month during the calendar year. If the employee worked for only a portion of the year, the 13th-month pay is computed pro rata.21

Is contractual employee entitled to separation pay?

We have to distinguish. As a general rule, contractual employees are not entitled to separation pay. The question lies with how the contractual employee got separated from the job. If the contractual employee is terminated as a result of expiration of contract, thus, the employee is not entitled to termination pay or separation pay because there is no dismissal or termination to speak of.

Separation pay is granted only to employees who are dismissed. With respect to contractual employees, when the contract with their employer ends, what actually takes place is an expiration of term of contract and not a dismissal in legal contemplation.

Hence, in the absence of an actual dismissal, there can be no claim for separation pay.

Despite that, the exception to the general rule is where the contractual employee is dismissed prior to the end of his contract. If this is the case, there is an actual dismissal for which separation pay may be claimed by the contractual employee.

A contractual employee is considered, for the duration of his or her contract, as a regular employee. The contractual employee enjoys a security of tenure for the limited period just like everybody else provided under the contract

He or she cannot be removed by the employer without just cause and without following the procedure outlined under the Labor Code for the termination of a regular employee.

Under Article 29722 of the Labor Code, an employer may terminate the services of an employee for the following just causes:23

  • Serious misconduct or willful disobedience by the employee of the lawful orders of his employer or representative in connection with his work;23
  • Gross and habitual neglect by the employee of his duties;23
  • Fraud or willful breach by the employee of the trust reposed in him by his employer or duly authorized representative;23
  • Commission of a crime or offense by the employee against the person of his employer or any immediate member of his family or his duly authorized representatives; and23
  • Other causes analogous to the foregoing.23

Thus, if the contractual employee is removed without just cause and without following the procedure outlined under the law, the employer not only commits breach of contract but also illegal dismissal.

Why do employers hire contractual workers?

Employers hire contractual workers for different reasons and factors. Some companies honestly engage their services to fill in for a short project or to provide assistance for their key personnel in their organization for workload to be performed just for a specific period. Others get them for unscrupulous objectives.

After the work is done the contractual employee already served her purpose and the company will let her go upon the end of contract. With such means, the company saved labor fees and resources instead of hiring an employee that potentially can be a regular one right after the probationary period. Hence, it’s a matter of need and, indeed, a very good cost-cutting technique.

Yet, the above stated reason is an ideal one, among various industries in the country, exploitation of the need for a living of contractual workers, having paid them cheap labor fees, and sustaining a higher revenue are still the main reasons why employers hire contractual workers.

The sad story behind it rooted from the fact that due to the expiration of the very short contract. The abusive-profit-concerned company will offer the workers another contract and hire them again just to avoid their regularization.

The latter will lead to the workers being entitled to a wide array of benefits that a regular employee receives, which most employers do not want.

Clearly, this cost-cutting scheme of various companies made them earned lots of money at the expense of poor contractual workers who just wanted stability and paying jobs for their daily lives.

Final Thoughts

There is clearly a need to completely prohibit or end contractualization and possibly amend the existing labor laws.

Different companies among various sectors hire seasonal workers to build up their output during busy season or months and let them go when the busy season died down because their services are no longer needed.

This is a very good cost-cutting scheme that works best for them. Nevertheless, workers are exploited because of their vulnerability to accept a contractual job that will sustain and support their daily needs and living.

The government must stand up for the spirit of the of the law and choose the welfare of all the people in outright claim for social justice and human rights. Clearly, if the employers’ objective is to circumvent and undermines the protected security of tenure, then, “endo” is prohibited based on jurisprudence.

This scheme of the petitioner was apparently designed to prevent the private respondents and the other “casual” employees from attaining the status of a regular employee. It was a clear circumvention of the employees’ right to security of tenure and to other benefits like minimum wage, cost-of-living allowance, sick leave, holiday pay, and 13th month pay. Indeed, the petitioner succeeded in evading the application of labor laws. Also, it saved itself from the trouble or burden of establishing a just cause for terminating employees by the simple expedient of refusing to renew the employment contracts.24

The five-month period specified in private respondents’ employment contracts having been imposed precisely to circumvent the constitutional guarantee on security of tenure should, therefore, be struck down or disregarded as contrary to public policy or morals. To uphold the contractual arrangement between the petitioner and the private respondents would, in effect, permit the former to avoid hiring permanent or regular employees by simply hiring them on a temporary or casual basis, thereby violating the employees’ security of tenure in their jobs.25

In spite this, because there is no law prohibiting contractualization, predator companies, who are solely after the money and revenue making activities disregarding their virtues and corporate responsibility, will just go on and circumvent the law, get away with it, and deny workers of their rights.

In a way, the Depart of Labor and Employment somehow regulated the practice of contractualization and managed to regularized contractual workers from selected sectors, but the welfare must be for all and not just merely selective. To attain this the government must pick its poison and let the hammer fall heavily, as in the words of

Justice Laurel, even if it will cost the great interest of the business sector. If it’s for the people, let it be. The welfare of the people is the supreme law or Salus populi est suprema lex.

  1. Article 296 of the Current Labor Code[]
  2. Then Article 281 of the Labor Code, Probationary Employment[]
  3. Id., Article 296, Supra.[]
  4. 1987 Philippine Constitution[]
  5. Id., Section 9[]
  6. Id., Section 10[]
  7. Id., Section 18[]
  8. Id., Section 20[]
  9. Tuppil, Jr., et al. vs. LBP Service Corporation, G.R. No. 228407, June 10, 2020[]
  10. Ibid.[][]
  11. Department Order No. 174, Series of 2017[]
  12. Articles 106-109, Labor Code[]
  13. Ibid., Labor-only Contracting[]
  14. RA 11199[]
  15. Section 9, RA 11199[]
  16. Section 8 (j) of Republic Act No. 11199[]
  17. Id.[][][][]
  18. KaltaSSS-Collect Progam[]
  19. Section 8 of DOLE Department Order No. 18-A[]
  20. Id.[]
  21. Central Azucarera de Tarlac vs. Central Azucarera de Tarlac Labor Union – NLU, G. R. No. 188949, July 26, 2010[]
  22. Current Provision, Art. 297, Labor Code[]
  23. Id.[][][][][][]
  24. Purefoods vs. NLRC, G.R. No. 122653 December 12, 1997[]
  25. Ibid.[]

RALB Law | RABR & Associates Law Firm

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  1. I just want to ask regarding the Contract of Work employee. Are they subject for 10% Withholding Taxes?
    The :aw is very unfair to US, we do not have any Government Mandatories like SSS Premium, Philhealth Premium, Pag-ibig Premium, even 13th month pay.

    I hope you will me some advice on how to get my refund in Withholding Taxes witheld for the year 2022/

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