Demystifying Contractualization: Why Manpower Agencies are Useless?
by LUKE ESPIRITU
May 24, 2018
The popular narrative regarding contractualization is that it began with the so-called Herrera Law of 1989. Allegedly, the Herrera Law introduced amendments to the Labor Code, or Presidential Decree 442, in the form of Articles 106 to 109 on contractor and sub-contractor.[1] Article 106 in particular is seen as the culprit behind contractualization. Since then, the idea of employment being bilateral and protected by security of tenure provided by the Labor Code gave way to another arrangement, the trilateral, which involves three parties, the principal, the job contractor, and the worker.
This narrative is problematic for the Herrera Law did not introduce Articles 106 to 109 of the Labor Code. True, the Herrera Law, or Republic Act 6715, amended the Labor Code but its amendments did not relate to provisions on contractor and sub-contractor. On the contrary, the very first amendment of the Labor Code was made in November 1, 1974, through Presidential Decree 570-A, and as early as that, Article 106 as presently worded already appeared as Article 104 of the Labor Code.[2] As such it was not in 1989 but in 1974, just right after the Labor Code was enacted by President Ferdinand Marcos, that the provisions on contractor and sub-contractor appeared.
The timeline is important because one feature of the narrative is that manpower agencies only proliferated because the law expressly allowed it. Stated elsewise, it was the law, particularly Articles 106 to 109, that established the trilateral arrangement as a mode of employment distinct from the bilateral arrangement. And this is supposedly bolstered by the fact that manpower agencies in the service industry began to flourish at around the period post-Herrera Law.
However, since the provisions on contractor and sub-contractor already appeared as early as 1974, and in the period immediately thereafter, trilateral forms of employment did not become as widespread until almost two decades later, this raises the question: did the law really launch the trilateral arrangement as a new form of employment? Did the law “create” it?
If one studies Article 106 of the Labor Code closely, it does not state that it establishes the trilateral arrangement as opposed to bilateral arrangement. Article 106 deals with payment of wages, not classification of workers into types. It is found in “Book III, Title II: Wages”.
In fact, instead of Article 106 "creating" the trilateral, it PRESUPPOSES its existence in order to resolve who among the parties shall be liable for workers’ unpaid wages? Instead of the law 'legalizing" or "allowing" the trilateral, it is PRACTICE that started it. Even prior to the Labor Code, some form of three-party arrangements existed in construction projects and in seasonal agricultural work. And when one scours the jurisprudential record, a case appears where regular security guards of a company in the 1960s were transformed into security agency workers in order to circumvent the right to form a union.[3]
Given some practices which pre-existed the Labor Code, what was the attitude of the law then when it was enacted in 1974? Two things are immediately apparent. One, the Labor Code made positive steps to resolve the question of fixing liability for workers’ unpaid wages in a trilateral set-up. Two, it neither expressly allowed nor categorically restricted or prohibited the practice. Instead, it delegated legislative power to the Executive, through the Secretary of Labor, to make its determination. Hence, Article 106 partly states:
“The Secretary of Labor and Employment may, by appropriate regulations, restrict or prohibit the contracting out of labor to protect the rights of workers established under this Code. In so prohibiting or restricting, he may make appropriate distinctions between labor-only contracting as well as differentiations within these types of contracting, and determine who among the parties involved shall be considered the employer for purposes of this Code, to prevent any violation or circumvention of any provision of this Code.” (Emphasis supplied)
Nevertheless, the Labor Code’s attitude toward trilateral arrangements occurring in practice was not as rosy as it was subsequently made to appear, i.e. that the law “expressly allowed” them. On the contrary, the law’s attitude was negative. Precisely, it deputized the Secretary of Labor to do two things: RESTRICT or PROHIBIT, as above-quoted.
As in all valid delegation of legislative power, the Labor Code provided the reasonable standard for restricting or prohibiting the trilateral arrangement, that is: “to protect the rights of workers established under this Code”; or “to prevent any violation or circumvention of any provision of this Code”. There is recognition that the practice is used to violate workers’ rights. Contrary to the idea that the law endorsed the trilateral arrangement, it considered the same potentially pernicious to be dealt with by the Secretary of Labor.
The problem is that Article 106 was stood on its head by successive Labor Secretaries. It was their department orders that actually “legalized” contractualization. Two decades after the Labor Code was enacted, the very first, Department Order 10, series of 1997, declared that: “Contracting and subcontracting arrangements are expressly allowed by law”![4] Said who? Not Article 106. Said Leonardo Quisimbing, the Labor Secretary who issued D.O. No. 10.
Worse, instead of employing the standard provided by Article 106 to restrict or prohibit contractualization, Sec. Quisimbing read into the law a corollary not stated therein; i.e. that the power to restrict or prohibit involves the power to allow. Then he invented his own standard to “allow” contractualization. And that standard is: “flexibility for the purpose of increasing efficiency and streamlining”.[5]
Departing from 1974, when it was regarded almost as an anomaly in employment relations, to be treated guardedly, and may be restricted or prohibited by the Secretary of Labor, the trilateral arrangement became an elevated concept in 1997 and considered as “essential for every business to grow.”[6] The neo-liberal atmosphere pervaded governmental policy and as a consequence dictated labor regulations.
And so began the reversal of the default rule. Instead of the default being: contracting and subcontracting may be restricted or prohibited to protect the rights of workers; the default became: contracting and subcontracting are expressly allowed for flexibility. Only the successive Secretaries of Labor since then perceived these two different things to be similar.
Department Order No. 10 (series of 1997) was followed by Department Order No. 18 (series of 2002), Department Order No. 18-A (series of 2011), and Labor Secretary Silvestre Bello’s Department Order No. 174 (series of 2017). They commonly have the following essential features:
a. The trilateral employment relationship has achieved recognition as a juridical concept entitled to a mantle of protection. It is no longer simply a fact occurring in practice to be curbed by regulation. So, there are now two main types of employment under the law: trilateral and bilateral, which are subject to separate rules albeit with some overlapping. If the employment is strictly bilateral, the security of tenure provisions of the Labor Code apply, particularly, Articles 280 to 286 (renumbered as Articles 295 to 391, respectively)[7]. If the employment is trilateral, these provisions do not apply to the principal, but apply only to the contractor, unless the contracting is deemed illegal.[8] What generally governs the trilateral set-up are Articles 106 to 109 of the Labor Code and the Department Orders issued by the Secretary of Labor.
b. Within the trilateral arrangement, a distinction is made between “legal” or “permissible” contracting versus “illegal” contracting. Essentially, three things differentiate legal from illegal contracting: (1) substantial capital; (2) activities that are not directly related to the principal business; and (3) power of control. Contracting is permissible if the job contractor has substantial capital, performs activities that are not directly related to the principal business of the principal, and has the power of control over its workers. When contracting is legal, the third party is called a job contractor; when illegal it is called a labor-only contractor.
c. Related to (a), there is a sub-layer of bilateral relationship within the trilateral set-up. The relationship of the workers relative to the contractor is bilateral and the relationship relative to the principal is not.
The positive act of granting juridical existence to the trilateral arrangement and placing it on a similar plane with the bilateral is being justified on the ground of efficiency. Efficiency is allegedly achieved by having third parties perform and specialize in the non-core functions[9] of the company. This purportedly allows the company to survive in a competitive environment.[10]
Of course, efficiency through specialization is a process that occurs continuously in the course of capitalist development. However, that process is alien to contractualization. When a company is forced to shut down a certain part of the production process or some internal function and outsource it to a third party with more efficient methods of production or of rendering service, that third party is not a manpower agency, job contractor, or third-party service provider under the above-stated Department Orders.
Instead, that third party is a separate and independent business that had branched out to form a separate line of industry and which, in the language of political economy, uses labor-power and realizes surplus value from the use of labor-power.
In order to illustrate this, one must consider first that the value of any commodity is expressed in the equation c + v + s representing the following: (1) constant capital, the value of goods and materials required to produce a commodity, which value is conserved and transferred to the new product; (2) variable capital, wages paid for the production of a commodity; and (3) surplus value, the new value created by the workers in excess of their labor cost which is appropriated as profit.
To illustrate the above points, let us take as example a particular commodity, a pair of headlights. A motorcycle manufacturer produces the same in-house at the rate of one unit per eight hours. Each finished product needs two units of headlights. The value per unit let us say is P1,500. The minimum wage is rounded off to P500 per worker for ease in computation. That means that two workers working eight hours each can produce the value of two units of headlights which is P3,000. The wage for the two workers totals P1,000. The value of all goods and materials used in producing one headlight let us say is P500, thus, also totalling P1,000 for a pair. Hence, in the equation c + v + s, a pair of headlights would carry the following values: P3,000 = P1,000 goods and materials + P1,000 wages + surplus value. In the equation, the surplus value, representing profit, can easily be determined as P1,000. When the capitalist sells the entire motorcycle as finished product, its total value would be x + P3,000, x being the c + v + s of all the other components of the motorcycle. And for the headlights alone, he would realize profit in the amount of P1,000.
Efficiency means that the labor time for the production of a commodity is reduced. For instance, another company specializes only in headlights and can produce two units in the span of eight hours. Instead of hiring two workers in order to produce two units of headlights, it needs only one. The minimum wage of one worker remains at P500, but this worker produces the value of P3,000 for a pair of headlights. When the company sells this to any motorcycle manufacturer at the value of P3,000, it realizes more surplus value because of the more efficient methods of production. Using c + v + s, the following values may be inputted: P3,000 = goods and materials + P500 wages + surplus value. Let us assume that the value of goods and materials used in production at the headlights company is the same as the value of goods and materials used in the in-house production at the motorcycle company, which is P1,000. Then by inputting the assumed value it can be determined from the following P3,000 = P1,000 goods and materials + P500 wages + surplus value that the surplus value is P1,500.
Because the headlights company has a more efficient way of producing, it can realize more surplus value, P1,500. What happens is that it has sufficient leeway to be competitive in pricing, can opt to maintain its surplus value at P1,000 and put the value of a pair of headlights at P2,500 instead of P3,000. This will drive down the price of headlights. If the motorcycle company insists on keeping the production of headlights in-house instead of buying the same from the headlights company, it will sell its motorcycle at the value of x + P3,000. But if it opts to buy from the headlights company instead of producing the component in-house, the motorcycle company can sell its motorcycle at the value of x + P2,500.
To remain competitive the motorcycle company may opt to shut down its department producing headlights and instead buy this component from the headlights company. Of course, the example given is merely illustrative and is not an actual case study. However, this fairly approximates the conditions that would drive a production process to branch out and a company to outsource in order to remain competitive.
This is not the process that occurs in contractualization, particularly under the trilateral work arrangement, in which the motorcycle company hires a manpower agency to supply it with two workers to produce a pair of headlights for eight hours. The values of two units of headlights, goods and materials, and wages remain the same. The surplus value remains the same, P1,000, computed at: P3,000 = P1,000 goods and materials + P1,000 wages + surplus value. The manpower agency is just given a cut from the surplus value realized by the principal. The manpower agency does not extract surplus value for itself.
Another example, before, packaging was part of the production process of many manufacturing firms. However, through the development of capitalism, where division of labor is a constant process, there are now factories that specialize in the production of packaging for products manufactured by other factories.[11] This development in the capitalist economy has nothing in common with contractualization. Packaging factories are not manpower agencies. What occurs instead is that there are some activities that formerly formed part of the production process but have become differentiated as a separate branch of the industry and performed by truly separate and independent businesses.
Contractualization, on the contrary, is the artificial creation of a trilateral relationship in the workplace. Instead of the company directly hiring its workers, it hires these workers from a middleman, otherwise known as manpower agency, third-party service provider, or job contractor. Trilateralism means that the original production process remains an integral whole in the workplace and had not branched out; and yet, some activities, the so-called “non-core”, are performed by contractual workers.
Moreover, in activities that have developed into a separate branch of the industry, what is under contract to be provided by one firm to another are specific products, not workers. And this applies even if the branch of industry is in the service sector. A business for example may have an in-house legal department but may later decide to close the department and secure the services of a law firm for more efficient legal representation. If it does this, the company does not enter into a trilateral relationship with the law firm’s associates.
The truism, therefore, that efficiency through division of labor or specialization is necessary in capitalist development does not justify contractualization. Contractualization is not tied to efficiency. It has no contribution to production. It is nothing but the process of selling labor-power by a middleman who derives as profit the difference between the retail price of labor-power and its value.
The prevailing attitude regarding contractualization has as starting point the idea of salvaging the trilateral work arrangement from total eradication. This is apparent in the recently issued Executive Order No. 51 signed by President Rodrigo Duterte, the House of Representative’s House Bill 6908, and the Senate Committee on Labor’s version of the Security of Tenure Bill.
Hence, the dominant framework is still based on defining two types of contracting, one legal, the other illegal. This continues the long established policy on contractualization, from DO No. 10 (series of 1997) to DO No. 174 (series of 2017), i.e. that it must be regulated rather than prohibited. All these past regulatory issuances by the Department of Labor have not curbed contractualization. On the contrary, successive improvements on regulation merely served to reinforce the so-called trilateral work relationship by forcing its evolution from primitiveness to its relatively developed forms.
The primitive level of contracting is that contractors or service providers do not have sufficient assets or do not act independently but are mere agents of the principal. The present thrust both in the House of Representatives and the Senate is to legislate still new regulations in the form of stricter registration and capitalization requirements that would eradicate this.
However, eradicating the primitive type of contracting is not something new. Fact is, this type of contracting is precisely “labor-only contracting”, declared illegal by all of the past implementing rules and regulations. To simply add another voice to the refrain of dealing a more severe blow to labor-only contracting will not solve the problem of contractualization. Far from ending contractualization, this is but an exercise in retooling contractualization as an institution at that precise historical stage when service providers have amassed just enough assets to level up.
At this historical stage, manpower agencies and cooperatives, like members of the Philippine Association of Legitimate Service Contractors (PALSCON) and Asiapro Cooperative, have already perfected the art of contracting. They can boast of sufficient capital or investment in order to ensure that contractual workers are entitled to minimum wage and all legally-mandated benefits.
However, these changes do not spell an end to exploitation. They merely seek to end primitive exploitation to pave the way for modern exploitation at a time when the exploiters can already afford to embrace modern means. What appears as a progressive advance from less to stricter regulation by the State simply coincides with the actual material development of service providers.
In contractualization, where lies the exploitation? It lies in how the workers are cheated in the sale of this special commodity and the only one they possess, labor-power. Political economy teaches that labor-power may be different in so far as it creates surplus value, but it is similar to any other commodity under capitalism in all other respects.
In the sale of commodities in general, sellers can negotiate for a better price if they sell direct to the end-users. What happens in labor contracting is that instead of workers being able to sell their labor-power direct to the capitalist end-user, a middleman is introduced so that the workers are forced to sell cheap.
In a word, the transaction is made artificially trilateral instead of bilateral. It is artificial because unlike in tangible commodities where physical restrictions of location and geography may give rise to middlemen as intermediaries between sellers and end-users, in labor-power, as a rule, there are no such restrictions. The worker can himself go direct to the capitalist to apply for a job, or sell his labor-power.
In the long run, the trilateral arrangement in the sale of labor-power depresses the social average of the value of labor-power as purchased by the capitalist as a class.
It does not matter whether the middleman is classified as “labor-only contractor” (primitive type) or an independent “job contractor” (modern type). As long as the trilateral arrangement is forced artificially upon the transaction, the exploitation subsists. The workers sell cheap, depressing the social average of the value of labor-power and, therefore, the capitalist buys cheap even if in the short run he had to spend extra by sharing with the middleman a portion of the surplus value extracted by the principal’s use of labor-power.
Therefore, anything short of abolishing the trilateral work arrangement in favor of direct or bilateral transaction between workers and the capitalist is nothing but continuing the same exploitation in a different form.
The solution to contractualization is to do away with middlemen altogether, may they be called legitimate job contractors or labor-only contractors. There must be no false dichotomy between legal and illegal contracting. They are a superfluity serving no productive function except to add another layer to the sale of labor-power. And just as there must be no distinction between legal and illegal contracting, there cannot be two types of employment arrangement, the bilateral on the one hand and trilateral on the other. Only the bilateral work arrangement must be granted legal existence.
So far, all the past Secretaries up to Secretary Bello have gone the route of regulation. No one has ever prohibited contractualization. Mere regulation can never solve the problem because it presupposes or creates the problem first. “Regulating” the trilateral work arrangement means instituting it a priori and preserving it as an institution.
Decades of regulation have brought workers to economic misery, loss of bargaining power at the workplace and insecurity of tenure. Not regulation but only the complete abolition of contractualization can improve the lives of millions of Filipino workers.
[2] Section 22 of Presidential Decree 570-A.
[3] American President Lines vs. Hon. Clave, G.R. L-51641, June 29, 1982. See Justice Abad Santos’ Dissenting Opinion.
[4] Section 1 (a) of Rule VIII-A added by D.O. No. 10 (1997) in Book III of the Implementing Rules.
[5] Section 1 (c) of Rule VIII-A added by D.O. No. 10 (1997) in Book III of the Implementing Rules.
[6] Ibid.
[7] Renumbered per Department Advisory No. 1, series of 2015.
[8] This is why citing Article 280 and arguing that a contractual worker performs activities “usually necessary or desirable in the usual business or trade” of the principal will generally not work except if there is illegal contracting. Article 280 will not be applied to a principal in permissible contracting.
[9] “Non-core” is the popular term used to denote activities that are “not directly related to the principal business”.
[11] This is culled from an actual example: Bonpack Corp. manufactures the packaging for Universal Robina Corporation’s food and beverage products.
