Ending jobs vs ending contractualization

By
BusinessMirror Editorial
-
July 9, 2018

More than a year before President Duterte issued Executive Order 52 prohibiting illegal
contracting and subcontracting on May 1, Labor Day, this paper had featured a study released by
the Philippine Institute for Development Studies (PIDS) in December 2016, which said the
government’s plan to end contractualization could lead to layoffs and greater inequality in the
country.

In the study, titled “Beware of the End Contractualization! Battle Cry,” PIDS research fellows
Vicente B. Paqueo and Aniceto C. Orbeta Jr. said ending contractualization would be more
expensive for companies than the government estimated. Hiring more permanent employees
would increase the cost of firms by about 30 percent to 40 percent, higher than the government’s
estimate of around 10 percent.

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“The dilemma is that, on the one hand, limiting government action to tightening enforcement
might not be enough to eliminate endo practice, as promised by President Duterte. On the other
hand, aggressive threats of government harassment, huge penalties, business closures, as well as
prohibition of all forms of TECs [temporary employment contracts] to close ‘loopholes’ could
lead to unintended adverse consequences like reduction in job opportunities and inclusive
growth,” Paqueo and Orbeta said.

Now, just a little over two months after the President banned contractualization, Rep. Ariel
Casilao of Anakpawis party-list claims at least 200,000 workers have already been fired, based
on data gathered by the labor group Kilusang Mayo Uno (KMU). He said several of the
country’s biggest companies have chosen to terminate their contractual workers instead of
regularize them in accordance with the President’s EO and the labor law provision that those
whose jobs are directly related to the business of a company cannot serve as a contractual
employee for more than six months.

One of those cited is the case of telecommunications giant Philippine Long Distance Telephone
(PLDT) Inc., which recently shed some 7,000 contract workers.

The Department of Labor and Employment (DOLE) insists PLDT must regularize these 7,000
contractuals, but PLDT counters that the onus is on the DOLE, while
denying it terminated the employment of its workers.
“The DOLE has ordered 38 service contract providers of PLDT, including our call center and
business-process service, to cease and desist from providing services to PLDT,” the telco said in
a statement. “PLDT did not terminate these service contracts.”

From June 2016 up to June 2018, a total of 182,915 contractual workers have been regularized
following the labor department’s campaign against illegal work contracting and
subcontracting. The DOLE has ordered the regularization of another 76,000 workers from top
local companies, which they found to be engaged in illegal labor-only contracting. We are
talking of just another 76,000 workers out of an estimated 1.3 million contractual employees in
the Philippines, and with the PLDT case, just around 7,000 workers out of 76,000—but already
the government finds a big fight on its hands; already there is much bickering, finger-pointing,
talks of impeding business and halting all but the most essential operations of a very essential
telecommunications service provider.

This alone illustrates why it is so hard to ban—with a shotgun approach and apparently without
benefit of a better-thought-out strategy—all forms of contractualization and enforce workers’
right to security of tenure, even if it is guaranteed not just by any law but by the Constitution
itself.

Security of tenure has become elusive and ambiguous in many workplaces today, not just here
but in other countries all over the world. Service contracting has become a major driver of
economic growth in the Philippines and other countries, with more companies engaging in
contracting and subcontracting.

Almost any kind of service or operation is being contracted out nowadays. For many businesses
and even for many governments, it has become an accepted practice that is part of reducing
operational costs. Many of what were once regular jobs have become contractual.

IBON Foundation estimates that 4 out of 10 (43.5 percent) rank-and-file workers in

establishments with 20 or more employees are now hired under various contractual or non-
regular employment schemes. Even business process outsourcing, where the Philippines is a
global industry leader, could be considered a form of contractualization. Big corporations
routinely outsource and offshore their back-office operations overseas to countries like the
Philippines to reduce costs.

It also bears noting that the so-called gig economy has steadily grown in many countries,
including the Philippines, signaling an increasing resort to a more flexible arrangement that both
the business and the workers deem suits them well.

Maintaining the balance between the need for labor flexibility and ensuring full-time
employment is a tightrope act. Perhaps the labor department can manage a more rational,
calibrated strategy that would allow it to better enforce workers’ rights while at the same time
not adversely affect the overall business environment and shed the very jobs it wants workers to
keep.
Contractualization: Which meaning do we
mean?
By: Atty. Ces Alvero Azucena Jr. - @inquirerdotnet
12:05 AM September 18, 2016

Contractualizaton is a term not found in the Labor Code and not even in the rules and regulations
issued by DOLE. Contractualization therefore has no official or standard definition. The loud
public talk to ban contractualization suggests the need to be clear about its different meanings.
One meaning is “endo” or end of contract. The other is “deceptive contractorship”. Both are
difficult to handle because a wrong action against them can harm business. And what harms
business ultimately harms labor by way of withheld investments and decreased job opportunities.
The announced plan to ban contractualization has merits if it means enforcement of the Supreme
Court ruling in 1997 in a case involving a well-known food manufacturing company. The ruling
struck down as “contrary to public policy” the company’s practice of employing workers batch-
by-batch; each batch stays for only five months, to be replaced by the next five-month batch. A
quick way to explain this is by quoting from the book Everyone’s Labor Code:

“The court  emphasized that fixed-term employment will not be considered valid, where, from
the circumstances, it is apparent that periods have been imposed to preclude acquisition of
tenurial security by the employee. If it is shown that that is the purpose of the contract, then it
will be declared null and void from the beginning or ab initio. Such periods should be struck
down or disregarded as contrary to public policy…”

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Following this summarization of the Supreme Court ruling, the author explains: “What [this
court ruling] struck down immediately is the all-too-common practice of hiring operating
personnel batch-by-batch, each batch under a five-month contract. At the end of the period, the
workers will be replaced by the next five-month employees because of “E.O.C.” (end of contract
or “endo”). The ruling has the effect (hopefully) of making “5-5-5” and “E.O.C.” things of the
past in numerous workplaces.” (2012 edition, p.327; 2015 edition, p. 329)

Unfortunately, after the court’s ruling came out on December 12, 1997, contractualization (a
term coined and popularized probably by workers) did not stop. Rather, it spread and multiplied.
As far as I know, no DOLE advisory has been issued to inform or to warn employers and
employees about the court’s declaration of nullity of the “endo” scheme. And  I am not sure
whether the labor inspectors (now called LLCO – labor law compliance officer) have been
alerted or instructed to enforce the ruling. Note that the ruling was issued nineteen years ago.

“Endo” is an abusive or corrupted use of the law. But hiring of employees on temporary basis is
not altogether illegal where such kind of hiring is really needed by the business. The law allows
employment in a project with pre-agreed termination date as well as seasonal employment, and
fixed-period employment. Even the hiring of temporary replacements of striking employees is
allowed.

The other meaning of contractualization is in the form of “deceptive contractorship”. It is done

by hiring a person and making him/her work as an employee but treating him/her as a
“contractor”.

A contractor is not an employee and therefore not covered by the Labor Code. Employee status,
on the other hand, puts the worker under the Labor Code’s protective umbrella. Supervision or
control of the manner, means and details of work execution and even of the worker’s conduct at
the workplace, is the hallmark of an employment relationship. By considering an employee as a
contractor, the hirer is able to evade the obligations of an employer, such as the SSS registration,
payment of Labor Code employment benefits, e.g., holiday pay, 13th month pay, etc.

But contractorship in contrast to employment is not necessarily wrong. Contractorship is often a

legitimate pursuit of a particular line of business. The contractor should be government-
registered, adequately capitalized to operate independently, and capable of supervising its
employees who render a particular line of work to client-contractees. That is the essence of
independent contractorship. The contractor, as employer, and its workers, as its employees, are
covered by the Labor Code. All the obligations of an employer are on the shoulders of the
contractor because a legitimate contractor is himself/itself an employer.

The problem is that there are people who hire people but label them as “contractors” although in
fact they are employees. The worker, badly in need of a job, has no choice, but to sign a
contractorship contract. In effect, the employee becomes “contractual”.  This is “deceptive
contractorship”. It is as reprehensible as the “endo contractualization” but much harder to
delineate. To draw the dividing line between employment relationship and contractorship is not
at all easy. The difficult task has “bedevilled” the court for decades.

Deceptive contractorship should not be mistaken for independent contractorship which is

perfectly legal. This is entrepreneurship, protected and supported by law. It promotes
specialization and competition. Striking against deceptive contractorship might mistakely
dampen or kill entrepreneurism. (This unwanted damage is the reason, incidentally, why the law
on so-called “labor-only contracting” is ill-conceived and retrogressive. It invalidates a two-way
business contract and forcibly makes the client-contractee the employer of the contractor’s
employees.)

In the 1800s entrepreneural enterprises – small and medium contractors and subcontractors –
brought America to the road to progress. Rather than discouraging and punishing small
contractors, we should help them grow

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All You Need to Know About
Contractualization

There are many questions and misconceptions that need to be cleared up when it comes to
contractualization. Here are the answers to some of these queries:

What is Contractualization?

Contractualization refers to the practice of hiring employees who would render their services for
a finite amount of time, usually, for a few months only. This is a system that has been practiced
and used by many companies, including large corporations. These enterprises often utilize this
arrangement in order to maintain their revenues up.

What is Endo?

In the previous presidential race, the issue of contractualization was put under the spotlight when
it was discussed during the final presidential debate that was held on April 24, 2016.

The five candidates, including current president Rodrigo Duterte, have all expressed their
opposition against “endo.” Endo means end of contract; it is also sometimes referred to as “5-5-
5” practice. Why? This is because some employers hire workers and then terminate their
contracts after five months, to avoid regularizing them – something that is mandated by the law.
According to the law, an employee who has been working for a company for six months should
be regularized unless the individual is not eligible to be a regular employee.

Regular employees are entitled to benefits and bonuses. However, through endo, employees are
stripped of these privileges. These benefits include:

 PhilHealth
 SSS
 Pag-IBIG
 Home Development and Mutual Fund (HDMF)
 13th month pay
 Paid sick leaves
 Paid vacation leaves
 Service incentive leave
 Meal and rest periods
 Housing and housing plans
  Expense account
 Company-sponsored vehicle
 Educational assistance

Endo has received several criticisms from many people, particularly workers; in spite of this, it is
important to note that 5-5-5 is in no way synonymous to contractualization unlike what some of
you might think. Endo or end of contract is a practice that utilizes contractualization to abuse
workers instead of valuing their contribution to different businesses.

Why Companies Practice Contractualization?

There are many legal forms of contractualization, such as the subcontracting of Filipino workers
abroad or to foreign countries like Hong Kong and Singapore. Laws have been established to
allow this system to run under certain industries like the car manufacturing, agriculture, and
business process outsourcing (BPO) sectors in the local scene.

There are a number of conglomerates in the country, for example SM Investments Corporation,
that would legally employ workers under this system for seasonal events or special occasions
like Christmas and school openings.

Furthermore, companies are choosing to practice this structure because they receive a lot of
benefits and these include:

 Being able to adjust quickly and efficiently when their workload changes
 Saving them the time and money from hiring full-time employees
 Improving your staff’s work by hiring contractual employees who are highly skilled and could
impart their knowledge to the internal staff

Can Local Firms Survive Without Contractualization?

The practice of contractualization has begun under the government of former president
Ferdinand Marcos back in the 1970s, when the Philippine economy was experiencing a high
unemployment rate and was suffering from instability.

Some people like the vice dean of the Economics Program at the University of Asia and the
Pacific (UA&P), Cid Tereso, believes that the time to end contractualization is now. He claims
that the local economy has grown to be robust and strong. According to him, it would be perfect
timing to implement strategies like a no-firing policy to move away from the current abuse.

However, there are many firms such as Human Nature that suggest that not many businesspeople
believe instigating such policies is a good idea. They think that it would open opportunities for
some people to take advantage of various businesses, knowing that they cannot be fired.
Moreover, there is no assurance that all corporations and organizations in the Philippines will be
able to survive without hiring temporary workers; and without this guarantee, there is no way to
tell if the market will thrive at all.

Will No-Contractualization Lead to Negative Economics?

The current Government has pledged to work on removing the entire system of
contractualization in the Philippine Labor law, in order to end the abuse some corporations are
participating in.

They are also working to end it in order to help workers get the benefits that being a regular
employee entails. It is understandable for all political parties to want to get rid of endo for noble
reasons however, they say that “the road to hell is paved with good intentions” and in this case,
getting rid of contractualization might result into a disaster.

There are two main reasons as to why establishing a no-contractualization rule will cause
negative economics:

 First, putting a deadline to this system will result into the closing down of numerous business
establishments across the country. This is because they simply do not have enough money to
pay for the financial trappings that come hand in hand with regular-status employment.

 Second, would-be investors will likely refuse to establish their businesses here because the new
law would mean that they will not be able to develop profits from their own capital.

Contractualization in the Future

According to Bernardo Villegas, Centre for Research and Communication research director and
UA&P co-founder, a win-win situation – where both employers and workers will be valued – can
be established. He says a better path in contractualization can be made through the help of
experienced work cooperatives like Asiapro.

In Asiapro, non-regularized employees still receive certain benefits that usually, only regular
employees enjoy. In this regard, workers do not have to worry about being abused by the system.
To learn more about Asiapro and our quest to help our member-owners,

Contractualization: Is it legal and just?

12:01 AM June 02, 2015

CONTRACTUALIZATION, a word we read in the newspapers and a topic of discussion in

media when the employment of Filipino workers comes to fore in commercial and industrial
operations. Contractualization is the practice of hiring a worker continuously for a period not
exceeding five months for a specific job, after which a new worker is hired to take his/her place
to do the same job for the next five months, after which another worker is again replaced with a
new hire (he/she could be somebody who had been hired for the same job in the past) who will
do the job in the next five months as well. The cycle goes on and on because the same job or task
remains to be done.

The five-month period of employment of a worker is a deliberate act of the employer. It is done
to circumvent the six-month probationary period, after which a worker, under the law, qualifies
to be appointed as a regular employee and paid the regular worker’s wage. As a regular
employee or worker, he/she is also entitled to enjoy vacation leaves, sick leaves, maternity
leaves; SSS and Pag-Ibig membership; retirement and all other privileges a regular employee is
entitled to under the law.

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To make it easy for employers to hire temporary workers for regular jobs, there are employment
contractors who supply companies with contractual workers, and these workers are shunted from
one company to another. They even appear to be employed by the employment contractors. The
provisions of the Labor Code are flagrantly violated.
Do we now have a new Labor Code that allows employers to circumvent the six-month
probationary period of employment? If the president of the Philippines and the labor secretary
allow contractualization of labor because this is fair and just to the Filipino worker, I stand
corrected.

—APOLONIO G. RAMOS, 42 Mindanao St., Marikina City

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CONTRACTUALIZATION ACT

CONTRACTUALIZATION ACT

Many companies in the country have resorted to hiring employees on a contractual basis, even if
the task requires them to do the regular type of work done in a company, thereby depriving the
employees of “security of tenure” and undermines their opportunity for long-term employment.

Many companies resort to labor contracting and/or contractualization of workers to avoid

regularizing these workers and reduce employment costs by not having to pay the benefits due
regular employees.

The unit cost of labor and the flexibility with which the employer can extract discipline from the
employee are major determinants of the employment within enterprises. In many ways, this is
what happened to Philippine labor. The series of welfare legislation over time has made the cost
of a regular employee in the firm grow out of line with market realities because many workers
are available to work at far lower rates of wage.

The regular employee enjoys many entitlements that represent costs to the firm beyond the
calculation of the regular wage as provided in the labor laws. The benefits going to regular
employees begin to escalate in relation to what might be considered the competitive wage rate –
the rate at which many laborers are willing to enter employment. In time, this led to the idea of
temporary – in contrast to regular – employees. These employees could be hired at the going
minimum wage – already loaded with mandated wage rates and other wage entitlements – but
not for the usual benefits of regular employees. This led to the increasing phenomenon of casual
employment as a major presence in the industrial and government labor market (Sicat, 2007).

Many companies hire workers for the seasonal upsurge in their businesses when they need to
augment their workforce, these are their peak months, however, let go of these workers during
regular business days, when the upsurge in business activity has passed and the extra workforce
is no longer needed.

The proposed measure aims to rectify the abuse of companies in resorting to labor contracting by
legislating measures that would restrict their use thereof.

Business groups also oppose ‘endo’ but not

legal contractualization
By: Roy Stephen C. Canivel - @inquirerdotnet

Philippine Daily Inquirer / 07:24 AM April 30, 2018

Two days before Labor Day, business groups stressed the importance of legal contractualization
in keeping work flexible and the country competitive against its peers in the region.

At the same time, top officials of business groups voiced their opposition to “endo,” a
contractualization scheme that offers short-term and unprotected temporary work arrangements.

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Endo workers are bound by a five-month time frame so that companies will not make them
regular employees, who become entitled to various benefits after six months at work.

Ending endo was a campaign promise of President Rodrigo Duterte.

For the business groups, however, rejecting endo does not necessarily mean opposing
contractualization.

The Labor Code allows contractualization. Moreover, according to Department Order No. 174,
employees of contractors and subcontractors should be entitled to certain rights and privileges.
These include security of tenure, self-organization and right to strike, as well as other perks, such
as retirement benefits, overtime pay and 13th month pay.

Most endo workers do not enjoy these benefits.

‘Middle ground’

The European Chamber of Commerce of the Philippines (ECCP) called legal contractualization a
“middle ground” for both management and laborers.

Removing contractualization, it said, would come at the expense of business.

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“Without contractualization, companies would be forced to make all employees regular, which is
just not practical and would kill the business,” said ECCP president Guenter Taus.

While businesses benefit from this arrangement, those who practice unlawful contractualization
should be “dealt with accordingly,” Taus said.

“There must be a clear distinction between lawful and unlawful contractualization, wherein
companies operating outside the bounds of the law should be dealt with accordingly and should
absorb any costs that they have been trying to avoid thus far,” he added.

The Management Association of the Philippines (MAP) echoed this, noting that legitimate
businesses should avoid endo.

“This [endo] is admittedly illegal,” said Emerico de Guzman, chair of MAP’s subcommittee on
labor.

“Legitimate business should really avoid this and learn to input the costs as legitimate costs for
doing business,” De Guzman added.

With the government’s move to have more contractual workers regularized, the Employers
Confederation of the Philippines (Ecop) said this would come at a cost to business.

Biting the bullet

Nevertheless, Ecop president Donald Dee said the group was willing to “bite the bullet”
regardless of the cost of ending endo.

“There will be an increase in cost. But it will be offset by better productivity,” Dee said.

The pros and cons of legal contractualization depend on whom you ask.
For the business sector, it’s an arrangement that allows the Philippines to compete with
neighbors.

Weeks before April 18, labor and management had been on their toes, wondering if Mr. Duterte
would sign an executive order (EO) that would regulate legal contractualization.

After Malacañang announced on that day that the President would no longer sign the EO and just
let Congress pass a law on contractualization, business leaders defended the benefits of the
practice of legally hiring contractuals.

In a draft EO they submitted to the President, various labor groups sought to regulate
contractualization. Under the draft, direct hiring would be the norm.

Alan Tanjusay, spokesperson for the Associated Labor Unions-Trade Union Congress of the
Philippines, said contractualization would still be allowed in some cases under this draft EO.

Contractual arrangements would be allowed only in cases in which additional workers are
needed to meet a temporary surge in demand, Tanjusay said, calling it a “compromise.”

Business leaders did not approve of this.

“The proposed ban on outsourcing is against the concept of free enterprise and is not necessarily
prolabor, as it stifles employment growth in the economy,” De Guzman said.

The Department of Trade and Industry said the EO drafted by labor groups would diminish the
country’s competitiveness.

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Govt ‘won’t abolish contractualization’

1

By KRISTYN NIKA M. LAZO, TMT on October 20, 2016 Top Stories

Twitter

The government will not likely abolish the entire system of contractualization in the country but
restrict it, according to a former Labor undersecretary.
Contractualization, also known as “endo” (end of contract) and “5-5-5,” is the illegal practice of
hiring and firing workers at the end of their five-month employment, enabling employers to
avoid regularizing and giving them benefits such as pension coverage.

Josephus Jimenez, also former president of People Management Association of the Philippines
Inc. (PMAP), told reporters at the sidelines of the 6th P&A Grant Thornton Business Forum on
Wednesday that the Department of Labor and Employment (DOLE) will not likely deliver its
promise to abolish contractualization by 50 percent by the end of this year, and 100 percent by
2017.

“This is my bottomline expectation: They [government]won’t abolish contractualization. They’ll

only put restrictions,” Jimenez said.

Removing the contractualization system would hurt the economy as this system gives the
Philippines “competitive advantage” over other regional economies, he added.

“My position is very simple, if 5-5-5 or ‘endo’ is illegal, then we have to stop it. But do not stop
the entire system of outsourcing, because outsourcing is the thing that gives you competitive
advantage. Without outsourcing, all the investors will go to Malaysia, Indonesia, Thailand,
Vietnam, Cambodia, Myanmar, Laos, Brunei Darussalam,” Jimenez said.

He noted that a number of local companies with foreign investors have held back with their
expansion and investment plans in the Philippines because of potential risks from policies of the
Duterte administration.

“Yes, the economy will suffer [without contractualization]. In fact, some investors have already
said, ‘[Look, we’re unstable here. Let us not put further investments because the policies are still
unclear],’” Jimenez said.
He added that he knows of five companies that have withheld their expansion plans in the
Philippines that would have employed 100,000 contractual workers in the transportation, food
and packaging sectors.

Citing the latest Labor Force Survey (LFS) in July, Jimenez estimated that 60 percent of the 42.5
million Filipinos who are employed are regular, while 40 percent are working under contracts.

Jimenez cited 10 reasons why “legitimate” contractualization “could not be, should not be and
would not be abolished in the country.”

He said “endo” contributes to the country’s competitiveness, provides employment opportunities,

serves as first door to regular employment, allows on-the-job training, offers viable alternative to
migration, adopts enough safety nets and gives adequate social protection, among others.
With its promise to abolish “endo,” the government through DOLE is amending Department
Order No. 18-A — dubbed as the “Endo Law” — which is set to be released by the end of this
month.

When asked about the Department of Trade and Industry’s proposed “win-win solution” on
contractualization, Jimenez said he agrees with the DTI proposal, suggesting some
improvements.

How contractualization became the norm

among Philippine businesses
By

Butch Fernandez

April 21, 2016

There are two narratives as to how contractualization became so pervasive in the Philippines.
Many labor groups have in the past routinely blamed the late senator and labor leader (a pillar of
the Trade Union Congress of the Philippines) Ernesto “Boy” Herrera for paving the way for
labor contractualization with amendments he introduced in 1989 to the Labor Code.

According to them, a very limited contractualization regime—in the past, limited to janitorial
services and similar short-term business arrangements —became the norm as a result of the
sweeping new provisions; hence, the tag  “Herrera Law.”  However, when Herrera died in
October 2015, his son Ernest—making a clarification validated by ex-Labor Secretary Ruben
Torres—told reporters (including the BusinessMirror) at his wake it was most unfair to blame the
late senator for the runaway proportions with which contractualization had been abused across
many sectors.

In fact, Ernest explained, the senator authored a bill mandating regularization of employees who
have rendered six months of continuous service—a provision subsequently included in the
revised Labor Code.

Ernest blamed the implementation by the Department of Labor and Employment (Dole) as part
of the culprit. DOLE circulars, he said, had greenlighted so-called labor-only contracting
agencies that dangle “take it or leave it” five-month contracts to desperate jobseekers. In a later
interview (not with the BusinessMirror), Ernest insisted, “the record shows my dad was very
critical and fought against these department orders favoring labor-only contracting.’’

One of the harshest critics of labor-only contracting, the Ecumenical Institute for Labor
Education and Research (EILER), had pointed to Articles 106 to 109, of what it called the
Herrera Law, as the source of the labor secretary’s power to issue orders that will promote hiring
of contractuals and other nonregular workers. An example given was Department Order 18-A
issued in 2011.

EILER said in one forum this has since become a nightmare that vastly expanded the once-
limited work arrangement for janitorial and other casual jobs to becoming the routine, or default
labor arrangement cutting “across all economic sectors, from manufacturing to wholesale and
retail trade up to business-process outsourcing.”

What Are Contracts And Why You Need

Them?
Linkilaw May 3, 2016 Legal Documents






Contracts usually do not enjoy the most appealing of reputations. Many people regard contracts
and legalese in general as boring, complex and vapid, yet a necessary hassle one has to go
through in today’s spick-and-span society plastered with procedures and rules. In today’s blog
post, we’ll put into the spotlight the main reasons why contracts are actually a very good creation
– and totally indispensable if you want to protect your interests.

The ABC’s Of It
Click to tweet

So what is a contract in the first place? Put simply, a contract is a written or spoken agreement
regarding an obligation that has to be enforceable by law. Two entities set out mutual rights,
responsibilities, and other rules towards each other, usually regarding employment, tenancy,
sales, etc. In other words, a contract regulates their relationship  by laying out the conditions of
the relationship and the scope of the work. There are two predominant types of contracts:

A written contract provides more certainty to the involved parties, and thus holds much more
weight than its verbal counterpart. From a legal perspective, spoken words are flimsy, and by
putting an agreement in writing, you’re minimising the risk of being double-crossed or violating
the terms yourself. It’s the best way to dodge misinterpretations and misunderstandings; and
even if both parties have honest intentions, details of an agreement can easily get forgotten if
they have not been jotted down.

In the case of a dispute, verbal contracts (even handshake agreements) could potentially be seen
as valid and binding in the court. However, when it comes to your legal standing and peace of
mind, it’s a very thin thread to hang by, and you should do it at your own risk.

Now that we’ve covered some of the very essentials, let’s get down to why you actually need
contracts:

 Contracts ensure you obtain your rights

Not only does a contract state the expectations of both parties, it also has to foresee how possible
problems and negative situations will be resolved. Quite understandably, the first and foremost
reason why two parties choose to sign a contract is to obtain something.   Specifically, a contract
can provide guarantee you will get paid or receive another type of remuneration – or, if you’re on
the opposite end of this agreement, that the party you’re giving money to will deliver from their
side.

Think about employment contracts, for instance. As we’ve already established in our recent
article on employment contracts, “an employment contract should in any case refer to the
obligations of the conducted work, the payment amount and method, any specific requirements
for both parties, and any property rights to the work produced by the employee.”

 Contracts ease your understanding of law

Laws can be convoluted and/or extremely extensive, time-consuming affairs, and if in the case of
a legal misinterpretation, you can end up in quite a doozy. Here’s where the beauty of contracts
becomes most evident: The legal principles contained therein are boiled down to a set of outlined
rules; ones that are particular to your context and that you can easily abide by.
Have a competent legal professional draft a contract you can understand and honour, especially
if this area of law in question is unknown or a bit murky to you. If there are some clauses or
stipulations you don’t fully understand, make sure your lawyer puts it across for you before you
sign it. It’s the best way to make sure all your legal ducks remain in row at all times.

 Contracts protect you and your property

Contracts have the power to protect you by limiting your liability, which is crucial should
matters (God forbid, but you never know) suddenly start hitting the skids. Your business assets
consist of many aspects, and property, both physical and intellectual, eat up a huge portion of
that valuable cake. Intellectual property is a field that’s especially prone to different, often
lacking interpretations, so make sure you protect it by a thoroughly drafted contract.

Another way you can use a contract to protect your business is to include a non-compete clause
in it. This legal move either a) limits the type of services your ex employees could offer once
they resign, and that’s based on your company’s unique product or services; or, b) provides you
with the upper hand on the market by establishing with other individuals or businesses that they
will not offer certain goods or services on the market (because they could harm your own
commercial prospects).

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Contracts and agreements

A business contract is a legally binding agreement between two or more persons or entities.

 Understanding business contracts

 Verbal and written contracts
 Essential elements of a contract
 General terms and structure of an agreement
 Standard form contracts and unfair terms
 Before signing a contract
 Ending a contract

TIP: Contracts can be complex. It is important that you fully understand the terms of a contract
before signing anything. You are advised to seek legal and professional advice first.
Understanding business contracts

Dealing with contracts is part of running a small business. You will have a number of business
relationships involving some type of contractual commitment or obligation.

You may:

 be a purchaser of goods and services - as a borrower of money, in rental agreements and

franchise agreements
 be a supplier of goods and services – retailer, wholesaler, independent contractor
 have a partnering agreement with other businesses – partnerships, joint ventures, consortium.

Managing your contracts and business relationships is very important.

TIP: You should be aware that the majority of contracts entered into will have goods and
services tax (GST) implications.

Verbal and written contracts

Contracts can be verbal (spoken), written or a combination of both. Some types of contract such
as those for buying or selling real estate or finance agreements must be in writing.

Written contracts may consist of a standard form agreement or a letter confirming the agreement.

Verbal agreements rely on the good faith of all parties and can be difficult to prove.

It is advisable (where possible) to make sure your business arrangements are in writing, to avoid
problems when trying to prove a contract existed.

Regardless of whether the contract is verbal or written, it must contain four essential elements to
be legally binding.

Essential elements of a contract

For a contract to be legally binding it must contain four essential elements:

 an offer
 an acceptance
 an intention to create a legal relationship
 a consideration (usually money).

However it may still be considered invalid if it:

 entices someone to commit a crime, or is illegal

 is entered into by someone that lacks capacity, such as a minor or bankrupt
  was agreed through misleading or deceptive conduct, duress, unconscionable conduct or undue
influence.

General terms and structure of an agreement

There is no specific format that a contract must follow. Generally it will include some terms,
either expressed or implied, that will form the basis of the agreement. These terms may outline
contract conditions or contract warranties.

Contract conditions are fundamental to the agreement. If the contract conditions are not met it is
possible to terminate the contract and seek compensation or damages.

Contract warranties are less important terms and not fundamental to the agreement. You cannot
terminate a contract if the warranties are not fulfilled, however, you may be able to seek
compensation for any losses incurred.

When negotiating the contract terms make sure the conditions of the contract are clearly defined
and agreed to by all parties.

Contracts may follow a structure that can include, but are not limited to, the following items:

 details of the parties to the contract, including any sub-contracting arrangements

 duration or period of the contract
 definitions of key terms used within the contract
 a description of the goods and/or services that your business will receive or provide, including
key deliverables
 payment details and dates, including whether interest will be applied to late payments
 key dates and milestones
 required insurance and indemnity provisions
 guarantee provisions, including director’s guarantees
 damages or penalty provisions
 renegotiation or renewal options
 complaints and dispute resolution process
 termination conditions
 special conditions

TIP: In almost all cases of creative work (such as a logo you pay to have designed) copyright
will remain with the creator, regardless of whether they created it on your behalf. If you engage a
contractor to produce material that attracts copyright protection make sure the contract includes
assignment of these protections, so that you own all the rights to the materials you paid to have
created.
Standard form contracts and unfair terms

A standard form contract is a pre-prepared contract where most of the terms are set in advance
with little or no negotiation between the parties. These contracts are usually printed with only a
few blank spaces for adding names, signatures, dates etc.

Examples of standard form contracts can include:

 employment contracts
 lease agreements
 insurance agreements
 financial agreements

Standard form contracts are generally written to benefit the interests of the person offering the
contract. It is possible to negotiate the terms of a standard form contract. However in some cases
your only option may be to ‘take it or leave it’. You should read the entire contract, including the
fine print, before signing.

If you intend to offer standard form contracts you must not include terms that are considered
unfair. This could include terms that:

 allow one party (but not another) to avoid or limit their obligations
 allow one party (but not the other) to terminate the contract
 penalise one party (but not another) for breaching or terminating the contract
 allow one party (but not another) to vary the terms of the contract.

There are laws protecting consumers from unfair contract terms in circumstances where they had
little or no opportunity to negotiate with businesses (such as standard form contracts).

Unfair contract terms and small businesses

A law protecting small businesses from unfair contract terms in standard form contracts applies
to contracts entered into or renewed on or after 12 November 2016, where:

 it is for the supply of goods or services or the sale or grant of interest in land
 at least one of the businesses employs fewer than 20 people
 the price of the contract is no more than $300,000 or $1 million if the contract is for more than
12 months.

For more information on unfair contract terms visit the ACCC website.

Before signing a contract

Before you sign a contract:

 read every word, including the fine print

  ensure that it reflects the terms and conditions that were negotiated
 seek legal advice 
 allow plenty of time to consider and understand the contract
 don’t be pressured into signing anything if you are unsure
 never leave blank spaces on a signed contract – cross them out if you have nothing to add so
they cannot be altered later
 make sure that you and the other party initial any changes to the contract
 obtain a copy of the signed contract for your records.

Once you’ve signed a contract you may not be able to get out of it without compensating the
other party for their genuine loss and expenses.  Compensation to the other party could include
additional court costs if the other party takes their claim against you to court.  Some contracts
may allow you to terminate early, with or without having to pay compensation to the other party.
You should seek legal advice if you want to include an opting-out clause.

TIP: If it is not possible to have a written contract make sure you have other documentation such
as emails, quotes, or notes about your discussions to help you identify what was agreed.

Ending a contract

Most contracts end once the work is complete and payment has been made.

Contracts can also end:

 by agreement – both parties agree to end contract before the work is completed.
 by frustration – where the contract cannot continue due to some unforeseen circumstances
outside the parties’ control.
 for convenience – where the contract allows a party to terminate at any time by providing
notice to the other party.
 due to a breach – where one party has not complied with an essential contract condition, the
other party may decide to terminate the contract and seek compensation or damages.

If a contract warranty or minor term has been breached it is unlikely that it can be terminated,
though the other party may seek compensation or damages.

Some contracts may specify what will be payable if there is a breach. This is often called
liquidated damages.

If there is a dispute regarding the contract it is important both parties communicate clearly to
attempt to resolve the matter. You may consider using our low-cost Alternative Dispute
Resolution (ADR) service or seek legal advice to help resolve your dispute.

Trade unions have long decried the “creeping casualization” of the labor force. It has been
denounced in the halls of Congress, in media, echoed and re-echoed in tripartite fora here and
abroad and, even in the ILO conference in Geneva.
To be fair, there has been abuse of outsourcing of labor by some employers. But all throughout
the years since the Labor Code was promulgated in 1974, the rules implementing Articles 106
which allows but regulates contracting out or subcontracting of labor has undergone several
changes. Every change has made outsourcing stricter and more restrictive.

D.O. 18-A of the past administration specifically defines substantial capital to mean paid up
capital of P3,000,000 of labor service contractors and payment of registration fee of P25,000
good for a period of three (3) years. The objective was to eliminate ‘fly-by-night’ service
contractors who are not financially capable of complying with the labor standards required by
law such as minimum wage, overtime, 13th month pay and other legally-mandated benefits.

Yet, it did not appease labor. Against world-wide trends, trade unions want outsourcing in all
forms to be eliminated. The cry for regularization of all contract workers gained traction during
the 2016 second presidential debate when moderator Karen Davila threw an innocuous-sounding
question of the candidates’ views on ‘555’ or ‘endo.” All the candidates, except Binay and Roxas
who tried to qualify their answers, replied that, if elected, they will abolish this pernicious
practice.

But here’s the kicker. ‘555’ or ‘endo’ is illegal even in previous labor issuances. Effective
enforcement was the problem. Perhaps, the candidates did not know that there are legitimate
forms of job contracting where contract workers serve indefinitely for years – not five months or
end of definite period – unless the principal reduces the number of contract workers for
economic or other reasons.

Metamorphosis of ‘555’ ‘endo’ to contractualization

Trade centers saw this opportunity to regularize all contract workers when President Duterte was
elected and repeated his promise to abolish ‘555’ or ‘endo.’ But somehow along the way, ‘555’
or ‘endo,’ has expanded its meaning to include all forms of contract work. The word
‘contractualization’ not found in the English dictionary nor in the Labor Code or its
implementing rules, has gained coinage and convoluted meaning.

In labor sector’s view, contractualization refers to all forms of non-standard work arrangements
even if the work could last indefinitely for years. Ironically, this new meaning runs counter to
what DOLE Secretary Bello explained in one press interview thus:

“Under end of contract (endo), you hire somebody. Under the law, they are given a period of six
months which is called probationary period. And within the six months, if the employers meet
the standards of the company then they will become regular. But what the employers do is that
they fire these employees after five months.”
Secretary Bello’s explanation of ‘endo’ finds support in my good friend, the respected author on
Labor Law, Cesar Azucena, who explained a Supreme Court decision on ‘endo:’ “What the court
struck down immediately is the all too-common practice of hiring operating personnel batch by-
batch, each batch under a five month contract. At the end of the period, the workers will be
replaced by the next five-month employees because of “E-O-C,” (end of contract or “endo”). The
ruling has the effect of making “5-5-5” and “E.O.C. things of the past in numerous workplaces.
(2012 edition, p. 327, Everyone’s Labor Code.

Again, to appease labor, the present administration issued D.O. 174, followed by D. O. 183,
increasing capitalization to P5,000,000 and registration fee to P100,000 and further restricting
job contracting or subcontracting. Did the two department orders mollify labor? No. They want
complete abolition as promised by the President. They are asking the President to sign an E. O.
to comply with his promise of ending contractualization as if he can do it by executive fiat. (As
of this writing, the draft E. O. is not yet signed by the President)

Definition of security of tenure bastardized

It is interesting to note that labor’s objection to contract work arrangement is based on two major
grounds: lack of security of tenure and violation of the right to organize and to collective
bargaining. D. O. 174 addresses these issues frontally by requiring all employees of service
contractors to be regularized with right to organize. So, where’s the beef now?

Labor’s definition of security of tenure is the direct hiring relationship between the principal
employer and employee without the participation of a service contractor. This is, of course,
unacceptable and contrary to the legal definition of security of tenure which refers to the right of
employees not to be dismissed without just or authorized cause and without due process.

Congress, wittingly or unwittingly, follow labor sector’s line by calling their pending bills as
security of tenure bills or S.O.T. for short. With all due respect, this is a misnomer or, at the very
least, a euphemism. Why not just refer to them correctly as Job Contracting and Subcontracting
bills? The debate has now shifted to Congress. The House of Representatives has approved its
own version. The Senate is still in the Committee stage. Will Congress abolish
contractualization? . Abangan!

(Author is past president of PMAP for two terms and past president of Society of Fellows in
Personnel Management, currently Vice President of ECOP. He is co-author of PMAP book,
“Personnel Management in the 21st Century,” and author of “Human Resource Management
from the Practitioner’s Point of View” and “Organization and Management.”)