Outsourcing 2021

Last Updated October 28, 2021

Philippines

Law and Practice

Authors



Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW) is one of the Philippines' premier law firms, with a cohesive multidisciplinary team of legal professionals who possess in-depth knowledge in specialised fields of law, backed by the extensive experience of 49 years in the practise of law. From a core group of seven lawyers at its inception in 1972, the firm has grown to a prestigious service organisation of more than 160 lawyers. Its principal offices are in Bonifacio Global City, Taguig, Metro Manila. The firm has full-service branches in thriving business commercial centres in the Visayas and Mindanao – Cebu City and Davao City. ACCRALAW’s labour and employment department handles litigation and advisory services on all employment-related matters, including dismissal and suspension of employees, money claims, petitions for certification elections, union disputes, collective bargaining negotiations, unfair labour practices, strikes and lockouts, labour-related civil/criminal cases, social welfare benefits, labour law compliance and audits, and corporate reorganisations.

Information technology (IT) outsourcing has been in a constant state of growth and has been reinforced as a common business strategy across the globe. With the COVID-19 pandemic, IT outsourcing has made remote work and virtual transactions convenient and feasible amidst community lockdowns and quarantine protocols imposed by the national government.

In the Philippines, IT outsourcing typically includes software applications services, data centre operations, help desk support, network operations and, to a limited extent, disaster recovery.

Robotic process automation (RPA) remains to be a widely used tool in business process automation. In an RPA system, an action list is developed by the system. By watching the user perform certain tasks, automated activities ensue after a set of demonstration actions by the user. A similar emerging trend is the use of Chatbot, a software application aided by natural language processing that enables the system (ie, bots) to understand human speech and generate automated responses. Both RPA and Chatbot use artificial intelligence (AI) and machine learning capabilities to handle a high volume of repeatable tasks that previously required humans to perform. Big companies in the country such as Convergys Philippines, Infosys and Accenture, as well as government agencies in the public sector, such as the Central Bank of the Philippines, are utilising these tools.

With regard to business process (BP) outsourcing, captives and shared service centres (SSCs) continue to provide an alternative to outsourcing to third-party vendors. Captives and SSCs have proven their ability to normalise operations and improve the efficiency of some processes. In a captive service model, a company uses a wholly owned subsidiary instead of a third-party vendor in order to maintain complete control over processes and delivery, as well as to keep critical activities within the organisation. Philippine entities normally set up as SSCs of global companies such as JPMorgan Chase, Shell and Procter & Gamble, have started to use this model.

The Impact of COVID-19

According to a study commissioned by the IT and Business Process Association of the Philippines (IBPAP), with the economic turmoil caused by the COVID-19 pandemic, 71% of organisations have initiated cost-cutting measures. As companies around the globe prioritise business continuity plans, a re-evaluation of their operations in offshore locations, such as in the Philippines, India, and South Africa, was necessary. These geographies were reported to have limited operational workforce and were found to be relatively slower to transition to remote delivery.

Particularly in the Philippines, IT-BP outsourcing establishments, which are considered to provide essential services, were allowed to operate albeit via skeletal workforce at the start of the pandemic, while other companies were constrained to either implement work-from-home arrangements or temporarily shut down their operations. As operational capacities were increased by the government in the Q3 of 2020, IT-BP outsourcing companies were allowed to operate at 100%, with due regard to health and safety measures at the workplace. Per IBPAP, by September 2020, the Philippine IT-BP sector had regained its momentum, thereby registering a 1.8% increase in headcount and 1.4% in revenue (as compared to 2019 figures). Although the hospitality and travel sectors were significantly affected by the pandemic, with some companies resorting to temporary layoff of workers and mass redundancies, sectors such as healthcare, e-commerce, retail, banking, finance and administration, and insurance, helped propel growth in the IT-BP industry.

As community quarantine restrictions begin to ease up, and with more workers returning to the office, IT-BP outsourcing companies transition to hybrid working schemes with videoconferencing applications being accepted industry-wide. In a survey conducted by IBPAP, it was shown that 87% of IT-BP companies are expecting to see a 5 to 15% growth in 2021, with the other 13% anticipating a flat growth. Some firms have also expressed their plans to expand to the provinces within the next 12 to 18 months.

The developments in new technology emerging in Philippine IT and BP outsourcing industries come with the effect of lesser manpower but higher revenue for the companies which are involved in the process of automation. Tasks which usually involve calculations, maintenance of records and repetitive and rule-based activities which have previously been done by employees, are simulated and delivered automatically by machines with RPA, Chatbot, and other capable software and AI. Nonetheless, with these new technologies on the rise, there is conversely an increase in the complexity of work and a demand for the development of new product and innovation strategies, calling for collaborative delivery of technology and human involvement.

With these developments, the Philippines’ IT-BP industry is expected to experience a growth of 5.0% in headcount and 5.5% in revenue in 2022 as companies, moving forward, will be enabled by accelerated digital transformation, skilled workforce, and strong government support.

The developments in technology have likewise brought blockchain and smart contracts into our jurisdiction. Considering the capabilities introduced by blockchain technology, there may be a wider adoption of the same in commercial applications and transactions. However, given that blockchain is still a relatively new concept in public policy in this jurisdiction, it might take more time for the Philippines to embrace its capabilities fully, although some companies, particularly financial institutions, have begun to assess which of their processes can leverage this technology as a solution to eliminate friction and ensure security within the business.

Articles 106 to 109 of the Labour Code and its implementing rules, Department of Labour and Employment (DOLE) Department Order No 174 series (“DO 174”) of 2017, provide the rules on contracting or outsourcing, including the rights and obligations of the parties to this arrangement and restrictions on the exercise of such rights.

Introducing DO 174

DO 174, which amended the Rules Implementing Articles 106 to 109 of the Labour Code, became effective on 3 April 2017 and superseded Department Order No 18-A which previously governed contracting arrangements in the Philippines. DO 174 applies to “an arrangement whereby a customer agrees to put out or farm out with a contractor or subcontractor the performance or completion of a specific job, work, or service within a definite or predetermined period, regardless of whether such job, work, or service is to be performed or completed within or outside the premises of the principal.” This involves a trilateral relationship among:

  • the principal (or customer), who decided to farm out a job, work or service to a contractor;
  • the contractor (or supplier), who undertakes the performance of a job, work or service; and
  • the employees of the contractor, who accomplish the job, work or service.

Exclusions

It must be noted that certain critical industries are excluded from the scope of DO 174. The DOLE Secretary issued on 9 June 2017 DOLE Department Circular No 1, series of 2017, which clarified the non-applicability of DO 174 to certain industries and contractual relationships. The said issuance clarifies that DO 174 does not cover information technology-enabled services involving an entire or specific business process, such as:

  • business or knowledge process outsourcing (including call centre activities);
  • legal process outsourcing;
  • IT infrastructure outsourcing;
  • application development;
  • hardware and/or software support;
  • medical transcription;
  • animation services; or
  • back office support.

Also excluded from the application of DO 174 are contractual relationships such as contracts of sale, lease, carriage, growing/growership, toll manufacturing, management, operation and maintenance. DO 174 also does not cover the contracting-out of jobs or works to a professional, or individual with unique skills and talents who performs the job or work themselves for the principal.

The Construction Industry, Private Security Agencies and Banks

DO 174 is likewise inapplicable to the construction industry, private security agencies and banks (to a certain extent), as there are separate issuances governing these businesses as will be explained below. The provisions of the Civil Code, on obligations and contracts, instead of the Labour Code, apply to the above excluded transactions.

In a contracting arrangement governed by the Labour Code, no employer-employee relationship exists between the customer and the employees of the supplier, provided the supplier complies with the requirements of law and is considered a legitimate independent contractor.

A contracting arrangement is considered legitimate if the following requirements are complied with:

  • the contractor is registered in accordance with existing regulations;
  • the contractor or subcontractor is engaged in a distinct and independent business and undertakes to perform the job or work on its own responsibility, according to its own manner and method;
  • the contractor or subcontractor has substantial capital to carry out the job farmed out by the principal on its account, manner and method, and investment in the form of tools, equipment, machinery and supervision;
  • in performing the work farmed out, the contractor or subcontractor is free from the control and/or direction of the principal in all matters connected with the performance of the work, except as to the results thereto; and
  • the service agreement ensures compliance with all the rights and benefits for all the employees of the contractor or subcontractor under the labour laws.

DO 174 prohibits a labour-only contracting arrangement, which is defined as:

  • an arrangement where:
    1. the supplier does not have substantial capital or investments in the form of tools, equipment, machineries and supervised work premises, among others; and
    2. the supplier or subcontractor does not exercise the right of control over the performance of the work of the employee; or
  • the supplier does not exercise the right of control over the performance of the work of the employee.

In a labour-only contracting arrangement, the customer is considered to be the direct employer of the supplier’s employees.

Security Services

The DOLE issued Department Order No 150-16, series of 2001, entitled “Revised Guidelines Governing the Employment and Working Conditions of Security Guards and Similar Personnel in the Private Security Industry”. This applies to private security agencies and their principals. This was issued to ensure that the rights of private security personnel meet the minimum benefits provided for by the law.

Construction Services

As mentioned earlier, the construction industry is excluded from the coverage of DO 174. The DOLE explained that it is the Philippine Contractors Accreditation Board (PCAB) which registers all contractors. Moreover, the construction industry is already governed by the following laws and government issuances:

  • Republic Act No 4566 or the Contractors’ License Law and its implementing rules;
  • DOLE Department Order No 19, series of 1993 (Guidelines Governing the Employment of Workers in the Construction Industry);
  • DOLE Department Order No 13, series of 1998 (Guidelines Governing the Occupational Safety and Health in the Construction Industry); and
  • DOLE-DPWH-DILG-DTI and PCAB Memorandum of Agreement-Joint Administrative Order No 1, series of 2011 (on co-ordination and harmonisation of policies and programmes on occupational safety and health in the construction industry).

Banking Functions

Under Central Bank of the Philippines (also known as Bangko Sentral ng Pilipinas or BSP) Manual of Regulation for Banks (MORB), inherent banking functions cannot be outsourced. These functions are defined as follows:

  • taking of deposits from the public;
  • the granting of loans and extension of other credit exposures;
  • managing of risk exposures; and
  • general management.

However, the MORB allows the outsourcing of banking functions to third parties or to related companies (ie, SSCs), provided that it has in place appropriate processes and information systems that can adequately identify and mitigate operational risks arising from the outsourced activities. According to existing BSP regulations, these banking functions include “printing of bank loan statements and other non-deposit records, bank forms and promotional materials; credit investigation and collection; processing of export, import and other trading transactions; transfer agent services for debt and equity securities; property appraisal; property management services; messenger, courier and postal services; security guard services; vehicle service contracts; janitorial services; and such other activities as may be determined by the Monetary Board”.

Republic Act No 10173 or the Data Privacy Act of 2012 (DPA) and its Implementing Rules and Regulations (IRR) govern the collection and processing of personal data by any natural or juridical person in the government or in the private sector, as either a personal information controller or personal information processor.

General Criteria for Processing Personal Information

Section 11 of the DPA sets out the general criteria for the processing of personal information. It provides that processing shall be allowed, subject to compliance with the requirements of the DPA and other laws allowing disclosure of information to the public and adherence to the principles of transparency, legitimate purpose and proportionality. Personal information must be:

  • collected for specified and legitimate purposes determined and declared before, or as soon as reasonably practicable after collection, and later processed in a way compatible with such declared, specified and legitimate purposes only;
  • processed fairly and lawfully;
  • accurate, relevant and, where necessary for purposes for which it is to be used in the processing of personal information, kept up to date; inaccurate or incomplete data must be rectified, supplemented or destroyed or its further processing restricted;
  • adequate and not excessive in relation to the purposes for which it is collected and processed;
  • retained only for as long as necessary for the fulfilment of the purposes for which the data was obtained or for the establishment, exercise or defence of legal claims, or for legitimate business purposes, or as provided by law; and
  • kept in a form which permits identification of data subjects for no longer than is necessary for the purposes for which the data was collected and processed, provided that personal information collected for other purposes may be processed for historical, statistical or scientific purposes, and in cases laid down in law may be stored for longer periods, and provided, further, that adequate safeguards are guaranteed by said laws authorising their processing.

Lawful Processing of Personal and Sensitive Personal Information

The DPA also sets out the specific and separate criteria for the lawful processing of personal information and sensitive personal information.

Under the DPA, cross-border sharing of data is allowed if consent is obtained and the following conditions are complied with:

  • Data-sharing for commercial purposes, including direct marketing, must be covered by a data-sharing agreement, and:
    1. the data-sharing agreement must establish adequate safeguards for data privacy and security, and uphold the rights of data subjects; and
    2. the data sharing agreement must be subject to review by the National Privacy Commission (NPC), on its own initiative or upon complaint of a data subject.
  • The data subject must be provided with the following information prior to collection or before their data is shared:
    1. identity of the personal information controllers or personal information processors that will be given access to the personal data;
    2. purpose of data-sharing;
    3. categories of personal data concerned;
    4. intended recipients or categories of recipients of the personal data;
    5. existence of the rights of data subjects, including the right to access and correction, and the right to object; and
    6. other information that would sufficiently notify the data subject of the nature and extent of data-sharing and the manner of processing.

The DPA imposes the penalties of imprisonment and a fine for prohibited acts which include unauthorised processing of personal information, accessing personal information due to negligence, improper disposal of personal information, and processing of personal information for unauthorised purposes. These prohibited acts are punishable by imprisonment ranging from one year to six years and a fine ranging from PHP500,000 to PHP2 million. A combination or series of these prohibited acts is punishable by imprisonment ranging from three years to six years and a fine of not less than PHP1 million but not more than PHP2 million.

The IRR of the DPA require that each personal information controller is responsible for personal information under its control or custody, including information that has been transferred to a third party for processing, whether domestically or internationally.

A “personal information controller” refers to a natural or juridical person, or any other body that controls the processing of personal data, or instructs another to process personal data on its behalf. On the other hand, a “personal information processor” refers to any natural or juridical person or any other body to which a personal information controller may outsource or instruct the processing of personal data pertaining to a data subject.

A personal information controller shall be accountable for complying with the requirements of the DPA, its IRR, and other issuances of the Commission. It shall use contractual or other reasonable means to provide a comparable level of protection to the personal data while it is being processed by a personal information processor or third party.

Under Section 25 of the IRR of the DPA, personal information controllers and personal information processors shall implement reasonable and appropriate organisational, physical and technical security measures for the protection of data.

Organisational Measures

The employer must designate a data protection officer who shall be accountable for ensuring compliance with applicable laws and regulations for the protection of data privacy and security.

Likewise, the employer must implement a data protection policy that provides for organisational, physical and technical security measures, taking into account the nature, scope, context and purpose of the processing. The policy must incorporate the following:

  • provision(s) ensuring that only personal data which is necessary for the specified purpose is processed;
  • procedures limiting the processing of data, to ensure that it is only to the extent necessary for the declared, specified and legitimate purpose;
  • a procedure for the collection of personal data, including procedures for obtaining consent, when applicable;
  • documentation and recording of the data processing system and activities; and
  • management, supervision and training of employees as to the processing, handling, storing and accessing of personal data;

Physical Measures

Physical security measures refer to the following:

  • implementation of policies and procedures to monitor and limit access to and activities in the room, workstation or facility, including guidelines to proper use of and access to electronic media;
  • designing of office space and workstations to provide privacy to anyone processing personal data; and
  • security against natural disasters, power disturbance, external access, mechanical destruction of files and equipment, and other similar threats.

Technical Measures

Technical security measures refer to the policies aimed at protecting the employer's computer systems used in the processing and storage of personal data. This includes the maintenance of the confidentiality, integrity, availability and resilience of the processing systems and services. The employer must implement a policy regarding regular monitoring of the system for security breaches, reasonably foreseeable vulnerabilities in the computer network, and measures for taking preventive and corrective action against security incidents.

In this jurisdiction, the standard supplier–customer contract between the principal and its supplier is the service agreement. Under DO 174, the service agreement must ensure compliance with all the rights and benefits for all the employees of the supplier under the law. Moreover, under Section 11 (b) of DO 174, the agreement should contain the following provisions:

  • specific description of contracted job or work;
  • term or duration of service;
  • place of work;
  • terms and conditions governing the contracted arrangement;
  • agreed amount of contracted job or work;
  • administrative fee of not less than 10% of the total contract cost; and
  • provision on the issuance of the bond(s) which the customer may require from the supplier.

Aside from entering into contracting arrangements with service contractors, Philippine companies have also tried other approaches which suit their business needs, one of which is multi-sourcing. In this arrangement, companies engage various service providers instead of having only one service provider handle the whole business process. This lets companies choose the best service provider for a specific function or service. This likewise helps promote healthy competition among the service providers.

Conversely, some companies enter into a joint venture with other companies for a new project or a business activity. In this arrangement, an association of persons or companies jointly undertake some commercial enterprise, generally contribute assets and share risks.

In the Philippines, the captives and SSCs make up a significant part of the IT-BP outsourcing industry, having generated millions of jobs and revenues for over the past few years, as intra-group services include administrative, human resources, finance, IT, management, marketing, research and development, among others. According to the Shared Services and Outsourcing Network (SSON), the growth in the services is driven by technology, knowledge and value-added competencies, which, based on a study in 2017, include invoice queue management, cash applications, general ledger, fixed assets, etc. Moreover, in a survey conducted in 2020, the SSON reported that 75% of Filipino SSCs aim to expand their scope either geographically or by adding new service offerings or both, subject to key concerns such as availability of skills and expertise in potential locations and labour costs.

The SSON likewise reported that global business services (GBS) is consistently the preferred target operating model for SSCs in the Philippines, with 57% of organisations already making the move toward “digitalised” GBS, leveraging automation, supporting wider enterprise digital change, and expanding their functions and services.

In this jurisdiction, the "customer" in an outsourcing arrangement, is referred to as the principal with whom the contractor (or supplier) has a contract.

Usually, the contractual protections for the customer in an outsourcing arrangement pertain to compliance with labour and social legislation, as those involving the wages and benefits of the supplier’s employees, for the purpose of avoiding the joint or solidary liability of the customer with the supplier. This is so because, even in cases of legitimate contracting, the customer is still jointly and severally liable for the unpaid wages and benefits of the employees. Thus, as a form of security, the customer may, pursuant to Article 108 of the Labour Code, require the supplier to furnish a bond equal to the cost of labour under contract, on the condition that the bond will answer for the wages due to the employees should the supplier fail to pay the same.

Furthermore, the customer may include the following stipulations in the service agreement:

  • submission of the employment contracts of the contractor’s employees to the principal;
  • a condition that the consideration of the service agreement will only be paid after the supplier has paid in full all wages, salaries and other benefits due to the contractor’s employees and has made all the required contributions to the Social Security System, the Home Development Mutual Fund, the Employees Compensation Commission and Philippine Health Insurance System;
  • to avoid the onset of an employment relationship between the customer and the supplier’s employees, provisions should ensure that it is the supplier which has the right to control the means and method of how its employees will perform the work, with the customer only having control as to the desired results, if only to avoid the customer being considered as the employer;
  • a "free and harmless" clause whereby the supplier holds the customer free from any and all liabilities that may arise from the outsourcing arrangement. A stipulation on liquidated damages may also be included in the agreement; and
  • posting of a bond by the supplier which will answer for the wages due to the employees should the supplier fail to pay the same.

With respect to remedies, as against the contractor, the customer may enforce the service agreement through arbitration or civil action depending on the agreement between the parties. Conversely, if the employees file a case against the supplier and implead the principal, the latter may file a motion to dismiss on the ground of lack of employer-employee relationship.

The customer and the supplier may stipulate in the service agreement that either party will be able to terminate the contract with or without cause and after serving the other party a formal notice and the observance of an agreed-upon notice period.

It is important to note, however, that under Section 13 of DO 174, in case of termination of employment caused by the pre-termination of the service agreement not due to authorised causes under Article 298 of the Labour Code, the right of the supplier’s employees to unpaid wages and other benefits including unremitted mandatory contributions shall be borne by the party at fault, without prejudice to the solidary liability of the parties to the service agreement as may be provided by law.

When a person sustains an injury as a result of a breach of contract or a legal invasion of their rights, they are entitled to recover damages which are the pecuniary compensation, recompense or satisfaction for the injury sustained. The party injured is entitled to damages which reasonably arise naturally from the breach of contract (direct loss), and which were reasonably in the contemplation of both parties, at the time the contract was entered into, as the probable result of the breach (consequential or indirect loss).

In this jurisdiction, the courts award different kinds of damages which may be in the form of:

  • Actual or compensatory damages – contemplate an adequate compensation for such pecuniary loss suffered by a person as they have duly proved. This includes the loss of what a person already possesses and the loss of a benefit that the person failed to receive because of the injury. Thus, this already compensates for the direct and the indirect losses.
  • Moral damages – may be recovered if there is physical suffering, mental anguish, serious anxiety, besmirched reputation, moral shock, social humiliation or a similar injury which is the result of another person’s wrongful act or omission.
  • Nominal damages – adjudicated in order that a right of a person, which has been violated, may be vindicated or recognised, and not for the purpose of indemnifying them for any loss suffered by them. Note that nominal damages cannot co-exist with actual damages.
  • Temperate damages – more than nominal but less than actual damages, may be recovered when there was in fact a pecuniary loss, but its amount cannot be established with certainty from the nature of the case.
  • Liquidated damages – agreed upon by the parties to a contract, to be paid in case of breach thereof.
  • Exemplary or corrective damages – imposed as a deterrent against socially deleterious actions. These are awarded in addition to moral, temperate, liquidated or compensatory damages.

For corporations and other juridical entities, generally moral damages cannot be awarded since, unlike a natural person, they cannot experience physical suffering or such sentiments as wounded feelings, serious anxiety, mental anguish or moral shock. However, the Supreme Court has recognised that when a juridical person has a good reputation that is debased, resulting in social humiliation, moral damages may be awarded. In other words, a corporation or other juridical entity can be an offended party in a defamation case and it can recover moral damages.

In our jurisdiction, parties are free to establish stipulations, clauses, terms and conditions as they may deem convenient, provided that they are not contrary to law, morals, good customs, public order or public policy. It is also standard that the law is deemed written into every contract. Thus, although a contract is the law between the parties, the provisions of positive law which regulate contracts are deemed written therein and shall limit and govern the relations between the parties.

In this connection, the Labour Code and DO 174 are the governing laws and regulations on contracting arrangements. Thus, deemed included in every service contract are Article 109 of the Labour Code and Section 9 of DO 174 which provide for solidary liability on the part of the customer and the supplier for purposes of enforcing the provisions of the Labour Code and other social legislation, in cases of violation of any provision of the Labour Code, including the failure to pay wages.

Generally, an employer may carry out employee transfers within its organisation as an exercise of management prerogative, provided that it is reasonable and done in good faith.

In the context of outsourcing, DO 174 provides that where the termination results from the expiry of the service agreement, or from the completion of the phase of the job or work for which the employee is engaged, the latter may opt to wait within three months to be re-assigned or transferred to another principal or customer. Failure of the supplier to provide new employment shall entitle the employee to payment of separation benefits as may be provided by law or the service agreement.

Where due to the exigencies of a business that compel the customer to reduce the supplier’s manpower dedicated to it, the affected employees of the supplier are usually placed on "floating status" whereby they do not lose their employment, but are usually subjected to a no work-no pay policy. Under prevailing jurisprudence, employees may be placed on floating status for a maximum of six months. Otherwise, they will have to be separated due to redundancy, paid separation pay of at least one month's pay or a month's pay per year of service (whichever is higher), and given a prior separation notice at least one month before their separation.

Under Section 6 of DO 174, other illicit forms of employment arrangements are declared prohibited for being contrary to law or public policy. Under this section, also prohibited are such other practices, schemes or employment arrangements designed to circumvent the right of workers to security of tenure. In connection with this, if the transfer of employees was done to circumvent the right of workers to security of tenure or their right to self-organisation, then the same may constitute an illicit form of employment arrangement under DO 174.

There is no explicit requirement under the law for an employer to consult its workers before outsourcing some functions, unless there is an applicable provision in a collective-bargaining agreement.

However, as a matter of good faith, it is advisable for the customer to consult with the trade union or the works' council, if there is any in the company, not necessarily to secure approval but if only to inform them about the intended outsourcing which may impact the employees. Under Article 267 of the Labour Code, “Any provision of law to the contrary notwithstanding, workers shall have the right, subject to such rules and regulations as the Secretary of Labour and Employment may promulgate, to participate in policy and decision-making processes of the establishment where they are employed insofar as said processes will directly affect their rights, benefits and welfare.”

Jurisprudence requires that, pursuant to this provision, the employees should at least be informed (though their approval need not be secured) of programmes affecting their rights and welfare. Under Article 259 (c) of the Labour Code, it is likewise prohibited “To contract out services or functions being performed by union members when such will interfere with, restrain or coerce employees in the exercise of their rights to self-organisation”. This constitutes unfair labour practice in the Philippines.

It is well settled under case law that transfer of employees within the company is an inherent right of the management. Although an employee has a right to security of tenure, this does not give them a vested right to the position so as to deprive the company of its prerogative to change their assignment to where they will be most useful. In a number of cases, the following reasons for the transfer of employees have been upheld by the Supreme Court:

  • transfer due to standard operating procedure of the company;
  • transfer due to business exigencies;
  • transfer in accordance with predetermined and established office policy and practice;
  • transfer to avoid conflict of interest;
  • transfer occasioned by the abolition of position; and
  • transfer pending investigation of irregularities.

For employees wanting to transfer to other outsourcing companies, it is the industry practice for the new employer to require resignations from and a clearance issued by the previous employer before accepting the new employees. In these kinds of transfers, there must be a valid separation from the old employer and accepted offer of employment with the new employer.

With regard to transfer of assets in relation to outsourcing, one of the considerations, especially in the IT and BP outsourcing industries, is whether or not to enter into a purely services-only arrangement or to include assets in the scope of the service agreement.

For the transfer of assets involved in outsourcing transactions, the formalities are similar to those of regular business industries. Thus, when there is a transfer of assets from one entity to another by way of sale, the provisions on sales under the Civil Code will apply.

In a transfer of assets, a Contract to Sell is first executed containing conditions to be fulfilled before a Deed of Absolute Sale is executed. Thereafter, the Deed of Absolute Sale is signed by the parties and notarised. However, if the transferor is registered with the Philippine Economic Zone Authority (PEZA) (with which any of the IT/BP outsourcing entities exporting services to foreign markets are registered, mainly to gain economic incentives), before the sale can be made, a letter of authorisation is first required from PEZA.

Land as an Asset

However, there are some assets, such as land, wherein the law requires certain formalities. For capital assets, or those assets generally not used in business, a capital gains tax should be paid. Conversely, for ordinary assets, the income will form part of the regular business income and will then be subject to corporate income tax. A documentary stamp tax should also be paid upon execution of the instruments transferring assets.

For the sale of land, the local transfer tax should likewise be paid to the local government unit, on top the capital gains tax (if the real property is a capital asset). Before registration with the Registry of Deeds, tax clearances are secured from the Bureau of Internal Revenue (BIR) and the City Treasurer’s Office as well as a certificate authorising registration from BIR.

Angara Abello Concepcion Regala & Cruz Law Offices

22nd Floor, ACCRALAW TOWER
2nd Avenue corner 30th Street
Crescent Park West
Bonifacio Global City, 1635 Taguig
Metro Manila, Philippines

+632 883 08 000

+632 840 37 007; +632 8403 7009

accra@accralaw.com www.accralaw.com
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Trends and Developments


Authors



Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW) is one of the Philippines' premier law firms, with a cohesive multidisciplinary team of legal professionals who possess in-depth knowledge in specialised fields of law, backed by the extensive experience of 49 years in the practise of law. From a core group of seven lawyers at its inception in 1972, the firm has grown to a prestigious service organisation of more than 160 lawyers. Its principal offices are in Bonifacio Global City, Taguig, Metro Manila. The firm has full-service branches in thriving business commercial centres in the Visayas and Mindanao – Cebu City and Davao City. ACCRALAW’s labour and employment department handles litigation and advisory services on all employment-related matters, including dismissal and suspension of employees, money claims, petitions for certification elections, union disputes, collective bargaining negotiations, unfair labour practices, strikes and lockouts, labour-related civil/criminal cases, social welfare benefits, labour law compliance and audits, and corporate reorganisations.

The COVID-19 Pandemic and the Impact on Outsourcing in the Philippines

Introduction

Almost a year and a half since the start of the imposition of a lockdown in the Philippines, the country remains under some form of community quarantine, going back and forth between the strictest and most lenient measures. Despite being under one of the worlds' longest lockdowns, the country has recently recorded its highest daily count of new COVID-19 cases.

Undeniably, the pandemic has taken a toll not only on the population’s health and safety, but also their livelihood. The pandemic and the imposition of community quarantines have greatly affected both employers and employees. On the one hand, employers face the difficult challenge of keeping their businesses afloat and at the same time ensuring their employees’ safety. On the other hand, the employees are the ones most at risk of contracting COVID-19, especially those who, because of the nature of their occupation or work, cannot utilise a telecommuting program or work from home scheme.

Moreover, employees face the risk of being separated from employment if their employers are forced to close shop or implement manpower reduction programmes due to the financial strain caused by the pandemic. Not to mention, both employers and employees are constantly trying to adjust and keep up with the with the changing guidelines applicable to the different forms of community quarantine.

Government efforts

The government, in its efforts to curb the spread of COVID-19, provide assistance to the populace, and pave the way for economic recovery, has issued a number of laws, including Republic Act No 11469, otherwise known as the Bayanihan to Heal as One Act, and Republic Act No 11494, or the Bayanihan to Recover as One Act.

Insofar as employment is concerned, the Department of Labor and Employment (DOLE) has issued several Advisories, Department Orders, and Joint Memoranda with other government agencies to further these efforts. To illustrate this, a number of bills shall be discussed in this article. All are currently pending in Congress and, if enacted, they will not only help in the government’s response to the pandemic, but will also greatly impact the realm of employment law in the Philippines, since they display the trends that lawmakers are attempting to respond to in light of the new demands of the workplace.

House Bill No 6864, or the “Better Normal for the Workplace, Communities and Public Spaces Act of 2020”

In August 2020, House Bill No 6864 (HB 6864) was approved in its third reading and is now pending before the Senate. This Bill aims to define and allocate roles, responsibilities, and obligations of the national government, local government, private sector, and individual Filipino citizen; identify standard and protocols in the management of physical spaces; mitigate the transmission of the virus; and provide operational parameters, guidelines, and recommendations for a “better way of life” until COVID-19 is effectively contained.

Standards for a “Better Normal” which include the universal and mandatory health and safety measures are provided by the House Bill. With regard to private commercial and industrial workplaces, the following measures, among others, are required for a “Better Normal”:

  • employers in applicable industries shall incorporate alternative work arrangements to lessen by at least 50% the number of employees required to report to their workplaces physically;
  • all expenditures in complying with the mandates of the Bill shall be borne by the employer and shall not in any way be charged to the employees;
  • employers may not discipline their employees for tardiness or absences due to travel difficulties related to the implementation of the Bill; and
  • employers are mandated to adopt a flexible working schedule in keeping with the policy of maintaining a minimum of eight hours per day or 48 hours per week, which shall be incorporated in a Management Plan.

Under HB 6864, all private business, offices, and establishments are required to submit a “Better Normal Workforce and Workplace Management Plan” ("Management Plan") to concerned local government unit. The Management Plan shall contain information on the following, among others:

  • the total number of employees in the workplace covered by the plan;
  • the overall strategy for the reporting of the workforce (which may be on a rotational, staggered, telecommuting or remote/working from home basis);
  • the total number of workers at any given time in the workplace;
  • the number of workers per area of space, and the spacing mechanisms to be implemented;
  • the introduction of physical changes in space management to protect employees and implement physical distancing;
  • the signs, reminders and other information in accessible formats installed to remind workers to practice mandatory health, safety and sanitation practices;
  • the provision of physical and personal protective equipment;
  • the mechanisms for managing employees who exhibit symptoms of, and/or are confirmed to have tested positive for, COVID-19, including the system for contact tracing; and
  • the compensation plan providing for how workers will be required to work and will be compensated while quarantined.

HB 6864 likewise provides for different prohibited acts and their respective penalties. Significantly, failure to submit the Management Plan within the prescribed period and failure of the employer, supervisor, manager, or any person in charge to abide by the Management Plan may be subject to imprisonment up to two months and a fine up to Fifty thousand pesos (PHP50,000). Moreover, for failure to submit the Management Plan, the employer’s permit to operate will be suspended.

Reviewing existing policies

Considering the foregoing obligations on the part of the employer, establishments may need to review and revise their existing policies to comply with the requirements of the Bill. While, generally, most of the obligations and guidelines can already be found in different issuances of the government, there are certain nuances such as the requirement of maintaining a 48-hour work week, which is not required under the current prevailing laws and regulations, as well as the requirement for a compensation plan for employees who are in quarantine.

Notably, HB 6468 contains a Sunset Clause which provides that the Act will expire after a three-year period from the date on which it comes into effect, or earlier if the President so declares following recommendations by the appropriate authorities that a viable vaccine has contained or eradicated COVID-19.

House Bill No 7036, or the “Security of Tenure Act”

To recall, the 17th Philippine Congress passed Senate Bill No 1826 which aimed to end contractualisation, and which President Rodrigo Duterte certified as urgent.

Current situation

Under the current law and regulations, “labour-only” contracting, a prohibited form of arrangement, is an arrangement where:

  • the contractor supplying workers to a principal does not have substantial capital or investment in the form of tools, equipment, machineries, work premises, among others and the contractor’s employees recruited and deployed are performing activities which are directly related to the principal business of the principal; or
  • the contractor does not exercise control over the performance of the work of the employee recruited and deployed.

The said Bill proposed to amend the definition of “labour-only” contracting by amending the conjunction “and” to “or” such that insufficiency of capitalisation of the contractor and the contractor’s employee’s performance of activities directly related to the main business of principal will be two separate grounds for a finding of “labour-only” contracting.

Senate Bill No 1826 was then vetoed by the President explaining that the “sweeping expansion of the definition of labour-only contracting destroys the delicate balance and will place capital and management at an impossibly difficult predicament with adverse consequences to the Filipino workers in the long term.”

Thereafter, various lawmakers of the 18th Philippine Congress refiled their respective versions in another attempt to end contractualisation.

The purpose of HB 7036

House Bill No 7036 (HB 7036), seeks to strengthen the private-employee’s security of tenure by amending the Labor Code of the Philippines.

Under HB 7036 “labour-only” contracting refers to an arrangement where:

  • the contractor does not have substantial capital or investment; or
  • the contractor has no control over its employees' methods and means of accomplishing their work; or
  • the contractor’s employees are performing activities that are directly related and necessary to the principal business of the employer to which they are supplied.

Similar to the change proposed by Senate Bill No 1826, HB 7036 makes use of the conjunction “or” and, in effect, expands the definition of “labour-only” contracting.

HB 7036 likewise seeks to prohibited fixed-term employment, except in cases of:

  • overseas Filipino workers;
  • workers on probation;
  • relievers who are temporary replacements of absent regular employees whose engagements shall not exceed six months;
  • project employees; and
  • seasonal workers.

Notably, “relievers” will be categorically recognised under HB 7036, provided that their engagements do not exceed six months.

Discontinuous employment

All other forms of discontinuous employment are prohibited under HB 7036. Further, clauses in employment contracts providing for a fixed period of employment are considered void. Employees under such agreement are deemed regular employees reckoned from the first day of employment.

The House Bill also seeks to afford more protection to the rights of relievers, project and seasonal employees. Employees will be considered as part of a work pool between their engagements, projects, or seasons. Moreover, they will be entitled to the right of first refusal to the task, work or project which is the subject matter of the employment.

Considering the foregoing proposed changes, employers who engage independent contractors must identify the activities performed by the contractor’s employees and must discontinue the outsourcing services directly related to its main business to avoid a possible discovery of labour-only contracting. Employers must likewise develop a procedure in the transfer of the activities performed by the contractor’s employees and their own fixed-term employees.

House Bill No 8817, or the “Freelance Workers Protection Act”

Based on a publication by a company providing market and consumer data, Statista, the number of self-employed workers had steadily increased in 2009. In 2018, there were approximately 11.1 million self-employed workers in the Philippines.

Considering the substantial number of individuals falling under this classification, it is only befitting that a law is enacted as an initial step in representing the growing number of freelance workers.

Current freelance laws

Under the current prevailing laws, freelance workers, not being considered as employees of the principal, enjoy minimal protection based only on the contract executed between the parties.

House Bill No 8817 (HB 8817), which has been approved by the House of Representatives and transmitted to the Senate for approval, aims to advance the rights and welfare of freelancers by ensuring them entitlement to humane working conditions.

Under HB 8817, a freelance worker refers to “any natural person or entity composed of no more than one natural person, whether incorporated under the Securities and Exchange Commission, registered as a sole proprietorship under the Department of Trade and Industry (DTI) or registered as self-employed with the Bureau of Internal Revenue (BIR), who is hired or retained to provide services, in exchange for compensation, as an independent contractor to do work according to one's own methods and without being subjected to the control of the hiring party, except only as to the results of the work.”

Freelance contracts

The House Bill provides that before the services of a freelance worker is engaged, the hiring party and the freelance worker shall execute a written contract which shall include, at the minimum, the following:

  • itemisation of all the services that the freelance worker will provide;
  • details of compensation and other benefits, including rate, method and schedule of payment;
  • period of employment;
  • grounds for breach of contract by either party;
  • the freelance worker's tax identification number; and
  • any other condition, item, or clause that the DOLE may direct.

HB 8817 requires the payment of night differential pay of at least 10% of the freelance workers’ regular compensation for each hour of work performed between 10pm and 6am, provided they are physically present in the workplace or on a field assignment. For those freelance workers deployed in dangerous areas, the payment of hazard pay equivalent to at least 25% of the total payment for the period of such deployment is likewise mandated.

Unlawful practices

The following practices by the hiring party are declared unlawful:

  • payment of compensation due the freelance worker later than 15 days after the date of payment stipulated in the contract;
  • requiring the freelance worker as a condition of payment of compensation, at any time after a freelance has commenced rendition of services, to accept a lower rate of pay;
  • retaliation against a freelance worker for exercising their rights under the Bill.

A hiring party who commits any of the unlawful practices will be held liable for a civil penalty ranging from PHP50,000 to PHP500,000.

Should the House Bill be enacted as a law, those engaging freelance workers must review the terms and conditions of the contracts and amend the same, if necessary, to comply with the requirements of the House Bill.

House Bill No 309, “An Act Instituting a Thirty-Five Hour Working Week Scheme as an Alternative Work Arrangement for Employees in the Private Sector”

Based on the Labor Force Survey conducted by the Philippine Statistics Authority, employees on average renders work 40 hours in a week. In this connection, a notable development is the growing trend of flexible working time and the gradual shift from the usual 40 hour working week to a shorter one.

In anticipation of the changing labour market, House Bill No 309 (HB 309) was drafted, seeking to start a 35-hour work week instead of the standard 40 hours.

Under HB 309, an employer in the private sector may, upon request of its employees or on a voluntary basis, implement a 35 hour working week arrangement upon such terms and conditions as may be mutually agreement upon by the parties, provided that the terms and conditions shall not be less than the minimum labor standards set by law.

In all cases, the employer shall ensure that employees under the 35 hour work week shall:

  • receive a rate of pay and other benefits not lower than those provided in applicable laws;
  • have the right to rest periods;
  • have equivalent workload and performance standards with those of comparable employees in the company; and
  • be provided the written information on the terms and conditions of the work scheme, as well as the corresponding responsibilities of the employee.

Considering the requirements of the House Bill, employers may need to:

  • review existing work arrangements to determine the feasibility of a reduction in working hours;
  • determine the costs and benefits of such reduced working hours scheme; and
  • review and revise company policies to ensure compliance with the Labor Code and other social legislation with regard to the benefits received by the employees who will work on reduced hours.

House Bill No 7909, or the “Paid Pandemic Leave Law 2021”

With the number of new COVID-19 cases increasing, it cannot be denied that employees, especially those not on a work from home arrangement, are at a great risk of contracting COVID-19 even despite the protocols prescribed by the Department of Health (DOH) and DOLE.

Current system

Once employees test positive, they are required to undergo a 14-day quarantine. Employees who test positive and are symptomatic may need a longer time before they can return to work depending on when the symptoms clear.

In such a case, the employees on quarantine may have their remaining leaves applied to days they are on quarantine. However, for those with no remaining leaves, the employees will receive no pay under the “no work, no pay” principle.

While the existing leaves granted to employees may already cover some of the days when they are on quarantine, the application of all the leave entitlements to days when employees are on quarantine deprives the employees of availing leaves for other occasions/reasons.

Changes anticipated with HB 7909

House Bill No 7909 (HB 7909) seeks to grant paid pandemic leave for the following employees:

  • confirmed cases of COVID-19 or any emerging infectious disease that has reached the status of a pandemic;
  • probable or suspected cases of COVID-19 or any emerging infectious disease that has reached the status of a pandemic, and who need to undergo medical quarantine;
  • close contacts of, or those who have had exposure to a confirmed case of COVID-19, or any emerging infectious disease that has reached the status of a pandemic, and who need to undergo medical quarantine;
  • those who have an immediate family member who has been confirmed as having COVID-19 or any emerging infectious disease that has reached the status of a pandemic, and who needs family care; or
  • those who have been rendered involuntarily out of work or placed under floating status by their employer due to the effects of the pandemic on the company but remain employed.

Paid pandemic leave shall be 14 days of paid leave at full pay for employees falling under the first four groups above, and a maximum of 60 days of paid leave at 80% pay for employees falling under the last group.

HB 7909 provides for a penalty ranging from PHP20,000 to PHP200,000 for employers who wilfully refuse to grant the paid pandemic leave.

Should HB 7909 be enacted into a law, employers may need to analyse the potential cost of the paid pandemic leave, put in place procedures regarding the application and processing of the applications within the prescribed period, and revise company policies to ensure compliance with the requirements of the bill.

House Bill No 9252, or the “Mandatory COVID-19 Immunization Act of 2021”

Under the current laws and regulations, despite the current situation and the trend of increasing number of COVID-19 cases in the Philippines, vaccination is not mandatory and instead highly encouraged.

Under Republic Act No 11525, otherwise known as the “COVID-19 Vaccination Program Act of 2021,” it is categorically stated that “the vaccine cards [which are proof of vaccination] shall not be considered as an additional mandatory requirement for educational, employment, and other similar government transaction purposes.”

In relation to vaccination in the workplace, DOLE Labor Advisory No 3, series of 2021 provides that a “no vaccine, no work” policy shall not be allowed.

The intention of HB 9252

House Bill No 9252 (HB 9252), which seeks to amend Republic Act No 11525, aims to make COVID-19 vaccination mandatory for persons as may be determined by the DOH, with the exception of those who are unable to receive vaccines for medical reasons. As stated in its declaration policy, the driving force of this bill is the mandate of the 1987 Philippine Constitution for the State to “protect and promote the right to health of the people.”

Under the Bill, the vaccination shall be given for free at any government hospital or health centre. Persons covered by the law, who have not been vaccinated, shall not be allowed to enter, convene or occupy public places, whether or not government or privately owned. HB 9252 also seeks to amend the provision of Republic Act 11525 quoted above by deleting the word “not” and thus making vaccine cards a mandatory requirement.

Significantly, the Bill contains a penal provision which provides that “any person who violates any provision of this Act, or any of its rules and regulations or without permission of the quarantine officer in charge, shall be punished by a fine not more than Fifty Thousand Pesos, or by imprisonment for not more than one year, or both.”

This bill may be considered as a drastic and unrealistic measure considering that the vaccination is heavily dependent on the doses that the Philippines is able to procure and considering that vaccine hesitancy of the populace remains to be a problem of the country.

Undeniably, if this Bill is enacted into a law, this will affect an establishment’s operations and manpower resources considering that only those employees fully vaccinated will be allowed to physically report for work.

Impact on outsourcing

From the foregoing discussion, it is clear that the government seeks to afford more rights and protection to labour (ie, shorter work hours, new framework for protecting freelancers, additional benefits). Consequently, this may lead to higher costs/expenses on the part of the employers.

With regard to outsourcing, the Security of Tenure Act and its proposed amendment on the definition of a “labour-only” contractor may have a chilling effect to employers who engage or plan to engage third party contractors, considering the higher risk of being declared as engaged in “labour-only” contracting. Moreover, the added benefits proposed by the bills may likewise result to higher contract prices for contracting arrangements. Contracting out to a third-party contractor may also cause complications in complying with the requirements set in the “Better Normal for the Workplace, Communities and Public Spaces Act of 2020.” It would then be a challenge for the DOLE to issue the implementing rules and regulations of the proposed laws to fill the gaps therein.

Angara Abello Concepcion Regala & Cruz Law Offices

22nd Floor, ACCRALAW TOWER
2nd Avenue corner 30th Street
Crescent Park West
Bonifacio Global City, 1635 Taguig
Metro Manila, Philippines

+632 883 08 000

+632 840 37 007; +632 840 37 009

accra@accralaw.com www.accralaw.com
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Law and Practice

Authors



Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW) is one of the Philippines' premier law firms, with a cohesive multidisciplinary team of legal professionals who possess in-depth knowledge in specialised fields of law, backed by the extensive experience of 49 years in the practise of law. From a core group of seven lawyers at its inception in 1972, the firm has grown to a prestigious service organisation of more than 160 lawyers. Its principal offices are in Bonifacio Global City, Taguig, Metro Manila. The firm has full-service branches in thriving business commercial centres in the Visayas and Mindanao – Cebu City and Davao City. ACCRALAW’s labour and employment department handles litigation and advisory services on all employment-related matters, including dismissal and suspension of employees, money claims, petitions for certification elections, union disputes, collective bargaining negotiations, unfair labour practices, strikes and lockouts, labour-related civil/criminal cases, social welfare benefits, labour law compliance and audits, and corporate reorganisations.

Trends and Development

Authors



Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW) is one of the Philippines' premier law firms, with a cohesive multidisciplinary team of legal professionals who possess in-depth knowledge in specialised fields of law, backed by the extensive experience of 49 years in the practise of law. From a core group of seven lawyers at its inception in 1972, the firm has grown to a prestigious service organisation of more than 160 lawyers. Its principal offices are in Bonifacio Global City, Taguig, Metro Manila. The firm has full-service branches in thriving business commercial centres in the Visayas and Mindanao – Cebu City and Davao City. ACCRALAW’s labour and employment department handles litigation and advisory services on all employment-related matters, including dismissal and suspension of employees, money claims, petitions for certification elections, union disputes, collective bargaining negotiations, unfair labour practices, strikes and lockouts, labour-related civil/criminal cases, social welfare benefits, labour law compliance and audits, and corporate reorganisations.

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