Contractor asked to be sued to make Principal liable – a case study

CONTRACTORS COME IN DIFFERENT FORMS, THIS ONE IS IN THE ROTTEN GROUP.

Author’s Note and Disclosure: The author is a Director of a DOLE-registered legitimate job contractor engaged in permissible job contracting compliant with the laws on contracting and subcontracting, as well as DOLE DO-174 and related regulations.

Yesterday, I was fortunate to have had the privilege of attending a seminar and learning from Labor Lawyer, Joseph B. Jimenez, who was formerly an undersecretary of the Department of Labor and Employment (DOLE). The topic was on DOLE Inspection following DOLE Department Order No. 183, Series of 2018 (DO-183).

He shared many nuggets of wisdom. However, one thing stood out to me.

In the middle of discussing contracting, Atty. Jimenez cited a case of a contractor who asked to be sued to make the Principal liable.

It went down like this.

A multi-national company engaged a contractor. (This is called the Principal.)

The contractor then deployed numerous personnel ranging from the hundreds to the thousands.

The contractor was a sole proprietorship owned solely by an individual. He hired his family members as administrative employees.

When the management of the Principal was changed after years of contracting, the contractor was not renewed. Unable to pay for the compensation and benefits of its employees, it is said that the sole proprietor asked a child/descendant who was, for all intents and purposes, an employee, to sue his father and implead/include the Principal as well in the labor case.

Throughout the hearing, the contractor did not submit a Position Paper or any other pleading, including the Principal.

A decision was released finding the contractor as a labor-only contractor and thus making the Principal an indirect employer liable for the unpaid salaries, benefits, and other entitlements. This easily ranged in the millions, given the size of the workforce and years that have passed until the case was decided with finality.

That’s one for the books. Those companies who think that this or similar scenario will not happen to them, think again.

Deplorable

What the contractor did was plainly deplorable.

It is for this reason that companies should engage DOLE-registered legitimate job contractors engaged in permissible job contracting compliant with the laws on contracting and subcontracting, as well as DOLE DO-174 and related regulations.

There are just too many non-compliant contractors whose only capital is their connection with executives of companies who approve procurement, as with our earlier example. These contractors do not have substanital capital nor have any tools or equipment; worse, some do not even have an office as they simply operate a fly-by-night (monkey) business.

Thus, when the management of these Principals do a re-organization, new executives flag down these contractors as high risk and replaces them. (In companies where culture is really bad, the cycle soon repeats when these new executive hire those who they have special arrangements and intentionally overlooking qualifications. Independent compliance audit is thus required to check for compliance.)

The contractors with hundreds/thousands of deployed personnel find themselves in desperate situations. Some successfully sign-up new clients where deployed personnel are transferred, while some are constrained to do massive lay-offs. Then there are the unscrupulous ones who like in our example have themselves sued by design to force the Principals to shoulder the compensation and benefits, even if the latter had already paid for them.

Independent Compliance Audit

Shady transactions remain in the shadows. Those who benefit from it will do whatever they can to avoid it from being exposed to the spotlight.

Thus, it is only through an independent compliance audit that the extent of the problem is discovered and who are likely involved all the way up to the responsible officers.

Depending on the size of a company, the Independent Compliance Audit may last from two weeks to several months, especially if there are several branches nationwide.

This is a cost of doing business.

With the many advantages brought about by a contracting arrangement, there will be a corresponding necessary expense to ensure its validity and continued legal compliance.