Article 106 of the Labor Code: Contractor or subcontractor
Status: In force
What does Article 106 say?
Whenever an employer enters into a contract with another person for the performance of the former’s work, the employees of the contractor and of the latter’s subcontractor, if any, shall be paid in accordance with the provisions of this Code.
In the event that the contractor or subcontractor fails to pay the wages of his employees in accordance with this Code, the employer shall be jointly and severally liable with his contractor or subcontractor to such employees to the extent of the work performed under the contract, in the same manner and extent that he is liable to employees directly employed by him.
The Secretary of Labor and Employment may, by appropriate regulations, restrict or prohibit the contracting-out of labor to protect the rights of workers established under this Code. In so prohibiting or restricting, he may make appropriate distinctions between labor-only contracting and job contracting as well as differentiations within these types of contracting and determine who among the parties involved shall be considered the employer for purposes of this Code, to prevent any violation or circumvention of any provision of this Code.
There is "labor-only" contracting where the person supplying workers to an employer does not have substantial capital or investment in the form of tools, equipment, machineries, work premises, among others, and the workers recruited and placed by such person are performing activities which are directly related to the principal business of such employer. In such cases, the person or intermediary shall be considered merely as an agent of the employer who shall be responsible to the workers in the same manner and extent as if the latter were directly employed by him.
Read the Labor Code on the DOLE website (it uses the article numbers before 2015)
What does it mean in plain language?
Article 106 of the Labor Code deals with work that a company gives to a contractor or subcontractor. The contractor's workers must be paid according to the Code, and the company is jointly and severally liable for their unpaid wages. When the contractor is only a supplier of workers, without real capital, for the company's main business, the law calls it labor-only contracting and treats the company as the real employer.
The article keeps the same number after the 2015 renumbering of the Labor Code, as the Supreme Court's citation in Daguinod v. Southgate Foods (2019) shows.
How does it work in real life?
Rodel: a security guard whose agency stopped paying
Rodel is a guard supplied by a security agency to a mall. The agency stops paying wages for two months. Under the second paragraph of Article 106, the mall is jointly and severally liable with the agency for the unpaid wages, up to the work Rodel did at the mall.
Mark: a cashier from an agency with nothing of its own
Mark is placed by an agency as a cashier at a fast-food branch. The agency has no equipment or premises of its own, and the store manager gives him all instructions. Like the worker in Daguinod, he can argue that this is labor-only contracting and that the store operator is his real employer.
Lea: a janitor from a real contractor
Lea works for a janitorial company that has its own supervisors, equipment and many clients, and she cleans a bank's offices. Cleaning is not the bank's main business, and the contractor has its own capital. Unless other facts show labor-only contracting, her employer is usually the contractor.
What does this mean in practice?
- The question is often who the real employer is. It matters for regularization, dismissal and money claims. See Endo and labor-only contracting.
- Evidence counts: the service contract, who gives instructions, who disciplines, and what the contractor owns.
- A worker who was dismissed can claim against both the contractor and the company. See illegal dismissal remedies and how to file a labor complaint.
- These cases depend on facts. A lawyer, a union or the Public Attorney's Office can check them. See Free legal help in the Philippines.
- For an overview of employment status, see probationary, regular and project employees.
What does Article 106 say?
The article has four paragraphs:
- Pay. The workers of the contractor and of any subcontractor "shall be paid in accordance with the provisions of this Code."
- Liability of the company. If the contractor fails to pay wages, the company that gave the work is liable together with it.
- Power of the Secretary of Labor. The Secretary may, by regulation, restrict or prohibit contracting-out of labor and distinguish labor-only contracting from job contracting.
- Labor-only contracting. It defines the arrangement and says who is the employer.
Is the company liable for the contractor's unpaid wages?
Yes, up to the work done for it. The second paragraph says:
In the event that the contractor or subcontractor fails to pay the wages of his employees in accordance with this Code, the employer shall be jointly and severally liable with his contractor or subcontractor to such employees to the extent of the work performed under the contract, in the same manner and extent that he is liable to employees directly employed by him.
"Jointly and severally liable" means the workers may collect the whole amount from either the contractor or the company. This applies even when the contracting is legitimate.
What is labor-only contracting?
The fourth paragraph defines it:
There is "labor-only" contracting where the person supplying workers to an employer does not have substantial capital or investment in the form of tools, equipment, machineries, work premises, among others, and the workers recruited and placed by such person are performing activities which are directly related to the principal business of such employer.
So two things are looked at:
- Capital. Does the supplier have its own substantial capital or investment, such as tools, equipment and work premises?
- The work. Do the workers do activities directly related to the company's main business?
When the arrangement is labor-only contracting, the supplier "shall be considered merely as an agent of the employer," and the company is responsible to the workers as if it had hired them directly. For the term itself, see labor-only contracting.
How do courts apply it?
They look at the facts, not at labels in the contract. In Daguinod v. Southgate Foods (2019), a cooperative placed a cashier at a fast-food franchise. The Supreme Court found it was a labor-only contractor: the work was core to the restaurant, the cooperative did not prove substantial capital, and the store's own manager disciplined the worker. DOLE registration was "merely presumptive proof" of legitimate contracting. The franchise operator was deemed the direct employer, and both were held jointly and solidarily liable for the worker's awards.
In Manggagawa sa Komunikasyon ng Pilipinas v. PLDT (2024), the Court stated that "labor contracting is not illegal per se." It set aside a DOLE order regularizing most of the contractors' workers, except those performing installation, repair and maintenance services, whom it declared regular employees of PLDT. It also said DOLE's findings must rest on substantial evidence.
DOLE implements Article 106 through department orders, including Department Order No. 174, series of 2017, as the Court noted in the PLDT case. This page does not describe that order, because its text was not reviewed.
Which Supreme Court rulings are relevant?
Frequently asked questions
What does Article 106 of the Labor Code cover?
It covers work that a company gives to a contractor or subcontractor. The contractor's workers must be paid according to the Labor Code, the company is jointly and severally liable for unpaid wages, DOLE may regulate contracting, and labor-only contracting makes the company the real employer.
Is hiring through a manpower agency legal?
Contracting is not illegal in itself. In Manggagawa sa Komunikasyon ng Pilipinas v. PLDT (2024), the Supreme Court said that labor contracting is not illegal per se. What Article 106 targets is labor-only contracting.
What is labor-only contracting under Article 106?
It exists when the supplier of workers has no substantial capital or investment, such as tools, equipment, machineries or work premises, and the workers do activities directly related to the main business of the company. The supplier is then treated as a mere agent of the company.
Who pays if the contractor does not pay our wages?
Article 106 makes the company jointly and severally liable with its contractor or subcontractor for unpaid wages, to the extent of the work performed under the contract. Workers may collect from either of them.
Does DOLE registration make a contractor legitimate?
Not by itself. In Daguinod v. Southgate Foods (2019), the Supreme Court said registration is only presumptive proof. The cooperative in that case was still found to be a labor-only contractor.
General information, not legal advice. For your case, ask a lawyer, the Public Attorney's Office (PAO) or the agency.
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