Subcontracting refers to the process of entering a contractual agreement with an outside person or company to perform a certain amount of work. The out-side person or company in this arrangement is known as a subcontractor, but may also be called a free-lance employee, independent contractor, or vendor. Many small businesses hire subcontractors to assist with a wide variety of functions. For example, a small business might use an outside firm to prepare its payroll, an accountant to help with its record keeping and tax compliance, or a free-lance worker to handle a special project. Subcontracting is probably most prevalent in the construction industry, where builders often subcontract plumbing, electrical work, drywall, painting, and other tasks.
(a) "Contracting" or "subcontracting" refers to an arrangement whereby a principal 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. (b) "Contractor or subcontractor" refers to any person or entity engaged in a legitimate contracting or subcontracting arrangement.
(c) "Contractual employee" includes one employed by a contractor or subcontractor to perform or complete a job, work or service pursuant to an arrangement between the latter and a principal. (d) "Principal" refers to any employer who puts out or farms out a job, service or work to a contractor or subcontractor.
In Philippines, to be a legitimate subcontractor, There is a Minimum capitalization requirement of at least P3Million paid up capital for corporations, cooperative, partnership; same P3M net worth for sole proprietorship (Section 3[l]) Tools, equipment, machineries and work premises are separately considered from the paid up capital requirement. It must be actually and directly used for the subcontracted work or services. Proof of ownership or lease agreement must be shown with photograph. Subject to verification inspection.
Regular employee versus Contractual employee
For one, the expiration of the employment engagement in contractual arrangement is predetermined.
Wage rates and “top of” benefits are different as regular employees observed the company pay scale while contractual engagement may or may not be based on the company pay scale. However it should not be below the minimum standards.
Rights of Contractual employees (according to Department Order 18- 02 of DOLE)
(a) safe and healthful working conditions;
(b) labor standards such as service incentive leave, rest days, overtime pay, holiday pay, 13th month pay, and separation pay as may be provided in the Service Agreement or under the Labor Code;
(c) retirement benefits under the SSS or retirement plans of the contractor, if there are any;
(d) social security and welfare benefits;
(e) self-organization, collective bargaining and peaceful concerted activities; and (f) security of tenure.

Hiring subcontractors offers a number of advantages for small businesses. For example, subcontracting mundane but necessary tasks can free up time and resources to enable the small business owner to concentrate on making money and growing the business. In addition, hiring a subcontractor is usually less expensive than hiring a full-time employee, because the small business is not required to pay Social Security taxes, workers' compensation benefits, or health insurance for independent contractors. Subcontracting does pose some potential pitfalls, however, such as a loss of control over the quality and timeliness of work. But small business owners can take several steps to help ensure that their relationships with subcontractors are productive and beneficial for all concerned.
Although hiring an independent contractor to handle a special project or help out during a busy season may be cheaper than hiring a full-time employee, a small business cannot simply call someone an independent contractor in order to avoid paying Social Security taxes and benefits. The U.S. Internal Revenue Service(IRS) scrutinizes employer-subcon-tractor relationships carefully, and any misrepresentation may be subject to severe financial penalties. To avoid confusion, small business owners should be aware of the distinctions between independent contractors and employees and consult IRS guidelines when making subcontracting decisions. Most importantly, all subcontractors hired by a small business should present themselves as being in business for the purpose of making a profit. In addition, all work and pay arrangements should be spelled out in a contract that specifically mentions that the work is being performed by an independent contract
Contract: For example, the contract should specify a certain amount of work to be performed by a given deadline, but should not specify how that work should be performed in terms of working hours or tools and materials used. In addition, payment should be made by the job rather than by the hour, and the subcontractor should not be prohibited from working simultaneously with other clients. should include tangible measures of job performance, as well as financial incentives to encourage the subcontractor to meet deadlines and control costs. The contract should also clearly define responsibilities and performance criteria, so that no questions arise later about whether the subcontractor or the client was supposed to handle a certain task or pay any extra charges incurred. The contract should also outline the procedures for changing the subcon-tractor relationship, including the means for renewal, cancellation, or termination. Finally, the contract should set strict confidentiality rules if needed and specify who owns the rights to any new ideas, inventions, or materials that are created from the business arrangement.
Benefits:
Indeed, subcontractors in many industries are often sources of valuable information and insight on ways in which small business owners can save time and money or improve quality.
Skilled, professional subcontractors with a strong work ethic can help boost your company's financial success and burnish its reputation with clients and community alike. get through busy periods; for others, it's a long-term strategy designed to create a scalable organization at minimal cost.
We decided to engage in subcontracting to ensure the project would be completed on time as we did not want any more full time employees.

A construction company can maintain a smaller staff and better handle temporary periods of high work volumes by subcontracting portions of their projects to other companies or individuals.

Costs: * Many companies encounter resistance from employees who feel that their jobs are threatened by subcontracting. Other companies may even find that turnover increases when the most interesting or fulfilling jobs are outsourced, leaving employees to perform less attractive tasks.
Solution: o avoid these problems, in-house employees should be informed of the plans to subcontract work and told the rationale behind the decision. The small business owner may also wish to get employee input about what work is appropriate for subcontracting, and take steps to make sure that employees continue to receive rewarding, interesting, career-building responsibilities. * Conversely, subcontractors who turn in sloppy or tardy work or behave in an unprofessional manner can quickly stain your company's name, and leave business owners (and any staff) with a heavier, messier workload.

Steps:
First, it is important to assess the needs of the small business to make sure that outside help is needed, decide which specific tasks or projects to subcontract, and determine what sort of subcontractor could best perform the work. The small business owner should also give some thought to the type of relationship he or she wants to have with the subcontractor. Some businesses choose to share control of the project or process with a trusted subcontractor, even including the vendor in strategic decision-making. Other companies choose to maintain a high degree of control internally and subcontract only minor projects on a limited, as-needed basis.

The next step in the subcontracting process involves preparing in-house staff and obtaining the support of key personnel for the decision

he next step is to begin contacting potential subcontractors, either formally or informally, and asking specific questions about the services provided and the terms of the contract.

negotiate a contract in order to help ensure a mutually beneficial relationship.

The next step is to prepare the subcontractor to interact efficiently with the client company during performance of the contract. The small business owner may wish to introduce the subcontractor to key employees, for example, and establish reporting relationships. It is also important to arrange to receive periodic progress reports from the subcontractor, as well as feedback about both the project at hand and the overall relationship. At the conclusion of the project, the small business owner should conduct a post-mortem and provide the subcontractor with an evaluation of their work.

Different with labor only contracting
Prohibited by law
Article 106 of the Labor Code of the Philippines defines “labor-only” contracting as follows:
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.
(i)The contractor or subcontractor does not have substantial capital or investment which relates to the job, work or service to be performed and the employees recruited, supplied or placed by such contractor or subcontractor are performing activities which are directly related to the main business of the principal; OR
(ii) [T]he contractor does not exercise the right to control over the performance of the work of the contractual employee.
He earns P340 in wage plus a P25 allowance a day to support his three children. His wife does not have a job.

), they are seeking for the regularization of 397 employees, who comprise 90 percent of the distillery’s labor force.
The contractual workers, some of them working for Tanduay for almost a decade now, are under labor contracts with service contractors, HD Manpower Service Cooperative and the GlobalPro Workers Cooperative.
Violations
But the strikers saw a glimmer of hope after labor officials, in its initial findings, found violations of labor laws against Tanduay and the service contractors.
On May 27, the Department of Labor and Employment (DOLE) in Laguna released the Notices of Results (NRs) of the compliance visit conducted by labor laws compliance officers in the distillery plant on April 28.
The NRs, copies of which were furnished to the Inquirer by
Tudla, were addressed to Tanduay plant manager Richard Teng, HD Manpower Service Cooperative owner Gregorio Hemedes, and GlobalPro Workers Cooperative owner Alejandro Lukban.
According to the NRs, Tanduay Distillers Inc., referred to in the report as the “principal,” and the two service contractors violated DOLE Order 18-A that provides for the supervision and control, and the work assignment of the workers.
DOLE Order 18-A covers labor provisions on job contracting.
DOLE, for one, noted that the workers were “directly reporting to the supervisor of the Tanduay Distillery Inc.” and were assigned at the production area “necessary to the production of the Principal’s business.”
It added that both contractors failed to assign a “trained first aider” and a safety and health officer to be present during the production.
Tanduay and the two service contractors also violated labor laws when they failed to pay the workers the five-day service incentive leave, an amount equivalent to five-day worth of salary, and when they deducted from the salaries the workers’ medical, uniform and personal protective equipment expenses.
Are said DOLE’s findings were favorable to their case as this “shows that we have been performing jobs similar to those of the regular employees.” a case of labor-only contracting, an illegal labor practice, as opposed to legitimate job contracting wherein contractors should have a direct supervision over the employees.

Fail to show substantial capital, P&G
Sucontracting:
(a) The contractor or subcontractor carries on a distinct and independent business and undertakes to perform the job, work or service on its own account and under its own responsibility according to its own manner and method, and free from the control and direction of the principal in all matters connected with the performance of the work except as to the results thereof; (b) The contractor or subcontractor has substantial capital or investment; and (c) The agreement between the principal and contractor or subcontractor assures the contractual employees entitlement to all labor and occupational safety and health standards, free exercise of the right to self-organization, security of tenure, and social and welfare benefits.

Labor only contracting an arrangement where the contractor or subcontractor merely recruits, supplies or places workers to perform a job, work or service for a principal. In labor-only contracting, the following elements are present:(a) The contractor or subcontractor does not have substantial capital or investment to actually perform the job, work or service under its own account and responsibility; and (b) The employees recruited, supplied or placed by such contractor or subcontractor are performing activities which are directly related to the main business of the principal.

A subcontractor employs its own workers

Read more: http://newsinfo.inquirer.net/695096/dole-finds-labor-violations-in-tanduay-workers-case#ixzz48Ij8Y999
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