Labor-Only Contracting Philippines: Who Becomes Liable

Last materially reviewed: August 16, 2026

Most workplace disputes involve two parties. Labor-only contracting involves three — a principal, a contractor, and the workers — and the whole question is which of the two companies is actually the employer, and who pays when something goes wrong.

That makes it a different problem from endo. Endo is about time: short contracts renewed to prevent regularization. Labor-only contracting is about parties: whether the company that hired you is a real contractor at all. If your concern is repeated short contracts, our guide on what endo is covers that. This guide covers the liability chain — Articles 106 to 109 — and who ends up answerable under each.

Direct Answer

Labor-only contracting exists where a contractor merely supplies workers and either lacks substantial capital or investment while the workers perform activities directly related to the principal’s business, or does not control how the work is performed. Where it is established, Article 106 treats the contractor as “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” — the principal becomes the employer outright. That is a different and heavier consequence than the solidary liability that attaches in legitimate contracting under Articles 106 and 109, where the contractor remains the employer and the principal shares specified liabilities.

Decision Snapshot

Question	Practical answer
Who this applies to	Workers engaged through an agency, manpower provider, cooperative or service contractor and deployed to another company, and the principals who engage them. It is a trilateral question — it does not arise where you were hired directly.
Core rule	Article 106 defines labor-only contracting and provides that where it exists, the intermediary is “considered merely as an agent of the employer”, who is then responsible to the workers as if he had employed them directly. Article 109 separately makes every employer and indirect employer responsible with the contractor for any violation of the Code, and provides that for civil liability they “shall be considered as direct employers.”
Main boundary	Legitimate contracting is lawful. A contractor is not labor-only merely because it is an agency, because the engagement is short, or because it is registered or unregistered. The finding turns on capital and investment, on whether the work is directly related to the principal’s business, and on who actually controls the work.
Key evidence	The service agreement between principal and contractor, the contractor’s DOLE registration and financial records, evidence of who supplied tools and premises, who issued daily instructions and approved leave and discipline, and payroll records showing what the contractor actually did beyond processing pay.
Deadline / rate / period	Money claims arising from employer-employee relations generally prescribe in three years; illegal dismissal actions in four. Under Article 108 a principal may require the contractor to post a bond equal to the cost of labor under the contract, answerable for unpaid wages.
First next step	Obtain the service agreement between the contractor and the principal, and establish in writing who gave you day-to-day instructions. Those two documents decide more labor-only contracting cases than anything else in the file.

Key Takeaways

Two different consequences. Legitimate contracting produces shared liability; labor-only contracting produces a change of employer.
Article 107 extends the chain to a party that is not an employer at all.
Article 109 calls both parties direct employers for civil liability purposes.
The elements are alternative, not cumulative — either route establishes it.
Registration does not settle it. A registered contractor can still be found labor-only on the facts.
Control is usually the decisive proof, and it is proved by ordinary documents.
D.O. 174 prohibits more than labor-only contracting — several other arrangements are separately banned.
Name both parties. Which one is ultimately liable is what the case decides.

Jump to a Section

Legal basis
The liability chain: Articles 106 to 109
Two consequences that are constantly confused
What makes contracting labor-only
Proving each element
The other prohibited arrangements under D.O. 174
Which party to name, and for what
Evidence and documentation
Common mistakes
Practical examples
What to do next
Frequently asked questions

Legal Basis

Authority	Rule supported	Type
Labor Code, Article 106	Contractor and subcontractor arrangements; joint and several liability of the employer for unpaid wages; the Secretary of Labor’s power to restrict contracting out; the definition of labor-only contracting and the agent consequence.	Statute
Labor Code, Article 107	Indirect employer — extends Article 106 to a person or entity that is not an employer but contracts with an independent contractor.	Statute
Labor Code, Article 108	Posting of a bond equal to the cost of labor under the contract, answerable for unpaid wages.	Statute
Labor Code, Article 109	Solidary liability — every employer or indirect employer is responsible with the contractor for any violation of the Code, and both are considered direct employers for civil liability.	Statute
DOLE Department Order No. 174, Series of 2017	Rules implementing Articles 106 to 109; the absolute prohibition against labor-only contracting and its alternative elements; the separate list of other illicit employment arrangements.	Department Order

The Liability Chain: Articles 106 to 109

These four articles are usually cited as a block — “Articles 106 to 109” — which hides the fact that each does something different. Read in sequence they build a chain, and knowing which link applies is what tells you who pays.

Article 106 — the contractor, and wages. It opens with the ordinary case: “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.” Then it adds the first liability rule — where the contractor fails to pay wages, “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.”

Note the limit built into that sentence: it is about wages, and it runs to the extent of the work performed under the contract. It is a backstop for pay, not a general transfer of employment.

The same article closes with the labor-only contracting definition and a far heavier consequence, set out in the next section.

Article 107 — the indirect employer. This is the link most often missed. It provides that Article 106 “shall likewise apply to any person, partnership, association or corporation which, not being an employer, contracts with an independent contractor for the performance of any work, task, job or project.”

In other words, you do not have to be anyone’s employer to be caught. An entity that engages a contractor for a job it needs done is an indirect employer and inherits Article 106’s liability, even though it employs nobody.

Article 108 — the bond. A protective mechanism that principals routinely overlook: “An employer or indirect employer may require the contractor or subcontractor to furnish a bond equal to the cost of labor under contract, on condition that the bond will answer for the wages due the employees should the contractor or subcontractor, as the case may be, fail to pay the same.” It is permissive, not mandatory — but a principal that never asked for one has no answer when the contractor’s payroll fails.

Article 109 — solidary liability, and the widest link. “The provisions of existing laws to the contrary notwithstanding, every employer or indirect employer shall be held responsible with his contractor or subcontractor for any violation of any provision of this Code. For purposes of determining the extent of their civil liability under this Chapter, they shall be considered as direct employers.”

Two things make Article 109 broader than Article 106’s wage rule. It reaches any violation of any provision of this Code, not only unpaid wages. And it says both parties are considered direct employers for civil liability — so a worker with a valid claim need not first exhaust the contractor.

Two Consequences That Are Constantly Confused

This is the distinction that decides what you are actually asking a tribunal for, and it is routinely collapsed into a single idea.

	Legitimate contracting	Labor-only contracting
Who is the employer	The contractor. That does not change.	The principal. The contractor is treated as a mere agent.
What the principal owes	Shared liability — jointly and severally for unpaid wages under Article 106, and responsible with the contractor for Code violations under Article 109.	Everything an employer owes: wages and benefits, and security of tenure.
Security of tenure	Runs against the contractor.	Runs against the principal, which is why a finding can produce regular status with the principal.
Practical effect	A second pocket to recover money from.	A different employer altogether.

Put plainly: solidary liability is about who pays. The labor-only finding is about who employs. The first gives you an extra respondent for a money claim. The second changes the answer to “who do I work for”, and with it every question that depends on the answer — regularization, dismissal, reinstatement.

What Makes Contracting Labor-Only

Article 106 states the statutory core: “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.”

Department Order No. 174, Series of 2017 implements that with two alternative routes — either is enough. The first combines a lack of substantial capital or investment with work directly related to the principal’s main business. The second is simply an absence of control: the contractor does not exercise the right to control how the work is performed, except as to the result.

Our labor-only contracting glossary entry sets out both tests and the definition in full. The registration and capitalisation machinery under D.O. 174, including the capital threshold and the penalties DOLE can impose, is covered in the contractualization entry. What follows here is the part neither covers: how each element is actually proved.

Proving Each Element

Stating the test is easy. Cases turn on evidence, and the elements are not equally hard to establish.

Element	What actually proves it	Practical difficulty
No substantial capital or investment	The contractor’s financial statements and registration records; evidence of who owns the tools, equipment and premises actually used. If everything you worked with belonged to the principal, that is the point.	Hard for a worker alone — the records sit with the contractor. Usually established through the tools-and-premises side rather than the balance sheet.
Work directly related to the principal’s business	A comparison between what you did and what the principal sells or does. Job description, actual duties, and whether regular employees of the principal perform the same work alongside you.	Usually the easiest. If the principal’s own staff do the same job, the point largely makes itself.
No control by the contractor	Who issued daily instructions, set the schedule, approved leave, conducted evaluations and imposed discipline. Messages, memos, rosters and any notice to explain are the strongest items.	Most decisive, and most provable from documents a worker already holds. A disciplinary notice on the principal’s letterhead is worth more than any argument.

Two points worth holding onto.

The control route stands alone. Because the elements are alternative, an absence of control establishes labor-only contracting even where the contractor is well capitalised. A large, registered agency is not automatically outside the rule.

Registration is evidence, not an answer. A DOLE certificate of registration is relevant, but it speaks to the contractor’s general standing, not to how a particular deployment was actually run. The facts of the engagement still govern.

The Other Prohibited Arrangements Under D.O. 174

Labor-only contracting is the best-known prohibition but not the only one. D.O. 174-17 separately declares a list of other illicit employment arrangements, and a scheme can be unlawful under that list without meeting the labor-only test at all. In summary, the prohibited arrangements include:

Farming out work to a cabo — a person or group offering workers to an employer.
Contracting out through an in-house agency.
Contracting out through an in-house cooperative that merely supplies workers.
Contracting out work because of a strike or lockout, whether actual or imminent.
Contracting out work performed by union members where it interferes with the right to self-organisation.
Requiring the contractor’s employees to perform functions currently being performed by the principal’s regular employees.
Requiring workers to sign antedated resignation letters, blank payrolls, waivers of labor standards, quitclaims or cooperative membership agreements.
Repeated hiring under short-duration contracts.
Employment contracts shorter than the term of the service agreement, unless the work is divisible into phases requiring different skills.
Other schemes designed to circumvent security of tenure.

The practical value of this list is that it gives a second route. Where the labor-only elements are difficult to establish, an arrangement may still be prohibited on one of these grounds.

Which Party to Name, and for What

Because the case is trilateral, the first practical question is who the respondents are. The short answer is both — the contractor and the principal — because which of them is ultimately liable is precisely what the case decides.

What each may answer for:

The contractor — as the employer, if the arrangement is found legitimate.
The principal, as indirect employer — jointly and severally for unpaid wages under Article 106, and responsible with the contractor for Code violations under Article 109, even where the contracting is legitimate.
The principal, as the employer — for everything, if labor-only contracting is established. That includes security of tenure, which is why these cases are often really about regularization.

Naming only the contractor is the common error. If the contractor is thinly capitalised — often the very fact that establishes the labor-only finding — a judgment against it alone may be worth little.

The procedure itself, the forum, the deadlines and the evidence-gathering steps are covered in our guide on filing a labor complaint over contracting arrangements, and the choice between DOLE and the NLRC in NLRC or DOLE: where to file.

Evidence and Documentation

Document	What it establishes
The service agreement between contractor and principal	What the contractor actually undertook — a defined service, or the supply of bodies. Often decisive on its own.
Your own employment contract and payslips	Who engaged you, on what terms, and who paid.
Instructions, memos, chat threads and rosters	Who exercised control day to day — the most decisive element. See using messages as evidence.
Any notice to explain or disciplinary paper	Whose letterhead disciplined you. Discipline is a classic indicator of employer status.
Records of tools, equipment, uniform and premises	Whose investment the work actually ran on.
The contractor’s DOLE registration status	Relevant context, though not determinative either way.
Evidence that the principal’s own staff do the same work	That the work is directly related to the principal’s business.

Common Mistakes

Naming only the contractor. A judgment against an undercapitalised agency can be uncollectible — and its thin capital may be the very thing that proves the case.

Treating solidary liability and the labor-only finding as the same thing. One shares the bill; the other changes the employer.

Assuming registration decides it. It does not. The conduct of the engagement governs.

Assuming both elements are needed. They are alternative. Absence of control is enough by itself.

Confusing this with endo. Endo is about contract length. Labor-only contracting is about which company is the employer. A worker can face one, the other, or both.

Overlooking Article 107. A principal that employs nobody is still an indirect employer and still inside the chain.

For principals: never requiring a bond. Article 108 exists precisely for the situation where a contractor’s payroll fails.

Practical Examples

Example 1 — the control route. A retail chain engages a manpower agency to supply merchandisers. The agency is registered and reasonably capitalised. But the store manager sets the shifts, approves leave, runs performance reviews and issues the notices to explain. Because the elements are alternative, the absence of contractor control can establish labor-only contracting on its own, notwithstanding the agency’s capital.

Example 2 — legitimate contracting with a wage failure. A manufacturer engages a genuine specialist maintenance firm with its own equipment, supervisors and methods. The firm hits cash-flow trouble and misses two payrolls. This is not labor-only contracting — the contractor remains the employer — but Article 106 makes the manufacturer jointly and severally liable for those wages to the extent of the work performed, and Article 109 makes it responsible with the contractor for Code violations.

Example 3 — the indirect employer. A property-holding company that employs no staff engages a contractor to run building services. Article 107 applies Article 106 to it even though it is not an employer, so it carries the same liability as any principal would.

Example 4 — prohibited without being labor-only. A company contracts out work normally done by its own union members during a bargaining deadlock. Whether or not the contractor is well capitalised and exercises control, contracting out because of an actual or imminent strike or lockout is separately prohibited under D.O. 174.

What to Do Next

Get the service agreement. It is the single most informative document, and it describes what the contractor was actually engaged to deliver.

Write down who controlled your work. For each of scheduling, instructions, leave approval, evaluation and discipline, record which company did it and find the document that shows it.

Check whether the principal’s own employees do your job. That is the directly-related element, and it is usually the easiest to establish.

Preserve messages before you lose access. Work accounts and group chats disappear quickly after a separation.

If you decide to file, name both companies — the contractor and the principal. For the route and the deadlines, see how to file a labor complaint.

If you are a principal reviewing exposure: look first at who your supervisors actually instruct, then at whether a bond was ever required under Article 108.

Related Enforcement Guide

How to File a Labor Complaint Against an Endo Employer

Related classification and compliance guides: Use the Four-Fold Test when contractor status is disputed, and review the DOLE labor inspection documents checklist when contractor and payroll records may be examined.

Frequently Asked Questions

What is labor-only contracting in the Philippines?

An arrangement where a contractor merely supplies workers to a principal and either lacks substantial capital or investment while the workers do work directly related to the principal’s business, or does not control how the work is performed. It is prohibited.

What happens when labor-only contracting is established?

Under Article 106 the contractor is treated as merely an agent, and the principal becomes responsible to the workers as if it had employed them directly.

Is all contracting illegal in the Philippines?

No. Legitimate job contracting is lawful. Only labor-only contracting and the other arrangements D.O. 174 prohibits are banned.

What is the difference between solidary liability and labor-only contracting?

Solidary liability under Articles 106 and 109 makes the principal answerable alongside the contractor while the contractor remains the employer. A labor-only finding makes the principal the employer.

What is an indirect employer?

Under Article 107, a person or entity that is not an employer but contracts with an independent contractor for work. Article 106 applies to it in the same way.

Do both elements have to be present?

No. Under D.O. 174 the routes are alternative — a lack of control establishes labor-only contracting on its own.

Does the contractor being DOLE-registered mean the arrangement is legal?

No. Registration is relevant but does not settle how a particular engagement was actually run.

Can I be regularized with the principal?

Where labor-only contracting is established the principal is the employer, so security of tenure runs against it. That is why these cases frequently resolve as regularization disputes.

Is labor-only contracting the same as endo?

No. Endo concerns short contracts used to prevent regularization. Labor-only contracting concerns which company is the employer in a three-party arrangement.

Who should I name in a complaint?

Both the contractor and the principal, since which of them is ultimately liable is what the case determines.

Sources and Legal Citations

Labor Code of the Philippines, Presidential Decree No. 442, as amended, Article 106 — Contractor or subcontractor; joint and several liability for wages; definition of labor-only contracting and the agent consequence.
Labor Code, Article 107 — Indirect employer.
Labor Code, Article 108 — Posting of bond.
Labor Code, Article 109 — Solidary liability; both parties considered direct employers for civil liability.
DOLE Department Order No. 174, Series of 2017 — Rules implementing Articles 106 to 109; prohibition against labor-only contracting and its alternative elements; other illicit forms of employment arrangements.

Disclaimer

This article is for general educational and legal-information purposes only. It is not legal advice and does not create a lawyer-client relationship. Whether an arrangement is labor-only contracting depends on the service agreement, the contractor’s capital and investment, the nature of the work, who exercised control, and the specific facts, and outcomes are assessed case by case. For a binding determination, consult a qualified Philippine labor law practitioner or the Department of Labor and Employment.

Labor-Only Contracting in the Philippines: Articles 106 to 109 and Who Becomes Liable