Endo: When and how does it end?

THE NATIONAL issue of “endo” (short for end-of-contract or the termination of a worker’s fixed short-term employment) has been in the limelight for some time now, but has not seen its conclusion yet.

Ending the practice of “endo” was reportedly a campaign promise of President Duterte. In fulfilling this promise, the Department of Labor and Employment (DOLE) issued a Department Order in March 2017 that provides a set of implementing rules for Articles 106 to 109 of the Labor Code, declaring the absolute prohibition of labor-only contracting. In addition, the President issued an Executive Order in May 2018 that emphasized the prohibition against illegal contracting or subcontracting of labor.

Then, sometime in June 2019, Congress submitted to the President for signing into law a bill that explicitly prohibits labor-only contracting and broadens its meaning by specifying the requirements for job contractors who may be allowed to do job contracting.

The passage of the bill elicited strong objections from the business sector, as a strict reading of the bill indicates it would prohibit most forms of contractual labor that, historically, various businesses need to access to suit the peculiarities of their operations.

The President vetoed the bill in late July 2019 and expressed that “…while labor-only contracting must be prohibited, legitimate job-contracting should be allowed, provided that the contractor is well capitalized… Businesses should be allowed to determine whether they should outsource certain activities or not…”

The labor sector, of course, strongly disagreed with the veto. The business sector was relieved.

I thought I would delve into this matter to try to contribute to the debate. Many may consider the issue as mainly legal in character, but I think it is more in the realm of economics.

I find that the issue, as repeatedly reported in the press, to be unclear. I thought the “endo” issue related exclusively to the fixed short-term employment of workers, which is continually renewed and also known as “5-5-5.” Under such a practice, a worker’s employment, which is done through job contracting or by direct hiring by employers, is only for five months and then their employment ends. The same worker may again be contracted for or hired by the same employer for another five months and so on. In the case of job contracting, the contractor pays the workers’ compensation, social security, and other employment benefits.

I looked at the Labor Code and discussed this matter with a friend who is a practicing labor lawyer to gain a better understanding of “endo” and the issues surrounding it.

Under Article 106 of the Labor Code — the main article that was amended under the vetoed bill — the Secretary of Labor and Employment can issue regulations to prohibit certain contractual labor practices as “labor-only contracting” as defined in the Code. And this is exactly what the DOLE Secretary did in 2017, although the Order did not specifically identify “endo” or “5-5-5” as labor-only contracting.

A large business organization has indicated publicly that the said DOLE Order effectively prohibits “endo.” My own reading of the Order indicates that “endo,” as described above, is indeed labor-only contracting and is, therefore, prohibited.

If, indeed, the issue is just about “endo” as described above, the DOLE Order and the subsequent Presidential veto message should have ended it. But these actions did not.

Obviously, there is a wider issue. Because of their nature, contractual and fixed-term employments, of which “endo” is just a part, is discontinuous and, therefore, the workers lack security of tenure (SOT). And here lies the wider issue. The labor sector is seeking SOT for workers under contractual and fixed short-term employments.

And the pursuit continues. Right after the Presidential veto, a bill was filed in the Senate which is essentially the same as the vetoed bill. A bill was also filed in the House of Representatives that prohibits all forms of contractualization and fixed short-term employment. DOLE also prepared its own proposed bill that expresses that job contracting is generally allowed, except for “core business activities or functions unless in cases of seasonal and project work arrangement.” Core business activity and function is defined as “An activity or function that is an integral part of the principal line of business of the contractor.” This DOLE draft bill also emphasized that the contractee shall not exercise control over the workers. This draft bill appears to prohibit most job contracting work. Fixed short-term employment is also prohibited, except in certain cases.

There was a recent news item reporting that a coalition of the country’s largest labor groups sent a position paper to DOLE indicating that the Coalition finds its draft bill unacceptable for certain reasons. I could not obtain a copy of the position paper, but it may be similar to the provisions in the House bill.

Here is where the wider “endo” issue stands today.

In trying to resolve the issue, it may be helpful to list the various forms that “job contracting,” the term that floats around and is used in the Labor Code and DOLE Order, may encompass.

Job contracting may include contract manufacturing, which is commonly used in the pharmaceutical and electronics industries and maybe in a few more. In this business activity, the contract manufacturer has its own facilities, including machinery, and hires its own workers. Then there are service providers that mainly provide labor service but maintain some facilities to enable them to carry on their business, such as janitorial services providers, messengerial services providers, and the like. Professional firms, such as accounting, law, and maybe other professions, also provide a similar form of services. There may also be temporary worker agencies that provide other types of temporary labor. In all these types of service organizations, the workers are employed by the service firm as its employees and whose work are generally not controlled by the contractee, except in temporary work agencies, where control is exercised by the contractee.

There are also contracted construction workers. The DOLE Order indicates that this activity is governed by a separate set of rules. Seasonal agricultural workers compose another group.

And finally, there is the “endo” or “5-5-5” — the type that triggers the current wider issue of SOT. In this type of job contracting, the contractee exercises control over the workers.

In a direct way of stating it, the central issue is whether all forms of contractual or fixed short-term employment are to be prohibited in order to provide workers SOT. This is exactly the position taken in the House bill.

It should first be noted that contractual and fixed short-term employment are part and parcel of any national economy. It is more prevalent in a setting where there is an abundance of labor, a condition that creates opportunities for business-minded people to organize workers in a manner that offers a cheaper source of manpower supply to business entities. Businesses, on the other hand, always seek lower cost of operations. Moreover, their needs necessarily vary. There are peaks and valleys in their businesses and, as a prudent measure, they maintain an optimal workforce that is below the peak and above the valley. When business is low, it absorbs the cost of unproductive labor; when business is high, they seek contractual labor.

That’s the macro view. Let’s look at the details.

Contract manufacturing is resorted to by a principal, generally, a foreign company, because it needs only a low volume of production and it is a cheaper alternative as opposed to building its own facility in the country. Under that contractual arrangement, the principal can sell its products in the country at a lower price as opposed to producing them itself or importing them. This type of work arrangement appears to be prohibited under the House bill and the DOLE draft bill. If this type of contracting is disallowed, the principal will either import the products or discontinue selling them in the Philippines. In either case, the country loses job employment and suffers a reduction in economic output.

The general language in the House bill may be interpreted to mean that service providers, such as messengerial and janitorial services and professional services, are also prohibited. The DOLE draft bill allows them if the contractee does not exercise control over the workers. Whatever is prohibited, such activities will cease to exist. Those businesses that used to access these services will very likely get the work done by their existing employees or by adding a few workers. But the net effect is reduced employment and decreased output.

Other kinds of temporary services are accessed by business entities to meet some unplanned and unanticipated needs and emergencies; the contractees exercise control over the workers. This type of contracting is clearly prohibited in both the House bill and DOLE draft bill and, therefore, will cease to exist. The effects will be the same as those discussed for other types of prohibited contractual work.

“Endo” is a cost minimization pursuit where labor demand is matched by adequate supply. It is prohibited in the DOLE Order, as well as in the House bill. It is also prohibited in the DOLE draft bill, because it is an arrangement where the contractee has control over the workers. Such a prohibition will result in higher labor costs and, as such, will likely result in reduced employment to temper the effect of the higher cost.

Under the House bill, project workers — which most likely include construction workers — and seasonal workers are deemed regular workers. They will not earn any pay and, presumably, social security benefits between projects and seasons, but they stay in the labor pool and have the right of first refusal for the next project or season. By being regular workers, they may be entitled to retirement benefits under the amended Labor Code. If so, these benefits will add to the cost of their employers. Under the DOLE draft bill, they are considered regular employees only during the time they are at work.

In sum, the prohibition of contractual and fixed short-term employments, with or without any exception, will lead to reduced employment and economic output. In some cases, it may also lead to higher labor costs.

I cannot find a ready measurement of the size of temporary employment in whatever form this is defined. But there is an alternative, although rough, indicator — the underemployment rate. As reported for July 2019, the underemployment rate is 13.9% (15.6% in January 2019). This proportion of underemployed workers to total workers is high, indeed and, therefore, the economic effects mentioned above cannot be ignored.

There is a more compelling consideration why prohibiting contractual work must be studied carefully. The two principal pillars of our economy are the millions of Overseas Filipino Workers (OFWs) who remit their earnings to the country, and the foreign jobs that are outsourced to our shores that create millions of local employment. OFW work is clearly contractual and fixed-term, while business processing work that is outsourced to the Philippines is similar to contract manufacturing. If we find foreign contractual work acceptable, why do we find such work arrangements unacceptable for Philippine business? It is a case of having double standards.

Perhaps, we should define the wider “endo” problem differently and move away from the fixation on SOT. Firstly, we must find and list abusive practices in job contracting and fixed short-term employment and prohibit them, instead of prohibiting entirely these work arrangements themselves. Secondly, we should change our laws to permit contractual and fixed short-term workers to earn wholly portable and higher retirement benefits. I will leave the first one to the experts. Lack of space does not permit me to expound further on the second one. However, it can be done by somehow combining the retirement benefits provided under the Social Security System (portable) and the retirement benefits under the amended Labor Code (non-portable) into the former.

The wider “endo” issue, because of its nature, is a big challenge. The government needs to show brilliance in providing a resolution to it — a fair resolution that will redound to the greater good of all of our citizens. This is not difficult to find.

Benjamin R. Punongbayan is the founder of Punongbayan & Araullo, one of the Philippines’ leading auditing firms.

As published in BusinessWorld, dated 08 October 2019