ECOP-DOLE MOU: Start of an industrial upgrading process?

January 3, 2019

AER-Industrial Policy Team

By Rene Ofreneo – January 3, 2019

The campaign of the trade union movement to end the “endo” practice of hiring workers on a short-term basis has not yet succeeded in prodding a reluctant Congress to pass a law formally outlawing the controversial “labor-only contracting” (LOC) system and abolishing all other forms of “contractualization”. Once the LOC  is declared unlawful, penal sanctions may be imposed on those who organize LOC arrangements. Under the present Labor Code, the Labor Secretary is simply informed that he may “prohibit” LOC, defined as a situation where the so-called employer has no capital, no equipment and  no control over the  work process

However, this has not deterred the Department of Labor and Employment in waging a campaign against the LOC system. It issued in 2017 Department Order No. 174, which tightens the rules on the registration and operations of “manpower agencies”. These third-party agencies often pose as the employers of the workers even if they are not because they do not possess sufficient capital and equipment and they do not have control over the work process.

Moreover, DOLE has launched an intensified labor inspection campaign focused on the determination of whether companies are engaging the services of manpower agencies in a legitimate manner or not. Articles 106-109 an  the new DO 174 allow “independent job contracting”, which is distinct or different from the “prohibited” LOC.

Labor Secretary Silvestre Bello proudly announced that the inspection campaign has been a big success, for it has resulted in the “regularization” of over 400,000 workers. Part of the success of the campaign was  the bold decision of DOLE to name publicly a score of  big employers found to be violating the DO 174 rules. Among the companies revealed to be violating the rules on LOC are the popular Jollibee, PLDT and  Dole Philippines, Inc. According to DOLE, 65 percent of the “regularized” workers were the result of voluntary compliance by the companies. There are close to 4,000 firms inspected in 2018 by the DOLE’s regional officers.

Now the Employers Confederation of the Philippines (ECOP) and DOLE have made another  dramatic announcement: ECOP’s member companies are committed to extend regular status to all their employees and the regularization process will initially cover 40 percent of  these companies’ employees. According to the media report, ECOP Acting President Sergio Ortiz-Luis and Labor Secretary Silvestre Bello III are now drafting a Memorandum of Understanding reflecting the commitments of ECOP to the DOLE’s regularization campaign.

The above ECOP-DOLE MOU will likely elicit intense internal debates within ECOP and  among ECOP’s member companies. In fact, some ECOP affiliate companies named and found by DOLE to be violating the rules on LOC are reported to be mulling over the filing of court cases questioning DOLE’s findings on alleged LOC rule violations.

The debates, however, should  not be  framed only in legal terms. The regularization issue has a dignity issue, as amply articulated by the unions in various forums. Workers’ rights are workers’ rights. Why not recognize the right of workers to regularization when the work they are doing is indeed regular and necessary to the conduct of the business? Example: retailing companies pretending that their sales work force are not their employees and the work of these employees are not regular and necessary to the business of retailing.

As to the argument that it is difficult to terminate the services of these employees once the demand for business goes down, the Labor Code is quite explicit on what are the remedies open to companies – the right of the employer to downsize retrench or even introduce “labor-saving device” based  on the imperative of business survival.

This brings us to the real issue of why labor contracting is a difficult nut to crack: the argument of employers and some liberal economists that tightening the rules on labor contracting reduce the capacity of business to compete in a globalized economic order.  The tighter rules weaken “labor flexibility” or the ease to fire or hire workers. They go against the overall policy of economic deregulation, which also requires a deregulated  labor market, meaning less or relaxed rules on wage fixing and labor hiring. Hence, some of the employers and economists are openly opposing the proposed law restricting labor  contracting, arguing that such law goes against the global trend towards labor flexibility, especially in the era of the “gig economy”.

The trouble is that the policy of labor flexibility or labor cost-minimization argument has  been part of the country’s labor-intensive export-oriented industrial (EOI) policy since the  1970s. And yet, there are no proofs that such policy has done the country any good. The  late labor law professor, Perfecto Fernandez, lamented that the cheap-labor policy under the EOI has reduced the system of collective bargaining into a system of collective begging. Unionism has been going down while LOC and other forms of labor contracting keep growing.

Is it not time to re-think the  policy of labor flexibility? Recent economic and labor developments in China, which had lower wages compared to the Philippines in the 1980s-1990s, tell us that going beyond the labor cost-minimization framework is one way of  advancing industrialization. A series of minimum wage increases and increased investments on skills are blended by China with their program of purposively pushing industries to go up the technology-intensive an  higher value-adding rungs of industrialization. This, in brief, is the explanation for the decline of labor-intensive industries such as garments in the coastal provinces of China.

What China is doing is nothing new. It is  simply replicating what Singapore did. Once upon a time a shopping paradise for Filipinos looking for cheap goods,Singapore had a dramatic industrial transformation in the 1980s and 1990s when Lee Kuan Yew asked employers to go higher value-adde  by raising wages and to enroll their workers in technology-oriented skills development that is supported by the Skills Development Fund (established in 1979).

And yet, what China is doing and what Singapore continues to do are not exceptional in development economics. Germany and other Western European countries pursued more or less the same development strategy after World War II.

Now back to ECOP’s public support to DOLE’s campaign for the regularization of all employees doing regular and necessary work. Has ECOP seen the light? That the way forward for the country is to go higher value-added, and that the country cannot scale the  higher rungs of the industrial ladder if it remains stuck in the old cheap-labor economic mentality?

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