Q: One of the leading presidential candidates has mentioned in the 2016 presidential debate that he will stop the labor policy on contractualization when he becomes president. How will contractualization affect entrepreneurs like me if this practice has been stopped? Please advise. – Alexander Truman by email 

What is contractualization?

A: Contractualization is a common employer practice of hiring people for a period not exceeding five months. Employers would normally get the services of manpower companies to supply them contractual employees after five months to ensure continuity. Nowadays, it is commonly known as outsourcing.

Companies that hire huge number of employees with little training are the ones that often practice contractualization. They do this to save on costs and avoid the hassle of regularizing employees once they have worked continuously for six months.

Employers can try out employees for few months and if the employee fails to meet the minimum standard, they can always find replacement at minimal costs until they find the right ones. 

The practice of contractualization has opened a lot of opportunities in the business process outsourcing (BPO) industry. In fact, because of the rise in demand for outsourced employees, the minimum entry level salary for employees with acceptable skill level has increased significantly over the past years.

Advantages of contractualization to employers

Under the labor law, when an employee gets regularized, he or she will automatically become entitled to regular worker’s wage and benefits such as vacation leaves, sick leaves, maternity leaves, Social Security System and other statutory benefits, retirements, and all other privileges provided by law.

On the average, the additional cost for the employer to pay for these benefits in behalf of the employees is around 7% of the total payroll costs.

While if the company practices contractualization, these entitlements would be reduced if not totally avoided. This translates to substantial cost savings for companies that hire large number of employees.

Companies that engage hiring agencies to supply them their manpower requirements also enjoy the ease of recruitment. Under contractualization, the procedure for hiring is easier, simplified, and faster because employers need to deal only with a hiring company to do all the work. This saves a lot of time and administrative costs if they do the hiring themselves.

When it comes to firing employees, contractualization also allows companies to terminate employment contracts easily without the hassle of due process provided by labor law for regular employees. 

Impact of contractualization to employees

While contractualization may be boon to employers, it may be bane to employees over the long term.  The practice of contractualization prevents employees to attain job security since their contracts are terminated every five months.

Independent workers like consultants who have no employee-employer relationship with the company are normally paid premium because it is assumed that the worker will use the extra pay to take care of his own security benefits.

But for the unemployed, contractualization provides job opportunity albeit on short-term basis. This allows the worker to be trained and learn new skills that she can use in her next job.

Without security of tenure, employees will not be able to get retirement benefits from their company when they stop working in the future. They also cannot enjoy other mandatory benefits like Philhealth or Pag-ibig when they need it.

But many workers under contractualization receive relatively lower wages compared to the regulars. Most of them are not covered by collective bargaining agreements (CBA) for higher wages and other benefits.

While many are able to get good employment under contractualization at decent salary, the long-term impact of contractualization does not favor the employee.

What employers can do

Contractualization is ideal for companies that need temporary labor for limited time period. For example, the company needs extra manpower support for three months to help handle increase in customer demand during Christmas season, or the company may need additional employees to work on their project that will last for one year.

During time of rising unemployment and slowing economy, contractualization may also be useful because it allows companies to provide job employment at least on temporary basis and help the economy to grow.

You may have to incur additional costs because of the mandatory benefits that you need to provide, but your employees may be more productive and maybe happier because they know that they are secure.

Perhaps, you may also want to provide training to make sure that your employees have the right skills to help you move forward. Putting an effective appraisal system can also help you select and retain the right employees before you make them regular after probation period has expired. Probationary employees that do not meet your standard after six months can be terminated and replaced.



Henry Ong is an entrepreneur, investor, researcher and business columnist for more than 20 years. He holds double degree in accountancy and applied economics, a Registered Financial Planner (RFP) and Certified Management Consultant (CMC). Follow him on twitter @henryong888