Labor Contracting and Manpower Services Co-ops

Labor Contracting and Manpower Services Co-ops
and the Nature of Workers' Cooperatives:
An Initial Analysis

by Erik Villanueva

(Note: I'm improving this article. Reactions to this article are most welcome. Please post here at the koopforum e-group or directly to erikvillanueva@yahoo.com)



A comparative rapid appraisal recently conducted by the University of the Philippines-Mindanao revealed high incidence of cheap labor, rampant employment of minors, poor working conditions, and exposure to chemicals in three major banana farms in Davao City. This has prompted the DOLE Regional Office to field labor inspectors in various plantation sites to validate the results of the study, as a step before the issuance of compliance orders to plantation firms that would be found to be violating labor laws.

One of main findings presented in the study was the non-compliance of prescribed wages among banana plantations on contracting services through the grower scheme. Farmers are paid P150 to P185 a day instead of the regular daily minimum wage of P214 for plantation workers. The study also noted the creation of cooperatives for labor contracting. The DOLE Regional Office has affirmed that even if the contractors are employing laborers, they should be treated as employees and must follow labor standards.

In recent years, many new co-ops were organized and registered with the Cooperative Development Authority (CDA) to perform manpower services to meet the outsourcing requirements of companies, including corporate farms or plantations, food processing companies, food chains, and various others. They are registered as manpower services co-ops. Examples of these co-ops include the Staff Search Asia Co-op, Asia Pro Co-op, Pro-Skills Co-op, Fast Track Co-op, and many others. In the absence of a clear cut definition of a workers’ co-op in the law, most of these co-ops would classify themselves as workers’ co-ops. The rapid increase in the number of cooperatives involved in the manpower services business has been triggered by the changes in the labor market and in the policy environment for manpower outsourcing business.

The UP-Mindanao study has once again brought attention to the issue of whether some co-ops supplying manpower services are in fact engaged in labor-only contracting. Another issue is whether manpower services co-ops that have supposedly organized themselves as workers’ co-ops may still fall under the regulatory jurisdiction of Department of Labor and Employment.

This is not a trivial issue, both domestically and globally. There is actually a dispute between the trade unions and workers’ cooperatives in Italy over the application of labor laws. In brief, Italian trade unions wanted to apply industry-wide agreements on the total annual wage even to the “working partners” (or the member owners) of cooperative firms. The co-ops believe that as firms controlled by the workers themselves, they should be allowed more flexibility in setting their own wage rates. The dispute over the definition of “working partner” was made more acute by a court judgment in 1995 that for working partners in cooperatives, entrepreneurial traits override those typical of workers employed in non-cooperative firms. This has been opposed by the Italian unions.

Furthermore, in the US, it has been noted that workers’ co-ops provide greater flexibility for job retention during recessions. Labor is considered a fixed rather than a variable cost over the short run in co-operatives although labor costs can be manipulated over the long run. Members can decide to reduce hours or wages and spread the work among them to provide job security. This has been observed empirically in the study of plywood plants owned and operated by workers co-ops. This kind of flexibility would be something private employers can only dream of, and is almost impossible under existing Philippine labor laws.

Moreover, one of the largest co-ops in the manpower outsourcing business in the Philippines, Asia Pro, has actually taken the position that it should not be covered by labor regulations because as a workers’ co-op, there is no employee-employer relationship between it and its members.

Further complicating the situation is the fact that there is no mention of workers’ cooperatives in Republic Act No. 6938 or the Cooperative Code, the general law regulating cooperatives in the Philippines. The nearest type of cooperative under which workers’ co-ops would fall is the producer co-op.

The Existing Regulatory Context of Manpower Services

Firms or agencies that provide manpower outsourcing or job contracting services are regulated by the Department of Labor and employment under Department Order No. 18, which was issued on February 21, 2002 and took effect on March 16, 2002.

Job contract agreement under the job contracting scheme is a new manning arrangement allowed under the department order. It permit business entity particularly manufacturing companies to sub-contract specific job, work, services or project to a legitimate job contractor duly registered by the DOLE.

DO No. 18 provides regulations for contracting or sub-contracting arrangements. Accordingly, the order has been promulgated to enhance employment promotion; promote observance of the rights of employees to just and human conditions of work, security of tenure, self-organization and collective bargaining; and enforce the prohibition on labor-only contracting.

The department order reaffirms that contractual employees are entitled to the rights and privileges enjoyed by regular employees under the law. The rules affirmed the rights of workers to “safe and healthful working conditions, separation benefits, overtime, 13th month pay, rest leaves and other standards; social security and welfare, self-organization, collective bargaining and peaceful action; and security of tenure.” It also affirms the power of DOLE to regulate, for the purpose of promoting and reinforcing employment, the labor contracting and subcontracting arrangements allowed under the law.

The new rules expressly prohibit “labor-only contracting” or the practice in which the contractor or subcontractor recruits or places workers to perform a job, work or service “directly related to the main business of the principal.” Section 7 of DO 18-02 would consider, under contracting or subcontracting arrangements, the contractor or subcontractor as the employer of the contractual employee “for the purposes of enforcing the provisions of the Labor Code and other social legislation.” Under the department order, the principal shall also be liable with the contractor in the event of any violation of the Labor Code, including the failure to pay wages. Under Section 7, the principal would be deemed the employer of the contractual employee where there is labor-only contracting, or where the contracting arrangement falls within the provisions provided under Section 6.

DO No. 18 supersedes the old rules under DO No. 10 of 1997, which was subject to criticism by some companies due to its stringent rules on contracting arrangements. The old rules listed certain activities as permissible contracting arrangements. The new department order does not contain a list of permissible contracting arrangements anymore and simply maintains the prohibitions in contracting arrangements and safeguards. The omission of the list of permissible activities gives both the DOLE and the industry players more flexibility, although some local service contractors have expressed some reservations over such deletions.

Observers of the manpower services industry have noted that D.O. No. 18-02 appears to recognize the need for local companies to explore alternative work-arrangements in order to compete globally, particularly the outsourcing of certain activities. Under the old rules, a company was prohibited from contracting out a service if it displaced the company’s regular workers. This prohibition was made without qualification and it tied the hands of most companies if they need to downsize their organizations to ensure the viability of the business. In the new order, the DOLE maintained the prohibition of contracting-out of services which may lead to the displacement of regular workers but with certain qualifications. The prohibition now reads: “contracting-out of a job, work or service when not done in good faith and not justified by the exigencies of business and the same results in the termination of regular employees and reduction of hours or splitting of bargaining unit.”

With this development, the general prohibition in the old rules on contracting-out services resulting in a displacement of regular workers appears to have been tempered. Under the current order, it now appears that companies may outsource a service even if its regular workers are currently undertaking the activity. The company, however, would be required to justify that such a contracting arrangement was done in good faith and demanded by the exigencies of the business. This development balances the interests of labor and management by protecting the regular workforce without sacrificing the viability of a company.

The current order also substantially decreased the possible liabilities of a company involved in a contracting arrangement. Under the old rules, a company may have been liable along with a contractor for violation of registration requirements by the contractor to the DOLE. Fortunately, the DOLE removed this unnecessary burden on companies with the current order. The current order now limits the possible solitary liability of a company with its contractor to only two instances: (1) violation of the Labor Code, and (2) non-payment of wages.

Despite the criticism raised by some sectors against the new department order, it can be seen as a positive step. With the present economic climate, companies must be allowed some flexibility in right-sizing their organizations in order to survive. More importantly, in the sensitive area of labor legislation, countries must always maintain a healthy balance between the interests of labor and management. Through the department order, the government aims to promote a more liberal policy on outsourcing without sacrificing the interests of labor.

Manpower Service Co-ops Seek Exemption from DO 18

Last November, the CDA called a consultation meeting with co-ops in the manpower outsourcing business, following a request from DOLE for CDA to issue an opinion regarding the position taken by some manpower services co-ops that they should not be covered by rules and regulations issued by DOLE.

Some of the co-ops in this business have argued that DOLE is not supposed to regulate them because of their nature as co-ops. They argued that:

1. They are co-ops owned by their member-workers
2. They provide job placement services to their member-workers
3. Their members are self-employed individuals who use the services of the co-op
4. They are not the employing firm for the workers thus placed
5. There is no employee-employer relationship between the co-op and the co-op member.

On the basis of these arguments, leaders of co-ops engaged in manpower services have requested the Cooperative Development Authority (CDA) to formulate a regulatory framework for this class of co-ops. CDA has responded by requesting a survey of employment and personnel policies, capital share structure, management, and other operational practices of co-ops in the manpower services business.

There is a need to compare the declared operational characteristics of manpower services co-ops against the conventional understanding of workers’ co-ops or labor-managed co-ops as found in mainstream economic and business literature, the latter being based on the long standing practices worldwide.

Characteristics of Workers’ Co-ops

A workers’ co-operative is a firm owned and controlled by its workers. Despite some divergences, workers co-operatives are conceived to follow the internationally accepted co-operative principles articulated by the International Co-operative Alliance (ICA).

What are these co-operative principles? First, membership is open and voluntary. Second, there is democratic control at all levels of the enterprise based on one member, one vote. Third, interest paid on share capital is limited. Fourth, workers share in any profits, usually in proportion to their work contribution. Fifth, some part of the co-operative's profits is devoted to worker education. And sixth, co-operatives cooperate among themselves. If a workers' co-operative is consistent with these principles, then its success depends on operating an economically viable and democratically managed business in which workers have the knowledge and capacity to participate in the decision-making process and ultimate control of the co-operative.

Like other co-operatives, a workers' co-operative differs fundamentally from a private firm, be it a corporation, a partnership, or a single proprietorship. Private firms are controlled by the capital owners who are the individuals who invested the capital of the firm. In this case the owners transact with the firm as suppliers of capital. In contrast, control of a workers' co-operative (or a labor-managed firm, as it is equivalently known), is based on workers’ personal rights derived from a worker’s labor contribution rather than on property rights derived from a capital contribution. As owners of the firm in their capacity as workers or employees, they have another right: to appropriate the residual income of the firm.

Co-operatives also differ from employee-owned firms, such as firms with an employee stock ownership plan (ESOP) in the United States and elsewhere. The membership right in an ESOP is based on share ownership and not on the functional role of labor in the company. ESOPs have been established primarily for tax advantages, without creating widespread employee ownership. Many ESOPs systematically have excluded lower- and middle-paid employees. Only a handful of ESOPs is more democratic, and gives workers full control of the firm and complies with the above definition of a worker co-operative.

Another important distinction is between workers' co-operatives and co-operatives of workers, such as savings-and-credit co-operatives and consumers' co-operatives whose members are workers in a given firm or locality. Many of such co-ops are among the most viable and successful in the Philippines. However, the nature of participation and control of workers as members in such co-ops is not as workers per se but as savers and borrowers or as consumers. Under the Co-operative Code (Republic Act 6938), co-ops are also categorized as institutional if membership is limited to employees of a given firm (as in a co-op of teachers in a school) or as occupational co-ops if membership shares a common occupation (as in a co-op of carpenters, or market vendors).

In the light of existing international experiences and standards, workers’ co-operatives are not to be confused with co-op services or facilities, such as credit co-ops and co-op stores, which are owned by workers in their capacity as consumers. For instance, the PLDT Employees Credit Co-operative, one of the largest and most successful co-ops of workers, is not a workers' co-operative in our definition, but an institution-based co-op of the savings-and-credit type.

Moreover, a co-op supplying manpower services may not be automatically classified as a workers’ co-ops. A group of people may agree to form a job contracting agency, hire staff to run the agency, and contract workers for job placements in the customer companies. If they agree to run the agency on a cooperative basis, that is, by assigning one vote per member regardless of the capital contribution, the agency becomes an investors’ producer co-op, which would be almost synonymous with a conventional company (following the analysis made by Yale economist Henry Hansmann on the relationship between firm ownership and efficiency). If they agree to divide all the staff functions in the agency all among themselves as owners, instead of hiring a staff, the agency would still fall short of being classified as a workers’ co-op. This is because DO No. 18-02 would consider the contractor or subcontractor as the employer of the contractual employees. If they are considered employees of the manpower agency and are not owners of that agency, then the agency cannot be classified as a workers’ co-op. In both cases, the contractual employees are inputs purchased by the owners (the investors in the first case, the agency staff in the second case) to deliver the final outputs (manpower services) to the market (the client companies).

In the light of the international experiences and standards (absent an expressed standard in the Cooperative Code) and in the light of the regulatory framework for manpower service agencies, we can conclude that the only way manpower services co-ops can classify as workers’ co-ops is when those who are contracted by the co-op for deployment, or to supply labor services, to a client company, are themselves owners of the co-op.

Following an analysis made by University of Zurich economist Ernst Fehr's: if the control and management of a firm is assigned exclusively to the workers in their role as workers on the basis of “one worker-one vote” principle, we call this firm a labor-managed firm or a worker co-op. Under this definition, labor-managed firms (LMF) are not characterized by the absence of hierarchy or by the prevalence of a particularly egalitarian income distribution or by the existence of collective property rights in the firm’s capital stock. These organizational and distributional arrangements are compatible with the definition of an LMF and may, therefore, be adopted by particular LMFs. The definition implies that the transformation of a capitalist firm (CF) into an LMF involves the redistribution of one important right, namely the ultimate right to determine the firm’s policy, from the capital owners (with voting rights) to the workers.

This means, for example, that if all capital owners of a firm happen to be also workers of that firm and the ultimate decision making power is vested in the workers in their role as capital owners, the enterprise is not labor-managed. The reason for this is that the one worker-one vote principle is not guaranteed because some workers may own more voting shares than the others and some workers may sell their voting shares to non-workers.

If the constitution of this firm rules out the possibility that non-worker hold voting shares and requires each worker to hold the same fraction of voting shares, it meets the definition of a pure LMF because the one worker-one vote rule is fulfilled.

Despite these distinctions, workers’ co-ops, or all co-ops for that matter, are not to be regarded as some sort of a half-way house between public firms and private firms. Co-operatives are owned and managed by private individuals, and should be considered as fully belonging to the private sector, except that they are governed and run differently. By implication, co-ops should be accorded all the rights and privileges given to the private capitalist firms.

Conversely, having the nature of a cooperative firm does not exempt a player in a particular industry from observing regulations that apply to the industry. Thus, all public transport franchises are regulated by the LTFRB, including those granted to transport service co-ops. All water co-ops would fall under the regulatory authority of the NWRB. It appears logical therefore, that all manpower outsourcing agencies, co-ops or not, must be covered by DOLE’s Department Order No. 18. This has been the position taken by the Business Enterprise and Cooperative Mentors, Inc. (BECMI), a consulting firm that has assisted retrenched and retiring workers in San Miguel, Jolibee, and other private firms in forming workers' co-ops as outsourcing partners of their former employers.

Is there a need for a new DOLE Order to cover only manpower service co-ops, including workers' co-ops? Or should the regulation of such co-ops fall solely on the CDA? The situation of workers in the plantations in Mindanao as reported by UP Mindanao indicates that these issues need prompt resolution.



Food for thought: if we believe that the cooperative set-up is the most efficient set-up for the production and delivery of certain goods and services, then how come co-ops in the Philippines have been successful mainly in savings and credit and not in consumers' distribution? and why are workers' co-ops rare? how can we really justify genuine consumer control of electric co-ops and water co-ops?