A layman’s take on labor contractualization

Edwin Santiago, Executive Director of the Stratbase ADR Institute

Still of particular interest in the Labor Day discussions is the issue on the contractualization of labor. More popularly known as “endo” or the 5-5-5 arrangement, this practice started in the mid-70s as a response to alarming unemployment. For the uninitiated, the term “endo” was coined from “end of contract.” On the other hand, 5-5-5 stands for three cycles of five-month contracts, a cunning ploy that makes workers in every contract a month shy from being regularized into the company, given the mandate of the law to make workers who have stayed for six months permanent. Right off the bat, you can understand why this is such a controversial issue.

For workers, they are deprived of benefits and security of tenure. Unlike their regularized counterparts, contractual workers do not have paid leaves and holidays as they are on a “no-work, no pay” basis. When the rest of the labor force is excited about long weekends, contractual workers dread these because no-work days spell no income. In the moments after the April 22 earthquake, contractual personnel had an additional worrying to do — having a reduced income, only to the extent of the number of hours actually worked because they were sent home. I feel for those whose shifts have just started, as their pay for that day may not even cover their transportation fare. On the other hand, there were those who had to trade off not being with their families just so they can earn their daily wage.

I would imagine that their situation gets dimmer by the day when their contract nears expiration. In a country with a pronounced unemployment problem — about 2 million — it is perfectly understandable for workers to experience a high degree of anxiety of whether their contract will be renewed or, if not, whether they can find employment elsewhere. Their apprehension is magnified several times as they have to worry about providing for their family, especially when they have circumstances that are out of the ordinary, such as sickness in the family that require expensive medicines, children with special needs, and the like. It is also in these times when these hapless employees are most vulnerable to the abuses of vicious individuals who prey on them.

For the business sector, they may have no scruples given the simple and logical explanation regarding the seasonality of some labor requirements. Some businesses need more people on certain periods of the year, such as the Christmas season. It is unreasonable to expect and require these companies to keep these extra hands the whole year round.

In reality, contractualization has detrimental effects on their operations too. A company that engages in this practice would have a very high turnover rate of personnel. This, in turn, creates a disruptive operational environment and actually leads to higher costs of training and higher incidence and costs of errors. Moreover, the motivation of contractual employees to perform well is superficial — only to the extent of the possibility that their contracts will be renewed. From the very start, they know that — notwithstanding any superior performance — their chances of becoming regular employees are slim to none.

But if this practice is not good for either labor or business, then, why does it persist? It may be stating the obvious that contractualization is generally undesirable for the individual, but even that may be relative. Is it truly undesirable when seen from the macro perspective of generated employment? Given finite resources, increasing labor costs for businesses may mean a decrease in jobs, and vice versa — contractualization may offer more employment opportunities compared to its regularization counterpart. As a sector, therefore, labor may get some nominal benefit. The question seems to be which is socially preferable — more people employed who are neither sad nor happy or fewer people employed who are happy?

But I strongly suspect that another big attraction of labor contractualization for business, at least at the managerial and operational levels, is the ease of replacing individuals who do not make the cut, have attitude problems, or are plainly disruptive to the organization. A probationary period of six months may be too short to make a determination of an individual’s fit for the job — both technical and behavioral. From the perspective of business, the regulatory environment has become so overprotective of regular labor that companies are backed into a corner. Companies lament that, more often than not, they are held hostage to the long-winded and tedious process of removing seriously erring employees once they enjoy regular status. Even if the company eventually wins, it may be a Phyrric victory, given the financial and organizational costs. Therefore, for them, the “endo” practice has become their hassle-free ticket out of these stressful conditions. It presents a fast and low-intensity resolution of the problem. Though, unfortunately, not all supervisors use this for the best of reasons. This may also be the enticement to government in having its own version of contractualization, using job orders.

Admittedly, the contractualization practice is being used for purposes other than those originally intended, such as in situations where the spirit of labor laws is thwarted. Be that as it may, it is not as simple as whether to allow the practice or not. Perhaps, helping business and government address their unspoken labor concerns and manage labor costs optimally and responsibly are the keys to resolving the issue of labor contractualization.

Some out-of-the-box thinking may accompany the discussions on the fate of contractualization as a practice. For instance, implementing premium wage rates — say, double — for contractual hires may be used to offset lost benefits. For some, extending the probationary period to one year versus the current six months may justify removing contractualization given that there is sufficient time to determine proper match of the employee with the job. Also, companies, by virtue of their infancy, for instance, may be allowed a limited period when they can engage contractual workers — who then shall enjoy first priority in regular employment when the period given by law has expired. Given the changing economic landscape, some individuals may actually prefer a temporary and part-time arrangement. Thus, contractualization, with sufficient safeguards accorded by law, may even be developed as a separate and legitimate mode of employment.

And, while these may sound politically incorrect for some or controversial for others, the point is that countless other options exist that have the potential of making us move forward, even incrementally. The more we set ultimatums and insist on finding a one-size-fits-all solution, the more difficult and protracted the resolution will be.



This article was originally published in BusinessWorld.

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