We are a food manufacturer with about 500 workers, including around 350 workers from three manpower agencies and one cooperative. Now, we are rethinking this approach to avoid any regulatory issues. Please advise. — Guiding Light.
Having 70% (350/500) of your workforce supplied by manpower agencies and a cooperative deserves closer scrutiny. While Philippine labor laws do not prescribe a fixed mathematical ratio between regular and outsourced workers, the legality of the arrangement depends much on compliance with the requirements for legitimate contracting.
One requirement is how those workers are managed, depending on the nature of their tasks. It’s about the classic Four-Fold Test of employer-employee relations. These are: Selection and engagement of employees, payment of wages, the power of dismissal, and the power of control.
It’s good that you’re now rethinking your approach. Make the necessary changes as soon as possible before being forced to deal with labor inspectors or union organizers, who may test the legality of your business operations.
ANALYSIS
In today’s dynamic business landscape, companies constantly face crucial questions similar to yours. Should you invest in the direct hiring of regular workers or rely on workers from manpower agencies or cooperatives? Both options have their advantages and disadvantages.
Choosing the right composition matters not only in manufacturing but also in other industries. That means, you have to understand its significant impact on cost, motivation, productivity, and long-term growth.
Let’s analyze this carefully so you can make an educated decision.
One, understanding the hidden costs. At first glance, agency workers appear to be the cheaper option. You pay only for the workers’ services for the period covered by the contract, then they go back to their employer, either the agency or cooperative.
Generally, this translates into lower fixed costs even with the service fees being charged by the agency or cooperative. On the other hand, the direct hiring of regular employees means higher upfront costs, including an above-average industry rate if you want to maintain the best and the brightest.
In addition, you must provide a range of benefits, including health insurance, paid vacation and sick leaves, and a lot more, including bonuses. However, these costs should not be evaluated in isolation.
While agency workers may save money initially, high turnover, repeated training, and constant coaching can accumulate significant hidden costs. In contrast, investing in regular employees often yields a sizeable return in the form of continuity, reliability, and long-term organizational knowledge.
Two, quality and productivity. Direct hires may develop stronger familiarity with company systems and processes over time, particularly when supported by effective training, supervision, and performance management.
Because of their above-average industry pay and perks, their long-term commitment fosters high engagement and motivation, which are crucial for sustaining performance over time. Agency or cooperative workers, by contrast, may lack long-term attachment to their client’s business.
While some of them may bring specialized skills, the client risks losing valuable knowledge when their contract ends. Also, their productivity and the quality of their work may fluctuate, especially if their contracts are short-term.
Three, flexibility and scalability. Businesses that have to deal with seasonal demand, project-based work, or sudden spikes in workload can scale their workforce quickly without long-term commitments.
Hiring contractual workers is ideal for retail, hospitality, or IT project development. Regular employees, however, are less flexible. Companies must manage fixed headcounts, which could be a challenge with fluctuating business demands.
Therefore, adding or reducing staff can be costly and time-consuming.
Four, legal and compliance factors. Labor laws must influence your decision in making direct hires and agency or cooperative workers. Directly hired regular employees enjoy comprehensive rights on salary, benefits, and job security.
Employers must comply with these laws, primarily DoLE’s Department Order No. 174, Series of 2017. That is where you can understand when it is lawful for an agency or cooperative acting as an independent business carrying out its operations from the control of the client company, except as to the actual results.
MAKING THE DECISION
Many successful organizations adopt a hybrid approach, maintaining a stable base of regular employees for essential jobs while supplementing them with agency or cooperative talent. Based on my observation with my clients, they maintain an average of about 80% directly hired regular workers.
This strategy allows them to balance cost, remain flexible, and achieve long-term worker loyalty. Therefore, hiring decisions are more than a financial calculation. They shape the future organizational capabilities and resilience of an organization.
The key is in recognizing that both employment models have a role to play, and smart businesses use each where it makes the most sense, but not to the extent of allowing agency or cooperative workers dominating the workforce composition.
Consult Rey Elbo for free. E-mail elbonomics@gmail.com or DM him on Facebook, LinkedIn, X or via https://reyelbo.com. Anonymity is guaranteed, if requested.
