Compliantly Engage Contractors in the Philippines

Any business hiring in the Philippines should understand the important legal distinction between who classifies as an independent contractor and who can be hired as an employee. Fines or penalties may be issued to businesses that  are hiring contractors under the guise of employment. 

Understanding the distinction between employees and independent contractors is therefore critical to compliantly engaging workers in the Philippines. It is important to work with a partner like Worksuite to ensure you put in place an engagement framework that accurately classifies independent contractors for you and lets you know when contractor talent must be engaged as a payrolled contractor or employed directly.

Philippine law distinguishes six key types of employment: probationary employment; regular or permanent employment; contractual or fixed-term employment; casual employment; project employment; and seasonal employment. The law does not define who is classified as an independent contractor versus an employee. 

However, depending on the classification, this can have significant implications for companies seeking to hire independent contractors in the Philippines. For the hiring company, engaging with independent contractors may be legally and financially risky, especially given the possibility of an independent contractor becoming re-classified as an employee of the hiring company. 

As in many countries, if the real substance of the company-contractor relationship proves to effectively be an employment relationship, the hiring company may suffer legal and financial penalties (including payroll taxes). It is therefore important to leverage an employment service partner like Worksuite when hiring in the Philippines in order to ensure that independent contractors fall under the correct working relationship with your business.

• Who is an independent contractor?

Like in many countries, there is no strict definition of employees and independent contractors in Philippine law. However, individuals are generally considered independent contractors if they:

• Receive payments for specific tasks completed, rather than a salary or wage
• Cannot simply be dismissed by the hiring company
• Are not subject to the hiring company’s operational rules
• Can choose their own working hours or schedule
• Can choose their own place to work from (unless the work is site-specific)
• Provide their own equipment to carry out assigned tasks 
• Do not work under direct supervision, directives, or instructions

The Philippines has four main categories of independent contractors. Unlike in many other countries, the Limited Liability Company (LLC) and the Private Limited Company (PLC) do not exist as legal entities.

• Freelancer: This is the most common category for individuals operating as independent contractors in the Philippines. Freelancers run their own noncorporate businesses as an individual, and therefore assume complete responsibility for all business risks and liabilities. Unlike sole proprietors, freelancers cannot hire their own employees. Freelancers must register with the Bureau of Internal Revenue (BIR) and are required to submit monthly, quarterly, and annual profit reports. 
• Sole proprietor: This refers to individuals who work as independent contractors but have not incorporated their own company. These individuals do not benefit from personal asset protection and are fully liable for all commercial, financial, and legal risks. Unlike freelancers, sole proprietors can hire employees. Sole proprietors must register with the relevant Department of Trade and Industry (DTI) National Capital Region (NCR) office.
• One Person Corporation (OPC): This is a corporation that has only a single stockholder who has limited liability. Unlike a sole proprietorship, OPC owners are more protected from business risks. Some categories of individuals, including licensed professionals, are prohibited from forming an OPC. A new OPC must be registered with the Security and Exchange Commission’s (SEC) Company Registration and Monitoring Department.
• Domestic Corporation: This is the closest business structure to the typical Limited Liability Company (LLC) and the Private Limited Company (PLC), which don’t exist in the Philippines. A Domestic Corporation is a distinct legal entity which is responsible for its business liabilities, although stockholders are also liable given their level of capital investment. A Domestic Corporation typically requires at least five incorporators, and the majority must be Philippine residents. Domestic Corporations must be registered with the SEC.

There are two primary engagement models for working with independent contractors in the Philippines:

• Direct engagement: Under this model, the hiring company engages directly with the independent contractor and establishes a direct contract for the provision of services. The hiring company then pays the independent contractor directly, in accordance with the terms of the contract.
• Third party: These firms come in two forms and both are specially designed to vet and engage freelancers compliantly as either contract employees or independent contractors on your behalf.
• Agency: Here, the hiring company engages with a staffing agency, which in turn supplies one of its own contractors to deliver the contracted services. The hiring company pays the staffing agency directly, in accordance with the terms of the contract. The contract is therefore between the hiring company and the staffing agency, while the agency pays the independent contractor through a separate contractual arrangement. 
• Umbrella company: Philippine independent contractors can also work through an umbrella company. This turns a ‘self-employed’ individual into a legal ‘employee’ of the umbrella company and therefore helps avoid complications around tax and other issues. The contractual relationship is between the umbrella company and the client, with the umbrella company running payroll and administration for the independent contractor. The umbrella company invoices the client directly while paying the contractor as a standard employee. Umbrella companies levy a fee on the contractor to cover their costs.
• Employer of record (EOR): Like an umbrella company, an EOR can also act as the independent contractor’s legal employer, while the hiring company is effectively a customer of the EOR. But while an umbrella company has a limited scope, an EOR has more extensive responsibilities, which can include all aspects of payroll, taxes, and HR (including onboarding and offboarding).
• Hiring partner: The hiring company can also work with a hiring partner who helps them vet potential independent contractors, set up contracts, ensure the contractor is properly classified, onboard and manage contractors, and pay contractors.

Companies hiring independent contractors in the Philippines should avoid making payments directly through their payroll system. Beyond these guidelines, there are no specific lawful requirements related to paying independent contractors in the Philippines. The contract should stipulate the preferred payment method agreed upon by both parties.

The Philippine tax year runs from 1 January to 31 December. All employees are subject to wage tax which is deducted at source. The country has a progressive tax rate starting at 20% for incomes between 250,000-400,000 Philippine pesos (PHP), and increasing up to 35% for incomes over PHP 8 million. Employers are required to withhold their employees’ tax, social security, and health insurance contributions from the employee’s salary payments. Employers must also file their own tax returns, which are due by 15 April for the preceding year.