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Compliantly Engage Contractors in the Philippines

Worksuite offers a whole range of professional services and compliance tools, making it easy to compliantly engage independent contractors in Philippines.


We work with the best legal partners in Philippines to create contract templates that are compliant with local laws to protect you and your contractors from fines and penalties.

Our bespoke onboarding workflows and screening questioners will help you determine the worker status in compliance with Philippine law, based on which you can decide to engage a worker as a contractor or full-time worker—all without needing to set up your business entity.

 
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Independent Contractor Classification 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.

Factors

Employee

Independent Contractor

Employment Laws

Philippine employment regulations are governed by the rules issued by the  Department of Labor and Employment (DOLE) along with a body of employment law, including: the Civil Code; the Constitution; Labor Code of the Philippines; Social Security Law; National Health Insurance Act; Home Development Mutual Fund Law; Domestic Workers Act; Solo Parents’ Welfare Act; Wage Rationalization Act; Tax Code 1997; Train Law 2018; collective bargaining agreements (where applicable)

Some provisions from the Civil Code may apply to independent contractors when the contract has not already covered them. Beyond this, there are no specific laws or  regulations governing relations with independent contractors.

Hiring Practice

The contract does not have to be in writing, although most companies choose to do so. The contract should include, at least, the job title, job description, salary, place of work, and any other employment conditions.

 

Employees must register with the Social Security System (SSS), Philippine Health Insurance Corporation (PHIC, or PhilHealth), and Home Development Mutual Fund (HDMF) prior to commencing employment, and provide their registration numbers to their new employer.

There are no specific practices relating to hiring independent contractors. Independent contractors can be hired directly or via an intermediary, such as a staffing agency or an umbrella company. Independent contractors may be found via word of mouth, job boards, social networks, industry bodies, or other forums. 

 

The four key independent contractor categories are: 

 

  • Freelancer
  • Sole Proprietor
  • One Person Corporation
  • Domestic Corporation
Tax Filing Documents

Employees are subject to wage tax which is deducted at source. The Philippines 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.

Independent contractors must file and pay their own income taxes. Additionally, contractors must submit monthly, quarterly, and annual profit reports to the Bureau of Internal Revenue (BIR). Taxes can be filed and paid by completing the relevant Income Tax Return forms and submitting these to the individual’s local BIR Regional District Office (RDO).

 

Self-employed contractors earning up to PHP 3 million per year can opt to be taxed according to the standard progressive tax rate, or they can pay a flat 8% rate on all income over PHP 250,000 plus the corporate income tax (CIT) rate of between 2% to 25%.

Payer's Tax Withholding & Reporting Requirements

The tax year runs from 1 January to 31 December, and employers must file their own tax returns for the preceding year by 15 April. Employers are required to withhold the employees’ tax, social security, and health insurance contributions from the employee’s salary payments. The Philippines has a mandatory privatized Social Security System (SSS) and a government-funded Philippine Health Insurance Corporation (PHIC, or PhilHealth), with employers and employees required to make contributions to both.

Hiring companies do not withhold any tax or social security contributions from contractors’ payments. Contractors must pay their own contributions to the SSS, PHIC, and HDMF.

Remuneration

Employees are paid on an hourly, weekly, or monthly basis.

Independent contractors typically submit an invoice on a monthly basis.

Workers’ Rights

Workers’ rights include: paid holiday leave; paid overtime; 13th month pay; rest periods; protection from unfair dismissal; right to form or join a union; maximum 8 hour workday; overtime pay; minimum notice period; paid maternity; paternity leave; pension (after 5 years of company service). There is no statutory minimum wage, and paid sick leave is not a statutory right.

There are no statutory workers’ rights  for independent contractors.

Benefits

The employer pays all employee benefits, including mandatory social and health insurance .

Independent contractors’ benefits are governed by the contract.

When Paid

Employees are paid every two weeks, not more than 16 days apart. Employees also benefit from a mandatory 13th-month-pay provision, which is paid by 24th December each year.

Independent contractors are paid upon the completion of the contract or task(s) and after they submit a relevant  invoice.

Employee

Employment Laws

Philippine employment regulations are governed by the rules issued by the  Department of Labor and Employment (DOLE) along with a body of employment law, including: the Civil Code; the Constitution; Labor Code of the Philippines; Social Security Law; National Health Insurance Act; Home Development Mutual Fund Law; Domestic Workers Act; Solo Parents’ Welfare Act; Wage Rationalization Act; Tax Code 1997; Train Law 2018; collective bargaining agreements (where applicable)

Hiring Practice

The contract does not have to be in writing, although most companies choose to do so. The contract should include, at least, the job title, job description, salary, place of work, and any other employment conditions.

 

Employees must register with the Social Security System (SSS), Philippine Health Insurance Corporation (PHIC, or PhilHealth), and Home Development Mutual Fund (HDMF) prior to commencing employment, and provide their registration numbers to their new employer.

Tax Filing Documents

Employees are subject to wage tax which is deducted at source. The Philippines 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.

Payer's Tax Withholding & Reporting Requirements

The tax year runs from 1 January to 31 December, and employers must file their own tax returns for the preceding year by 15 April. Employers are required to withhold the employees’ tax, social security, and health insurance contributions from the employee’s salary payments. The Philippines has a mandatory privatized Social Security System (SSS) and a government-funded Philippine Health Insurance Corporation (PHIC, or PhilHealth), with employers and employees required to make contributions to both.

Remuneration

Employees are paid on an hourly, weekly, or monthly basis.

Workers’ Rights

Workers’ rights include: paid holiday leave; paid overtime; 13th month pay; rest periods; protection from unfair dismissal; right to form or join a union; maximum 8 hour workday; overtime pay; minimum notice period; paid maternity; paternity leave; pension (after 5 years of company service). There is no statutory minimum wage, and paid sick leave is not a statutory right.

Benefits

The employer pays all employee benefits, including mandatory social and health insurance .

When Paid

Employees are paid every two weeks, not more than 16 days apart. Employees also benefit from a mandatory 13th-month-pay provision, which is paid by 24th December each year.

Independent Contractor

Employment Laws

Some provisions from the Civil Code may apply to independent contractors when the contract has not already covered them. Beyond this, there are no specific laws or  regulations governing relations with independent contractors.

Hiring Practice

There are no specific practices relating to hiring independent contractors. Independent contractors can be hired directly or via an intermediary, such as a staffing agency or an umbrella company. Independent contractors may be found via word of mouth, job boards, social networks, industry bodies, or other forums. 

 

The four key independent contractor categories are: 

 

  • Freelancer
  • Sole Proprietor
  • One Person Corporation
  • Domestic Corporation
Tax Filing Documents

Independent contractors must file and pay their own income taxes. Additionally, contractors must submit monthly, quarterly, and annual profit reports to the Bureau of Internal Revenue (BIR). Taxes can be filed and paid by completing the relevant Income Tax Return forms and submitting these to the individual’s local BIR Regional District Office (RDO).

 

Self-employed contractors earning up to PHP 3 million per year can opt to be taxed according to the standard progressive tax rate, or they can pay a flat 8% rate on all income over PHP 250,000 plus the corporate income tax (CIT) rate of between 2% to 25%.

Payer's Tax Withholding & Reporting Requirements

Hiring companies do not withhold any tax or social security contributions from contractors’ payments. Contractors must pay their own contributions to the SSS, PHIC, and HDMF.

Remuneration

Independent contractors typically submit an invoice on a monthly basis.

Workers’ Rights

There are no statutory workers’ rights  for independent contractors.

Benefits

Independent contractors’ benefits are governed by the contract.

When Paid

Independent contractors are paid upon the completion of the contract or task(s) and after they submit a relevant  invoice.

Who classifies as an Independent Contractor in the Philippines

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

Independent Contractor Categories

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.

Contracting Models

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.

Contractor Payments

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.

Tax and Social Security

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.