How to hire and pay independent contractors in Philippines

The Philippines has become a popular outsourcing destination in recent years thanks to its thriving IT and services industry. Its proximity to major Asian markets and relatively low labor costs have made it an attractive option for companies looking to hire remote talent.

Every country has different laws that affect how you hire and pay employees. The Philippines is no different. If you’re looking to hire independent contractors in the Philippines, you need to have some background knowledge of local laws and business practices. You also have to understand how to classify your workers correctly in compliance with Filipino employment law.  

You don’t have to worry, though. In this article, we will take you through what you need to know before you hire contractors in the Philippines. We have also included information about relevant labor laws, tax and compliance practices, and how you can avoid misclassification risks. 

Ready to dive in? Let’s go.

Unique considerations of managing contractors in the Philippines

There are two primary considerations before you hire workers in the Philippines. 

First, at-will employment does not exist. This means that the employer and the worker must have a contractual agreement, setting out the duties and responsibilities of the worker. English is one of the official languages in the Philippines, and employment contracts can be written in English. However, if the worker is a Philippine national and unable to understand English, a copy of the contract must be provided in Filipino.

Second, the lack of at-will employment means that workers can only be terminated for “just cause” or conditions outlined in the contract. Employers have to make sure that clearly defined termination clauses are included in the agreement. 

What are the risks of misclassifying Filipino independent contractors as employees?

In the Philippines, there are legal differences between independent contractors and employees. It’s important to classify your Filipino workers appropriately, or you could face penalties or legal consequences.

What constitutes an employee? 

An employee is an individual who works for your company and agrees to give you control over how and when they accomplish work tasks. You are obliged to meet the employee’s minimum wage and overtime requirements, offer employee benefits, and pay a portion of the employee’s income taxes.

What constitutes a contractor? 

An independent contractor is usually hired on a non-exclusive basis to accomplish specific tasks based on a fixed salary or wages as mutually agreed. However, the contractor has the freedom to decide when and how they do their job. The employer is not required to withhold taxes on behalf of their contractor or offer them benefits.

You can learn more about the differences between the employee and contractor classifications in Remote’s expert guide to understanding misclassification.

Penalties for misclassification in the Philippines

There are significant consequences if you misclassify an employee as an independent contractor in the Philippines. If you classify someone as an independent contractor when they should be an employee, you’re committing fraud against both the employee and the government. Since you’re not offering employee benefits for your Filipino workers or paying employment taxes, you could face steep fines or penalties.

In the Philippines, the consequences include making payments to employees for the benefits you didn’t provide and paying back taxes to the government. You may also be required to pay additional fines if there is reasonable evidence to show that you were intentionally misclassifying an employee. 

Additionally, misclassifying an employee as an independent contractor can place your intellectual property (IP) rights at risk. The easiest way to address this issue is to work with a global contractor management service that can offer you the maximum protection for your IP and help you minimize risks to your business. 

What are the labor laws in the Philippines?

Labor practices and employment law in the Philippines are defined by the Labor Code of the Philippines. Some Filipino labor laws concerning employees and contractors are:

• Employees must be paid either every other week or twice a month. Contractors are usually paid once an invoice is submitted at the end of a project, or at regular intervals, as clearly outlined in their contract.

• Employees must be offered 125% overtime pay if they work more than 40 hours a week or eight hours a day. Contractors are not mandated to receive overtime.

• At the end of the calendar year, employers must offer all employees a “13th month” bonus equal to what the employee earns in a month. This does not apply to contractors.

• Companies with employees must contribute to the Philippines’ Social Security System (SSS). However, companies hiring contractors do not have to contribute.

• All workers who earn more than 1,000 Filipino pesos per month must contribute to the SSS and pay income tax.

Foreign companies interested in hiring contractors in the Philippines should also refer to the guidelines mentioned in The Department of Labor and Employment’s Department Order No. 174 regarding contracting and subcontracting.

Tax and compliance practices for hiring independent contractors from the Philippines

Filipino contractors are responsible for filing and paying their taxes. 

It’s a good idea for employers to make sure that their Filipino contractors are registered with the Bureau of Internal Revenue (BIR). 

US-based employers have to submit certain tax compliance forms to the Internal Revenue Service (IRS) such as:

• W-8 BEN Form: This form helps the IRS determine the foreign status of non-resident aliens employed by US companies.

• 1096 Form: This form is a printable cover sheet that is used when submitting paper forms to the IRS by mail.

• 1042-S Form: This form reports the amount of money a US company has paid to international contractors (outside the US).

But don’t let the hassle of submitting paperwork put you off. Remote can take the stress out of the process by automatically generating the relevant tax forms for your contractors. Remote’s tax compliance feature for US companies can help you stay organized while you onboard and manage your contractors.

How do I convert an independent contractor in the Philippines to an employee?

There are several reasons why you might want to convert your contractor to an employee. Some reasons you could choose to convert your contractor to an employee are:

• To retain their services for longer

• To offer them benefits to boost engagement

• To make them a permanent team member

• To save money in the long run

The conversion process involves providing your workers with an updated contract covering details of minimum wages, termination clauses, and overtime pay. You also have to offer benefits, comply with tax laws, and follow employment laws and regulations.

Alternatively, a global contractor management service like Remote can handle the conversion process for you. Remote can help you convert your contractors to employees quickly and easily by generating compliant contracts in Filipino and working out your tax requirements.

How do I pay an independent contractor in the Philippines?

Some common ways to pay international contractors in the Philippines are:

• Paper checks

• Bank transfers

• Digital payment platforms (PayPal or Wise)

• Traditional money transfer companies (Western Union or MoneyGram)

However, most of these options have transaction charges or markup fees for currency exchange. 

Alternatively, you could use a global contractor management service like Remote to handle contractor payments. Remote makes it easy to pay your distributed workforce quickly by covering tasks like automation of recurring payments and invoice management.

The best way to hire international contractors in the Philippines

If you’re looking to expand your team in the Asia Pacific region, hiring from the Philippines is a solid option because your business can benefit from the support of talented contractors at affordable rates. 

Sure, you’ll still need to learn about tax and compliance practices and navigate the legalities of hiring in another country. But Remote makes contractor management a simple and easy process. With Remote, you can: 

• Stay compliant with Filipino labor laws and taxes.

• Onboard contractors all over the world compliantly via localized contracts.

• Approve and pay invoices quickly and automate recurring payments.

• Get the support of our friendly team who can guide you through the process.

Plus, our fair price guarantee means you only pay for the contractors you’re actually working with. 

If you have any questions about how you can hire and pay contractors globally, contact our friendly team who are waiting to help. Ready to get started with Remote? Sign up and start onboarding your team today!