The Philippines is already a popular choice for companies hiring full-time remote employees. Now, companies like Amazon, Apple, and Canva are putting the country on the map as a top choice for hiring independent contractors.
It makes sense. The Philippines is home to a large pool of skilled and cost-effective talent, particularly in the thriving IT and customer service sectors.
Is your company interested in adding Filipino contractors to your team? Before you make an offer to your first freelance hire, you'll want to brush up on local labor laws and compliance.
We'll walk you through the differences between contractors and employees, provide tips for creating effective contracts, and share best practices for managing contractor relationships and avoiding misclassification risks.
Key Takeaways:
- Independent contractors in the Philippines are a source of cost-effective skilled talent in industries such as IT, digital marketing, customer service, and design.
- Contractors are paid according to the terms of their independent contractor agreement and generally do not receive the same benefits as employees.
- Misclassifying contractors can result in significant penalties, fines, and potential tax liabilities.
What Are the Benefits of Hiring Contractors in the Philippines?
Hiring contractors from the Philippines offers several advantages, particularly for companies seeking a balance of high-quality work and cost-efficiency.
Businesses aren't required to provide Filipino contractors with the same benefits full-time employees are entitled to, such as health insurance and retirement contributions, enabling them to tap into specialized talent without the overhead costs of hiring an employee.
The Philippines also boasts a diverse talent pool. Many contractors possess specialized skills in fields such as IT, digital marketing, customer service, and design. This allows companies to find freelancers with the experience their business needs without making a long-term commitment.
What's the Difference Between a Contractor and an Employee in the Philippines?
There are several key ways contractors differ from employees in the Philippines.
Control and Autonomy
Filipino employees generally work for only one employer, which dictates the tasks, hours, and locations in which the employee works.
On the other hand, independent contractors have more autonomy, allowing them to determine their work schedules and methods. Contractors also have the freedom to work for multiple clients simultaneously.
Compensation and Benefits
Employees receive regular salaries and legally mandated benefits such as health insurance, social security, paid leave, and 13th-month pay.
Contractors are compensated based on the terms of their contract, such as hourly or milestone-based payments, and are typically not entitled to additional benefits.
Tax Laws and Obligations
Employers withhold taxes and submit them to the Bureau of Internal Revenue (BIR) for their employees.
Contractors must register as self-employed with the BIR and are responsible for their own tax filings. U.S.-based companies hiring contractors in the Philippines must provide them with a W-8BEN form.
Employment Security and Legal Protections
Employees are protected by the Labor Code, including due process for termination and protections against unfair dismissal.
Contractors rely on contractual terms for security, and have fewer legal protections.
Filipino Labor Laws Governing Contractors
The Philippines' Department of Labor and Employment's (DOLE) Department Order No. 174 guides laws for companies hiring Filipino contractors.
Contractors must register with DOLE. Failure to do so may result in presumed labor-only contracting. They also need service agreements outlining job descriptions, duration, and payment terms. Ending a contract does not automatically terminate employment, as contractors may seek re-employment within three months.
If contractors are classified as labor-only, the principal company assumes employer responsibilities.
These regulations are designed to protect contract workers from unfair treatment, but can sometimes create compliance burdens for foreign companies hiring Filipino contractors.
Misclassification Risks for Contractors in the Philippines
Failure to understand and follow Filipino employment law when hiring independent contractors could result in serious consequences for employers.
Fines, Back Payments, and Tax Liabilities
Employers that misclassify workers may face fines and be responsible for unpaid employee benefits, including:
- Social security
- Health insurance
- Overtime
- Back taxes
Intentional misclassification may lead to additional fines for non-compliance.
Employee Claims and Legal Risks
Misclassified workers can sue to claim employee rights, such as severance pay, retirement benefits, and protections under the security of tenure.
Intellectual Property (IP) Risks
Misclassification may place a company's IP rights at risk, as contractors could potentially retain ownership of any work completed on behalf of the company.
Creating Contracts for Your Filipino Contractors
When creating contracts for Filipino contractors, include clear terms to ensure clarity and compliance.
Begin with a detailed project outline covering the work scope, deliverables, milestones, and deadlines. Define payment terms, including:
- Compensation structure (hourly, milestone-based, or fixed)
- Payment schedule
- Method of payment
Incorporate non-compete clauses to limit the contractor's work with competitors and establish intellectual property rights to ensure that ownership of project-related IP remains with your company.
Contracts should also include:
- Confidentiality agreements to protect sensitive information
- Definition of what qualifies as confidential information
- The length of confidentiality obligations
Specify termination conditions by outlining the grounds for ending the contract, notice periods, and consequences for breaches, such as financial penalties or legal action.
Managing the Contractor Relationship
Building effective working relationships with Filipino contractors requires clear communication and cultural awareness.
Reiterate Contractual Expectations
Kick off the contractor relationship by walking through the contract together. Answer any questions the contractor may have about the project scope, milestones, deadlines, and deliverables, and make sure you're both on the same page.
Schedule Regular Check-ins
These meetings are critical touch points where both parties can discuss updates, address concerns, and provide feedback.
Establishing a routine of regular check-ins will foster ongoing communication about project progress and any challenges that may arise.
Respect Cultural Nuances
Understanding Filipino cultural values such as pakikisama (harmony) and hiya (shame) is essential for building solid relationships with contractors.
These concepts influence interpersonal dynamics and decision-making processes in Filipino culture.
Provide Detailed Feedback
Any feedback should be constructive to maintain a positive working relationship.
If there are any issues, these conversations allow the contractor to ask questions so they can course correct and get the project back on track.
Hire and Pay Contractors with RemoFirst
Hiring contractors in the Philippines can be challenging, given the complexities of Filipino employment laws.
However, an Employer of Record (EOR) like RemoFirst simplifies every step in managing international contractors, from ensuring compliance with local laws to making contractor payments in over 150 countries.
Book a demo today and discover the simplicity of managing Filipino independent contractors with RemoFirst.
