With reliably good levels of English, well-recognized skills and specialties, and overall low labor costs, independent contractors in the Philippines are excellent short-term or project-based additions to a team. However, navigating the local regulations around independent contractor classifications can be difficult. Complex local regulations make it hard to accurately and safely pay contractors in the Philippines.
That’s why we’ve put together this guide to understanding the key definitions of an independent contractor. Here, we discuss everything you need to know when hiring or working with contractors as an employer. We also highlight the best ways you can pay contractors in the Philippines.
How are Worker Classifications Different for Employees and Independent Contractors in the Philippines? How to Avoid Independent Contractor Misclassification
The law in the Philippines largely defines Independent contractors in many of the same ways as those in other countries. Typically, this is related to how directly a company manages a contractor. It’s essential that you first consider the position that your are hiring for and ask yourself if a contractor would…
- be in charge of their own independent business?
- use their own equipment and workspace and completes assigned tasks under their own supervision according to their own schedule?
- be engaged for a specific project or period of time?
In addition, recent amendments to labor regulations in the Philippines have included the following further points about contractors:
- Am I subcontracting this worker from a third party without them being a legal employee of said third party?
As the employer, you can also ask yourself:
- How much control do I have over the way contractors complete their work?
- Do I pay contractors in the Philippines in the same way and according to the same payroll schedule as employees?
No single point confirms if a worker is an employee or a contractor. However, too much uncertainty can mean an investigation into employee misclassification. This is a where a company hires a worker as an independent contractor to avoid the cost of employee benefits or protections. In this situation, companies treat workers employees to all extents and purposes while denying them relevant rights.
Companies found to have falsely hired or misclassified employees as independent contractors can face the following penalties:
- Being forced to provide backpay and all missed employee benefits, including annual leave payments and social security contributions.
- Damages of up to PHP 500,000 plus fees.
- Possible criminal charges or prison sentences in cases where the company avoids taxes or commits fraud.
- Limitations or regular inspections imposed by the authorities which can restrict a company’s operations for the future. This can make it harder to hire going forward.
When you pay contractors in the Philippines, this may mean trying to use a different payment method to pay employees. We discuss potential methods below.
Which Benefits and Employment Laws Relate to Contractors in the Philippines?
In 2017, the Department of Labor and Employment (DOLE) put specific limits and restrictions on contractors via Order 174. This better defined the employer-contractor relationship, aiming to reduce the opportunity for companies to misclassify workers as contractors.
Companies in the Philippines must hire independent contractors through an independent contractor agreement. This document outlines contractor duties, project requirements, and how the client will pay contractors in the Philippines.
In contrast to many countries, the Philippines has prohibited labor agencies from supplying contractors to companies under in-house arrangements. Instead, now if a third-party “subcontracts” a worker, they must be a legal employee of said third party. This makes traditional umbrella company contracts harder. As a result, it’s important to consider more stable forms of third-party agreements like an Employer of Record.
How Do Employer Taxes and Labor Costs Relate to Contractors in the Philippines?
In addition to managing their own taxes and social security contributions, contractors in the Philippines have several additional burdens.
- They must pay a ₱100,000 registration fee when first starting out as a contractor.
- Contractors in the Philippines must reregister their certification every 2 years.
Owing to the strict separation of independent contractors and employees, employers do not have to provide any tax or social security management aid when they pay contractors in the Philippines. This means that there are few additional payroll costs for employers.
In fact, Order 174 removes any legal responsibility for the employer to remit amounts for a contractor’s social security fund. This simplifies the distinction between employees and contractors even further.
However, the risk of penalties remains if you aren’t making payments securely or in accordance with local laws.
How to Hire and Pay Contractors in the Philippines Safely in 4 Different Ways
Direct Deposits or Wire Transfers
Despite the fact that they are also used to pay employees, direct deposits can pay contractors in the Philippines once or regularly. This depends on your work agreement and payment schedule.
While doing this, take care to keep contractor payments separate from other payments provided to regular employees. Additionally, you cannot withhold taxes or social security contributions from clients in the same manner as for employees.
Checks used to be the most common form of payment for most contractors, but they are now far less so. Due to the possibility of a bounce and the decreasing availability of checks, they are less reliable.
Unless you have been specifically instructed to utilize checks when paying a contractor in The Philippines, consider other options. This is because they are more likely to be lost and take longer to complete than electronic payments.
PayPal or Other Online Payment Systems
Because of its high transfer fees and the rise in online banking businesses, PayPal’s popularity has substantially declined. For paying independent contractors anywhere in the world, these online payment process options remain quick and easy.
Expected to cover 45% of all transactions in the Philippines by 2025, digital wallets and real-time payment methods are quickly taking over. There are many different digital payment options available to pay contractors in the Philippines, with GCash and PayMaya being widely available.
Guaranteed Payroll Services
Numerous third-party systems and payroll processing partners are available specifically to pay freelancers. These options can handle paying independent contractors on time and in accordance with the law. They include PEOs (Professional Employer Organizations) and Employers in Record (EORs) in the Philippines.
These third-party services can act as the legal employer to hire and pay contractors in the Philippines on your behalf. An EOR can handle providing the contractors with secured payment processing services and employee benefits. At the same time, you receive the same high-quality specialist services with complete compliance assurance.
What You Can Do If You Want to Convert an Independent Contractor into an Employee in the Philippines
If you have found a contractor that can complement your operations long-term, you might consider hiring them full-time.
Due to the need to prevent unnecessary investigations owing to the changing relationship, this can be a delicate operation. You might need to provide the contractor with extra incentives for giving up the freedom that comes with freelancing.
An organization that can pay contractors in the Philippines can also help if you don’t have a local company structure. The added advantages and protections that come with being an employee are also useful for persuading contractors.
You first have to come to an agreement on an employment contract that works for both of you. It’s critical that you both also understand every aspect of how your business partnership will transform into one of employment.
5 Advantages of Using an Employer of Record Services to Pay Contractors in the Philippines
- Streamlined and Guaranteed Payment Processes – Employer of Record services give you all the tools you need to pay contractors in the Philippines through a single online and automated platform.
- Local Legal Compliance Assurance – An EOR employs teams of local and international legal experts to manage consistent compliance assurance in matters of labor and employment.
- Access to Employee Benefits for Contractors, Leading to Higher Satisfactions Rates – When you pay contractors in the Philippines through an EOR they have the option to be legally hired by us, meaning they benefit from all employee rights and protections.
- Lowered Employer Liability and Misclassification Risk – Without a direct connection to the contractor, you can expand fearlessly knowing that all employer responsibilities are managed for you.
- Contractor Agreement Management, Including Formation and Termination – We can help you create and manage the perfect legal documentation to simplify contractor relationships in the Philippines.