For companies looking to expand their global workforce, hiring employees in the Philippines has many benefits. The Philippines is well-known for its outsourcing capabilities, fast-growing economy, and young English-speaking workforce. The country has a significant labor force made up of about 40.5 million individuals, close to 40% of its total population. The major industries in the Philippines include manufacturing, agribusiness, and the services sector.
The following guide explains how to hire employees in the Philippines from another country and compliantly tap into this growing market.
Can Foreign Employers Hire Filipino Workers Directly?
While foreign employers cannot simply hire workers in the Philippines directly, it is still possible to work with Filipino talent. If a company wants to hire employees located in the Philippines, there are multiple ways to hire and pay them compliantly.
If a company is looking for overseas Filipino workers (OFW), the Labor Code of the Philippines requires different steps and conditions. OFW refers to an individual from the Philippines who is working and living in another country. In fact, remittances sent home by OFWs now account for roughly 10% of the country’s overall GDP. However, this is different from hiring employees who are located in the Philippines.
How to Hire Employees in the Philippines
There are several methods for hiring employees or remote workers in the Philippines from another country:
1. Set Up an Entity in the Philippines
If a company wants to hire a Filipino workforce directly, it can establish an entity in the Philippines. Having an entity in another country allows you to create a local branch and hire employees. Not only does this option provide you with full autonomy to hire talent directly, but it is also a strategic route if you’re looking to establish a long-term business presence in the Philippines. Entity establishment is a beneficial option if you hold fixed assets in the country, have a substantial budget to spend, or are planning to hire a large number of employees.
While setting up an entity is the traditional route for businesses building an overseas presence, it also requires a large investment in both time and money. It requires a knowledgeable team with an understanding of the local laws and regulations, bandwidth to take on complex and time-consuming processes, initial capital investment, and ongoing entity maintenance fees. A payroll partner or multi-country payroll solution is also needed to help process employee payments. Entity establishment in the Philippines should only be pursued if it fits your long-term global expansion goals.
2. Partner With an Employer of Record
A global Employer of Record (EoR) is a legal entity equipped to hire, pay, and manage supported employees in global markets on your behalf, including the Philippines. A global EoR simplifies the process by handling all risk mitigation, payroll, and benefits associated with your global workforce to ensure you stay compliant with local labor laws and regulations. While a global EoR takes care of the employment and payroll process, your company maintains management of your employees’ day-to-day responsibilities and goals.
Partnering with a global EoR is a streamlined option to test foreign markets and set up your workforce quickly in multiple countries with less financial commitment and risk.
3. Hire and Pay Contractors in the Philippines
Instead of hiring employees, a company can hire and pay Filipino contractors. This gives you the ability to target talent with specialized skills needed for a specific project or on a sporadic basis. Because a contractor provides their services as a self-employed individual, there is no commitment beyond the contract term. Hiring and paying contractors can ultimately result in more flexibility, quick onboarding time, and overall cost savings. Plus, a business can re-engage a contractor at any time.
Compliance Risks When Paying Filipino Workers
While it is possible to hire and pay Filipino workers from a different country, there are still compliance risks that come with engaging employees and contractors across international borders.
Incorrect Payroll Contributions
An employer’s social and payroll contributions in the Philippines may seem foreign to companies based in another country. Failure to calculate payroll contributions correctly lead to fines, so it’s important to understand the requirements. In the Philippines, an employer must factor in the following payroll contributions for their employee:
- Social Security. The Filipino Social Security System includes sickness, maternity, disability, retirement, death, funeral, unemployment, and compensation benefits.
- Philippine Health Insurance Corporation (PhilHealth). PhilHealth is the government-funded health care system.
- Home Development Mutual Fund. This housing program provides short-term loans and access to housing programs for all Filipino workers.
When a company has a fixed location in the Philippines and is generating revenue, the business triggers permanent establishment. Having a permanent establishment means that you are liable for corporate taxes in the Philippines.
A company that does not compliantly recognize its permanent establishment obligations is vulnerable to several risks, including unpaid taxes, interest and penalties, employer liabilities, and legal issues.
Withholding Statutory Benefits
Filipino employees have entitlements to benefits and holidays that may be new to a global employer. These include:
- National regular holidays. The number of national regular holidays ranges from year to year. In 2022, there are 11 national regular holidays.
- Special non-working days. The Filipino government prescribes between 8-10 special non-working days per year.
- Service discretionary leave. This is similar to paid time off in other countries.
- Personal Equity and Retirement account (PERA). PERA is a retirement fund similar to the United States’ 401K retirement plan.
- 13th-Month pay. Unlike a bonus, 13th-month pay is not negotiable and is typically equivalent to one month’s pay or 1/12th of the employee’s annual salary. It is required to be paid by December 24 each year.
When a company engages with contractors, misclassification, even if unintentional, is a risk. If you treat the contractor like an employee, where you manage their work schedule and pay them a fixed salary, they could claim they are no longer a contractor and are entitled to employee benefits.
Each country has its own employee and contractor definitions. Consider the tax laws and reporting requirements for both the country your company is located in, as well as the Philippines. If a contractor is misclassified, your company faces potential risks, including fines and penalties, reputational damage, and forced market exit.
If your company is based in the U.S. and you are engaging with a contractor, use a W-8BEN tax form to classify your foreign worker’s status as a non-U.S. citizen and determine proper tax reporting and withholdings.
Hire in the Philippines Quickly and Compliantly
Working with Filipino talent is possible when done compliantly. Whether you choose to establish an entity, partner with a global EoR, or engage with contractors, consider all of the risks involved and take the necessary steps to ensure compliance.
Velocity Global’s knowledgeable team and full suite of employment solutions enable you to easily pay and manage your global workforce. Our global Employer of Record solution helps you quickly hire and pay your distributed employees without facing compliance risks. Additionally, our Multi-Country Payroll solution streamlines payroll by allowing you to pay employees in multiple countries from one centralized platform. For international contractors, our Contractor Management Solution provides a safe way to engage and pay contractors around the world without the risk of misclassification.
Contact us to learn which solution is best for your business.