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 Philippines 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 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 seek to establish a long-term 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, entity establishment is costly and time-consuming. 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.
Global employers also need a payroll partner or multi-country payroll solution to help process employee payments. You should only pursue entity establishment in the Philippines if it fits your long-term global expansion goals.
2. Partner With an Employer of Record in the Philippines
An employer of record (EOR) is a legal entity equipped to hire, pay, and manage supported employees in global markets on your behalf, including in the Philippines. An EOR handles all risk mitigation, payroll, and benefits associated with your global workforce to ensure you stay compliant with local labor laws and regulations.
While an EOR takes care of the employment and payroll process, your company maintains management of your employees' day-to-day responsibilities and goals.
Partnering with an EOR is a streamlined option to test foreign markets and set up your workforce quickly in multiple countries with less financial commitment and risk.
Learn more: What Is an Employer of Record (EOR)?
3. Hire and Pay Contractors in the Philippines
Instead of hiring employees, a company may choose to hire and pay Filipino contractors. Engaging contractors allows employers 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 also results in more flexibility, quicker onboarding times, and cost savings.
However, engaging Filipino contractors increases the risk of contractor misclassification, which leads to penalties such as back taxes, back benefits, and reputational damage. We cover misclassification risk in more detail below.
Learn more: Should You Hire a Contractor or Full-Time Employee?
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 correctly calculate payroll and taxes in the Philippines leads 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 a government-funded healthcare system.
- Home Development Mutual Fund. This housing program provides short-term loans and access to housing programs for all Filipino workers.
Permanent Establishment
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 statutory 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. Employers must pay it out by December 24 each year.
Learn more information on the Philippines' labor laws and regulations.
Misclassification Risk
When a company engages 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, you must 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.
Learn more: How to Avoid the Risk of Independent Contractor Misclassification
Hire in the Philippines Quickly and Compliantly
Working with Filipino talent is possible when done compliantly. Companies can ease the stress of hiring and supporting employees in the Philippines by working with an experienced partner like Velocity Global.
Velocity Global’s knowledgeable team and suite of employment solutions enable you to easily pay and manage your global workforce. Our Employer of Record (EOR) solution helps you quickly hire and pay distributed employees without facing compliance risks.
Additionally, if your business plans to establish an entity in the Philippines and other foreign countries, our Multi-Country Payroll solution streamlines payroll by allowing you to compliantly pay employees in multiple countries from one centralized platform.
Ready to quickly and compliantly hire employees in the Philippines? Contact Velocity Global to get started.
