As your company grows, you may encounter certain projects that require specialized talent. Working with independent contractors allows for greater agility in scaling your workforce based on project needs without the extended employment hiring process; however, while hiring independent contractors in the Philippines can be beneficial for your company, there are also risks and responsibilities to be aware of.

Hiring independent contractors in the Philippines

Global contractors and employees are separate worker types. It’s essential to understand the difference between these designations to avoid the risks associated with misclassification.

Independent contractors vs. employees

The country’s labor code regarding independent contractors defines this position as an individual who provides services to an organization. Common characteristics of independent contractors include:

  1. They control the method, manner, timing, and place of work, while the client controls only the desired result or deliverable.
  2. They provide substantial capital or business resources, such as tools, equipment, technology, staff, or other resources needed for the work.
  3. They are not subject to day-to-day employer control, supervision, discipline, or direction regarding how the work is performed.

Employees, in contrast, are under the discretion of an employer’s direction and performance requirements. In return, the employer provides the tools and space to carry out the job. The employer must deduct compensation income tax and employee-side SSS, PhilHealth, and Pag-IBIG contributions from employee wages. Employers must also remit their own required contribution shares.

Penalties for misclassification

Employers generally do not register true individual independent contractors with the Department of Labor and Employment (DOLE) simply because of the engagement. DOLE registration is more commonly required for covered contractors, subcontractors, manpower agencies, or service providers under labor contracting rules. If at any point a contractor perceives their working relationship is more similar to that of an employee, they can report it to the DOLE.

The primary consequence of misclassification is that the contractor may be treated as an employee. The company may owe back pay, statutory benefits, payroll tax withholding, and retroactive SSS, PhilHealth, Pag-IBIG, and Employees’ Compensation contributions, with possible penalties or surcharges. DOLE may also order compliance and impose administrative penalties.

How to hire independent contractors in the Philippines

There are 3 basic steps to follow when hiring an independent contractor.

1. Carefully conduct interviews.

While there is no one-size-fits-all way of conducting interviews, handling them with care can prevent any confusion among candidates. Employee interviews often involve questions about character traits to gauge how a candidate may contribute to company culture. Since contractors will not be an integral part of your company, it’s best practice to avoid these questions.

Instead, treat these interviews like business transactions. Find out how a candidate can complete a job by learning about their skills and experience related to the project.

2. Create a service agreement.

A service agreement outlines the conditions and requirements for both parties to successfully complete the project. This agreement should include:

  1. Pay rate and arrangements
  2. A description of the project and due date
  3. Termination terms

3. Introduce necessities.

Training and onboarding can signify employer control, which doesn’t apply to independent contractors. Instead, focus on introducing necessities for the project. These necessities might include providing important company contacts or introducing any workflows the contractor needs to complete the project.

How to pay independent contractors in the Philippines

Rather than receiving wages, independent contractors charge for their services. The service agreement should outline the payment arrangement between both parties, but the contractor is responsible for providing an invoice for all payments.

Employers generally are not responsible for remitting SSS contributions for genuine independent contractors. Contractors are usually treated as self-employed, but misclassification can create employer liabilities.

Terminating independent contractors

Genuine independent contractors generally do not have the same statutory termination protections as employees. Termination is primarily governed by the service agreement, including agreed notice periods, termination grounds, payment obligations, and post-termination duties. If the worker is an employee in substance, employee termination protections may apply regardless of the contract label.

Turn to G-P when hiring independent contractors in the Philippines.

As a part of our #1 suite of global employment products, G-P Contractor™ allows companies to hire and pay global contractors faster, with self-service workflows and a wide set of flexible payment options. Whether you’re hiring employees or contractors, our platform streamlines the process with a single solution for your global workforce.

Contact us to learn more.