Employee vs. Contractor: How to Classify Workers in the Philippines (Quiz included) [2024]
When hiring workers in the Philippines, it's crucial to classify them correctly—otherwise, you risk significant penalties.
Philippine authorities can crack down on the misclassification of workers, and order companies to pay millions of PHP in back taxes and fines.
Misclassification is also damaging for workers: It cheats employees out of benefits and protections they're entitled to under Philippine law, such as minimum wage, overtime pay, vacation pay, and employment insurance benefits. This has a negative impact on the company’s reputation, too.
Learn about how to classify your workers correctly—and stay compliant with Philippine labor code and employment laws—in this guide.
Classifying workers in the Philippines
The Department of Labor and Employment categorizes Filipino employees and contractors differently—and classifying them correctly can be the difference between smoothly running your global team and racking up huge fines and penalties (more on those below).
What is an employee in the Philippines?
In the Philippines, an employee is defined as an individual who works for an employer in return for wages or other remuneration. Employees are defined by various federal and provincial laws, but the most important distinction is that the Philippines' robust worker protection laws always apply to employees—meaning they're always entitled to statutory benefits, including:
- Retirement
- Sick leave
- Vacation pay
- Holiday pay
- Unemployment insurance
- Health insurance
- Parental leave
- 13th-month pay
What is a contractor in the Philippines?
In the Philippines, a contractor is defined as an individual who provides services to a business or organization, but who is not an employee of that business or organization. Independent contractors are also known as self-employed individuals, consultants, or freelancers.
Worker classification overview: Employees vs contractors in the Philippines
Contractors
Employees
High level of worker control. Contractors are generally given more autonomy to determine how to complete the work and when to do it.
More direction from the employer. Employees are generally subject to more control and direction from their employer, who will provide guidance on how to perform the work and may set specific hours of work.
Equipment and tools are owned by the worker.
Equipment and tools are typically provided by the company.
Less integrated. Contractors tend to be independent, they’re more likely to work remotely, and they use their own tools and equipment.
Highly integrated. Employees are typically more integrated into the employer's organization, for example, they may work at the employer's premises.
No entitlement to benefits. Contractors are not entitled to the same benefits and protections as employees, and they are responsible for paying their own taxes (including income taxes and social security contributions).
Entitled to benefits. Employees are entitled to certain employment benefits and protections, such as minimum wage, overtime pay, and vacation pay. They may also be entitled to benefits like health insurance, retirement plans, and paid sick leave.
Time-bound engagement. Contractors are typically engaged for a specific project or period of time.
Indefinite engagement. Employees are generally hired for an indefinite period of time.
Limited termination protections. Contractors can be terminated due to breaches of their underlying contract.
Disciplinary processes. Employees can only be dismissed for authorized causes and must go through necessary termination procedures.
Non-exclusive services. Contractors cannot be contractually bound to a single company; they can provide their services to more than one organization.
Exclusive services. Employees can be contractually bound to provide services to just one company.
Tests to classify workers in the Philippines
If you want to classify workers yourself, the Philippines uses a “four-fold” test to distinguish employees from independent contractors. The four main criteria are:
- Power of control
- Power of dismissal
- Selection and engagement of the employee
- Payment of wages
Keep in mind that in a dispute, Philippine courts and tax authorities look at all aspects of the working relationship, and no single factor should be considered conclusive for classifying a worker.
That said, the “control test,” is the most common factor that determines the working arrangement. In the Philippines, an employee-employer relationship exists when a company has power over how a worker goes about completing a task (for instance, mandating they work in the office on company computers from 9 a.m. to 5 p.m. every day). Contractors, on the other hand, can set their own hours and work autonomously.
Courts look at written agreements to assess the scope of the working relationship between both parties, but can also look at the relationship in action. In the Philippines, the two main components that suggest an independent contracting arrangement are:
- The worker has a distinct business separate from the company.
- The worker performs tasks autonomously, without supervision from the company.
Penalties for misclassifying workers in the Philippines
Businesses found to have misclassified employees as contractors in the Philippines face serious financial risk. Here are some of the potential costs, fines, and penalties:
- Back pay and benefits reimbursement if a worker was terminated.
- Court-ordered damages of up to PHP 500,000, plus associated attorney fees.
- Separate monetary fines and possible prison sentences to companies who don’t make necessary contributions to entitlement programs such as the Social Security System (SSS), the Home Development Mutual Fund (also known as the Pag-IBIG fund), and the Philippine Health Insurance Corporation (PhilHealth).
- Additional interest fees and fines until the unpaid contributions are settled.
There's more than just the financial risk. Companies found misclassifying workers can suffer other consequences, such as legal disputes, reputational damage, difficulty recruiting new workers, negative impact on employee morale, and increased scrutiny from government agencies.
The Bureau of Internal Revenue (BIR) and other Philippine authorities are motivated to audit and investigate businesses they suspect are misclassifying workers so they can increase their tax revenue. Misclassification, whether accidental or intentional, is risky and potentially very costly.
Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.
