The Legal Framework of Employment in the Philippines: How an Employer of Record Keeps You Compliant

Expanding your business into the Philippines offers significant opportunities to hire from a large, skilled, and cost-effective workforce. However, navigating the local legal framework—ranging from labor laws and tax obligations to complex compliance challenges, can be daunting for foreign companies looking to hire locally. An Employer of Record (EOR), such as Cadana, simplifies these complexities by managing every aspect of local employment, allowing you to focus on growing your business with confidence.

Understanding the Local Labor Laws

Employment Contracts and Working Conditions

• Written Agreements: While not always mandatory, written employment contracts are considered best practice in the Philippines. They should clearly outline job responsibilities, compensation, working hours, leave entitlements, and termination procedures.
• Working Hours and Overtime: The Philippines sets standards for daily and weekly working hours. Overtime work exceeding 8 hours/day or 40 hours/week must be compensated at 125% of the regular hourly rate, ensuring that all hires are treated fairly.
• Employee Protections: Laws protect employees against unfair dismissal, mandate safe working conditions, and provide for benefits such as paid leave, sick leave, and maternity leave. These laws are designed to promote a healthy work environment and safeguard workers’ rights.

Statutory Benefits

• Social Security System (SSS): Employers and employees contribute to the SSS to provide retirement, disability, and other social benefits. For example, SSS contributions total 16% of salary (12% employer, 4% employee).
• PhilHealth: This mandatory health insurance program ensures that employees have access to essential healthcare services. Contributions are 6% of salary (4% employer, 2% employee).
• Pag-IBIG Fund: Also known as the Home Development Mutual Fund, it supports employees with housing loans and savings programs. Contributions are 4% of salary (2% employer, 2% employee).

Navigating Tax Obligations

Income Tax (PAYE)

• Progressive Tax System: The Philippines employs a progressive tax system with brackets updated annually. For example, in 2023, income up to ₱250,000 is taxed at 0%, while higher brackets apply up to 32%.
• Tax Deductions: Employers must withhold the appropriate amount of tax from employee salaries and remit it to the Bureau of Internal Revenue (BIR) on a monthly basis.

Other Payroll Deductions

• Social Contributions: Besides income tax, employers must also manage contributions to the SSS, PhilHealth, and Pag-IBIG Fund.
• Compliance Reporting: Timely submission of payroll reports and tax filings is critical to avoid penalties and ensure smooth operations.

Compliance Challenges for Foreign Businesses

Complex Regulatory Environment

• Varying Standards: Local labor laws in the Philippines can be detailed and vary by industry, making it challenging to stay updated on every regulation.
• Strict Enforcement: The Philippine government enforces labor and tax laws rigorously. Non-compliance risks penalties from the Department of Labor and Employment (DOLE), including fines and criminal charges for severe violations.
• Administrative Burden: Managing employment contracts, processing payroll, and ensuring timely tax filings require specialized knowledge and resources.

Risk of Non-Compliance

• Legal Penalties: Failing to adhere to statutory requirements may result in fines and sanctions from local authorities.
• Employee Disputes: Missteps in handling contracts or benefits can lead to grievances and legal disputes, disrupting operations and affecting your brand’s reputation.

How an Employer of Record (EOR) Like Cadana Helps

An Employer of Record (EOR) acts as your local legal entity, taking on the role of employer and assuming responsibility for all HR, payroll, and compliance functions. Here’s how Cadana, as your EOR partner in the Philippines, can help ensure compliance:

1. Legally Compliant Hiring and Employment Contracts

• Contract Management: Cadana helps draft and manage employment contracts that fully comply with Philippine labor laws, ensuring clarity and consistency for every hire.
• Local Expertise: Their in-country legal experts understand the nuances of local regulations, ensuring that your contracts and employment practices meet all requirements.

2. Streamlined Payroll and Tax Management

• Accurate Salary Processing: Cadana handles monthly payroll, ensuring that salaries are calculated correctly, and statutory deductions (including income tax, SSS, PhilHealth, and Pag-IBIG) are applied.
• Timely Tax Filings: The EOR ensures that all payroll taxes and contributions are remitted on schedule, keeping your business in good standing with the BIR and other regulatory bodies.
• Automated Systems: Advanced payroll systems reduce the risk of human error and provide transparent reporting, making it easier to monitor compliance.

3. Comprehensive Compliance and Risk Mitigation

• Ongoing Regulatory Updates: Cadana keeps abreast of changes in Philippine labor laws and tax regulations, ensuring that your employment practices remain compliant.
• Expert HR Support: With local HR support, any employee issues or disputes are managed professionally, minimizing legal risks.
• Reduced Administrative Burden: By outsourcing HR and payroll functions, you can avoid the complexities of setting up a local entity, allowing you to focus on your core business activities.

Summary

Understanding and complying with the legal framework of employment in the Philippines is essential for any international business looking to expand into this vibrant market. An Employer of Record, like Cadana, offers a comprehensive solution by handling everything from drafting compliant employment contracts to managing payroll and ensuring tax and statutory contributions are accurately processed.

By partnering with an EOR, you can confidently hire in the Philippines, knowing that every aspect of local compliance is expertly managed. This enables you to focus on growing your business and capturing new market opportunities without the administrative and legal burdens of local employment.

Ready to expand your workforce in the Philippines? Partner with Cadana today and experience seamless hiring and compliance support as you scale your business internationally.