- Overview: Philippines
- Global HR Compliance
- Global PEO and Payroll
- Work Permit for Hiring Expats via PEO
- Expand without a company set up
- Contractor vs. Employee: Which Is Better?
Convert Independent Contractors to Employees in the Philippines
Find out how you can make an informed decision on whether you should engage and pay employees or independent contractors using our free ‘Employee vs. Independent Contractor’ Checklist.
Designed to be used by companies engaging the remote workforce in the Philippines, the checklist is the best way to define why and in what cases companies should onboard new hires or convert existing contractors/freelancers into employees without missing any crucial aspects.
What Our Clients Are Saying?
I’d like to share my experience dealing with Acumen International company.
Speed & responsiveness: Very prompt in response to my first inquiry about converting contractors into employees to follow-up questions.
Completeness of information: I like how detailed the estimates and the transparency make us feel more confident about where the money goes.
Overall experience: I am pleased and impressed with how fast they respond to my inquiries. We can trust the company to employ the contractors we want to keep.
Quah Shen Dee,
People Success Officer
I have always found Acumen International very supportive, professional, and helpful. They pay salary on time and are always ready to sort out any issues.
I must admit I truly enjoy my time as an Acumen International employee and feel like they care about me as an individual. I have a dedicated manager that provides me with detailed explanations when it’s needed. Payments are always prompt, and the entire team does its best to respond to any of my questions.
I highly recommend Acumen International to anyone that requires their services.
Employment Tests to Determine the Correct Employee Status
Misclassifying independent contractors is a common problem for global companies looking to expand their teams. Companies can face legal and business issues if they misclassify employees, including
- Inaccurate tax reporting
- Non-compliance with local and international employment laws
- Greater likelihood of employee and insurance company lawsuits
- Decreased retention because independent contractors may feel insecure and like second-class citizens.
To mitigate these risks and ensure compliance with local labor law, companies must take action when they begin to hire or outsource their services. By following a checklist that addresses the most important issues related to working with contractors, you can be sure that your business will remain in compliance and avoid the costly consequences associated with employee misclassification.
Degree of Control
Independent contractors (freelancers) are professionals who provide services to companies under contract. They may work remotely or on-site and are typically distinguished from employees based on the degree of control exercised by the company. In general, the more control a company has over an individual, the more likely that person is an employee rather than an independent contractor.
If the client provides explicit instructions on completing a task, including what needs to be done, when it should be done, and where it should be done, this is referred to as “how, what, when, and where” testing. In these cases, the workers are usually controlled by the client and would therefore be considered employees.
One of the key distinctions between employees and contractors is that employees are typically required to complete the work that “comes down the pipe,” as stipulated in their job description.
A high degree of control over the contractor’s work or schedule might also help show that they are more like employees than independent contractors.
The employment relationship is built on two key concepts:
- that the employee is an individual and not a legal entity;
- that the employee cannot be replaced.
The employment contract is personal to the individual, based on their skills, experience, and identity. The employer hired them because of these qualities, and so they are essential to the contract.
It is implied that a worker given the right to substitute for themselves and to have work assigned to someone else is not providing a personal service and is not an employee. This would suggest that the employer can quickly replace the contractor, indicating that they do not need such a contractor personally for their business. Also, suppose the employer has the right to assign work to someone else. In that case, it means they control how many people work for them at one time and when, which would mean the contractor is not considered to be working under an employment contract but a contract of service.
Mutuality of Obligation
The concept of mutuality of obligation means that both an employer and employee have specific duties and responsibilities to each other. An employer is obligated to provide work for their employee while the employee is required to complete the assigned work.
Suppose a worker is not focused on a specific project and has to do any task allocated by the client. In that case, there is probably mutuality of obligation, and the worker is not seen as an independent contractor by tax authorities.
Financial and Entrepreneurial Risk
When examining the rights and responsibilities of an independent contractor, there is often confusion over what classifies one as an employee. Financial and entrepreneurial risk is the essential distinction between an employee and an independent contractor. If a contractor can make a profit or a loss, i.e., financial risk, this would suggest that the contractor is independent. Otherwise, they may be considered to be an employee.
OECD, Commentary on Article 5
Whether a person is independent of the enterprise represented depends on the extent of the obligations that this person has vis-à-vis the enterprise. Where the person’s commercial activities for the enterprise are subject to detailed instructions or to comprehensive control by it, such person cannot be regarded as independent of the enterprise. Another important criterion will be whether the entrepreneurial risk has to be borne by the person or by the enterprise the person represents.
An independent agent will typically be responsible to his principal for the results of his work but not subject to significant control with respect to the manner in which that work is carried out. He will not be subject to detailed instructions from the principal as to the conduct of the work. The fact that the principal is relying on the special skill and knowledge of the agent is an indication of independence.
How Tax Authorities Can Distinguish Independent Contractors from Employees
- How the parties treat each other.
- The amount of control exercised by the principal over the details of how the work is done.
- Whether payments are made by time or by results.
- Whether the work is part of the regular business of the principal.
- Whether the contract was entered into as a means of carrying on business or for any other commercial purpose.
- Whether the work requires special skills and initiative and whether such skill is peculiar to any trade or business.
- The length of time for services to be provided, and more.
- Whether the worker is taking on financial risk.
- Whether the worker is providing their own equipment.
- Whether the worker is in receipt of employment benefits.
- Whether the worker can profit from their work.
- Whether the worker has the right to terminate the contract.
- Whether the work performed requires special skills and initiative.
- The permanence or exclusivity of the relationship with the employer company.
3 Compelling Reasons to Convert Independent Contractors to Employees in the Philippines
1. Avoid Worker Misclassification Risk
It is not uncommon for an employer to misclassify an employee as an independent contractor. An employer may misclassify an employee to save on taxes, overtime, and worker compensation. Working with Independent Contractors is also an invitation to a potential lawsuit. The employer can be liable if the tax authorities come after him for employee misclassification.
The tax authorities have been cracking down on independent contractors who are not independent service providers but full-time employees. This happens when a company misclassifies an employee as an independent contractor. Workers misclassified as independent contractors are not provided with certain benefits available to employees. These include unemployment taxes and workers’ compensation insurance.
The tax benefits of hiring independent contractors are only available for employers if the contractor is treated like one. That means they should be able to negotiate with you over their hours, rates, and projects; they should have ultimate control over how and where their work is done, and they should have the freedom to offer their services to multiple employers at once and incur entrepreneurial risk. If your employee seems more like an independent contractor, you should ask yourself why you treat them like an employee and what are your potential misclassification risks.
If it turns out that your workers were misclassified, as an employer, you can be held responsible for back taxes owed on their behalf.
The tax authorities in many jurisdictions, including the Philippines, have developed multi-faceted tests to determine whether someone is an employee or an independent contractor.
2. Increase Worker Retention in the Philippines
Business owners are often tempted to save on labor costs and taxes by hiring independent contractors or freelancers in the Philippines. They are under the impression that they can avoid having to pay taxes, insurance, and benefits. The reality is that it’s almost always more expensive in the long run because once you have to let go of a great worker, you have to spend time and money recruiting and training a replacement.
An even bigger issue is that you’re not giving them a stable work environment by not treating independent contractors as employees. They may work for several different companies at once. There’s no continuity in their workday, which can lead to a lack of job satisfaction, another liability for employers.
As an employer, there are several reasons why you should convert your independent contractors into full-time employees. It shows that you value your top talent. Independent contractors might feel like second-class citizens if you only hire them part-time or as independent contractors.
The Independent Contractor is a great team member. They are exceptionally skilled at what they do and are an essential part of your team. But the economy is tough right now, so there’s a good chance you’ll lose them. You can’t afford to lose their skills and expertise.
3. An Independent Contractor Is a Valuable Team Member
- They perform exceptional work that adds value to your business.
- They bring their unique skills, expertise, and ethical attitudes to the table.
- they have specific goals and objectives that motivate them to work hard for you.
- Their work is typically high quality, and they are invested in completing it well before deadlines.
- They add to your creativity by bringing new ideas from outside your team.
How IT Companies Can Succeed In Converting Existing Contractors To Employees in the Philippines
As the IT industry largely depends on unique skills and expertise, more and more IT companies are hiring talent internationally. To help you engage and reward your international IT talent with 100% compliance regardless of their location, we have designed an innovative Express Global Employment (EGE) solution.
With its help, many companies have already benefited from choosing employment or employer-employee relations versus conventional contracting.
Express Global Employment solution gives IT companies like yours a decisive advantage in the fight for top global IT talent. By offering stability and statutory benefits of official employment, you can win high-profile IT contractors/freelancers looking to change their status to employees in the Philippines.
Companies gain maximum employee engagement and loyalty, with employees enjoying a stable workload and working on ambitious projects they might have never had as freelancers. With no need to look for new projects all the time, employed developers and other skilled IT professionals stay with one company longer, leading to lower staff turnover. In addition, when using our PEO solution, you get protected from any employee-independent contractor misclassification risks and unexpected costs.
We can help you recruit international IT talent with subsequent employment in any country worldwide if you have not found the candidates yet.
Engaging Independent Contractors with Confidence in the Philippines
Acumen Internation, a global PEO (Professional Employment Organisation), helps companies, especially those with offices in multiple countries, to prevent legal trouble by ensuring they are not misclassifying employees as independent contractors. Tax and labor laws are complicated and vary globally, making it hard for companies to know what they’re doing is right. A global PEO handles these issues for you with on-site customer support and expertise in local labor law. They also ensure that professionals are being appropriately handled for tax purposes and adhere to the complex regulations of local labor laws. This ensures that your company has the necessary infrastructure in place so that you can focus on your core areas of business without having to worry about these legal issues.
5 Benefits of Hiring and Payrolling Foreign Employees vs. Independent Contractors in the Philippines
- Engaging and paying foreign talent via a global PEO solution is about 30% cheaper than engaging in-house.
- Saves around 50% of costs compared to working and paying through your entity.
- With the help of employment, employee loyalty grows by 47%, which is why you can retain the top minds long-term.
- Legal foreign employment eliminates 95% of legal, financial, and business risks. Leveraging the global PEO (Professional Employer Organisation) solutions, you can get flexibility and take up more projects of different duration.
- You can start a bare-bones operation in the Philippines with just one or a couple of employees and easily add any headcount as you move along.
- Less time spent on recruitment, evaluation, onboarding of globally distributed teams of professionals, or a learning curve.