Employer of Record (EOR) Philippines

Employment Contracts in Philippines

In the Philippines, employment contracts play a crucial role in establishing the terms and conditions of the relationship between employers and employees. These agreements not only ensure compliance with local labor laws but also provide clarity and transparency regarding each party’s responsibilities. For businesses operating in the country, understanding the various types of employment contracts is essential for creating fair and legally compliant arrangements.

Types of Employment Agreements:

• Fixed-Term Employment Agreement: A fixed-term contract is designed for a specific duration, with an explicitly stated end date. This type of agreement is typically used for temporary roles, project-based work, or seasonal employment needs.
• Indefinite Employment Agreement: The most common type of employment contract in the Philippines, an indefinite agreement does not have a set end date. It remains active until the employee or employer decides to terminate the relationship, making it ideal for permanent, full-time positions.
• Part-Time Employment Agreement: This agreement outlines reduced working hours compared to a full-time schedule. Part-time employees are compensated on an hourly basis and may not always be entitled to the same benefits as full-time staff, depending on company policies and labor laws.
• Freelance or Consulting Agreement: Designed for independent contractors or freelancers, this type of contract specifies the scope of work, payment terms, and conditions for short-term or one-off projects. It emphasizes the contractor’s independent status and limited affiliation with the company.

Working Hours

Under Philippine labor laws, employees are generally required to work no more than eight (8) hours per day, excluding a one (1) hour lunch break. However, there is no legal restriction against working fewer than eight hours if agreed upon by both the employer and the employee.

13th Month Salary

In the Philippines, the 13th-month pay is a government-mandated benefit aimed at supporting employees financially, particularly during the holiday season. It is calculated as one-twelfth (1/12) of the total basic salary an employee has earned over the calendar year.

How to Calculate 13th-Month Pay

The computation process is straightforward:
13th-Month Pay = Total Annual Basic Salary ÷ 12

Components Included in the Calculation

The calculation of the 13th-month pay is based on the “basic salary,” which refers to specific earnings tied directly to the employee’s services. Here’s what is generally included:

• Basic Salary: The fixed amount paid to an employee for work performed. It excludes other forms of compensation, such as bonuses, overtime, or other discretionary payments, unless these are explicitly integrated into the basic pay.
• Cost-of-Living Allowance (COLA): COLA is included in the computation only when it forms part of the employee’s basic pay structure as per agreements or policies.
• Other Salary-Integrated Benefits: Certain benefits, such as allowances, may be included if company policies, collective bargaining agreements, or longstanding practices consider them part of the basic salary. These must be consistent and regularly provided to be factored into the computation.

Termination, Notice Period and Severance Pay

In the Philippines, terminating an employment contract involves a structured process with distinct legal requirements, depending on the circumstances surrounding the termination. These circumstances are generally categorized into three main types: dismissal by the employer for valid reasons, termination due to authorized causes, and voluntary resignation by the employee. Understanding these different scenarios and their legal implications is crucial for both employers and employees to ensure a fair and lawful process.

Dismissal by the Employer for Authorized Causes

On the other hand, authorized causes for dismissal occur due to external factors, often unrelated to the employee’s actions. These include business-related reasons such as the introduction of labor-saving technologies, redundancy where positions are no longer required, or organizational restructuring aimed at preventing losses. Additionally, terminations can happen due to the permanent closure of the business or the employee’s health conditions, such as illness or disability, which affect their ability to perform their job. In such cases, the termination is not a result of the employee’s misconduct, but rather operational or health-related needs of the employer.

Dismissal by the Employer for Valid Causes

In the Philippines, employers have the legal right to terminate employees based on certain justifiable reasons. Valid causes for dismissal include serious misconduct, fraud, immoral behavior, and physical assault. Other grounds for termination may include repeated violations of company policies, willful disobedience to lawful orders, or a breach of trust. Additionally, theft, dishonesty, substance abuse in the workplace, and committing crimes against the employer or their family are considered valid reasons for termination. Such actions directly breach the expected standards of conduct and ethical behavior in the workplace.

Procedures for Termination in the Philippines

The termination procedures in the Philippines differ based on whether the dismissal is due to valid causes or authorized causes, and both employers and employees must adhere to the legal process. For valid cause dismissals, the employer must establish a legitimate reason, gather supporting evidence, and provide the employee with a notice of termination outlining the cause and circumstances, along with relevant documentation. The employee must be given an opportunity to explain within a specified time frame, usually 5 days, after which a final decision is made. In the case of authorized cause dismissals, the employer must identify the grounds for termination, provide written notice to the employee at least 30 days in advance, and submit a copy to the Department of Labor and Employment (DOLE). Employees terminated for authorized causes are entitled to separation pay in accordance with DOLE guidelines.

Severance Pay

Severance pay is compensation provided to employees who are terminated due to authorized causes such as illness or business closure. The amount of severance pay depends on the employee’s length of service and the reason for the termination.

Who Is Not Entitled to Severance Pay?

Employees who voluntarily resign are generally not eligible for severance pay. However, exceptions may exist if separation pay is stipulated in the employment contract, collective bargaining agreement, or company policy.

Notice Period

In the Philippines, both employers and employees are required to follow specific notice period protocols when ending an employment contract, except in cases of dismissal for just causes where no notice is needed.

• Employer Notice Period: If an employer intends to terminate an employee due to authorized causes (e.g., redundancy or business closure), they must provide the employee with a written notice at least 30 days before the intended termination date. This notice must outline the reason for termination, and a copy should be sent to the Department of Labor and Employment (DOLE) office.
• Employee Notice Period: If an employee chooses to resign without just cause, they must give their employer at least 30 days’ notice in writing. This allows the employer to manage the transition and avoid work disruption. If the employee fails to provide the required notice, they may be held responsible for damages incurred by the employer due to the sudden departure.

However, if an employee resigns with just cause (e.g., due to severe mistreatment), they are not obligated to provide advance notice.

Employees vs Independent Contractors Compliance

In the Philippines, the legal and regulatory requirements for hiring independent contractors and employees differ significantly. Understanding these differences is crucial for businesses to ensure compliance with the law. Independent contractors are typically engaged for specific tasks or projects, with flexibility and less oversight from the hiring company. They are responsible for their own taxes, tools, and equipment, and are free to work with other clients. On the other hand, employees are considered permanent members of an organization and enjoy various statutory benefits, including social security, health insurance, and paid leaves. Employers must comply with labor laws, such as minimum wage regulations, and ensure the provision of a safe working environment. Below is a comparison table highlighting the key distinctions between independent contractors and employees in the Philippines.

Understanding these distinctions helps employers navigate their legal obligations and classify their workers correctly, ensuring smooth operations and compliance with Philippine labor laws.

Social Security in Philippines

The Social Security System (SSS) provides crucial financial support in times of need, from sickness to retirement. For 2024, understanding the updated contribution rates, how to calculate your share, and when to pay is essential for both employees and employers.

SSS Contribution Rate for 2024

In 2024, the SSS contribution rate is 14% of an employee’s monthly salary, split between the employer and employee:

• Employer’s share: 9.5%
• Employee’s share: 4.5%

This rate applies to monthly earnings from ₱4,000 to ₱30,000. While a further increase to 15% was proposed, it has been delayed, so the 14% rate remains for the year.

How to Calculate SSS Contributions

• Employees: Contributions are based on salary, with the employer deducting and remitting both shares. For example, with a ₱20,000 monthly salary, the total contribution is ₱2,800 (₱1,900 from the employer and ₱900 from the employee).
• Self-employed/Voluntary Members: Contributions are based on declared income. For a declared income of ₱4,000, the total contribution is ₱560.
• Non-working Spouses: The contribution is 14% of half the working spouse’s salary credit. For a spouse with a ₱15,000 salary credit, the contribution is ₱1,050.

When to Pay SSS Contributions

• Employees: Payments are made by the employer on behalf of the employee and are due by the end of the following month.
• Self-employed/Voluntary Members: Contributions are also due by the end of the following month for monthly payments.
• Household Employers & OFWs: Payments are due by the end of the month after the applicable period, with flexibility for how often contributions are paid.

Paying on time ensures you avoid penalties and maintain access to SSS benefits. Keep track of your deadlines to stay compliant throughout the year.

Payroll in Philippines

Minimum Wage Adjustments

In 2024, the daily minimum wage in Metro Manila saw an increase of ₱35, bringing the new range between ₱608 and ₱645 depending on the industry. Each region in the Philippines sets its own minimum wage, determined by the Regional Tripartite Wages and Productivity Board (RTWPB). While the Bangsamoro Autonomous Region in Muslim Mindanao (BARMM) has the lowest wage rate, the National Capital Region (NCR) offers the highest minimum wage in the country.

Payroll Cycle Regulations

The payroll cycle in the Philippines refers to the regular period at which employees are paid. The Department of Labor and Employment (DOLE) mandates that all workers must be paid at least twice a month, with a maximum gap of 16 days between payments. The standard payroll cycle for most companies follows a bi-monthly schedule, with paydays on the 15th and the last day of each month.

Overtime Compensation

Employees working overtime in the Philippines are entitled to 125% of their regular hourly rate. For work done on rest days or holidays, the overtime pay increases to 130% of their daily rate. It’s essential to understand that pay rates for rest days and holidays differ from the regular daily wage.

Mercans’ Payroll Capabilities

• Payroll Cycle Management in the Philippines: Mercans offers a seamless payroll cycle management solution that ensures timely and accurate payments to your employees and contractors in the local currency. With our services, your payroll process becomes efficient and fully localized, making it a stress-free experience for businesses in the Philippines.
• Payroll Setup, Processing, and Administration: Mercans provides complete payroll services, from careful setup to precise processing and smooth administration. Our expert team handles every detail with a focus on accuracy and compliance, allowing you to focus on what matters most—your business operations—while we manage your payroll efficiently.
• Statutory Filings and Payments: Stay compliant with all Philippine regulations with Mercans’ help. We take on the responsibility of managing your statutory filings and payments, ensuring that your business adheres to legal requirements. Our team ensures timely and accurate submissions, so you can have peace of mind knowing your compliance obligations are in capable hands.

Personal Income Tax in Philippines

Personal income tax in the Philippines is a progressive tax system that applies to individuals based on their income level and residency status. Resident citizens are taxed on their worldwide income, while non-residents are taxed only on income sourced within the country. The tax structure varies depending on whether the income is from compensation, business, or passive sources.

Tax Rates for Compensation Income

Philippines Employee Hiring Cost

When hiring in the Philippines, it’s important to consider not just the gross salary, but also additional costs that an employer must cover. These include mandatory benefits and contributions to social security, health insurance, and other statutory benefits. For instance, if you hire an employee with a gross annual salary of PHP 100,000, the total annual cost to the employer would be approximately PHP 23,543. This covers the required employer contributions for Social Security System (SSS), PhilHealth, Pag-IBIG, and other legal benefits.

This table reflects the gross salary and the additional costs for mandatory contributions that employers are required to pay in the Philippines. The total employer cost would be PHP 123,543 for an employee with a gross annual salary of PHP 100,000.

Employee Benefits in Philippines 

Employers in the Philippines provide various benefits designed to enhance the well-being, financial stability, and growth of their employees. These benefits support work-life balance and contribute to professional development. While benefits packages may differ based on the company or industry, there are several standard offerings that employers must provide.

Mandatory Employee Benefits

In the Philippines, certain employee benefits are mandated by law. These include:

• Social Security System (SSS): This program provides protection for workers through benefits such as retirement, disability, sickness, maternity, and death benefits. Contributions are shared by both employees and employers.
• PhilHealth: A government-run health insurance program that offers medical coverage. Both the employer and employee contribute a portion of the salary to this fund.
• Pag-IBIG Fund: A mandatory savings scheme that supports workers in securing housing and provides short-term loans. Both parties contribute to this fund.
• Employees’ Compensation Program (ECP): This program covers employees who suffer work-related injuries or illnesses, offering compensation for medical expenses and lost wages.
• 13th Month Pay: Employees receive an additional salary, equivalent to one-twelfth of their basic annual salary, typically paid out during December.
• Service Incentive Leave: Employees with one year of service are entitled to five days of paid leave each year.
• Holiday Pay: Employees who work on official holidays are entitled to additional pay as per the law.
• Maternity Leave: Female employees are granted 105 days of paid maternity leave, with an option for an additional 30 days of unpaid leave.
• Paternity Leave: Male employees are entitled to seven days of paid leave following the birth of their child.
• Retirement Pay: Employees who reach the age of 60 to 65 and have served at least five years are entitled to a retirement benefit based on a formula set by law.

Additional Employee Benefits

In addition to the mandatory benefits, many employers offer supplementary benefits that further support employee well-being:

• Group Life and Accident Insurance: Many employers provide life and accident insurance for employees, often in amounts 24 to 48 times the employee’s monthly salary or a lump sum.
• Disability Benefits: Employees who suffer total and permanent disabilities may receive a lump-sum payment.
• Critical Illness Coverage: Some companies offer insurance that covers a range of critical illnesses, either as a rider on a life insurance policy or as a standalone benefit.
• Medical Coverage: A large number of companies offer full coverage for medical expenses, with premiums often fully paid by the employer.
• Dental and Optical Benefits: While not as common as medical coverage, some companies include dental and optical benefits as part of their health insurance packages.
• Business Travel Insurance: Employers often purchase group travel insurance to cover employees traveling for business.

Work Permit in Philippines 

To obtain a work permit, individuals generally need to first secure an Alien Employment Permit (AEP) from the Department of Labor and Employment (DOLE). The AEP is a prerequisite for applying for the 9(g) Work Visa, which allows foreigners to legally work in the country. The process to obtain these permits requires submitting a series of documents, including a completed application form, a valid passport, an employment contract, and a business permit from the employer’s company, among others. Additionally, the employer must also provide certain certifications regarding the company’s workforce, including the number of international and local employees.

Once the AEP is approved, foreign workers can apply for the 9(g) Work Visa. The application will need to include the necessary documentation such as the employee’s passport, a certified copy of the AEP, a clearance from the Bureau of Immigration, and evidence of the employer’s business registration. The application is further supported by an employment contract and proof of the company’s legal standing, such as the Articles of Incorporation and SEC certification.

The work permit process in the Philippines ensures that foreign workers are employed within legal boundaries and that companies hiring non-nationals follow proper regulations. While there are other visa options for specific purposes, the 9(g) Work Visa remains the most common choice for expatriates seeking long-term employment in the country.

EOR Solutions in Philippines 

• EOR for Prospective Employees in the Philippines: Mercans provides tailored Employer of Record (EOR) solutions to businesses aiming to hire top talent in the Philippines. We handle every aspect of the employee lifecycle while ensuring full compliance with local labor laws, offering peace of mind and efficiency for your operations.
• EOR and Recruitment Solutions: For organizations seeking to streamline talent acquisition, we combine EOR and recruitment services into one seamless offering. By leveraging our extensive network and deep industry knowledge, we assist in attracting, hiring, and retaining the best candidates, simplifying your entry into the Philippine market.
• Visa Sponsorship and Global Mobility: Our visa sponsorship and global mobility services simplify the relocation process for international employees. We ensure your workforce remains compliant with the Philippines’ immigration and employment regulations, making cross-border employment smoother and more efficient.
• AOR for Contractor Payments: Navigating contractor payments can be complex. Our Assistance on Record (AOR) service manages all aspects of contractor payments, ensuring they are accurate and fully compliant with Philippine law, reducing administrative burdens for your business.
• Transitioning Freelancers to Full-time Employees: Mercans supports businesses in converting freelancers into permanent employees in the Philippines. With our expertise, we manage the legal and operational aspects of this transition, ensuring a smooth and compliant process.
• HCM System Integration: Streamline your workforce management by integrating Mercans’ EOR services with your existing Human Capital Management (HCM) system in the Philippines. This integration ensures real-time data flow, improved compliance, and optimized payroll operations for greater efficiency and cost-effectiveness.

Best Employer of Record Philippines 

Mercans stands out as a leading Employer of Record (EOR) in the Philippines for several important reasons:

• Full Compliance with Local Laws: Mercans ensures full adherence to Philippine labor laws and regulations, including those set by the Department of Labor and Employment (DOLE) and other relevant government bodies. This ensures that your business operates smoothly without worrying about legal compliance.
• Independent and Tailored Services: As a standalone entity, Mercans offers custom-designed employment services that cater specifically to the needs of businesses in the Philippines, providing flexibility and dependability.
• Wide-Ranging Employment Solutions: Mercans supports various employment types, including full-time employees, freelancers, contractors, and expatriates, offering flexible solutions to meet diverse workforce needs.
• Enterprise-Grade Solutions: Mercans offers scalable, sophisticated solutions ideal for large enterprises, accommodating complex business structures and ensuring seamless operations in the Philippines.
• Multi-Currency Payroll Services: Mercans manages payroll in various currencies, helping multinational companies streamline their financial processes in the Philippines.
• Global Reach with Multi-Country Payroll Expertise: With its extensive global network, Mercans excels in managing multi-country payroll, facilitating smooth operations for businesses expanding into the Philippines.
• Commitment to Data Protection: Mercans complies with the Philippine Data Privacy Act of 2012, ensuring that employee data is handled with the highest standards of security and privacy.
• ISO Certifications: Mercans holds ISO 20000 and ISO 27001 certifications, demonstrating its commitment to superior IT service management and robust information security practices.
• Strict Security Compliance: Mercans adheres to the highest security standards in application development and management, ensuring your business data is secure.
• HRBlizz Platform: Mercans’ proprietary HRBlizz platform streamlines payroll and talent management, with expert knowledge of Philippine labor laws and business protocols, helping businesses manage their workforce efficiently while staying compliant.
• G2N Nova: The G2N Nova platform supports gross-to-net payroll processing across 100+ countries, providing an advanced payroll engine that integrates seamlessly with your existing Human Capital Management (HCM) systems, ensuring smooth payroll operations for businesses in the Philippines.