Guide to Professional Employer Organization in the Philippines

Professional Employer Organizations (PEOs) are crucial for expanding your operations in the Philippines. By partnering with a PEO, you can outsource critical HR functions such as payroll processing, benefits administration, recruitment, and compliance management. This outsourcing model is suited for foreign businesses who want to expand into the country without establishing a legal entity. 

Startups, small-medium enterprises (SMEs) use PEOs to hire remote workers and freelancers to ensure legal compliance with the Philippine labor code. In a country where  labor laws are strict and complex, a PEO can simplify the onboarding process for you. 

In this article, we will learn about PEOs in the Philippines. We will outline its advantages and limitations, as well as alternative HR models. 

What is PEO in the Philippines and How Does it Work?

A PEO in the Philippines is a third-party company that enters into a co-employment relationship to share employer responsibilities. This includes HR, payroll, benefits, and compliance tasks while you retain control over business operations and employee management. 

With a co-employment model, you and the PEO share employer responsibilities and liabilities. Here is an overview of you and your PEO’s division of roles:

In other words, the PEO acts as a partner sharing employer responsibilities with your company. The PEO manages HR administration, compliance, payroll, and benefits, while you manage employee career growth, and core business operations. 

Advantages and Limitations of a PEO in the Philippines

Benefits of Using a PEO in the Philippines

Using a PEO in the Philippines provides plenty of benefits for companies who want to expand in the country. Here are key benefits: 

• Cost Efficiency: thanks to favorable currency exchange rates and low cost of living, using a PEO in the Philippines is more cost-effective. Salaries for experienced professionals are significantly lower compared to those in the West. For example, a typical salary for a front-end developer is about PHP 40,000 (~USD 700) depending on experience, while hiring in the US will cost you upwards of USD $9,200 per month.
• Access to skilled professionals: you get access to the Philippine’s skilled and educated workforce. The Philippines boasts a 96.29% literacy rate and is one of the best countries in Asia for English proficiency.  English remains a dominant language in education, government, business, and formal settings, contributing to the country’s strong bilingual capabilities.
• Streamlined HR and Payroll Management: a PEO reduces repetitive paperwork and administration by handling all time-consuming HR functions and freeing up internal resources. Tasks such as payroll processing, tax filings, employee onboarding, and benefits administration will all be handled by the PEO.
• Compliance with the Philippine Labor Code: Employment laws in the Philippines can be complicated and frequently changing. PEOs provide expert assistance to ensure compliance with labor laws, tax regulations, and employee-related legal requirements.
• Enhanced Employee Benefits and Development: PEOs give you access to competitive employee benefits packages such as health insurance (medical, dental, vision), life insurance, retirement plans, and other perks that might be difficult or costly for smaller companies to provide independently.
• Risk Mitigation and Liability Sharing: In a co-employment model, the PEO assumes responsibility for workers’ compensation, unemployment claims, and other employment-related liabilities, reducing the client company’s exposure to risks.
• Faster and Easier Hiring and Expansion: PEOs simplify the hiring process in the Philippines, by managing onboarding and compliance without the immediate need to establish a local legal entity. For example, RecruitGo can onboard employees in as fast as 3 days.

Challenges and Limitations of PEOs in the Philippines

While a PEO in the Philippines provides plenty of benefits, there are some challenges and limitations that you should consider before engaging in a partnership with a PEO. This model is generally more suitable for small to mid-sized companies or those with short-term presence in the Philippines. Companies planning to expand beyond the Philippines need to engage multiple PEOs, which can strain resources and complicate compliance. 

Here are challenges and limitations that you should consider before outsourcing your staff with a PEO: 

• Legal and Compliance Risks: because you are co-managing together with your PEO partner, you still retain some legal responsibility. If the PEO fails to comply with tax remittances or labor requirements, you can be held liable for penalties and legal issues. This shared liability can create ambiguity and risk.
• Loss of Control and Flexibility: Working with a PEO means sharing HR decision-making authority. This can slow down processes and limit your ability to act swiftly on HR matters such as performance management or benefits selection. For example, if the PEO chooses a different benefits provider than the company prefers, the company has little say in the matter.
• Cost and Fee Transparency: PEO services often come with fees that may not be fully transparent upfront, including additional costs that can impact budgeting and financial planning. Fees may also increase as the company rapidly expands its workforce, making costs unpredictable.
• Variability in Service Scope and Quality: Not all PEOs offer the same range of services. Finding a PEO that offers a full suite of services aligned with the company’s needs can be difficult, especially if hiring across multiple countries.
• Potential Impact on Company Culture and Employee Experience: Outsourcing HR functions to a PEO can affect employee access to HR services. Consequently, it may negatively influence morale and engagement if employees feel disconnected from the company’s internal culture.
• Challenges in Transition and Role Overlaps: Switching to a PEO model can be bumpy if there is no clear delineation between existing staff roles and the PEO’s responsibilities. This can potentially cause confusion or overlap in job functions in your company.

Employer of Record (EOR) – An Alternative to PEO

Another model you should consider when outsourcing staff in the Philippines is Employer of Record (EOR). Like a PEO, an EOR is a third-party organization that assumes all legal responsibilities related to employment of your Filipino staff. This arrangement allows your company to hire and manage employees in the Philippines without establishing a local legal entity. 

Here are key responsibilities of an EOR in the Philippines: 

• Acts as the official legal employer of your workforce in the Philippines.
• Ensures compliance with local labor laws, tax regulations, and employment standards.
• Manages payroll, tax filings, and employee benefits administration.
• Obtains necessary work permits and handles regulatory compliance.
• Handles employee onboarding, contracts, and offboarding.
• Assumes full legal liability and employment risks related to the workforce.

Unlike a PEO, an EOR completely assumes all legal liabilities of your staff. This means, your EOR partner will manage all aspects of hiring, onboarding, and administration while you maintain management and make decisions on core business matters. 

Here is an overview of the difference between an EOR and a PEO in the Philippines:

RecruitGo’s EOR service in the Philippines provides a turnkey solution for companies wanting to hire employees locally. We offer full legal employment services and assume all compliance risks. With our in-depth knowledge in the Philippine’s local labor laws and workforce, you can instantly build a global team in the country. 

Know more about RecruitGo’s end-to-end staffing solutions in the Philippines with our local experts. Fill out the form below!

Frequently asked questions

Yes, engage with a PEO in the Philippines, you must have a local legal entity. A PEO operates under a co-employment model, meaning you share employer responsibilities with the PEO. Because a PEO does not assume full legal employer status over your staff, you need to have a registered business entity in the country.

The PEO typically manages payroll processing, tax filings, benefits administration, and ensures compliance with local labor regulations. However, your company retains legal obligations and risks, including potential penalties for any compliance errors or labor law violations. While the PEO handles many administrative and HR functions, your business remains liable for employment-related legal issues, sharing the risk and compliance duties with the PEO.

The PEO does not control your employees’ daily work or salary decisions. While the PEO becomes the legal employer for tax and payroll purposes under a co-employment model, your company retains full operational control over employees. The PEO handles administrative functions but it does not have authority over how employees perform their work or make decisions regarding their salaries and working hours.

Your company retains the primary responsibility for managing their performance. If your employee is not meeting expectations under the PEO, you are responsible for implementing performance management strategies such as setting clear objectives, providing regular feedback, and, if necessary, initiating performance improvement plans. It will be your decision to coach, impart disciplinary actions, or terminate your employee.