The benefits of employment contracts for Philippine freelancers

In recent years, freelancing has seen exponential growth in the Philippines, due in part to the combination of the flexibility and variety brought on by the Gig economy with the country’s lower cost of living, high English proficiency, and available talent in traditionally more flexible roles.

Despite the popularity of this work style, some significant drawbacks can make it a less secure means of conducting business. If you are a freelancer in the Philippines, this article will help you understand how employment contracts can be more beneficial to you than standard freelance gigs.

Navigating the different types of employment contracts in the Philippines

Standard employment contracts for full-time employees in the Philippines

Standard employment contracts in the Philippines are usually determined bilaterally through negotiation between the employer and the prospective employee. Labor law in the Philippines establishes several different types of employment contracts, each having specific provisions and validity terms:

1. Regular or Permanent Contract: Standard contract for hiring an employee for an indefinite period. Typically includes full employment benefits and protections required by the labor code.
2. Project-based contract: Used for hiring employees for a specific project or undertaking. The contract validity ends upon project completion. This type of contract allows for annual renewals.
3. Contractual contract: Applies to hiring employees to perform specific roles for a fixed term or duration, with start and end dates being specifically defined within the contract. The contract can be renewed or extended at the employer’s discretion.

Service contracts established with Philippines freelancers

The Philippines’ gig economy has seen one of the fastest growths within international markets, with an estimated 1.5 million workers currently working within it. As such, labor regulations in the country include two types of employment contracts that apply specifically to the hiring of Philippine freelancers:

1. Consultancy contract: Established to hire a consultant or freelancer to provide a company with specialized services, expertise, or advice on a project or specific task. These contracts typically outline roles, deliverables, compensation, and terms.
2. Freelance contract: Employment arrangement where individuals work independently on a project or task basis. Freelancers or independent contractors hired under this type of contract are not considered full-time employees of the company.

Unlike traditional employees, freelancers generally have more flexibility in choosing projects, setting schedules, and determining compensation rates. The most common roles for Philippines freelancers are writing, graphic design, programming, and consulting.

Common misconceptions about hiring Philipines freelancers through a third party 

Overview of statutory tax and social contributions in the Philippines

The Philippines’ labor code requires employers and employees to contribute a specific amount of an employee’s earnings towards mandatory tax and social security benefits. For regular employment contracts, these contributions are shared between both parties, with the employer paying the larger sum:

*Depends on the annual salary bracket

Statutory contributions are calculated by the employer during payroll processing. Calculations must be applied accurately to avoid underpaying, which can result in added fees. To dive a little deeper into this topic, take a look at our related article on the cost of hiring employees in the Philippines.

How different employment contracts in the Philippines affect contribution responsibilities

As mentioned previously, for standard employment contracts, the contribution responsibilities are shared by both parties. However, freelancers and self-employed individuals are responsible for calculating and settling the total contribution amount on their own. This results in freelancers having to contribute more of their overall earnings towards mandatory social contributions.

It is a common misconception in the Philippines that employees hired through Agencies and Employer of Records (EOR) are responsible for the complete amount of the contributions. This is inaccurate as the contributions are dependent on the type of employment contract, therefore as long as you have a regular, project-based, or contractual contract, you only pay your share.

The only difference for employees hired through a third party is the legal employer. Typically, EORs and agencies will manage the employee payroll based on the information provided by the hiring party. For example, RecruitGo’s EOR service will ensure that contributions are calculated accurately based on the salary for both the hiring employer and the employee.

Consequences of failing to report and pay contributions

It is common for Philippines freelancers to incorrectly assume that they are not required to contribute towards mandatory insurance and taxes, due to not having a legal employer. As these individuals are legally considered self-employed, they assume the responsibility that usually falls on the employer. 

Failure to pay mandatory contributions in the Philippines is illegal and can lead to several consequences, such as fines and prosecutions. It can also result in an individual being ineligible for coverage under the concerned insurance plans. This can lead to rejected medical expense reimbursement, as well as limited social security.

Keep in mind that potential audits conducted by the Department of Labor and Employment (DOLE) can incur fines on top of payment arrears for all denied benefits. Freelancers are also less likely to be approved for financial loans such as mortgages and car leases, due to the lack of income security.

How an Employer of Record can merge the flexibility of freelancing and the stability of employment contracts

If you are a freelancer in the Philippines and you are interested in taking advantage of some of the benefits of employment contracts, RecruitGo can assist you in finding a suitable employer, and also to determine the most mutually beneficial contract type. For example, it is possible to maintain a flexible work style while also establishing stability through the contractual contract:

RecruitGo’s team of local advisors can walk you through every step of the recruitment process in the Philippines, including proper payroll administration. For employers looking to hire in popular freelance roles, we can also help in setting up remote working hubs for local teams. To get started, contact us via the form below to set up a consultation with one of our specialists!