Foreign companies have two options in hiring Filipinos in the Philippines to work remotely for the foreign company—start a company or hire freelancers. Such hiring practice is an industry in itself in the Philippines. This industry is called the Business Process Outsourcing industry.
Our Experience and The Industry
Our firm, Respicio & Co. Law Firm, advises a number of companies in the industry. The Philippines has a thriving business process outsourcing (BPO) industry.
Many BPOs (the hiring company) have offices in the Philippines. They take advantage, mainly, of the tax incentives provided by the government. They also find that managing employees is easier administratively and from a project management standpoint if the company has a presence in the Philippines.
BPOs that maintain a presence in the Philippines obtain a license from the Securities and Exchange Commission (SEC) as a branch office of a foreign company or as an independent company, which can stand as a subsidiary of a foreign company. These companies also have to register with the local government authorities, tax authorities, and social security and housing agencies, among others. Many of these legal responsibilities are brought about by having employees. BPOs in the Philippines hire Filipinos as employees, as distinguished from independent contractors.
Coming with these legal responsibilities are legal compliance requirements that are paid or submitted to various government agencies. Compliance activities are performed every month. They include the payment of taxes and social contributions and the submission of reports. The cost of these requirements is expensive for BPOs maintaining many employees.
The biggest concern of local BPOs is their exposure to labor cases. To start, the Philippines has a broad list of labor standards that must be complied with, such as premium night pays and statutory bonuses. But the greater concern when it comes to cost is labor cases lodged by departed employees. Employees in the Philippines enjoy the security of tenure. They may not be terminated by will but only upon the just causes provided by the Labor Code. These causes primarily pertain to serious professional inadequacy and offenses against the company. Minor work infractions are generally forgiven by jurisprudence. Most of the issues in labor cases revolve around whether the facts causing the separation warrant it.
The largest portion of the cost of a labor case lost by the company is back wages. The employee is awarded back wages as though the employee had been entitled to his salary from the moment of separation until the finality of judgment. Illegal termination cases run on average for about two years.
There is an incentive for the companies to settle labor cases. While their case may be strong, the risk of losing in the end is expensive. Many employees pursue a labor case however unmeritorious their case may be. There is no cost on their part to lose. Local BPOs implement a complex labor management and termination process to minimize the cost of labor disputes. In practice, the rate of winning and losing a labor case is 50-50, although many labor disputes are settled out of court.
It is because of all these factors that many BPOs do not establish a presence in the Philippines (foreign BPOs). There are perhaps more foreign BPOs in existence than BPOs with a presence in the Philippines. The foreign BPO’s operation with respect to its Filipino contractors involves only entering into a service contract agreement by the contractor and the foreign BPO.
The foreign BPO’s exemption from the legal requirements above mainly stems from the Filipino contractors’ not being treated as Filipino employees. As the rendering of services, like the purchase of goods, may be carried out cross-border, what governs the relationship between the foreign BPO and the Filipino contractor is the general laws of obligations and contracts of the country where they may wish to lodge a case against the other. Whereas an employee in the Philippines and his employer are subject to the labor laws discussed above.
In practice, we have not yet seen a foreign BPO prosecuted for a labor dispute upon any of the grounds discussed above. It is perhaps because of the practical difficulty of obtaining jurisdiction over the person of the foreign BPO that is not in the Philippine jurisdiction or perhaps because the theory of employer-employee relationship between a foreign BPO and a Filipino contractor has not been recognized yet in Philippine jurisprudence. In addition to these, a lawyer may be reluctant to advocate the theory because it is plainly without merit under prevailing industry practice vis-a-vis the legal test for the existence of an employment relationship.
Under Philippine jurisprudence, an employer-employee relationship exists if the employer controls the means of the work of the employee as distinguished from the result of the work. Such control implies continual monitoring of employee execution with the power to actively order amendment of work as it is performed. Where in the beginning a definition of the result is specified and the manner of work is advised, there is no control. The company may comment on the delivered service by the contractor in the end and suggest changes thereon. There is no employment relationship in this case.
It is from these considerations that many foreign BPOs obtained confidence to hire Filipinos as contractors. This practice is prevalent and thriving.
By:
Atty. Harold Respicio, C.P.A.
Managing Partner
harold@respicio.ph
+639178588564
www.respicio.ph
Respicio & Co. Law Firm, 10th Fl., One World Place, 32nd St., Bonifacio Global City, Taguig, Philippines 1630