The Philippines is a growing hub for international businesses looking to expand operations, attract skilled talent, or outsource services. However, hiring and paying employees in the Philippines requires a comprehensive understanding of local employment laws, payroll systems, and mandatory benefits. This guide provides a detailed roadmap to help your business navigate these requirements.
1. Hiring employees in the Philippines
Recruitment and employment contracts
Employment contracts: In the Philippines, employment contracts are required and must detail the job description, salary, benefits, and working hours. Contracts can be written or verbal, but written agreements are highly recommended to avoid disputes.
Common employment types:
- Regular employment: After a six-month probationary period, employees become regular, granting them greater legal protections.
- Project-based employment: For tasks tied to a specific project with a defined end date.
- Fixed-term employment: Contracts with a predetermined period, allowed only under specific legal conditions.
- Casual employment: For temporary tasks lasting no more than 12 months.
Labour market regulations: The Department of Labor and Employment (DOLE) oversees recruitment processes, ensuring compliance with national laws and regulations.
Work permits for foreign nationals
If hiring foreign employees, they must obtain the necessary permits:
- Alien Employment Permit (AEP): Issued by DOLE, allowing foreigners to work in specific roles not easily filled by locals.
- 9(g) visa: For employees staying long-term in the Philippines.
2. Employment laws in the Philippines
Key regulations
Labour Code of the Philippines: Governs employment practices, outlining minimum wages, working hours, leave entitlements, and termination rules.
Minimum wage: Minimum wages vary by region. For example:
- In Metro Manila, the minimum wage is PHP 610/day (as of January 2025).
- Lower rates apply in rural regions.
Working hours and overtime: The standard workweek is 8 hours/day or 48 hours/week. Overtime is paid at 125% of the regular hourly rate.
Rest days: Employees are entitled to one rest day per week, typically Sunday.
Termination rules:
- Just causes: Misconduct, gross negligence, or breach of contract.
- Authorised causes: Redundancy, business closure, or illness.
Severance pay is mandatory for authorised terminations.
Anti-discrimination laws
Employers must adhere to anti-discrimination provisions, ensuring fair hiring practices regardless of gender, religion, age, or disability.
3. Payroll essentials in the Philippines
Payroll components
- Basic salary: The employee’s agreed monthly pay.
- Mandatory benefits: Include government-mandated contributions (see below).
- Deductions: Taxes and social security contributions.
Taxation
Income tax rates (progressive scale):
- 0% for income below PHP 250,000 annually.
- Rates range from 15% to 35% for higher earnings.
Employers are responsible for withholding income tax at the source and remitting it to the Bureau of Internal Revenue (BIR).
Social security contributions
Employers must deduct and contribute to the following:
- Social Security System (SSS): Covers pensions, disability, and maternity benefits.
- Employer contribution: 8.5% of monthly salary.
- Employee contribution: 4.5%.
- PhilHealth: Provides health insurance.
- Contribution rate: 4.5% of monthly salary (shared equally between employer and employee).
- Pag-IBIG Fund: A housing savings fund.
- Employer contribution: 2% of monthly salary.
- Employee contribution: 2%.
Payroll frequency
Most employers pay salaries bi-monthly (15th and 30th of the month), but weekly or monthly payments are also allowed.
4. Payroll process in the Philippines
Managing payroll in the Philippines requires compliance with local labour laws, tax regulations, and mandatory social contributions. Below is a step-by-step guide to the payroll process to help ensure accuracy and compliance:
A. Gather employee information
To set up payroll, employers must collect detailed information from employees, including:
- Full name and contact details.
- Taxpayer Identification Number (TIN): Required for income tax filings.
- Social Security System (SSS) number: For pension and other benefits.
- PhilHealth number: For healthcare coverage.
- Pag-IBIG Fund membership ID: For housing fund contributions.
- Bank account details: For salary disbursements (if applicable).
B. Calculate gross pay
Gross pay includes:
- Basic salary: The agreed-upon monthly, bi-weekly, or weekly salary.
- Overtime pay: Calculated at 125% of the hourly rate (150% for rest days or holidays).
- Bonuses: Such as the mandatory 13th-month pay or performance incentives.
- Allowances: Meal, transportation, or other taxable and non-taxable allowances.
C. Deduct employee contributions
Employers are required to withhold and remit employee contributions for the following:
- Social Security System (SSS):
- Employee contribution: 4.5% of monthly salary.
- PhilHealth:
- Employee contribution: 2.25% of monthly salary.
- Pag-IBIG Fund:
- Employee contribution: 2% of monthly salary.
These deductions must be calculated and deducted from the employee’s gross pay.
D. Withhold income tax
Employers must calculate and withhold income tax from employees’ salaries based on a progressive tax scale. Key steps include:
- Determine the taxable income by deducting mandatory contributions from the gross salary.
- Apply the relevant tax rate, which ranges from 0% to 35%, depending on the income bracket.
- Ensure compliance with tax exemptions (e.g., the PHP 250,000 annual income tax exemption).
All withheld taxes must be submitted to the Bureau of Internal Revenue (BIR) monthly.
E. Calculate net pay
Net pay is the amount employees receive after all deductions. It is calculated as:
Net pay = Gross pay – (Employee contributions + Income tax)
F. Prepare and distribute payslips
Employers are required to provide payslips to employees detailing:
- Gross pay and its components.
- Deductions (e.g., taxes and contributions).
- Net pay.
Payslips can be distributed electronically or in printed form.
G. Remit contributions and taxes
Employers must remit all contributions and taxes to the respective government agencies:
- SSS, PhilHealth, and Pag-IBIG Fund: Remittances are typically due monthly or quarterly, depending on the agency’s guidelines.
- BIR (income tax): Employers must file monthly and annual tax returns using forms such as BIR Form 1601-C and BIR Form 2316.
Failure to remit on time may result in penalties, fines, or interest charges.
H. Maintain records
Employers are required to keep accurate payroll records for compliance and auditing purposes. Key documents include:
- Employee payslips.
- Payroll registers.
- Tax filings and proof of remittance.
- Contribution receipts for SSS, PhilHealth, and Pag-IBIG Fund.
I. Conduct audits and updates
Regularly review payroll processes to ensure compliance with the latest laws and regulations. This includes:
- Updating salary structures to reflect changes in the regional minimum wage.
- Adjusting contributions to match new rates set by SSS, PhilHealth, or Pag-IBIG Fund.
- Ensuring timely updates to employee records, especially for resignations or promotions.
5. Mandatory employee benefits
Leave entitlements
- Service incentive leave (SIL): Employees with at least one year of service are entitled to 5 days of paid leave annually.
- Maternity leave: 105 days of paid leave for mothers (additional 15 days for single mothers).
- Paternity leave: 7 days of paid leave for married fathers.
- Parental leave for solo parents: 7 additional days annually.
- Special leave for women: 60 days for surgery due to gynaecological conditions.
13th month pay
Employers must provide 13th-month pay, equivalent to one month’s basic salary, paid no later than 24 December each year.
Other common benefits
- Meal and transportation allowances.
- Health and life insurance: Not mandatory but widely provided to attract top talent.
- Retirement benefits: Required for employees who have worked at least five years and are aged 60+.
6. Compliance and penalties
Labour inspections
DOLE conducts regular inspections to ensure employers comply with labour standards. Non-compliance can lead to fines, penalties, or suspension of business operations.
Record-keeping
Employers must maintain accurate records of payroll, contributions, and contracts. Failure to do so may result in legal disputes or penalties.
7. Hiring options – Direct hire vs outsourcing
Direct hire
Pros:
- Full control over employment terms.
- Better alignment with company culture.
Cons:
- Greater administrative burden.
- Compliance risks if unfamiliar with local laws.
Outsourcing or using an employer of record (EOR)
Pros:
- Simplified compliance.
- Reduced administrative workload.
- Quick onboarding of employees.
Cons:
- Less direct control over employee management.
8. Practical tips for international employers
- Work with local experts: Partner with a local payroll provider or legal expert to ensure compliance.
- Understand cultural nuances: Filipino employees value work-life balance and strong interpersonal relationships in the workplace.
- Invest in training and development: Offering career growth opportunities helps retain top talent.
Conclusion
Hiring and paying employees in the Philippines involves navigating a mix of local labour laws, payroll systems, and cultural practices. By understanding the regulatory landscape and leveraging local expertise, your business can successfully establish a presence in this growing market.
FAQ
No, foreign businesses typically need a local legal entity or can partner with an employer of record (EOR) to hire employees in the Philippines. An EOR handles payroll, compliance, and other HR functions on behalf of the foreign company.
Yes, certain industries such as construction, retail, and the BPO (business process outsourcing) sector have additional regulations. For example, BPO workers may have specific rules for night shift work and overtime due to the nature of their schedules.
Salaries are generally negotiable, depending on the role and industry. However, they must comply with the regional minimum wage laws, which vary across the country.
Non-compliance with payroll laws can result in penalties such as fines, interest on unpaid contributions, and potential suspension of business operations by the Department of Labor and Employment (DOLE).
Yes, employees cannot work more than 12 hours per day, including overtime, except under specific conditions such as emergencies or with proper DOLE approval.
Yes, Filipino employees can work remotely for international companies. However, the employer must still comply with local employment laws, including tax and contribution requirements.
Employees working on regular holidays are entitled to 200% of their daily wage. If they work overtime on a holiday, an additional 30% of the hourly rate applies.
Yes, employers can place new hires on a probationary period of up to six months. After this period, employees become regular, gaining full benefits and protections under the Labour Code.
Part-time employees are entitled to proportionate benefits, such as social security contributions and holiday pay, based on the number of hours worked compared to full-time employees.
Upon resignation or termination, employees are entitled to receive their final pay, including any unused leave, 13th-month pay (prorated), and other due benefits. Employers must provide the final settlement within 30 days unless otherwise stated in the employment contract.
Yes, many companies use payroll software or partner with third-party providers to streamline calculations, tax remittances, and compliance. Popular solutions include QuickBooks, SAP, and Filipino-specific platforms like PayrollHero.
Payroll disputes are typically addressed internally first. If unresolved, employees can file complaints with the DOLE or the National Labor Relations Commission (NLRC), which mediate and resolve disputes according to labour laws.
Yes, night shift employees (working between 10 PM and 6 AM) are entitled to night differential pay, which is an additional 10% of their hourly rate for every hour worked during this period.
While not legally required, it is common practice for employers to provide necessary work equipment, such as laptops or internet allowances, to ensure remote employees can perform their duties effectively.
Yes, employers can offer stock options or equity as part of compensation packages. However, this is subject to specific tax implications and Securities and Exchange Commission (SEC) regulations.