Philippines: Liability of Foreign-Based Companies Hiring Philippine-Based Workers Under Philippine Labour Laws
The extra-territorial application of Philippine labour laws is often discussed in the context of overseas Filipino workers (“OFW”), who, despite being outside the territorial jurisdiction of the Philippines, are nevertheless afforded its mantle of protection. With the advancement of technology, however, an emerging employment arrangement now demands attention from local legislators. An increasing number of Filipinos based in the Philippines are being directly engaged by foreign-based employers through the use of technology. Such workers are popularly known as “freelancers,” workers in the “gig” industry, or even “independent contractors,” although a closer look at the arrangement would reveal that the relationship is more likely one of employment.
From 2019 to 2020, the Philippines recorded a 208% growth in freelance revenues.[1] But how are these workers protected under current labour laws? A related question of interest to many foreign companies hiring workers based in the Philippines is, what are their responsibilities, if any, under local labour laws? For Filipino workers who are deployed abroad, or OFWs, it is clear that the Labour Code of the Philippines applies and may be enforced notwithstanding their employers residing abroad.[2] For the Philippine-based Filipino worker with a foreign-based principal, however, there seems to be a gap in regulation.
Foreign-based principals are able to engage Filipino workers in the Philippines through the following arrangements:
- Foreign-based principals who engage independent contractors and therefore have a direct contractual relationship with them.
- Foreign-based principals who incorporate a local subsidiary in the Philippines, which in turn will serve as employers of local workers.
- Foreign-based principals who engage a separate local company that will serve as employers of local workers.
Foreign-based principals who engage independent contractors and therefore have a direct contractual relationship with them
Foreign-based principals may opt to engage a certain category of workers called independent contractors. Independent contractors are workers engaged by reason of their unique skills and talents, which set them apart from employees, with control of corporate leadership limited only to the results of their work and not the means and methods used.[3]
Independent contractors are not employees. Their contracts, therefore, are covered by the Civil Code of the Philippines and not the Labour Code. For instance, the duration and termination of the engagement, work hours, payment of wages, and discipline of workers are ordinarily covered by specific standards provided under the Labour Code for regular employees. This is not the case for independent contracts. The foreign-based principal may agree with the independent contractor as to all aspects of the engagement. For example, grounds for termination under the Labour Code may not apply, and the foreign-based principal and independent contractor may agree on how the engagement would be terminated, either mutually or unilaterally. In sum, the engagement of the independent contractors is governed by the terms of his/her agreement with the foreign-based principal, and this cannot be amended by the courts absent any stipulations contrary to law, morals, good customs, public order, or public policy.
Foreign-based principals who incorporate a local subsidiary in the Philippines, which in turn will serve as employers of local workers.
Another route for foreign-based principals to engage local workers is to incorporate a local subsidiary in the Philippines. In this case, the local subsidiary is a domestic corporation and takes on the role of the employer of the local workers. As employers of the local workers, the local subsidiary will have control over the selection and engagement of the employee; payment of wages; discipline and/or dismissal of the employee; and control over the employee’s conduct. In the Philippines, this is often termed the “four-fold test,” which is used to determine the existence of an employment relationship.
Of these four, control is the most important. The so-called “control test” is regarded as the most crucial and determinative indicator of the presence or absence of an employer-employee relationship. Under the “control test,” an employer-employee relationship exists where the person for whom the services are performed reserves the right to control not only the end achieved but also the manner and means to be used in reaching that end.[4]
As an employer, the local subsidiary will be expected to comply with the labour standards under the Labour Code, such as providing safe and healthful working conditions; compliance with labour standards such as but not limited to service incentive leave, rest days, overtime pay, holiday pay, and 13th month pay; provision of retirement benefits under the law or retirement plan of the company, if there are any; social security and welfare benefits; guaranteeing the right to self-organization, collective bargaining, and peaceful concerted activities; and guaranteeing the right to security of tenure.
Foreign-based principals engaging a local company that will serve as an employer
Although untested by local jurisprudence and not expressly recognized by any law, foreign-based principals may also engage a separate local company, often referred to as Employer-of-Record. In this arrangement, the Employer-of-Record serves as the formal employer of the worker while the foreign-based principal exercises management and control over the employee’s ultimate results or output. The Employer-of-Record is based in the Philippines and will be expected to comply with the labour standards under the Labour Code as outlined above.
In this set-up, there exists a “trilateral relationship.” In this trilateral relationship, the foreign-based principal controls the contractor and his employees with respect to the ultimate results or output of the contract. The Employer-of-Record, on the other hand, controls his employees not only with respect to the results to be obtained but also with respect to the means and manner of achieving these results. This pervasive control by the Employer-of-Record over its employees results in an employer-employee relationship between the Employer-of-Record and the local workers.
Neither the Department of Labour and Employment nor the Supreme Court have rendered any issuance categorically disallowing such arrangements. However, in the case of American Power Conversion Corporation vs. Lim, the Supreme Court, after finding that the Filipino worker was hired by the foreign-based principal, was on the payroll of Employer-of-Record’s affiliate, and was under the supervision and control of two other affiliates, ruled that all entities are jointly and severally liable to pay the Filipino worker’s claims.[5]
The best arrangement will ultimately depend on the business needs of the foreign-based principal. A local employer based in the Philippines, whether as the foreign-based principal’s local subsidiary or Employer-of-Record, allows the foreign-based principal to comply with the labour standards of the Labour Code while shielding themselves from liabilities inherent in engaging local manpower, which many times prove itself to be complex.
[1] “The growing number of Filipino freelancers”, Philippine Institute for Development Studies published 15 May 2023.
[2] I-People Manpower Resources, Inc. v. Court of Appeals, G.R. No. 246410, (2023).
[3] Ditiangkin, et al v Lazada E-Services Philippines, Inc., G.R. No. 246892 (2022).
[4] Atok Big Wedge Company, Inc. vs. Jesus P. Gison, G.R. No. 169510 (2011).
[5] American Power Conversion Corporation vs. Lim, G.R. No. 214291 (2018).
