Labor laws and compliance in the Philippines
This guide has important information for businesses looking to hire employees or contractors in the Philippines. It has been one of the most dynamic economies in the East Asia Pacific region between 2010-1019, averaging an annual growth rate of 6.4%. The country has a growing middle class with a large and young population. The Philippines is a major destination for outsourcing/offshoring for the US businesses due to cultural affinity between the two countries.
Minimum Wage
Varies by state
Overtime Wage
1.25x Regular Wages
Meal Breaks
60 minutes (unpaid)
Rest Breaks
No federal mandate
Working hours
8 hours/day, 40 hours/week
Salary Payment Cycle
Monthly
Payroll Taxes
Social security, Public health insurance, Home development mutual fund
Paid Vacation
5 days after one year of service
Overtime Hours
Beyond 40 hours in a week
Night Shift Hours
110% of regular pay Between 10PM and 6AM
Holidays
10 holidays/year
No Work Days
8 days/year in addition to Saturdays and Sundays
A business needs a local entity in Philippines to hire locally.
Setting up an entity in Philippines involves registering with multiple agencies and can take 30 days. If you want to register a subsidiary in The Philippines, you will need to invest at least $200,000 as equity. A business requires at least four officials, two of whom must be residents of the country.
Setting up an entity in The Philippines is a 5-step process that requires you to register with SEC, provincial government, mayor’s office, Bureau of Internal Revenue, Social Security, and the health insurance corporation.
You will also need to comply with benefits, payroll, tax, and HR laws.
Philippines differentiates between employees and contractors. There are different rules for both, and incorrect classification can lead to fines.
Philippines does not have a national minimum wage rate. It’s set at the provincial level.
While all employers must pay the specified minimum wage for the region, in the outsourcing industry, you need to pay significantly more to attract good talent.
The current minimum wage rate (June 2022) in different parts of the country are:
| Region | Minimum Wage (Daily) |
|---|---|
| Metro Manila | 570 Pesos |
| Cordillera Administrative Region | 380 Pesos |
| Ilocos Region | 372 Pesos |
| Cagayan Valley | 400 Pesos |
| Central Luzon | 414 Pesos |
| Calabarzon | 390 Pesos |
| Mimaropa | 355 Pesos |
| Bicol | 365 Pesos |
| Visayas | 410 Pesos |
| Central Visayas | 382 Pesos |
| Mindanao | 378 Pesos |
| Davao Region | 443 Pesos |
| Soccsksargen | 368 Pesos |
| Caraga | 350 Pesos |
Work hours are tightly regulated in Philippines.
Standard working hours in Philippines are 8 hours per day and one hour of lunch break. Working hours include the time during which the employee is required to be at the workplace and all hours that he is asked to work. It also includes any short breaks or rest periods during the working hours.
Employees must be given one day off after every six consecutive days of work.
Employers must pay 10% extra for nightshift.
Overtime is to be paid at 125% of regular pay for extra hours worked on a regular workday. Any work done on a holiday or weekend is to be paid at 130% of regular work.
Employers typically follow a monthly payment schedule, with salaries paid on the first of every month. Salary is prorated for employees joining in the middle of a month.
Salary must be paid in cash, by check, or by direct deposit to the employee’s account at a bank or other financial institution.
Employers also need to pay the 13th month salary to every eligible employee by December 24th . Any employee who has worked for at least one month in the year is eligible to receive the 13th month salary.
Many employers also pay a Christmas bonus to their employees in December. But that is not mandated by law.
Individual Income Tax
In Philippines, domestic income is subject to income tax for both citizens and foreigners. Any foreign income of a resident is also taxed in the Philippines.
Philippines income tax system follows a slab structure. It means individuals pay income tax based on their income level. This is also called the progressive tax system in which a person with higher earnings pays higher taxes.
Employers must deduct and withhold income tax on employees’ compensation. Failing to do so has legal consequences. This tax is paid to the government by the employer.
The following table shows income tax rates in Philippines as of July 2022:
| Annual Salary (Pesos) | Applicable Tax Rate |
|---|---|
| 0 – 250,000 | No tax |
| 250,000 – 400,000 | 20% |
| 400,000 – 800,000 | 25% |
| 800,000 – 2,000,000 | 30% |
| 2,000,000 – 8,000,000 | 32% |
| Above 8,000,000 | 35% |
Employers bear the following costs in Philippines:
- Social Security: Employers contribute 8.5& of the salary towards employee’s social security. This contribution is mandatory. It’s capped at 1700 Pesos for salaries above 24750 Pesos. Employers also need to withhold 4.5% of salary towards employee’s contribution towards social security. Employee contribution is capped off at 900 Pesos.
- Public Health Insurance (PhilHealth): Employers must contribute 1.75% of salary towards public health insurance program. They also need to deduct 1.75% from the salary towards employee’s contribution. The minimum salary for PhilHealth contribution is 10,000 Pesos and maximum salary is 70,000 Pesos.
Many employers provide a secondary health insurance cover to attract high-quality employees. Secondary health cover is valued by employees as it helps them avoid delays and access benefits not covered by PhilHealth.
- Home Development Mutual Fund (HDMF or Pag-IBIG) – It provides housing loans and offers financial assistance to Filipinos so they can afford decent housing. Employers contribute 2% of the monthly salary (maximum 100 Pesos). Employee contribution is 1% if the salary is below 1,500 Pesos and 2% above this, subject to a monthly cap of 100 Pesos.
There are 12 paid public holidays in Philippines. In addition, there are six special holidays that are unpaid holidays.
Employers in the Philippines must give five days of paid leave to employees who have worked for at least one year. Employees can get paid for unused portion of the leave.
Employees get 90% of their average daily salary for up to 120 days in a year if they fall sick. The employer pays the salary to the employee. This is reimbursed by the social security system.
All female employees get 60 days of paid maternity leave for their first four pregnancies. If a C-section or surgery is needed, the employee can get up to 78 days of leave.
Women employees who undergo a gynecological surgery get up to 60 days of paid leave, provided they have worked for at least six months.
Married male employees get seven days of paternity leave for the first four pregnancies of their wives.
In Philippines, a solo parent can take up to seven days’ leave.
Philippines has a comprehensive social security system that offers several mandatory benefits to employees:
- maternity pay
- sickness pay
- pensions
- disability benefits
- salary loans
- life insurance
- funeral grants
In addition, many employers also provide supplemental health, dental and vision insurance to their employees. In fact, a good health insurance plan can be a very attractive recruiting tool in Philippines.
An employee can be terminated for authorized causes as per the Labor Code. Employer can also terminate an employee for violation of corporate rules and regulations.
An employee can terminate the employment at will.
Employer must give a notice period of 30 days for terminating the employee.
Employees are eligible for one month of severance pay for every year of service.
