Everything you need to know about Filipino employment contracts Everything you need to know about Filipino employment contracts

Everything you need to know about Filipino employment contracts
12 Jun 2018

The Filipino Labour Code is the country’s general employment legislation, which regulates the relationship between employees and their employer as well as all other employment-related matters. The law applies to all Filipino enterprises and joint ventures and to all employment relationships between Filipino nationals and foreign enterprises.

There are also several other special laws specifying statutory minimum employment benefits and standards, with which an employer must comply legally. These include the Social Security and Sexual Harassment Laws and the National Health Insurance and Comprehensive Dangerous Drugs Acts.

The Philippines’ Department of Labour and Employment (DOLE) is the main government agency responsible for enforcing employment laws in the country. DOLE monitors and administers employers’ compliance with labour standards and addresses employment-related issues through the Office of the Secretary of Labour and Employment, or through its regional offices.

Types of employment contracts

Filipino employment law recognises five categories of employment based on the nature of that employment:

  • Regular employment, where an employee continues working for an indefinite period;
  • Probationary employment, where an individual is subject to a period of observation and evaluation, with the aim to assessing their suitability for permanent employment;
  • Project-based employment – this comprises fixed period, term-based or seasonal employment based on when the project expires, its length and whether it is a seasonal or incidental activity.

Employment contracts are required in the case of each of these types of employment. While they may be oral or written, they must satisfy the essential requirements and minimum statutory standards laid down in the Labour Code. Any element of an employment contract that fails to do so is considered invalid.

In general, employment contracts are written in English, but employers must provide dual language contracts, with the other language being Filipino, if the employee in question is a Filipino national. The aim is to ensure that both parties understand the exact terms of the arrangement. Furthermore, the contract must clearly state the employment terms relating to each employee type in order to avoid confusion or future disputes. 

As a rule, employment contracts include the following information:

  • Job role and status;
  • Job description;
  • Pay;
  • Employee benefits;
  • Length and nature of probationary period, if any;
  • Period of notice;
  • Code of conduct;
  • Employee grievance mechanism;
  • Company policies.

Working hours and overtime

Maximum working hours are generally eight hours per day or 48 hours per week. Employees are entitled to a daily unpaid meal break of at least one hour, or a paid meal break of 20 minutes.

If an individual works in excess of eight hours in a given day, they are entitled to overtime payments equivalent to their usual wage rate plus at least 25%. For work performed on a rest day, an additional wage rate may apply.

But entitlement to overtime pay does depend on the nature of the duties and responsibilities held by an employee. The following workers are not entitled to overtime pay, or any other minimum conditions of employment laid down by the Labour Code:

  • Government employees;
  • Managers;
  • Officers;
  • Field personnel;
  • Family members of an employer if they depend on that employer for support;
  • Domestic helpers and people in the personal service of another; and
  • Employees who are paid by results, as determined by the Secretary of the Philippines’ DOLE. 

Leave

Employees are entitled to 12 regular paid holidays each year. If required to work on these holidays, they are entitled to be paid at twice the rate of their regular wage or salary. There are also due three special, non-working unpaid holidays.

Staff members are not legally entitled to statutory sick leave. But in practice, employees tend to be granted it through voluntary employer policies or collective bargaining agreements.

The Filipino Labour Code also grants up to 78 days of paid maternity leave to female employees, and seven days of paid paternity leave to male employees.

Social security

Filipino social legislation requires both employees and employers to contribute to the Social Security System (SSS), National Health Insurance Programme and Home Development Mutual Fund. This Fund covers sickness, maternity, disability, retirement, deaths and funerals, health insurance and housing loans.

Contribution rates are set based on an employee’s monthly renumeration, but employers cannot deduct their share from an employee’s monthly contribution. Failure to pay within a stipulated time period could result not just in employers being subject to fines but also facing criminal sanctions.

The current SSS contribution rate is 11% of each staff member’s monthly renumeration, not exceeding ₱16,000 (US$318). Employers pay a contribution of 7.37% and employees, 3.63%.

Personal income tax rate

Foreign nationals working in the Philippines are classified as “resident aliens” based on the duration of their stay and employment in the country. Income earned by such individuals is treated the same way as those of Filipino nationals and is taxed at source by their employer. In some cases, income tax is deducted at source from the foreign worker’s gross income at a rate of 15% before any other deduction is made.

As per the latest reform, income tax rates for the years 2018-2022 are given in the table below. After 2022, income tax rates will be further reduced for all taxpayers, apart from those earning an annual income above ₱8 million (US$152,250).

Dezan Shira income tax table 1

Dezan Shira income tax table 2

Termination of contract and severance pay

Filipino laws recognise two categories of ‘cause’ for terminating employment contracts: ‘just cause’ and ‘authorised cause’. An employee who is dismissed for a ‘just cause’ is not entitled to severance or termination pay. 

But staff members dismissed for an ‘authorised cause’ receive severance pay that is equivalent to at least a half or full month’s pay for every year of service, depending on the reason for their termination.

Conclusion

As has become clear, employment contracts form an essential part of doing business in the Philippines because they establish the rights and obligations of both employers and their employees.

Due to the surplus of low-cost labour that is available in the country, employment contracts can help employers to hire better quality workers in line with their business requirements. But they must ensure that these documents conform with all the legal requirements laid down in Filipino employment laws if they are to avoid financial or criminal liability.  

 

By Vasundhara Rastogi, editor, Dezan Shira & Associates.

This article was first published on ASEAN Briefing

Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and ASEAN, we are your reliable partner for business expansion in this region and beyond. For inquiries, please email us at info@dezshira.com. Further information about our firm can be found at: www.dezshira.com.

 

 

The Filipino Labour Code is the country’s general employment legislation, which regulates the relationship between employees and their employer as well as all other employment-related matters. The law applies to all Filipino enterprises and joint ventures and to all employment relationships between Filipino nationals and foreign enterprises.

There are also several other special laws specifying statutory minimum employment benefits and standards, with which an employer must comply legally. These include the Social Security and Sexual Harassment Laws and the National Health Insurance and Comprehensive Dangerous Drugs Acts.

The Philippines’ Department of Labour and Employment (DOLE) is the main government agency responsible for enforcing employment laws in the country. DOLE monitors and administers employers’ compliance with labour standards and addresses employment-related issues through the Office of the Secretary of Labour and Employment, or through its regional offices.

Types of employment contracts

Filipino employment law recognises five categories of employment based on the nature of that employment:

  • Regular employment, where an employee continues working for an indefinite period;
  • Probationary employment, where an individual is subject to a period of observation and evaluation, with the aim to assessing their suitability for permanent employment;
  • Project-based employment – this comprises fixed period, term-based or seasonal employment based on when the project expires, its length and whether it is a seasonal or incidental activity.

Employment contracts are required in the case of each of these types of employment. While they may be oral or written, they must satisfy the essential requirements and minimum statutory standards laid down in the Labour Code. Any element of an employment contract that fails to do so is considered invalid.

In general, employment contracts are written in English, but employers must provide dual language contracts, with the other language being Filipino, if the employee in question is a Filipino national. The aim is to ensure that both parties understand the exact terms of the arrangement. Furthermore, the contract must clearly state the employment terms relating to each employee type in order to avoid confusion or future disputes. 

As a rule, employment contracts include the following information:

  • Job role and status;
  • Job description;
  • Pay;
  • Employee benefits;
  • Length and nature of probationary period, if any;
  • Period of notice;
  • Code of conduct;
  • Employee grievance mechanism;
  • Company policies.

Working hours and overtime

Maximum working hours are generally eight hours per day or 48 hours per week. Employees are entitled to a daily unpaid meal break of at least one hour, or a paid meal break of 20 minutes.

If an individual works in excess of eight hours in a given day, they are entitled to overtime payments equivalent to their usual wage rate plus at least 25%. For work performed on a rest day, an additional wage rate may apply.

But entitlement to overtime pay does depend on the nature of the duties and responsibilities held by an employee. The following workers are not entitled to overtime pay, or any other minimum conditions of employment laid down by the Labour Code:

  • Government employees;
  • Managers;
  • Officers;
  • Field personnel;
  • Family members of an employer if they depend on that employer for support;
  • Domestic helpers and people in the personal service of another; and
  • Employees who are paid by results, as determined by the Secretary of the Philippines’ DOLE. 

Leave

Employees are entitled to 12 regular paid holidays each year. If required to work on these holidays, they are entitled to be paid at twice the rate of their regular wage or salary. There are also due three special, non-working unpaid holidays.

Staff members are not legally entitled to statutory sick leave. But in practice, employees tend to be granted it through voluntary employer policies or collective bargaining agreements.

The Filipino Labour Code also grants up to 78 days of paid maternity leave to female employees, and seven days of paid paternity leave to male employees.

Social security

Filipino social legislation requires both employees and employers to contribute to the Social Security System (SSS), National Health Insurance Programme and Home Development Mutual Fund. This Fund covers sickness, maternity, disability, retirement, deaths and funerals, health insurance and housing loans.

Contribution rates are set based on an employee’s monthly renumeration, but employers cannot deduct their share from an employee’s monthly contribution. Failure to pay within a stipulated time period could result not just in employers being subject to fines but also facing criminal sanctions.

The current SSS contribution rate is 11% of each staff member’s monthly renumeration, not exceeding ₱16,000 (US$318). Employers pay a contribution of 7.37% and employees, 3.63%.

Personal income tax rate

Foreign nationals working in the Philippines are classified as “resident aliens” based on the duration of their stay and employment in the country. Income earned by such individuals is treated the same way as those of Filipino nationals and is taxed at source by their employer. In some cases, income tax is deducted at source from the foreign worker’s gross income at a rate of 15% before any other deduction is made.

As per the latest reform, income tax rates for the years 2018-2022 are given in the table below. After 2022, income tax rates will be further reduced for all taxpayers, apart from those earning an annual income above ₱8 million (US$152,250).

Dezan Shira income tax table 1

Dezan Shira income tax table 2

Termination of contract and severance pay

Filipino laws recognise two categories of ‘cause’ for terminating employment contracts: ‘just cause’ and ‘authorised cause’. An employee who is dismissed for a ‘just cause’ is not entitled to severance or termination pay. 

But staff members dismissed for an ‘authorised cause’ receive severance pay that is equivalent to at least a half or full month’s pay for every year of service, depending on the reason for their termination.

Conclusion

As has become clear, employment contracts form an essential part of doing business in the Philippines because they establish the rights and obligations of both employers and their employees.

Due to the surplus of low-cost labour that is available in the country, employment contracts can help employers to hire better quality workers in line with their business requirements. But they must ensure that these documents conform with all the legal requirements laid down in Filipino employment laws if they are to avoid financial or criminal liability.  

 

By Vasundhara Rastogi, editor, Dezan Shira & Associates.

This article was first published on ASEAN Briefing

Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and ASEAN, we are your reliable partner for business expansion in this region and beyond. For inquiries, please email us at info@dezshira.com. Further information about our firm can be found at: www.dezshira.com.

 

 

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