7 Features of Staff Leasing in the Philippines

By: Garry Pagaspas, CPA

Taking into account the advantages of Filipino talents (e.g. English speaking, attitude towards work, manpower cost, and work efficiency, among others) Philippines has become a top pick for back-office support operations of foreign accounting and consulting firms abroad and that of business process outsourcing (BPO) operations in Philippines dealing directly with foreign clients, if not with the parent entity for the delivery of quality services.

Approaches for Philippine set-up could vary depending on many factors such as a more long-term set-up or a short-term exploratory set-up. For a long-term set-up, setting up a local entity in the Philippines could be good, while for short-term exploratory set-up, some would resort to special arrangements with staffing or manpower agencies, Business Process Outsourcing (BPO) in Philippines, accounting firms or local consulting firms for staff leasing in Philippines, or sometime referred to under professional employer organization (PEO) or employer of record (EOR) in Philippines.

Notably, there seems no prescribed guidelines issued by government agencies specifically applicable to staff leasing in the Philippines or professional employer organization (PEO) or employer of record (EOR) in Philippines but it seems to simply adopt the labor laws, rules, and regulations related to it. Accordingly, let me share my personal views on some features of these staff leasing arrangements in Philippines that you may find useful for your Ph set-up:

1. Binding legal agreement for staff leasing in Philippines

For the purpose, legal agreement should be executed to formalize the staff leasing arrangement by and between your company abroad or using their parent entity abroad – e.g. Singapore or Hong Kong entity and the staff leasing entity in Philippines. Some would use a direct Staff Leasing Agreement setting forth the terms and conditions – staff leasing entity as employer housing employees on its office (unless under work from home arrangement) and your company abroad utilizing the team for your outputs and paying prescribed fees – e.g. set-up fees, monthly fees, and termination fees.

The rest would take the arrangement with the staff leasing entity as service provider for some defined output with the staff leasing employees handling delivery of the services under the supervision of your company representatives abroad.

2. Local entity as staff leasing employer in Philippines

Normally, under staff leasing agreement in Philippines, the staff leasing entity in Philippines acts as employer of your team in Philippines and for this, staff leasing is at times termed as “employer of record” (EOR) or “professional employer organization” (PEO) in Philippines. Employment status may vary under the rules – e.g. probationary employment, regular employment, contractual basis, or project-based employee depending on the terms agreed upon. Other terms and conditions of employment could likewise be imposed by the employer and could be arranged based on your preferences, to the extent that it is aligned with the local labor rules.

As an employer, they are under obligation to its employees as imposed by the Labor Code of the Philippines, as amended, such as on payment of wages and benefits mandated by law, dealing with mandatory contributions, and security of tenure, among others. On this scope, they take their risk relative to such obligations.

3. Compensation, fees and charges for staff leasing in Philippines

Under staff leasing arrangement, your company abroad utilizing staff leasing employees in Philippines would undertake to pay employee compensation – those owing to the employee for every payroll period; employer share on mandatory contributions for social security, housing and health insurance; and related employee benefits imposed by labor rules such as 13th month pay, leave credits, maternity benefits, among others. On top of that, some arrangements would impose a one-time set-up fee for each employee for hiring and other related works, a monthly administrative fee as a percentage of monthly compensation or a fixed amount that could cover their time charges for recurring works like payroll computations and government remittances, applicable local taxes, if any, and at times, a termination fee upon your decision to end the arrangement.

4. Staff Leasing employee’s disciplinary action under local entity

In Philippines, security of tenure is given much emphasis under our labor rules, and employees could only be terminated on justifiable reasons – e.g. just or authorized causes specifically provided by the rules along with prescribed due process and cannot simply be terminated at will of the employer like in other countries. If you intend to discipline staff leasing employees in Philippines, closely coordinate with the staff leasing employer in Philippines for proper handling – e.g. sending of memorandum to employees, hearing out employees’ side for the required opportunity to be heard under the rules, and sending management decision on the alleged violation of the staff leasing employees. Failure to comply with the rules could be a ground for staff leasing employees to file a case for illegal termination in Philippines or any appropriate case with the labor department.

5. Mandatory Philippine reporting compliance for staff leasing employees

Employers in the Philippines carries certain obligations such as withholding taxes on compensation every payroll period along with remitting them monthly to the tax authorities and filing related quarterly and annual reports; withholding employee welfare contributions for social security, housing mutual fund, and health insurance along with remitting them monthly and filing related quarterly reports with such respective government agencies; and such other reports required such as 13th month pay reporting to the labor department. These obligations are normally undertaken by the local staff leasing company in the Philippines and they would ensure compliance, otherwise, penalties would be imposed for failure to comply.

6. Doing business in Ph/ Permanent Establishment implications

One concern of the foreign company abroad entering into staff leasing arrangement is whether or not the same would create a permanent establishment in Philippines under the applicable tax treaty or would be tantamount to doing business in the Philippines that is required to register with the Securities and Exchange Commission (SEC) under the Revised Corporation Code (RCC) and applicable foreign investment laws. This could be a technical legal area, and such implication could depend on the terms and conditions of the staff leasing in the Philippines.

7. Setting-up own entity and employing your staff leasing team

As soon as you realize the long-term advantages of your Philippine team, you may then decide to set-up your own entity in the Philippines and take them out from the staff leasing arrangement so they become employees of your Ph entity taking into account the experience and familiarity that they have working on your account. Normally, staff leasing arrangement would have termination provisions which could vary from a simple notification to some monetary considerations to be allowed to convert them as your employees. For the purpose, please pay attention the termination provisions to avoid issues that could lead to legal battle and more headaches.

Author’s Profile:

Garry Pagaspas, CPA is a currently the Managing and Tax Partner of G. Pagaspas Partners & Co. CPAs (independent member firm of Allinial Global, 2^nd largest accounting association worldwide based on International Accounting Bulletin’s 2023 released survey) based in Makati City with Global Outsourcing offices in Kalibo, Aklan. He is likewise the President at Tax and Accounting Center, Inc., the training and consulting company he founded in relation to his passion for teaching and helping out Ph entrepreneurs and foreign investors to Philippines.

Views in this article is personal to the author, not equivalent to a professional opinion and does not represent that of the organizations he is connected with. For your feedback or related concerns on staff leasing or employer of record in Philippines, you may send mail at info(@)taxactgcenter.ph (please exclude open and close parenthesis on the @ sign.