If you need to hire a programmer or other skilled worker and want someone who will work remotely as an independent contractor, you have no shortage of options available. The “gig economy” is growing by leaps and bounds; and, while workers previously valued job stability over flexibility, for several years now this balance has been shifting in the opposite direction. As a result, both in the United States and abroad, there are numerous highly-skilled individuals available for work on a contract basis, and several websites offer the ability to hire a skilled worker with the click of a button.
But, before you hire an independent contractor – and particularly one who lives and works overseas – it is important to consider the legal implications. While the process of hiring someone thousands of miles away has never been easier, doing so without exposing your company to unnecessary liability still requires careful forethought and proper documentation. Each country’s contracting and labor laws are unique, and companies must not overlook the critical importance of protecting their intellectual property.
Hiring an Independent Contractor in the Philippines
In this article, we will examine some key legal considerations involved in hiring an independent contractor who resides in the Philippines. While some of the concepts discussed below are general in nature, others are specific to Philippine law. Before hiring an independent contractor in the Philippines or elsewhere, companies should be sure to obtain legal advice tailored to their unique business needs.
1. Contractor Regulations in the Philippines
Earlier this year, the Philippines’ Department of Labor and Employment (DOLE) issued Department Order No. 174, which established a number of new guidelines for companies that engage Filipino contractors. Contractor laws in the Philippines impose a variety of requirements and restrictions on contract-based work relationships, many of which are intended to protect contract workers against unfair treatment. However, these regulations also impose substantial burdens and foreclose a variety of opportunities that would otherwise be available.
For foreign companies seeking to hire independent contractors in the Philippines, understanding when Department Order No. 174 and other laws and regulations apply is essential. While compliance is not necessary with all contract-based relationships, if an engagement implicates the Philippines’ contracting and labor laws, the financial and compliance burdens can be substantial.
2. Philippines Freelancer Registration and Tax Compliance
Contract-based relationships with online freelancers (who operate independently and not through an agency) are among those that are generally exempt from the Philippines’ onerous contracting and labor law requirements. However, there are still other rules and regulations that apply. While these rules and regulations generally apply to freelancers in the Philippines – as opposed to the foreign companies that hire them – companies that hire Philippines-based freelancers may want to take reasonable measures to ensure that the freelancers they hire are complying with local law.
Online freelancers in the Philippines must register with the country’s Bureau of Internal Revenue (BIR). They are also subject to a variety of tax obligations and must comply with monthly, quarterly, and annual reporting obligations. While a freelancer’s failure to register or pay income tax may not have direct legal implications for a US-based company that hires them on a contract basis, suddenly losing a freelancer due to legal trouble may lead to project delays or the loss of work product.
3. Benefits (and Limitations) of Entering into an Independent Contractor Agreement
While one of the most basic pieces of advice for companies hiring independent contractors is to make effective use of independent contractor agreements, it is important to understand the limitations that apply in the context of hiring an overseas freelancer. But first, let’s look at the reasons why having an agreement is important. By requiring freelancers to sign independent contractor agreements, companies can:
- Obtain representations and warranties that freelancers are in compliance with local regulatory requirements and will pay all applicable taxes resulting from the engagement.
- Secure ownership of intellectual property rights in freelancers’ work product through assignment and “work-made-for-hire” provisions.
- Establish protections for trade secrets and other confidential information that must be disclosed to freelancers.
- Establish clear expectations, schedules, and deliverables for freelancers’ services.
- Document their efforts to establish a valid independent contractor relationship as opposed to hiring the freelancer as an employee.
Now, let’s consider the practicalities of signing an agreement with an individual who resides in a foreign country half a world away. If he or she breaches the agreement, what are you going to do? Is it worth engaging local counsel in the Philippines to take legal action? Having an agreement in place still provides value even if the practicalities of enforcement are limited, but companies seeking to hire freelancers in the Philippines (or elsewhere overseas) will also likely find substantial value in carefully screening freelancers and choosing those who have a record of successful engagements with other foreign companies.
Although going through an agency to establish a business-to-business relationship can help alleviate some of the concerns involved in contracting with an overseas freelancer directly, due to the Philippines’ recently-updated contractor regulations, this approach should be taken only with a clear understanding of the potential implications involved.
4. The Risks of Employee Classification
When deciding whether a worker should properly be classified as an employee or an independent contractor, companies (and government authorities) are left to balance a number of different factors. There is no bright-line test for determining whether a worker falls into one category or the other, and this inherently creates certain risks for companies seeking to rely on the benefits of the independent contractor model.
In the Philippines, employees enjoy a number of unique protections, including rights to “rest days,” “13th month pay,” and various forms of leave. Anti-discrimination laws, restrictions on termination, and various other legal provisions impose additional obligations for employers as well. In the US, being classified as an employer means additional tax compliance obligations as well as potential legal obligations under the Family Medical Leave Act (FMLA), the Americans with Disabilities Act (ADA), and various other federal and state laws.
5. Your Company’s Obligations to the IRS
In most cases, when a US-based company hires a foreign contractor overseas, the relationship does not trigger any tax or reporting obligations to the Internal Revenue Service (IRS). If, however, your company hires a Filipino worker on a contract basis to perform services on US soil, potential tax and reporting obligations will apply.
In either case, companies that hire foreign freelancers should have their freelancers complete IRS Form W-8BEN. Companies are entitled to rely on the representations freelancers make on Form W-8BEN (unless they have reason to believe the representations are false); and, if it turns out that a freelancer misrepresented his or her tax qualifications on Form W-8BEN, his or her misrepresentations will not result in tax liability for the hiring company.
Questions? Contact Us for a Confidential Consultation
If you have questions about hiring overseas freelancers to help your business grow, we encourage you to contact us for help. We provide experienced legal representation for startups and established companies across the United States and worldwide. To schedule a confidential consultation with attorney Jiah Kim, please call (646) 389-5065 or inquire online today.
This blog post is written for educational and general information purposes only, and does not constitute specific legal advice. You understand that there is no attorney-client relationship between you and the blog publisher. This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.