Philippine Labor Laws for Foreign Companies: How to Hire, Pay, and Terminate Employees Legally

The Philippines is a popular outsourcing destination for foreign companies due to its skilled workforce, cost-effective labor, and English proficiency. However, navigating Philippine labor laws can be complex. This guide answers the most common questions foreign employers ask about hiring, payroll, termination, and compliance.

The Philippine Labor Code (Presidential Decree No. 442) categorizes employees into different types:

• Regular Employees: Those who work continuously for six months or more are automatically regularized and gain full labor protections under Article 280.

• Probationary Employees: Employees on a trial period (up to six months). Employers must provide clear performance standards and follow due process before terminating them.

• Fixed-Term Employees: Hired for a specific period (e.g., project-based roles). Contracts must justify the legitimacy of the fixed-term employment.

• Project-Based Employees: Workers engaged in temporary, project-specific work.

• Casual Employees: Employees who perform incidental, non-integral work for the company.

• Written contracts are highly recommended for clarity and compliance.

• Probationary periods must not exceed six months unless covered by a government-approved apprenticeship program.

• Employers must comply with DOLE regulations when structuring employment terms.

Yes, but with caution. Many foreign companies prefer independent contractors to avoid labor law obligations. However, misclassification risks are high. If contractors perform core functions, work exclusively for one client, or follow strict company instructions, they may be reclassified as employees entitled to full labor benefits.

• Clearly define the scope of work and payment terms.

• Ensure the contractor works independently and has control over their schedule.

• Avoid exclusivity clauses that mimic employer-employee relationships.

The Wage Rationalization Act (RA 6727) sets regional minimum wages:

• Metro Manila: ~USD 11 per day

• Provincial rates vary based on cost of living.

However, professional employees earn significantly higher salaries:

• Software Engineers: USD 880 - USD 2,100 per month

• Accountants: USD 700 - USD 1,600 per month

• Customer Service (BPO): USD 440 - USD 790 per month

• Marketing Managers: USD 1,050 - USD 2,630 per month

Severance Pay in the Philippines

• No automatic severance pay unless termination is due to authorized causes (redundancy, retrenchment, business closure).

• Severance pay is 0.5 to 1 month’s salary per year of service.

• No severance is required for just cause terminations (misconduct, fraud, negligence).

Mandatory Employee Leave Benefits

• Service Incentive Leave (SIL): Article 95: 5 days of paid leave per year for employees with one year of service.

• Maternity Leave (RA 11210): 105 days of paid leave (plus 15 days for solo mothers).

• Paternity Leave (RA 8187): 7 days of paid leave for fathers.

• Special Leave for Women (RA 9710): 60 days of paid leave for gynecological conditions.

Most companies provide additional sick and vacation leave to stay competitive (typically 15-30 days combined).

Legal Requirements for Termination

• Employers must have a valid reason and follow due process.

• Just causes (misconduct, fraud, negligence) require:

• A notice to explain (NTE) detailing the charges.

• An opportunity for the employee to respond.

• A final termination notice if the explanation is unsatisfactory.

• Authorized causes (redundancy, retrenchment, business closure) require:

• 30 days’ advance notice to the employee and DOLE.

• Severance pay based on length of service.

• No At-Will Employment: Unlike the US, employers must provide justifiable reasons for termination.

• Burden of Proof: Employers must prove why the termination is justified to avoid wrongful dismissal claims.

• Strict Labor Protections: Termination without due process can lead to NLRC cases, reinstatement orders, and financial penalties.

• Employees can file a complaint with DOLE or the National Labor Relations Commission (NLRC).

• A mandatory mediation session is required before legal proceedings.

• If unresolved, the case proceeds to formal hearings.

• The NLRC issues a decision, which can be appealed.

• If the employer loses, they may be required to reinstate the employee, pay back wages, and legal damages.

The Pascua v. Doessel Group Pty Ltd FWC 2669 Case (Australia-Philippines Independent Contractor Dispute)

This case involved an Australian company terminating a Filipino independent contractor, raising questions about procedural fairness and employer responsibilities across jurisdictions.

• The Fair Work Commission ruled in favor of the Filipino contractor, citing wrongful dismissal due to lack of procedural fairness, despite the worker being classified as an independent contractor rather than an employee.

• Lesson for Employers: This case highlights that contractor misclassification and termination procedures can lead to legal risks, even when dealing with non-employee workers. Foreign companies hiring contractors in the Philippines should ensure proper agreements, compliance with local labor laws, and clear termination procedures to avoid similar disputes.

Read more: Avoiding Misclassification Risks: How KMC Teams’ Employer of Record (EOR) Model Protects Your Business

Benefits of Using an EOR in the Philippines

An EOR like KMC helps foreign companies:

• Avoid labor law violations by ensuring full compliance.

• Handle payroll, taxes, and mandatory benefits effortlessly.

• Prevent wrongful termination disputes by managing documentation.

• Secure better HMO and benefits rates due to bulk employee enrollment.

• Provide structured employment contracts that meet DOLE regulations.

Hiring in the Philippines offers significant cost and talent advantages, but strict labor laws require careful compliance.

Key considerations:

• Use clear employment contracts to define roles and responsibilities.

• Classify workers correctly (employees vs. independent contractors).

• Follow due process when terminating employees to prevent legal risks.

• Offer competitive benefits (HMO, additional leave) to attract top talent.

• Work with an EOR like KMC to simplify compliance and risk management.

By following these best practices, foreign companies can successfully build a compliant, productive workforce in the Philippines.