What global businesses need to know about payroll in the Philippines
Did you know that the Philippines is made up of 7,641 different islands? And that more than 5000 of them don’t even have names?
This enormous archipelago in the western Pacific Ocean is home to more than 115 million people, making it the 14th-most populated country in the world. It’s an island that has been heavily influenced by its history, from Spanish colonialism, through American and Japanese control, and then the Marcos dictatorship, before becoming a more modern democracy in recent times.
The Philippines’ proximity to China, Japan and south-east Asia, as well as its strong maritime links, makes it a popular destination for global manufacturers – over 55% of the country’s exports are electronic products. Part of this is down to the fact that wages in the Philippines are very low, although the proportion of the population living in extreme poverty has reduced from over 25% in the 1980s to less than 5% now.
Doing business in the Philippines can be challenging, not only because of the cultural characteristics that shape its payroll, but also because corruption remains an issue. However, understanding the basics around Philippines payroll can put you on the right track, however, and this guide is the perfect place to start.
Getting Started
Before you get going, it’s essential to check the Filipino government’s Foreign Investment Negative List, which sets out industries and types of business where foreign ownership is either regulated or restricted. These restrictions may be due to a desire to protect local business interests (especially smaller enterprises), or for reasons of national security and public health). Furthermore, the minimum share capital requirement for foreign-owned businesses can be as much as US$200,000, depending on the industry.
Another useful thing to note about doing business in the Philippines is that interpersonal relationships are enormously important. It’s not uncommon for colleagues to spend the majority of a meeting discussing non-business matters in an effort to solidify teams and relationships. Bearing this cultural trait in mind is vital to doing business successfully in the Philippines.
On a more practical level, the administrative procedures of setting up operations in the Philippines can be a long, drawn-out affair. That’s in no small part to the large number of different organizations that new companies have to set up with. These include:
- Registering a business name with the Securities and Exchange Commission
- Applying for a business permit from the mayor in the city where the business is situated (this may require a fire assessment of the premises)
- Registration with the Department of Labor and Employment, Social Security System, PhilHealth health insurance, and the PagIBIG home improvement fund
- Obtaining a tax certificate from the City Treasurer’s Office
All payments must be made from in-country bank accounts, which can be set up in one day with a minimum capital deposit of 5,000 pesos (approximately £70, $85, €80). However, companies who use a third-party global payroll solution are not required to set up in-country bank accounts.
Employment Considerations
Contracts may be either oral or in writing. Employees are allowed to unionize, though collective bargaining is rarely practiced and union membership is low.
A standard working day in the Philippines is eight hours, with some employees working five hours per day and some working six. Overtime should be paid at 125% of the employee’s regular wage, increasing to 135% for work between 10pm and 6am. Employees working on regular public holidays receive 200% of their wage, rising to 260% after eight hours. Work on special non-working days should be paid at 130% of normal salary, rising to 169% after eight hours.
Probation periods can last anywhere between one and six months, and should be mutually agreed between employee and employer. Once an employee reaches six months’ service, they are automatically assumed to have passed probation. Notice periods are a minimum of 30 days, and employers are permitted to pay in lieu of notice.
Compensation and Severance
Minimum wages in the Philippines vary between different regions, and also between agricultural or non-agricultural work. Rates range from 316 pesos (approx. £4.30; $5.45; €5.20) to 645 pesos per day (approx. £8.80; $11.10; €10.60), with non-agricultural work in metropolitan Manila subject to the highest rates.
Filipinos are also entitled to the ‘13th month’ bonus of one extra month of their usual salary, with tax applied at normal rates. Often this is paid in December in time for Christmas, but some employers choose to pay it in two installments, one in June and one in December. Staff in more senior, managerial positions are not entitled to this bonus.
In the case of severance pay, Filipino workers are entitled to one month’s wages for every year worked for the company. Any partly-served year of more than six months counts as a full year, in terms of calculating the length of service. The employee is also entitled to at least one month of notice before being terminated, provided the dismissal is without cause.
Tax & Withholding Considerations
As in many countries, income tax in the Philippines is levied at progressive rates. However, the thresholds are very high compared to earnings, and even people earning double the minimum wage in Manila won’t need to pay any income tax at all.
The first 250,000 pesos earned per year (approx. £3,400, $4,300, €4,100) is exempt, after which the first band of 15% kicks in. Further bands of 20%, 25% and 30% apply at gradually higher levels, until the highest band of 35% is applied to all earnings over eight million pesos per year (approx. £109,000, $138,000, €132,000).
Social security contributions are relatively low. Employers and employees each contribute 2.5% to the health insurance fund, and between 1% and 2% (depending on earnings) to the home development fund. The main social security payments are 10% from employers and 5% by employees. VAT is 12% and the general corporation tax rate is 25%.
The nature of the compliance regulations can make having an international payroll solution not just helpful, but necessary to keep up with the monthly contributions. Any overdue taxes are subject to a surcharge of up to 25%, which can quickly eat into a company’s profits.
Time Off & Paid Leave
The Philippines has one of the lowest paid leave entitlements anywhere in the world at just five working days per year. However, in practice, most employers offer substantially more than this. Unused leave can be carried over at employer’s discretion, but if it isn’t, employees should be paid for it in lieu instead.
The Philippines effectively has two types of public holiday from a payroll/employment perspective. There are around 12 ‘regular holidays’ each year, for which employees should receive paid time off, plus overtime rates if they’re required to work. But there are also around ten ‘special non-working days’ each year, where employees can take unpaid time off, but should be paid if they work. (See the ‘Employment Considerations’ section above for pay rates for these types of holidays.)
There are no legal requirements around sick leave (paid or unpaid), and employees are expected to use annual leave entitlement if they’re ill. However, many employees create their own sick leave policies that provide better provision in this area.
Paid maternity leave entitlement is 105 days, increasing to 120 days for single mothers; there are also an extra 30 optional unpaid days available. They receive 100% of salary paid by employers as a lump sum; however, employers can then claim back a maximum of PHP 70,000 (approx. £960; $1210; €1160) of this money from social security.
Paternity leave is seven paid days, also paid in full by employers and claimed back from social security. They can also receive a further seven transferred from the mother’s maternity leave entitlement.
In Summary
The Philippines is a great place to do business in the region, but it’s also a place where an understanding of the culture, people and ways of working is absolutely critical. In this regard, there really is no substitute for local experts, who can act as a bridge between workforce expectations and payroll practicalities. A good global payroll provider will be able to connect you to this expertise – not only in the Philippines, but in all the countries in which your organization operates.
This guide is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional. Click here to see more country payroll guides from CloudPay.