Employment Structure Matters

About the Author

Martyn Ryan is a Co-Founder of Ryoss, a consulting firm that specialises in helping international businesses establish and operate successfully in the Philippines. Over more than a decade working closely with the Philippine market, Martyn has advised companies across Australia, North America and Europe on how to structure their operations, workforce and compliance frameworks so they can access the country’s exceptional talent while operating with confidence.

Throughout this time, Martyn has seen firsthand both the opportunities the Philippines offers and the challenges businesses face when they enter the market without the right guidance. Many organisations initially arrive with strong intentions but are given incomplete or misleading advice about how hiring, employment structures and outsourcing arrangements should work. The result can be poorly designed employment models, compliance failures and workers who are not treated with the level of professionalism and protection they deserve.

Why Foreign Companies Cannot Simply “Hire Directly” in the Philippines

The compliance realities of international hiring, and why the details matter

Global remote work has fundamentally changed how businesses think about talent. Today, a company in Sydney, London or San Francisco can access skilled professionals almost anywhere in the world. Few markets have benefited more from this shift than the Philippines.

With a workforce of nearly two million professionals working across the IT-BPM and outsourcing sector, and an industry generating more than US$35–40 billion in annual export revenue, the Philippines has established itself as one of the most mature and capable offshore talent markets globally.

For international businesses looking to scale operations, the attraction is clear: a highly educated, English-proficient workforce combined with a strong cultural alignment with Western organisations.

However, while hiring talent internationally has become easier technologically, the legal and regulatory frameworks governing employment have not changed. And this is where many companies encounter difficulties.

At Ryoss, a large proportion of the work we undertake with new clients begins with a situation where a company has already attempted to hire in the Philippines but later discovered that the structure they used was not compliant with local labour law.

In many cases, the original advice seemed reasonable. The company was told that it could simply hire someone as a contractor, pay them directly from overseas, or operate informally until the team grew larger. On the surface, these approaches can appear efficient and low risk.

But when something goes wrong, when a worker raises a claim, when a relationship deteriorates, or when regulators review the arrangement, the consequences can be significant.

This paper explains why those risks arise and why experienced international employers take a far more structured approach to hiring in the Philippines.

The Philippine labour framework: substance over form

Employment relationships in the Philippines are governed by the Philippine Labor Code, overseen by the Department of Labor and Employment (DOLE) and adjudicated through the National Labor Relations Commission (NLRC).

At the heart of Philippine labour law is a principle that international employers sometimes underestimate:

• The reality of the working relationship matters more than the wording of the contract.
• Courts and regulators do not rely solely on what an agreement calls the worker. Instead, they assess the actual nature of the relationship.

This assessment is commonly known as the “control test.”

If a company exercises control over how work is performed, supervises the individual’s activities, integrates them into the organisation, or relies on them as part of its operations, the worker may legally be considered an employee, even if the contract describes them as an independent contractor. This distinction is critically important. Once an individual is deemed to be an employee, the employer must comply with a range of statutory obligations under Philippine law.

“In the Philippines, calling someone a contractor does not make them one.
If the relationship functions like employment, the law will treat it as employment.”

Statutory obligations employers must meet

If a worker is classified as an employee in the Philippines, the employer is required to comply with several statutory obligations designed to protect workers.

These include mandatory contributions to national benefit systems such as:

• Social Security System (SSS): providing retirement, disability and social protection benefits
• PhilHealth: the national healthcare programme
• Pag-IBIG Fund: housing and social savings contributions

Employees are also legally entitled to 13th-month pay, which effectively provides an additional month’s salary each year. Beyond these statutory contributions, the Labor Code provides broader protections around:

• employee benefits and leave entitlements
• retirement provisions
• due process requirements in termination cases
• security of tenure protections for regular employees

For foreign companies unfamiliar with the Philippine system, these obligations can initially appear administrative. But if they are overlooked, the legal exposure can become significant.

Misclassification: the most common compliance failure

The most frequent problem we see involves the misclassification of employees as independent contractors. This typically happens when a company hires a Filipino professional directly from overseas, signs a contractor agreement, and pays the individual without establishing a local employment structure.

For a period of time, the arrangement may appear to work perfectly well. However, as the working relationship evolves, the contractor often becomes more integrated into the company’s operations. They begin working regular hours, reporting to supervisors, using internal systems and performing functions central to the organisation.

At that point, the arrangement begins to resemble employment rather than independent contracting. If a dispute arises and a labour tribunal determines that the worker should have been classified as an employee, the employer may be required to provide retroactive entitlements. These can include:

• unpaid statutory contributions
• back wages and benefits
• unpaid 13th-month pay
• penalties and interest
• damages related to labour claims

In some cases, the court may also order the employer to regularise the employee’s status, providing additional protections under the Labor Code.

What initially appeared to be a simple offshore hiring arrangement can quickly become a complex compliance issue.

When contractor models fail: lessons from case law

Philippine courts have consistently reinforced the principle that substance prevails over form when determining employment relationships. Several notable cases illustrate how this plays out in practice.

In a widely discussed ruling involving delivery riders working for an e-commerce platform, the Philippine Supreme Court determined that the workers had been misclassified as contractors. The court concluded that the level of operational control exercised by the company established an employer-employee relationship. Similar disputes have emerged in the remote work environment.

In one case involving a Filipino virtual assistant working for a foreign company, the worker challenged her classification as a contractor. Despite being paid as a freelancer, the tribunal determined that the working arrangement resembled employment because of the level of supervision and integration into the company’s operations.

The court ultimately recognised the worker as an employee under Philippine labour law. These cases highlight a broader pattern: when a worker becomes embedded in an organisation’s daily operations, the contractor label rarely holds up under legal scrutiny.

Labour-only contracting: increased regulatory scrutiny

In addition to misclassification disputes, the Philippine government has taken steps to address what is known as labour-only contracting. Under Department Order No. 174, labour-only contracting arrangements are prohibited where an intermediary supplies workers but lacks substantial capital or operational independence.

In such cases, the principal company may be legally deemed the employer. Government inspections over recent years have identified thousands of companies suspected of labour-only contracting arrangements, affecting hundreds of thousands of workers. For foreign companies entering the market without experienced guidance, it is easy to unintentionally create a structure that falls within these prohibited categories.

The risks extend beyond legal liability

While legal penalties are a major concern, the consequences of misstructured employment arrangements extend well beyond regulatory exposure.

One of the most immediate impacts is workforce instability. Workers engaged informally or without proper benefits often experience reduced job security and lower engagement. Over time, this can lead to higher attrition and reduced team cohesion. Reputational risk is another factor. In an increasingly connected world, disputes around employment rights can quickly surface in public forums or professional networks, potentially affecting a company’s brand.

Operational disruption is also common. When a labour dispute arises, businesses often need to rapidly restructure their employment arrangements, regularise staff and resolve historical obligations. And finally, the financial implications can be substantial. Retroactive contributions, legal costs and regulatory penalties can accumulate over multiple years.

In many cases, the cost of resolving the issue significantly exceeds the cost of establishing a compliant structure from the outset.

Why businesses should not sweep this under the carpet

At Ryoss, we encourage international businesses to think about offshore hiring in terms of employment infrastructure, not simply access to talent. The most successful offshore operations are built on structures that support both the employer and the employee.

This includes ensuring that workers:

• receive their statutory contributions
• are covered by compliant employment contracts
• have access to healthcare benefits and insurance
• are integrated into a professional working environment

For employers, this infrastructure creates transparency and protection.

It ensures:

• clear payroll and tax reporting
• documented HR processes
• compliance with local labour law
• stronger workforce stability
• reduced exposure to disputes

In other words, the infrastructure protects both sides of the relationship.

Structuring employment correctly

For international businesses hiring in the Philippines, there are three recognised approaches to structuring employment in a compliant way.

1. Establishing a local entity

Companies can incorporate a Philippine entity and employ staff directly. This provides full control but requires regulatory registration, ongoing compliance and administrative oversight.

2. Using an Employer of Record (EOR)

An Employer of Record legally employs the worker while the foreign company manages their day-to-day activities. The EOR handles payroll, statutory contributions, benefits and employment compliance.

3. Build-Operate-Transfer (BOT) models

For larger teams, a Build-Operate-Transfer structure allows an intermediary to establish and operate the team initially before transferring ownership to the client once the operation reaches scale. Each of these structures exists to ensure that businesses can access talent while remaining fully compliant with Philippine labour law.

Buyer Beware

Unfortunately, the offshore hiring market has developed in a way where misinformation, oversimplification, and a lack of disclosure are not uncommon.

In particular, we frequently encounter situations where:

• the true salary of the employee is not disclosed to the client
• statutory contributions are unclear or inconsistently managed
• providers offer unfounded legal advice regarding contractor structures
• agreements lack detail around employment protections and obligations
• workers are treated as transactional resources rather than genuine employees
• the client is given very little transparency about where their money is actually going

These practices are problematic not only from a compliance perspective, but also from an ethical one.

The Philippines is home to a highly capable, professional workforce that is eager to contribute to international organisations. When employment models are designed poorly or without care, it is often the workers themselves who are most exposed to risk.

Responsible businesses should aim to create genuine employment opportunities that respect both the law and the people performing the work.

Putting the business first

When selecting a provider to support offshore hiring, business owners must approach the decision with the same level of diligence they would apply to any other strategic business partnership.

While pricing will always be a consideration, it should never be the sole determining factor.

If a provider’s offering appears dramatically cheaper than the rest of the market, it is important to understand why.

In many cases, the difference can be explained by:

• hidden margins within payroll structures
• reduced employee benefits
• incomplete statutory compliance
• misclassification of employees as contractors
• limited HR infrastructure
• or simply a lack of transparency around the employment model

When things are running smoothly, these details can seem trivial. However, when an employee raises a claim, when a dispute occurs, or when authorities review the arrangement, those details quickly become very important.

For this reason, the most responsible approach is to put the long-term stability of the business first and ensure that any employment structure is both transparent and compliant.

Questions every business should ask a provider

One of the most effective ways to assess a provider is simply to ask clear and direct questions about how the employment model works.

A reputable provider should be comfortable answering questions such as:

• Who is the legal employer of the worker?
• What salary does the employee actually receive?
• What statutory contributions are paid on behalf of the employee?
• How are SSS, PhilHealth and Pag-IBIG contributions managed?
• What employee benefits are included in the employment package?
• How are management fees structured and disclosed?
• What HR support and protections are provided to employees?
• What happens if a labour dispute or compliance issue arises?
• How are employment contracts structured and governed?

The quality and clarity of the answers to these questions often reveal a great deal about the integrity of the provider.

Warning signs to watch for

Business owners should also carefully review agreements and documentation before committing to any offshore hiring arrangement. Certain patterns may indicate a higher level of risk. These include:

Lack of salary transparency: If the provider is unwilling to disclose what the employee actually earns, this is a major red flag.

Single bundled pricing models: Agreements that present a flat “seat price” without breaking down salary, statutory contributions and service fees can obscure important details.

Vague claims about compliance: Statements such as “we take care of compliance” without explaining how contributions, taxes and employment obligations are fulfilled should be treated cautiously.

Contractor models presented as legally risk-free: If a provider confidently claims that long-term contractor arrangements carry no risk under Philippine labour law, independent legal advice should be sought.

Minimal documentation: A lack of structured employment contracts, HR frameworks or employee benefit programmes may indicate that the underlying employment model is loosely managed.

The reality of the market

It is important to emphasise that there are many excellent providers operating within the Philippines who take compliance, transparency and employee wellbeing very seriously.

The challenge for business owners is simply knowing how to distinguish responsible operators from those whose models are built primarily around cost positioning and speed of acquisition.

When the right provider is selected, offshore hiring can be one of the most powerful ways for businesses to scale capability, increase resilience and unlock new opportunities.

But achieving those outcomes requires a structure that protects both the organisation and the people working within it.

The Philippines offers extraordinary talent and professionalism.

The responsibility lies with businesses, and the providers they choose to work with, to ensure that opportunity is built on foundations that are transparent, compliant and fair for everyone involved.

The Ryoss perspective

The Philippines remains one of the most attractive global markets for skilled professionals, and many international companies have built highly successful teams there.

However, one of the most consistent lessons we have observed is that compliance should never be treated as an afterthought.

At the beginning of an offshore hiring journey, many of the regulatory details can appear administrative or even trivial.

But when something goes wrong, when a dispute arises, when an employee raises a claim, or when regulators review the structure, those details suddenly become extremely important.

This is why our approach at Ryoss has always been clear:

• Start with compliance.
• Build the right employment infrastructure.
• Protect both the business and the people working within it.

When the structure is right from the beginning, companies can focus on what truly matters, building capable teams, scaling operations and growing their business with confidence.