3 from tax perspective / 5 from social security perspective

Nothing specific, but with the rise in digital platform services, we are seeing an increasing global trend in case law and legislation aimed at protecting platform workers' labor rights. For more insight on these developments, along with other employment law updates, click here.

A finding that a contingent worker has been misclassified may result in:

(a) The contingent worker being declared as an employee of the business establishment, which will entitle the individual to greater employment law rights, such as the right not to be dismissed unless for a legal cause and after compliance with statutory process; right to minimum employment terms and conditions (e.g., minimum wage, leave benefits, working time, retirement pay, etc.); right to self-organize; and social security coverage.

(b) Liability for back wages and benefits in case the contingent worker has been terminated.

(c) Moral, exemplary and other forms of damages (including attorney's fees). A finding of bad faith may result in moral and exemplary damages equivalent to PHP 300,000 to PHP 500,000 (around USD 6,000 to USD 10,000). Attorney's fees is usually 10% of the total monetary award.

• 25% surcharge
• 12% interest per annum
• Compromise penalty up to a maximum amount of PHP 50,000 (around USD 1,000)

There are three social security agencies in the Philippines, which have different penalties, as follows:

(a) For the Social Security System, a fine of PHP 5,000 to PHP 20,000 (around USD 100 to USD 400), or imprisonment of 6 years and 1 day to 12 years, or both, at the discretion of the court. If the act or omission is committed by a corporation, its managing head or directors shall be liable for the penalties.

(b) For the Home Development Mutual Fund, a fine of not less than, but not more than, twice the amount involved or imprisonment of not more than 6 years, or both such fine and imprisonment, at the discretion of the court. When the offender is a corporation, the penalty shall be imposed upon the members of the governing board and the president or general manager.

(c) For the Philippine Health Insurance Corporation, fine of PHP 50,000 (around USD 1,000) for every violation per affected employee, or imprisonment of 6 months to 1 year, or both such fine and imprisonment, at the discretion of the court. If the employer is a juridical person, its officers and employees, or other representatives found to be responsible, shall be liable.

In all of the above, the business establishment may also be held liable to pay unremitted contributions plus any applicable interest and/or penalty until settlement of unpaid contributions.

There are three social security agencies in the Philippines, which have different penalties, as follows:

(a) For the Social Security System, a fine of PHP 5,000 to PHP 20,000 (around USD 100 to USD 400), or imprisonment of 6 years and 1 day to 12 years, or both, at the discretion of the court. If the act or omission is committed by a corporation, its managing head or directors shall be liable for the penalties.

(b) For the Home Development Mutual Fund, a fine of not less than, but not more than, twice the amount involved or imprisonment of not more than 6 years, or both such fine and imprisonment, at the discretion of the court. When the offender is a corporation, the penalty shall be imposed upon the members of the governing board and the president or general manager.

(c) For the Philippine Health Insurance Corporation, fine of PHP 50,000 (around USD 1,000) for every violation per affected employee, or imprisonment of 6 months to 1 year, or both such fine and imprisonment, at the discretion of the court. If the employer is a juridical person, its officers and employees, or other representatives found to be responsible, shall be liable.

In all of the above, the business establishment may also be held liable to pay unremitted contributions plus any applicable interest and/or penalty until settlement of unpaid contributions.

In cases of fraud, the employee or officer responsible for the violation can be held criminally responsible.

Imprisonment can be imposed by all three social security agencies for various lengths:

1. (a) Social Security System - 6 years and 1 day to 12 years
2. (b) Home Development Mutual Fund - not more than 6 years
3. (c) Philippine Health Insurance Corporation - 6 months to 1 year

The main employment law risk is misclassification. There are no laws governing engagement of contingent workers per se. Instead, to validly engage contingent workers in the Philippines (e.g., individual contractors, freelancers, consultants, etc.), the business establishment must ensure that: (1) the elements of an employment relationship are absent in its relationship with the contingent worker, and (2) the contingent worker has the characteristics of an independent contractor. The Philippines is a pro-employee jurisdiction, and the burden of proving the validity of the arrangement is with the establishment. In case of doubt, Philippine courts tend to rule in favor of the contingent workers. 

• Possible assessment for deficiency withholding taxes on compensation
• In addition to the basic deficiency tax, the following penalties may be imposed: (a) 25% surcharge; (b) 12% interest per annum; and (c) compromise penalty up to a maximum amount of PHP 50,000 (around USD 1,000)

Misclassification risk under the Social Security System, leading to liability for failure to pay employer social security contributions and failure to withhold and remit employee social security contributions.

In addition, the period spent as a contingent worker will be included in the calculation of retirement pay at the time of retirement.

The main employment law risk is misclassification. There are no laws governing engagement of "contingent workers" per se. Instead, to validly engage contingent workers in the Philippines (e.g., individual contractors, freelancers, consultants, etc.), the business establishment must ensure that (1) the elements of employment relationship are absent in its relationship with the contingent worker, and (2) the contingent worker has the characteristics of an independent contractor. The Philippines is a pro-employee jurisdiction, and the burden of proving the validity of the arrangement is with the establishment. In case of doubt, Philippine courts tend to rule in favor of the contingent workers.

Misclassification risk under the Social Security System, leading to liability for failure to pay employer social security contributions and failure to withhold and remit employee social security contributions

In addition, the period spent as contingent worker will be included in the calculation of retirement pay at the time of retirement.

Misclassification risk for three social security agencies, leading to liability for failure to pay employer social security contributions and failure to withhold and remit employee social security contributions

Possible assessment for deficiency withholding tax on compensation in case of a misclassification. In addition to the basic deficiency tax, the following penalties may be imposed: (a) 25% surcharge; (b) 12% interest per annum; and (c) compromise penalty up to a maximum amount of PHP 50,000 (around USD 1,000).