Philippine law assesses employment status by the substance of the relationship, applying the four fold test with control as the decisive factor. The label on the earlier agreement does not settle it.
So the question is not whether the person becomes an employee on conversion day. It is whether they already were one. If they were, the earlier period potentially carries:
Unremitted SSS, PhilHealth and Pag-IBIG contributions, with penalties.
13th month pay for the period worked.
Withholding tax that should have been deducted at source.
Service credit counting from the original start date, which affects separation pay calculations and regularisation.
Employment & Compliance
Converting a Philippine contractor to a full-time employee
In short
Conversion itself is straightforward. The complication is the prior period. If the relationship was already employment in substance, the earlier months may carry unpaid contributions, 13th month pay and withholding obligations, and length of service may be counted from the original start date rather than the conversion date.
This is one of the most common situations we see. A company engages someone as a contractor, it works, the role grows, and 12 months later everyone agrees they should be a proper employee. The conversion is the easy half. The half that needs thought is what the previous 12 months were, legally.
Why the prior period matters
The honest assessment
Work through the substance of the arrangement as it actually ran.
Did you set their working hours? Did they report to a manager? Did you direct method rather than assess outcome? Did they work only for you? Did they use your systems and equipment? Were they doing work that is necessary and desirable to your core business, continuously?
The more of those that are yes, the more the prior period looks like employment that was labelled otherwise. That is not a reason to avoid converting. It is a reason to take advice on the exposure before you do, so the decision is made with the number in front of you.
Did you set their working hours? Did they report to a manager? Did you direct method rather than assess outcome? Did they work only for you? Did they use your systems and equipment? Were they doing work that is necessary and desirable to your core business, continuously?
The more of those that are yes, the more the prior period looks like employment that was labelled otherwise. That is not a reason to avoid converting. It is a reason to take advice on the exposure before you do, so the decision is made with the number in front of you.
How the conversion itself works
Mechanically it is a new employment relationship under Philippine law, whether through your own entity or through employer of record infrastructure.
An employment contract replaces the services agreement.
The person is enrolled with SSS, PhilHealth and Pag-IBIG.
Withholding tax on compensation begins at source.
Semi monthly payroll starts, at intervals not exceeding 16 days.
13th month pay accrues from the employment start date.
Statutory leave and holiday entitlements apply.
An employment contract replaces the services agreement.
The person is enrolled with SSS, PhilHealth and Pag-IBIG.
Withholding tax on compensation begins at source.
Semi monthly payroll starts, at intervals not exceeding 16 days.
13th month pay accrues from the employment start date.
Statutory leave and holiday entitlements apply.
The probation question
A common instinct is to put the converted person on a 6 month probationary period. Be careful with this.
Probation exists to assess suitability for a role. Where the person has already performed the same work for you for a year, a probationary period is difficult to justify and easy to characterise as an attempt to reset security of tenure. If the prior relationship is later found to have been employment, the regularisation clock likely ran from the original start date regardless.
Probation exists to assess suitability for a role. Where the person has already performed the same work for you for a year, a probationary period is difficult to justify and easy to characterise as an attempt to reset security of tenure. If the prior relationship is later found to have been employment, the regularisation clock likely ran from the original start date regardless.
Pay, and the number that surprises people
Contractors quote a rate that absorbs their own tax and contributions. Employees do not.
Converting at the same headline number is usually a pay cut in the person's hands, because deductions now come off it. Meanwhile your total cost rises, because employer contributions and 13th month pay sit on top of gross salary. Statutory employer costs run roughly 11 to 16 percent depending on seniority, falling as salary rises because SSS, PhilHealth and Pag-IBIG all cap out.
Model both sides before you make the offer. The conversation goes badly when the employee discovers the net change after signing.
This is general information rather than legal advice. Where a prior contractor period is involved, take advice from a Philippine employment lawyer before converting.
Converting at the same headline number is usually a pay cut in the person's hands, because deductions now come off it. Meanwhile your total cost rises, because employer contributions and 13th month pay sit on top of gross salary. Statutory employer costs run roughly 11 to 16 percent depending on seniority, falling as salary rises because SSS, PhilHealth and Pag-IBIG all cap out.
Model both sides before you make the offer. The conversation goes badly when the employee discovers the net change after signing.
This is general information rather than legal advice. Where a prior contractor period is involved, take advice from a Philippine employment lawyer before converting.
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