The Philippines has been proclaimed numerous times and over the years as the “call centre capital of the world”, the Philippines continues to be a preferred service provider for outsourcing. The Information Technology-Business Process Management Association of the Philippines (IBPAP) projected a 7% revenue growth rate in the business process outsourcing industry for 2024. However, to truly take advantage of the benefits of outsourcing in and to the Philippines, it is worthwhile to understand the evolution and types of outsourced activities to see which suits your company’s purpose.

Outsourcing to the Philippines started in the 1990s and bolstered during the same decade with a special law by the Philippine legislature designating certain geographic areas called “economic zones” where foreign companies seeking to outsource and hire Filipino workers can set up shop and avail of special tax and other fiscal incentives. To this extent, this type of outsourcing activity, which is the more common connotation of outsourcing, is known as “offshoring” because this is mainly taken advantage of by foreign companies offshoring certain internal business activities or business processes to the Philippines. For purposes of this Outsourcing Guide and unless otherwise distinguished, the discussions in this guide focus on offshoring as a type of outsourcing.

The activities that were offshored or outsourced to the Philippines started with basic support services to the main business such as customer support (mostly through call centres) handling customer-related services such as service onboarding, customer inquiries, and customer complaints. During those early years, most of these services were done over the telephone. This type of outsourcing took advantage of the similarity of language, that is, the relatively high English-speaking population of the Philippines.

Over the years, the type of services evolved to more sophisticated work that can be offshored to the Philippine workforce. No longer merely call centres, other business processes and back office functions of a company started to be offshored as well, such as administrative support, sales, billings and collections, data entry and transcription, and creative designs. The term “business process outsourcing” or “BPO” became mainstream as more and more activities or business processes within a company were outsourced.

As the BPO industry matured, there arose a higher form of offshoring known as “knowledge process outsourcing” and even highly specialised activities such as “legal process outsourcing”.

Knowledge process outsourcing or KPO refers to those activities that are outsourced and requires a higher level of education, knowledge, or skill, but were nonetheless still able to be done by the Philippine workforce. These activities that were outsourced includes accounting and finance, engineering designs, human resources, and information technology systems such as software programming, database maintenance, and tech support. This type of outsourcing took advantage of the similarity of professional studies, that is, the relatively same baseline educational system of certain professions applicable throughout the world.

Currently, at the higher end of the spectrum, legal process outsourcing or LPO has seen success in the Philippines, mostly with western countries outsourcing to Philippine-qualified lawyers certain specific subset of legal services such as contract review and discovery process relating to disputes.

In general, the main allure of outsourcing is the cost-saving benefit but maintaining the same quality of service by a company to its customers. Thus, the key players then and until now are mostly western countries such as the United States, the United Kingdom, and Australia, as well as some other western European countries such as France and Switzerland. Lately, some Singaporean and Indian businesses have also offshored some of its business process to the Philippines. The common denominator in most of these countries is that their medium of business communication is English which is the same for the Philippines.

The current (and even the past) attitude of the Philippine government and its regulators and implementing agencies have always looked favourably upon the business process outsourcing industry in the Philippines as an important and significant driver of economic growth. The Central Bank of the Philippines (Bangko Sentral ng Pilipinas) even recognised this in its publication when it mentioned that, based on the Philippine Development Plan (PDP) 2005-2010 and its successor, PDP 2011-2016, the Philippine government’s support to the industry has steadily increased, recognising that the Philippines is a top destination of choice for voice and non-voice services, for information technology-business process outsourcing, and for global in-house centres for multinational corporations.

Continuing this trend, the PDP 2023-2028 states that the key trend for BPO moving forward is the evolution from cost-saving to value-adding services. In line with the KPO, the health care industry represents a new area of growth opportunities for outsourcing and offshoring. To support all of these, the Philippine Department of Trade and Industry and the Department of Science and Technology have formulated the Fourth Industrial Revolution roadmaps outlining overall strategies for the necessary facilities and services to support the BPO industry and its players, as well as to help maintain their global competitiveness, to prepare the future workforce for the jobs of the future, to attract research and development of multinational and big tech companies to locate in the Philippines, and to establish AI-powered BPO and smart cities.

Because of these government initiatives and support, there is also a rise in the establishment of “shared service centres” in the Philippines whereby multinational companies with different subsidiaries and affiliates worldwide would establish an office in the Philippines that would share in the back office services provided by that office.

For others wanting to take a more cautious and baby steps approach, another key trend is engaging the services of a Philippine company providing “employer of record” (EOR) services to quickly hire a Philippine team and outsource work while studying in parallel the setting up of its own “owned” Philippine entity. An EOR is a third-party service provider that can immediately onboard the Philippine staff by putting them under its own payroll. Once the “owned” Philippine entity is registered, the staff are then migrated from the EOR to that owned entity.

An alternative option to the EOR model is simply hiring the offshore Philippine staff as independent contractors who would then be directly working with the head office team but remotely from the Philippines. However, this model has the most risk in terms of employment law and is a grey area from a case law perspective.

None. To procure service providers, Philippine government bodies are required to follow the requirements and procedures provided under the Government Procurement Reform Act (Republic Act No. 9184, as amended). In 2024, a new statute called the New Government Procurement Act (Republic Act No. 12009) was enacted into law and likewise, Philippine government bodies are required to follow the requirements and procedures to procure service providers, including activities they may wish to outsource.

None, but see our discussions under question 5.

Outsourcing in the Philippines is not governed by specific legislation but is subject to general laws and principles. These include the Civil Code of the Philippines, which outlines obligations and contracts, the Data Privacy Act of 2012, which serves as the primary law on privacy rights, and the Intellectual Property Code of the Philippines, which regulates intellectual property such as copyrights, trademarks, and patents.

Philippine contract law, influenced by Western legal traditions, addresses key aspects such as the formation, fulfillment, termination, and resolution of disputes. Contracts are legally binding between the parties, with their terms and conditions treated as law. In cases of disagreement, parties often rely on the provisions of their agreement to seek remedies.

The Philippines’ privacy regulations align closely with European standards, particularly those found in the General Data Protection Regulation (GDPR). Meanwhile, intellectual property laws in the country are shaped by international agreements to which the Philippines is a signatory. These include the Convention Establishing the World Intellectual Property Organization (1980), the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement) (1994), the Patent Cooperation Treaty (2001), and the WIPO Copyright Treaty (2002).

Within the Philippines itself, outsourcing by particular sectors does have sector-specific regimes and laws such as those for banks, insurance companies, and securities brokers/dealers. However, these Philippine laws do not necessarily apply to offshoring by those same sectors operating in a foreign country that would outsource certain business processes to the Philippines.

For example, if an American or Australian bank operating as a bank in their respective home countries wish to outsource its customer support services, the regime that would govern would also be respectively American or Australian laws governing those banks. As to the Philippine side, if the customer support team of those banks would operate in the Philippines, these offshored teams would not necessarily be governed by Philippine banking laws since they are not operating in the Philippines as a bank, but rather, only as part of the bank, particularly, operating in the Philippines as a customer support centre.

For reference, the following are the sector-specific regimes for companies operating as banks, insurances companies, and securities brokers/dealers, which apply to companies registered in the Philippines as such:

For Banks

Under the Manual of Regulations for Banks (MORB) issued by the Central Bank of the Philippines, banks are permitted to outsource specific services or activities to third-party providers or related entities within their group, provided such arrangements comply with existing regulatory guidelines. The purpose of outsourcing may include gaining access to specialized expertise or addressing operational constraints. However, outsourcing is subject to stringent requirements, including the establishment of robust processes, procedures, and information systems capable of identifying, monitoring, and mitigating operational risks associated with outsourced functions. Despite delegating these activities, the bank’s board of directors and senior management retain ultimate responsibility for ensuring that outsourced functions are performed in a secure and compliant manner, adhering to all relevant laws, rules, and regulations.

The MORB explicitly prohibits the outsourcing of certain core banking functions deemed essential to the institution’s operations. These include:

1. accepting deposits from the public;
2. granting loans or other credit exposures;
3. managing risk exposures; and
4. overseeing general management functions.

For Insurer/Reinsurer Functions

The Insurance Commission, through a Circular Letter, has identified specific functions that insurers and reinsurers are prohibited from outsourcing. These functions are integral to the conduct of “doing or transacting insurance business” and are considered essential to the operations of insurers and reinsurers. As such, they must remain under the direct control and supervision of the insurer or reinsurer. The non-outsourceable functions are outlined as follows:

1. Solicitation Activities: The task of soliciting insurance or reinsurance business is reserved exclusively for the insurer, reinsurer, licensed agents, or brokers. Outsourcing this function is strictly prohibited, except in circumstances explicitly authorized under guidelines issued by the Insurance Commission.
2. Risk Assessment and Acceptance Decisions: The evaluation and decision to accept or reject risks is a fiduciary responsibility of the insurer, reinsurer, or licensed non-life company underwriter(s). This function directly affects the insurer’s risk management framework and cannot be delegated to external parties.
3. Claims Approval or Rejection: Decisions regarding the approval or denial of insurance or reinsurance claims must be made solely by the insurer or reinsurer. These decisions are critical to ensuring adherence to policy terms, regulatory standards, and the maintenance of consumer trust.
4. Loss Adjustment: Activities related to loss adjustment, which involve assessing the scope and extent of an insured loss, are restricted to the insurer, reinsurer, or licensed independent or public adjuster(s). Such activities demand professional expertise and cannot be assigned to unlicensed entities.

Although the core functions cannot be outsourced, the Circular Letter allows insurers and reinsurers to engage business process outsourcing (BPO) providers for advisory or consultancy services related to these activities. However, these engagements are strictly limited to providing support and expertise. The decision-making authority and operational control over these functions must remain with the insurer or reinsurer.

The prohibition on outsourcing these key activities underscores the need for insurers and reinsurers to maintain direct accountability and uphold the integrity of their operations.

For Securities Broker Dealers

The Securities and Exchange Commission (SEC) has issued a memorandum circular governing the outsourcing activities of broker-dealers. Under this circular, broker-dealers are permitted to outsource back-office functions, subject to strict limitations. Specifically, broker-dealers are prohibited from outsourcing:

1. Material Activities: Functions deemed essential to the core operations of the broker-dealer; and
2. Client-Facing Activities: Any activity that involves direct interaction or contact with clients for purposes such as the buying and/or selling of securities or the solicitation of investments in securities, unless expressly permitted under the Securities Regulation Code, the Anti-Money Laundering Act (as amended), or other relevant laws, rules, or regulations.

Additionally, clearing and settlement activities may only be outsourced to service providers expressly authorized by the SEC to perform such functions.

Service providers engaged by broker-dealers for outsourced functions may further subcontract these activities, provided that:

1. The principles and standards outlined in the SEC memorandum circular are equally applied to the subcontractor;
2. The broker-dealer retains the right to prohibit any additional subcontracting by the service provider; and
3. Any subcontracting arrangement is not implemented without prior notice to the SEC.

Foreign companies outsourcing to the Philippines must also consider any statutory restrictions in their home jurisdictions that may affect the legality or execution of outsourcing arrangements.

The SEC’s guidelines emphasize the importance of maintaining control over critical activities and ensuring compliance with applicable legal and regulatory frameworks. By imposing these safeguards, the SEC seeks to uphold the integrity of the securities market and protect investors.

Generally, outsourcing will not trigger any notification or approval requirement under the Philippine Competition Act. Those arrangements that may require notification or approval are those defined as merger and acquisitions.

Acquisition refers to the purchase of securities or assets, through contract or other means, for the purpose of obtaining control by: (1) one (1) entity of the whole or part of another; (2) two (2) or more entities over another; or (3) one (1) or more entities over one (1) or more entities, while merger refers to the joining of two (2) or more entities into an existing entity or to form a new entity. Even then, not all mergers and acquisitions will require notification or approval as there is also a minimum transaction value to be considered a notifiable event.

Nonetheless, there are certain prohibited acts which an outsourcing arrangement should take care not to violate.

The first are anti-competitive agreements defined as follows:

1. The following agreements, between or among competitors, are per se prohibited:
   1. Restricting competition as to price, or components thereof, or other terms of trade;
   2. Fixing price at an auction or in any form of bidding including cover bidding, bid suppression, bid rotation and market allocation and other analogous practices of bid manipulation;
2. The following agreements, between or among competitors which have the object or effect of substantially preventing, restricting or lessening competition shall be prohibited:
   1. Setting, limiting, or controlling production, markets, technical development, or investment;
   2. Dividing or sharing the market, whether by volume of sales or purchases, territory, type of goods or services, buyers or sellers or any other means;
3. Agreements other than those specified in (a) and (b) which have the object or effect of substantially preventing, restricting or lessening competition shall also be prohibited, provided, those which contribute to improving the production or distribution of goods and services or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefits, may not necessarily be deemed a violation.

The second are abuse of dominant position which is when one or more entities abuse their dominant position by engaging in conduct that would substantially prevent, restrict or lessen competition such as:

1. Selling goods or services below cost with the object of driving competition out of the relevant market;
2. Imposing barriers to entry or committing acts that prevent competitors from growing within the market in an anti-competitive manner except those that develop in the market as a result of or arising from a superior product or process, business acumen, or legal rights or laws;
3. Making a transaction subject to acceptance by the other parties of other obligations which, by their nature or according to commercial usage, have no connection with the transaction;
4. Setting prices or other terms or conditions that discriminate unreasonably between customers or sellers of the same goods or services, where such customers or sellers are contemporaneously trading on similar terms and conditions, where the effect may be to lessen competition substantially;
5. Imposing restrictions on the lease or contract for sale or trade of goods or services concerning where, to whom, or in what forms goods or services may be sold or traded, such as fixing prices, giving preferential discounts or rebate upon such price, or imposing conditions not to deal with competing entities, where the object or effect of the restrictions is to prevent, restrict or lessen competition substantially;
6. Making supply of particular goods or services dependent upon the purchase of other goods or services from the supplier which have no direct connection with the main goods or services to be supplied;
7. Directly or indirectly imposing unfairly low purchase prices for the goods or services of, among others, marginalized agricultural producers, fisherfolk, micro-, small-, medium-scale enterprises, and other marginalized service providers and producers;
8. Directly or indirectly imposing unfair purchase or selling price on their competitors, customers, suppliers or consumers, provided that prices that develop in the market as a result of or due to a superior product or process, business acumen or legal rights or laws shall not be considered unfair prices; and
9. Limiting production, markets or technical development to the prejudice of consumers.

Generally, aside from those discussed in questions 7, outsourcing agreements are not restricted under competition law.

The Intellectual Property Code (IP Code) of the Philippines provides that intellectual property rights consist of copyright and related marks; trademarks and service marks; geographic indications; industrial designs; patents; layout designs (topographies) of integrated circuits; and protection of undisclosed information.

Any of these may be created in the course of an outsourcing agreement, depending on the type of outsourcing agreement the parties may enter into.

Ownership of an IP created by virtue of a contractual relationship shall follow the rules provided under the IP Code.

For instance, as a rule, the right to a patent shall belong to his inventor, his heirs, or assigns. If two or more persons have jointly made an invention, the right to a patent shall belong to them jointly.

However, in cases of commissioned work, the person who commissions the work shall own the patent, unless otherwise provided in the contract.

On the other hand, for works covered by copyright, the copyright shall belong to the author of the work.

However, in case a work is commissioned by a person other than an employer of the author and who has paid for such work made, the person who commissioned the work shall have ownership of the work, but the copyright thereto shall remain with the creator, unless there is a written stipulation to the contrary.

Additionally, in case a work is created by an author during and in the course of his employment, the copyright shall belong (a) to the employee, if the creation of the object of copyright is not a part of his regular duties even if the employee uses the time, facilities, and materials of the employer; or (b) to the employer if the work is the result of the performance of the employee’s regularly-assigned duties, unless there is an agreement, express or implied, to the contrary.

Ultimately, the ownership of an IP created by a supplier will depend on what is provided in the contract. If the contract did not provide for any rules regarding IP ownership, then it will follow the rule as indicated in the IP Code as described above.

The IP Code recognizes the protection of undisclosed information, which includes confidential information, know-how, and trade secrets. However, it must be noted that nothing in the IP Code requires the registration of such undisclosed information.

While the protection of the such undisclosed information is not elaborated under the IP Code, the Consumer Act of the Philippines provides that it is prohibited for any person to use for his own advantage, or to reveal, any information concerning any method or process which is considered as trade secrets, and hence, entitled to protection.

Additionally, parties usually include a confidentiality clause in their contracts which would generally provide that any confidential information obtained by one party from another party by virtue of such contractual relationship shall be regarded as confidential information, even after the contract has been terminated. Alternatively, it is also a common practice of some entities to simply enter into a confidentiality agreement or non-disclosure agreement to protect their confidential information, trade secrets, and other know-hows.

The Data Privacy Act of 2012 (DPA) provides for the laws regarding processing of personal data. It covers the processing of all types of personal information and applies to any natural and juridical person involved in processing personal information, including those personal information controllers (PIC) and personal information processors (PIP) who, although not found or established in the Philippines, use equipment that are located in the Philippines, or those who maintain an office, branch or agency in the Philippines.

The Implementing Rules and Regulations of the DPA provides for the rules to be followed when a PIC contracted a PIP in order to process personal information on their behalf. In case the PIC contracts a PIP, the DPA requires that the parties enter into a contract or any legal act which shall bind the PIP to the PIC and which shall set out, among others, the subject-matter and duration of the processing, the nature and purpose of the processing, the type of personal data and categories of data subjects, the obligations and rights of the personal information controller, and the geographic location of the processing under the subcontracting agreement.

When entering into an outsourcing arrangement, the parties must take into consideration the mandatory provisions that must be found in an outsourcing agreement, as provided under the DPA:

1. That the PIP shall only process personal data upon the documented instructions of the PIC;
2. Ensure that an obligation of confidentiality is imposed on persons authorized to process the personal data;
3. Implement appropriate security measures and comply with the DPA, its implementing rules, and any other issuances of the National Privacy Commission;
4. Not engage another processor without prior instructions from the PIC;
5. Assist the PIC, by appropriate technical and organizational measures and to the extent possible, fulfil the obligation to respond to requests by data subjects to the exercise of their rights;
6. Assist the PIC in ensuring compliance with the DPA, its implementing rules, and any other issuances of the National Privacy Commission;
7. At the choice of the PIC, delete or return all personal data to the PIC after the end of the provision of services relating to processing;
8. Make available to the PIC all information necessary to demonstrate compliance with the obligations laid down in the DPA, and allow for and contribute audits, including inspections conducted by the OIC or another auditor mandated by the latter;
9. Immediately inform the personal information controller if, in its opinion, an instruction infringes the DPA, its implementing riles, or any other issuances by the National Privacy Commission.

These outsourcing agreements should not be confused with data sharing agreements, which is the transfer of personal data from one PIC to another PIC, which has another purpose for processing different from the purpose of the first PIC. The National Privacy Commission has issued a separate guide which provides for the requirements on creating a data sharing agreement. While the National Privacy Commission requires the creation of an outsourcing agreement for transfer of personal data from a PIC to a PIP, the creation of a data sharing agreement for the transfer of personal data from a PIC to another PIC is not mandatory and is done for best practices only.

The DPA only covers personal data of data subjects. For non-personal data, it may be covered by any other contractual agreement by the parties, for instance, by a non-disclosure agreement or confidentiality agreement. These contracts are usually a separate document annexed or attached to the main outsourcing agreement.

The parties are free to include provisions in their non-disclosure or confidentiality agreements as long as such provisions are not contrary to law, morals, good customs, public order, or public policy.

The following are cybersecurity laws in the Philippines that may be relevant to outsourcing arrangements:

1. Internet Transactions Act – This act is for the regulation of e-commerce to protect consumer rights and data privacy, encourage innovation, promote competition, secure internet transactions, uphold intellectual property rights, ensure products standards and safety compliance, and observe environmental sustainability.
2. Cybercrime Prevention Act – This act provides for cybercrime offenses. Such cybercrime offenses include, among others, illegal access of any computer system, illegal interception of any non-public transmission of computer data, data interference or the intentional or reckless alteration, damaging, deletion, or deterioration of computer data, electronic document, or electronic data message, and misuse of devices. The Cybercrime Prevention Act also covers computer-related offenses (i.e. computer-related forgery, fraud, and theft) and content-related offenses.
3. Electronic Commerce Act – This act aims to facilitate domestic and international dealings, transactions, arrangements, contracts, and exchanges and storage of information through the utilization of electronic, optical and similar medium, mode, instrumentality and technology to recognize the authenticity and reliability of electronic documents related to such activities and to promote the universal use of electronic transaction in the government and general public.

These cybersecurity laws shall be taken note of by each party to an outsourcing arrangement.

Legislation has not caught up with advances in technology so there is no specific legislation regulating certain technologies like artificial intelligence, robotic process automation, cloud computing and blockchain/distributed ledger technologies.

However, there are special legislation that touch upon these subjects in a more general manner such as the Intellectual Property Code of the Philippines and Data Privacy Act for artificial intelligence and robotic process automation and the Securities Regulation Code for blockchain/distributed ledger technologies (assuming these functions as securities rather utility tokens).

The Labor Code of the Philippines mandates that employees are afforded the security of tenure, prohibiting their dismissal without just or authorized causes and due process. Thus, Philippine jurisprudence directs that outsourcing agreements cannot be used to circumvent the rights of employees to security of tenure.

Nonetheless, there are two types of outsourcing agreements under Philippine employment law: labor-only contracting and legitimate contracting. Labor-only contracting is prohibited under Philippine Law.

Labor-only contracting, according to a Department of Labor and Employment Order, occurs when:

1. Lack of substantial capital or resources: The contractor or subcontractor only provides, recruits, or assigns workers to carry out tasks that are directly linked to the principal employer’s core business, without sufficient capital or tools to operate independently.
2. Workers provided without independence: The contractor does not possess the necessary capital, equipment, or resources to conduct its business independently and merely acts as a supplier of workers.
3. Direct control by the principal employer: The workers supplied by the contractor perform duties that are integral to the principal employer’s main operations and are under the direct supervision and control of the principal employer.

The consequences of labor-only contracting arrangements are as follows:

1. The principal employer, who outsources the employees, becomes liable for the payment of wages and benefits of employees. He also bears the responsibility in complying with Philippine labor standards.
2. The contractor, the recruiting agent, may face penalties including fines and revocation of their business licenses
3. The workers gain the status of regular employee of the principal employer.

Legitimate contracting is allowed under Philippine law if the contractor or subcontractor:

1. Has substantial capital or investments in tools, equipment, or supervision.
2. Retains control and independence over the means and methods of accomplishing the contracted work.
3. Ensures compliance with labor laws and standards for its workers.

Finally, outsourcing agreements in the Philippines mandate full compliance with Philippine labor standards, including payment of minimum wage, holiday pay, overtime pay, and other statutory benefits provided under the Labor Code of the Philippines. Contractors and subcontractors are also obligated to remit mandatory contributions under the Social Security Act, Universal Healthcare Act, and the Home Development Mutual Fund Law.

In the Philippines, foreign companies seeking to hire local staff, a process often referred to as “offshore staffing,” can consider several approaches depending on their business needs and long-term objectives. These methods offer varying degrees of operational control, cost implications, and legal compliance requirements.

Options for Hiring Philippine-Based Staff:

1. Employer of Record (EOR) Model: The Employer of Record (EOR) model involves engaging a third-party Philippine company to serve as the legal employer of the staff. The EOR handles payroll, human resources, and compliance functions on behalf of the foreign company. In return, the foreign company pays the EOR for the employees’ salaries plus a service fee. This approach is particularly useful for companies looking for a simplified entry into the Philippine labor market without directly establishing a local entity.
2. Engaging Independent Contractors: Foreign companies may also hire Philippine-based workers as independent contractors. While this model may provide operational flexibility, it carries potential risks under Philippine labor laws. Misclassification of workers as independent contractors, when in practice they function as employees, can lead to compliance issues, including claims for employee benefits and security of tenure
3. Establishing a Philippine Entity: Foreign companies may choose to set up a local entity, such as a wholly-owned subsidiary, branch office, representative office, regional headquarters, or regional operating headquarters. Each type of entity serves distinct purposes and carries specific limitations, tax obligations, and potential exemptions. The choice of entity depends on the nature of the foreign company’s activities in the Philippines. Establishing a local entity enables companies to manage employees directly, including setting up payroll systems and ensuring compliance with local labor and tax regulations. Proper structuring and preparation are crucial to ensure a seamless transition and operational efficiency.
5. Many foreign companies initially opt for the EOR model or hire independent contractors to test the market or quickly scale operations. However, as their operations expand and the need for greater control over staff grows, companies often transition to establishing their own Philippine entity. This transition typically involves transferring employees from the EOR or independent contractor arrangements to the newly established local entity.

Under Philippine law, corporations are recognized as separate and distinct juridical entities, and employees are entitled to security of tenure. When transferring employees from an EOR to a foreign company’s local entity, certain legal and procedural steps must be followed:

1. Termination and Separation Pay: Employees may need to be formally terminated from the EOR, triggering the payment of separation pay. These costs are often passed on to the foreign company.
2. Recognition of Tenure: Consequently, employees’ tenure with the EOR may be recognized by the new entity, allowing them to retain their continuous employment status. This requires careful coordination to avoid disputes or claims.

Engaging legal and human resource professionals with expertise in Philippine labor and corporate law is strongly recommended to navigate the complexities of these processes effectively..

The general tax considerations are mostly favourable to outsourcing arrangements. As mentioned previously, the Philippine government looks at the entire outsourcing industry as an engine for economic growth. Thus, there are several tax legislations that are geared towards promoting the Philippines as a haven for outsourcing in general and offshoring in particular.

The Philippines has both general tax laws and special tax laws that provide both fiscal and non-fiscal incentives to outsourcing and offshoring arrangements. Offshoring arrangements are classified as export enterprises which are granted incentives to promote foreign currency inward remittance to the Philippines.

The latest general tax law is Republic Act No. 12066 (known as the CREATE MORE Act) which amended the National Internal Revenue Code of the Philippines, the general tax law of the Philippines. The CREATE MORE Act clarified the tax incentives of BPO companies that are registered with the various investment promotion agencies of the Philippines. Once registered, a BPO company can be classified as a “Registered Business Enterprise” (RBE) or a “Registered Export Enterprise” (REE) as the case may be.

RBEs and REEs now have the option to choose between a special tax rate called the Special Corporate Income Tax (SCIT) of 5% or the Enhanced Deductions Regime (EDR) for up to 17 or 27 years. Additionally, the CREATE MORE Act provides for a reduced 2% local tax based on its gross income which shall be in lieu of all local taxes, fees, and charges.

More importantly, the CREATE MORE Act acknowledges evolving business model by formally recognising work-from-home arrangements for RBEs operating within geographically-located economic zones without compromising their tax incentives despite their staff working outside of such geographic zones.

BPO companies that are export-oriented are also entitled to VAT zero-rate for their local purchases, while their importations are value-added tax (VAT)-exempt.

Other well-established special tax legislation that provides for fiscal and non-fiscal incentives to BPOs are The Omnibus Investment Code, The Special Economic Zone Act, and The Bases Conversion and Development Act.

While there are legislations and regulations on environment, social and governance (ESG), there is no specific law or regulation that pertains to outsourcing arrangements. The current ESG legislations and regulations are mostly applicable to certain industries, rather than outsourcing practices of those industries. For example, there are specific ESG regulations for publicly-listed companies, banks, and insurance companies.

There are laws of general application that apply even to BPO companies with operations which are more labour-intensive such as the Anti-Sexual Harassment Act, the Safe Spaces Act, and the Anti-Trafficking in Persons Act. All of these laws should be embedded into a BPO company’s employee handbook and code of conduct to ensure compliance with Philippine laws.

BPO companies are mostly service exports, thus, there is not much of an issue with regard to export controls.

However, the DPA applies to all transfers of personal data, even transfers of such to entities outside the Philippines. Because each country has different privacy laws, in cases of cross-border transfers or multi-jurisdictional outsourcing arrangements, laws of one party may conflict with the privacy laws of another party.

Under Philippine law, certain liabilities cannot be contractually excluded due to mandatory application of statutes and public policy considerations.

Philippine laws enumerate the following non-excludable liabilities:

1. Liabilities from fraud or bad faith (Civil Code, Art. 1171): Parties, even through mutual agreement, cannot waive liability due to bad faith and fraud.
2. Liabilities from gross negligence (Civil Code, Art. 1172): Courts are empowered to enforce liabilities for negligence, particularly when it leads to harm, injury, damages, or even death.
3. Liabilities from public policy or mandatory laws (Civil Code, Art. 1306): Contractual stipulations that exclude liability for being contrary to law, morals, good customs, public order, or public policy are deemed void.
4. Liabilities under labor laws: An employment contract in the Philippines, imbued with public interest, cannot stipulate that employers exclude liability for statutory benefits or violation of labor standards.
5. Liabilities for consumer protection: The Consumer Protection Act of the Philippines mandates that implied warranties over products or services cannot be waived, prohibiting unfair trade practices and holding manufacturers, distributors, service providers, and sellers liable for defective products or services.
6. Liability for data privacy breaches: The Data Privacy Act of 2012 assigns accountability to the Personal Information Controller, even if a third-party processor is involved.

Contractual disputes involving outsourcing arrangements are resolved through negotiation, mediation, arbitration, or litigation.

1. Negotiation and Mediation: This method attempts to resolve disputes through amicable dialogues between stakeholders and parties. This is typically contractually stipulated to allow the parties to remedy internal conflicts.
2. Arbitration: The Alternative Dispute Resolution Act of 2004 promotes arbitration as a mechanism for resolving disputes. Arbitrations can be contractually stipulated as either institutional arbitration or ad-hoc arbitration.
3. Litigation: If alternative methods fail to settle conflict, the dispute may be resolved through litigation under the Philippine court system.

In relation to contractual breaches, the remedies commonly available are specific performance, rescission, and damages.

1. Specific performance: The Civil Code of the Philippines provides that a non-breaching party may demand the performance of a contractual obligation to the breaching party when the latter failed to comply with its obligations.
2. Rescission of the contract: The Civil Code of the Philippines allows for rescission in reciprocal obligations when one party fails to fulfill his contractual obligations.
3. Damages: The Civil of the Philippines provides that a non-breaching party may claim for damages for losses incurred due to the breach. The damages include the natural and probable consequences of the breach.

Outsourcing in the Philippines is under the scope of regulatory oversight of appropriate government agencies, primarily, the Department of Labor and Employment (DOLE). The enforcement measures of regulatory agencies include the imposition of fines, suspension or revocation of business licenses, civil and criminal liabilities, and administrative sanctions for non-compliance with mandated regulations.

1. Fines and penalties: Regulatory government agencies, such as the DOLE, impose fines and penalties for violations of labor standards and its issuances.
2. Suspension or revocation of business licenses: The DOLE, through its Department Order, provides for the suspension or cancellation of registration of erring contractors or subcontractors.
3. Civil and criminal liability: Breaches that involve fraud, gross negligence, or illegal contacting may result in civil or criminal liability.
4. Administrative actions: Appropriate government agencies may initiate administrative actions for violation of labor laws or data privacy rules.
5. Contractual remedies: The Civil Code of the Philippines allows parties to stipulate the enforceability of unliquidated damages, provided it is not unconscionable.