Australian businesses hiring in the Philippines usually arrive at the same three options: engage the person as a contractor, use a PEO, or use an Employer of Record.
The three get talked about as if they are variations on the same idea. They are not. They differ on the question that matters most, which is who legally employs the person, and that answer determines who carries the risk if something goes wrong.
This article covers what each arrangement actually involves and how to work out which one fits. If you want the detail on how an Employer of Record works, our Employer of Record page covers it properly.
The three arrangements, briefly
| Contractor | PEO | Employer of Record | |
|---|---|---|---|
| Who legally employs the person | Nobody, in theory. They work for themselves | You, through your own local entity | The EOR provider |
| Do you need a Philippine entity | No | Yes | No |
| Who runs payroll and statutory contributions | The contractor handles their own | You, with the PEO administering | The EOR |
| Who directs the day-to-day work | You, in practice, which is the problem | You | You |
| Where the misclassification risk sits | With you | Limited | With the EOR |
| Typical fit | Genuine project work | Businesses already established locally | One or a few staff, no local entity |
Engaging someone as a contractor
This is where most businesses start, because it is the easiest thing to set up. You agree a rate, they invoice you, you pay them.
It genuinely works when the relationship is genuinely a contracting one. Someone running their own business, with other clients, using their own equipment, delivering defined pieces of work on their own schedule. A designer you use for occasional projects is a contractor. That is a real and legitimate arrangement.
The trouble starts when the label and the reality diverge. If you set the hours, direct how the work is done, provide the systems, and the person works only for you, the contract saying independent contractor does not settle the question.
Philippine courts look at the substance of the relationship rather than the paperwork, weighing who selected and engaged the worker, who pays them, who can dismiss them, and, most decisively, who controls the manner in which the work is performed.
It is worth understanding how the Philippine system approaches these questions. Article 4 of the Labor Code of the Philippines states that all doubts in interpreting the Code are to be resolved in favour of labour. That is a deliberate feature of Philippine employment law, and it means a borderline arrangement is not likely to be read your way.
If the relationship is later treated as employment, the obligations that were never met become payable, including statutory contributions and 13th month pay, which is required under Presidential Decree No. 851 at one twelfth of basic salary for the calendar year.
This is general information rather than legal advice, and your circumstances may differ. It is worth confirming with an adviser before deciding.
Where a PEO fits, and why it usually does not
A Professional Employer Organisation is often mentioned alongside an EOR as though the two are interchangeable. For most Australian small businesses, one of them is not available.
Under a traditional PEO arrangement, the provider becomes a co-employer alongside your business. It administers payroll, benefits and HR while you remain the employer of record in the legal sense. That requires you to have a legal entity in the country where the person works.
If you have no Philippine entity, a PEO does not solve your problem, because there is no employer for the PEO to sit alongside. That is the practical difference between the two, and it gets blurred constantly because some providers use the terms loosely.
A PEO makes sense if you already have a Philippine company and want to hand off payroll and HR administration. If you are an Australian business with two staff and no entity, it does not apply.
Employer of Record
Under an Employer of Record arrangement, the provider is the legal employer. There is no requirement for you to have a local entity, because the EOR already does.
For us, that is Digitek Operations Inc., our Philippine company. It holds the employment contract, runs payroll in pesos, and handles the statutory contributions and local obligations. You direct the work, set priorities and manage performance, exactly as you would with anyone else on your team.
The person is a properly employed staff member on a local contract rather than a contractor, so there is no misclassification question to resolve later. That is the point of the arrangement.
How Employer of Record works with Digitek
Setting up your own entity
The fourth option, which is worth stating honestly because it is sometimes the right answer.
Registering a Philippine company gives you full control and, at sufficient scale, the lowest cost per head. It also means incorporation, local officers, a registered office, a bank account, tax registration and a compliant payroll function.
That workload is much the same whether you employ two people or fifty. Somewhere above roughly fifteen to twenty staff the maths usually turns in favour of your own entity. Below that, the overhead is difficult to justify.
If your accountant has recommended setting one up, follow that advice rather than ours. They know your structure.
How to choose
Work through these in order.
Is the work genuinely independent? If the person will run their own schedule, use their own tools and serve other clients, a contractor arrangement is legitimate. If you will direct their day, it is employment in substance and should be structured that way.
Do you have a Philippine entity? If yes, a PEO is available to you. If no, it is not, and the realistic choice is between an EOR and setting one up.
How many people, and for how long? One to a handful of long-term staff points to an EOR. Fifteen or more points towards your own entity.
Who do you want carrying the employment risk? Under an EOR it sits with the provider. Under a contractor arrangement it sits with you.
Will the person handle customer data? If so, Australian Privacy Principle 8 covers cross-border disclosure of personal information, and you remain accountable for how that information is handled regardless of which arrangement you choose. Worth understanding before you start rather than after.
Frequently asked questions
What is the difference between an Employer of Record and a PEO?
An Employer of Record becomes the legal employer of your staff member, so you do not need a company in that country. A PEO co-employs alongside your own local entity, administering payroll and HR while you remain the legal employer. The practical difference is the entity requirement. If your business has no company in the Philippines, a PEO arrangement is not available to you and an Employer of Record is.
Can I just engage my Philippine staff member as a contractor?
Only if the relationship is genuinely independent. Philippine authorities look at the substance rather than the contract wording, weighing who engaged the person, who pays them, who can dismiss them and, most importantly, who controls how the work is done. If you set the hours, direct the method and the person works only for you, a contractor label is unlikely to hold. The Labor Code also directs that doubts be resolved in favour of labour.
What happens if a contractor is later treated as an employee?
The obligations that should have applied become payable, which can include statutory contributions, leave entitlements and 13th month pay under Presidential Decree No. 851. Exposure builds over the length of the engagement rather than starting from the day the question is raised, which is why the arrangement is worth getting right at the outset rather than revisiting later.
Do I need my own company in the Philippines to hire someone there?
No. That is precisely what an Employer of Record is for. The provider already holds the local entity and employs the person on your behalf, so you can have a properly employed staff member in the Philippines without incorporating, appointing local officers or running a Philippine payroll yourself.
At what point should I set up my own Philippine entity?
It is a question of scale. The administrative work of incorporating and running a compliant local payroll is much the same for two staff as for fifty, so the cost per person falls as the team grows. Most businesses find their own entity starts to make sense somewhere above fifteen to twenty staff. Below that, an Employer of Record is usually the more practical route. Your accountant is the right person to confirm it for your structure.
Working out which one fits
If you are weighing these up, the useful starting point is the role itself. How many hours, how much direction, how long you expect the arrangement to run, and whether the person will handle anything sensitive.
Tell us what the role looks like and we will tell you honestly which arrangement suits it, including when the answer is that you do not need us.
