Why So Much Advice About Filipino VA Compliance Is Wrong

There is a shocking amount of really terrible information out there about this. And what's even worse is all the information looks super reliable and authoritative until you realize what their incentive is in creating that content teaching you about compliance. The reality is that almost all content that has been created around compliance has the incentive structure of trying to get you to use their employer of record service, which means they're not only not giving necessarily correct advice, they're actively trying to lead you into paying for something that you probably don't need. And it doesn't get better with asking AI either, because AI has been fed all of this poorly incentivized content that is teaching the wrong things. Welcome to the Secret Sauce of Outsourcing Podcast that's dedicated to making you better at outsourcing to the Philippines. This is episode 472, Compliance and Taxes, and we are going to cover something that it is shocking how terrible the information is online around this. So in preparing for this podcast, I asked ChatGPT about compliance and I got all this information that was like, wow, that's really different than what I've thought for 20 years. And I started reading it and then I was like, well, I should like verify all this stuff because I've talked to multiple attorneys in the past and I have like hundreds of thousands of user experiences that say different than what ChatGPT is saying. And so I started reading and found, wow, everything is confirming what ChatGPT says. But I don't know, man, like, this is weird. And so I want to get into this and why almost everything you will find online about this is wrong. And I was shocked at what I found. So before I get into this, Let me tell you, I am not an attorney. I am not an accountant. You should contact your attorney and your accountant and ask their advice on this. I am not qualified to give you legal advice. However, here's what I've seen over the last 20 years and seeing hundreds of thousands of people across really all countries who are hiring people in the Philippines. That person is an independent contractor. The Philippines government in reality will not allow you to classify them as an employee unless you do specific things. Which one of them is you must have a business in the Philippines, like legally registered business in the Philippines. There are no tax obligations for you with the VA that you're hiring in the Philippines. And it is very difficult to turn that person from an independent contractor into an employee regardless of what you do. That's the short. Now let's get into the why. So when I first started hiring people in the Philippines, I just kind of ignored all compliance issues. And then I went to my accountant and he was like, yes, what you're doing is fine. He filed it under subcontractors. They're a subcontractor. Did you do this or this? Like, are you dictating the exact hours they have to work? Do they come into work? Do you force them to work on this specific computer or whatever? Like, no, I don't do any of that stuff. He was like, well, then they're a subcontractor, period. And over the years I had multiple people ask, and so we kind of pursued it and we found an attorney in the Philippines and they confirmed like, yeah, there's really no way for you to classify this person as an employee unless you really, really want to, but you have to set up a business in the Philippines in order to do that. That's the only way that the Philippines government will allow you to classify them as an employee. They won't let you withhold taxes and submit taxes, or they won't let you pay their SSS or their PhilHealth unless you have a legal entity in the Philippines. You can't do it. They can do it for themselves. They have to do it for themselves, but you can't do it unless you have a legal entity in the Philippines. And this is what this attorney in the Philippines confirmed to us. We went to someone else and we were like, hey, what do you think? And they said the same thing. And so we were like, well, you know, like this is what compliance is. So then we started asking people in the US, like, what are the compliance issues? Well, we got led to the tax treaty with the Philippines, and I read the whole tax treaty and it confirmed everything that we've said. Like, you got to comply with labor laws, but if your business is in the US and they're in the Philippines, they're responsible for their taxes. You're responsible for your taxes, and they don't deal with your taxes. You don't deal with their taxes. You're both separate. This is what the tax treaty between the two countries said. But then I get questions from employers who, they wanna hire someone and they go to their accountant, their accountant freaks out and they're like, whoa, whoa, whoa, wait a minute. You could create an employee relationship and you could have lots of problems here. And look, I've been doing this since 2006. I've seen a lot. And every time someone comes back to me and says, well, my CPA says, I'm like, well, you should go back to your CPA and Have them justify it. Like, have them give you a reason why they're saying this. Go back and ask, like, what's the reasoning? Because like, I get it in the US, like, if that person's in the US, then they're an independent contractor unless you violate specific things and then they're an employee and then you have to like classify them as employee and withhold wages and all that. What if they don't have a US ID number? Like there is no Social Security number, there is no green card, there's no ID number under which to withhold. Go back to your CPA and ask. So this has happened, I don't know, 100 times. 200 times over the years, and I have never once had someone come back and say like, yeah, my CPA confirmed this. And this has happened across the US, the UK, Canada, Australia, Europe. It's happened all over the place where CPAs freak out. You go back to the CPA and are like, well, why are you freaking out? What's the reasoning behind this? And what it turns out is the CPA is trying to protect their butts. They're trying to protect themselves. They're not trying to protect you. I mean, yeah, they are, but without knowing or understanding or seeing anything, they just tell you, "No, no, you can't do that," or, "Well, you need to be really careful here." And then when pressed, not one in 20 years and across hundreds of thousands of employers have ever come back and said, "Hey, actually, here's the law. Here's the reality of it." Not one time, which to me says something about what the actual law and requirements are. So like we went to these attorneys, we went to accountants, and they all confirmed, look, this is an independent contractor and there's nothing you can do about it unless you really want to. And then you can set up a business in the Philippines and you can make them an employee. Okay, so why is ChatGPT then telling me something different? And if I read all the references that ChatGPT is using, they're all telling me something different. Here's what I found. ChatGPT will give you its references that it used. And I looked at it and started clicking on them and reading them. And I was like, wow, yeah, maybe I'm wrong here. And then I went to the homepage of every one of them. I started going to the homepage because I was like, I don't know about this. Only to find that every single one of those references is either an employer of record service or an agency or something trying to get you to use their service. And that's where all the content is because there's a financial incentive. Behind scaring people into using an employer of record, into saying, oh, are you actually compliant? If you're not compliant, there could be lots of fees and penalties with it. This is funny. So I went and read, and what would be the fines according to the Philippines government? Like a 24,000 Filipino peso fine. Well, right now that's $400 would be the fine if you do something really wrong, which even classifying them as an employee wasn't even the possibility according to the government of the Philippines. It was underpayment that was the problem, leading to a 24,000 Filipino peso fine, $400. And so what you have is you have employers that are scared of not being compliant. And so you pay $100 per month per employee to an employer of record to protect yourself, to make that person an employee of that employer of record service. So you have 4 people, you pay $400 a month forever when the actual fine itself is $400 if something ever went wrong, which in 20 years and hundreds of thousands of employers doing this, I've never seen. Never seen it happen. And when something goes wrong with an employer who used OnlineJobs or hired someone in the Philippines, I hear about it. Like, I'm the first person they come to when something goes wrong. I get emails every single day from employers who had something go wrong. I probably get like 2 per day. Well, I mean, we have 25,000 active employers right now and I get 2 per day, which is almost every single time it went wrong. What I don't hear are all the times it went right. Although I do hear 2, 5, 10 a day of employers saying this went right. When something goes great, you don't go and write a review. You write a review when something goes wrong, right? Like you contact the person when something goes wrong. You go and write a review on Trustpilot when something goes wrong. You don't write a review when like, oh no, this was actually really great. I really love this. So I hear about every time it goes wrong. I don't hear every time it goes right, but I still hear more of it going right than I hear of it going wrong. Here's the compliance that, as far as I understand it, and as far as attorneys have confirmed to me, and what's different than what you're reading online. In order to see if it is an independent contractor, you have to see, are you forcing them to work specific hours? Look, when we went through this with the attorney, there was a five-fold test. And one of the tests that nobody ever talks about, which was actually really important to the attorney, was do you require them to wear a uniform that you provide? No, no, I have never read that on any of these employer of record websites or agencies that are saying like, oh, you have to be really careful here. That was one of the tests. One of the 5 things was, uh, do you require them to wear a uniform? Well, no, you don't, so you've already passed that test. Do you require them to work specific exact hours? Well, no, I don't. I have 60 full-time contractors that work for me in the Philippines, and I don't require any of them to work specific hours. They get to set their hours, and our customer service team, who has to double cover every shift, they work it out among themselves. Like, here's when you're going to work, here's when you're going to work. Okay, fine, cool. We're on board. If you're requiring them to work specific hours, well, that is one of the 5 tests. Another test is, do you require them to work on your equipment? Are you providing the equipment for them is the question. Well, we don't provide their equipment. We do provide a benefit to people who work for us over time that will— we'll save money for them. And when they're ready to buy something electronic, which we've had people buy microphones or iPads or computers that they're going to use, and like sometimes we didn't even know that they bought it, we certainly didn't require it, then we'll reimburse it. Is that a reasonable option? Yeah. Do I require them to use my computer? No. I don't. Do I provide the computer? No, I don't. I provide a benefit that they might use. That's test number 3. Test number 4 is, do you require exclusivity? Like, do you require that they only work for you? Which, I don't require it, but I strongly suggest it, and I'm willing to do things that will incentivize them to work only for me. But do I forbid them from having another job? No, I don't. And you shouldn't either. But you can do things that will make them prioritize you highly over other people. So that they remain an independent contractor but really focused on you. The last thing is, do you direct how the work is done daily? And some of that I do direct and some of it I don't direct. But either way, I certainly haven't done all these things. And there's a 5-part test that like any government agency is going to be like, oh, well, you did direct all the work exactly, but you didn't meet any of these other 4. And that's not going to turn someone into an employee, especially when the Philippines government doesn't really want you turning them into employee. Now, ChatGPT says especially control over work as the main test, but that comes from ChatGPT's references, this company that wants you to use their employer of record service. So now what if that person were to get turned into an employee? What if there's an extenuating circumstance that they were to get turned into an employee? The Philippines government decided, look, you did something wrong. I've never seen this happen. Hundreds of thousands of employers, millions of Filipino workers. Never seen it happen. But what if they did? What is the penalty? Well, the penalty is back pay, wages, overtime, holiday pay for where like you didn't pay them. Mandatory benefits. So like 13th month pay and paid time off. Social contributions, SSS and PhilHealth. And fines, which I already talked about the fines. So, for a lot of really good employers that are hiring people in the Philippines are already doing all these things anyway. Like, you're already paying fair wages. You already pay overtime if they're working overtime, which overtime in the Philippines is over 48 hours a week. The Philippines labor laws require 1 day a week off. It's 8 hours a day, 6 days a week. 1 day a week off is the standard in the Philippines. You're already paying the 13th month pay. You probably already give holidays off and maybe some paid time off, which these are the requirements. These are the penalties. Social contributions, SSS and PhilHealth and Pag-IBIG. Like, we pay these. And if you want to find out about these, onlinejobs.ph/benefits, you can give these. Those are the consequences of getting classified as an employee. You have to do the things that you're already doing. I mean, this— when I was reading about this over and over and over again, I was just like, you're a scammer. This company is trying to fearmonger people into using their silly service that doesn't provide any value. It doesn't do any good to anybody using it. Okay, so here's one thing that I actually did find legally for the Philippines that could get you in trouble. This is the DOL, Department of Labor Employment in the Philippines. They're really concerned about underpayment. If you underpay people, that's where the Philippines government could get involved. And what they deem as underpayment is paying less than the minimum wage, which the minimum wage is different all across the country, but the highest one is in Manila. So if you're paying less than 645 per day, then you are underpaying someone. So what does that translate to? So right now the conversion rate to US dollars is 60 to 1. So if you divide 645 per day by 60, That gives you 10.75 which would be $10.75 per day for work. Well, if you divide that $10.75 by 8 hours per day, that gives you $1.34. So, if you're paying more than $1.34 per day, you're fine. Like you're not underpaying someone, right? According to the minimum wage of the Philippines. Which at OnlineJobs, we already say that you can't pay someone less than $3 an hour. Well, so then you're double the minimum wage, which the minimum wage is not a livable wage. It's a joke. You cannot survive on the minimum wage in the Philippines. But there's so many people unemployed that how do you make the minimum wage higher? You would just unemploy more people, which is a problem. If you underpay people less than across an average of $1.34 per hour, then you're in trouble. That's the reality of the law here. Outside of what, what all these companies want you to believe. That's the reality. Now, in all of this, there is one exception. This one exception comes from Australia. So, if you are in the US, you can skip this section. If you're in the UK or Canada or the EU or Brazil or wherever, you can skip this. This comes from Australia and Australia only. About 2 years ago, there was a case where a VA in the Philippines sued in Australia her employer for wrongful termination. She felt like she had been treated poorly. I don't know the whole story because there is not— the whole story is not out there. You only get bits and pieces. And about once a month, I get someone from Australia that says, "No, you're wrong. What about this case? Have you heard of this? You have to use an employer of record in Australia." And what happened was she got mad. She made a case that she was an employee, and Australia said, yep, she's protected under Australian law and she's due all these things from this employer. So what happened? Well, I don't know. There's no follow-up to this anywhere. This single case happened like about 2 years ago. And if this was like a real big thing, I would expect to have it happen again. Like if this was something that was going to make people in the Philippines a lot of money, or if this was something that was going to cause all kinds of problems for Australia. I would expect to like see this again, and I haven't. There's been nothing. There's been no follow-up on it, which tells me— and you know, again, I'm not an attorney, I'm not an accountant— that this was an isolated case of something really weird where like she was probably treated pretty poorly by this employer and she was upset. And I did read something from her saying that she wanted to teach her kids that you can stand up for yourself stand up when someone is bad to you, which I think she did. She taught her kids that you can stand up for yourself when someone treats you poorly. Now, what happened to her afterward? Well, I don't really know. I would imagine, I mean, since we haven't heard of it happening again, gosh, I would bet the Philippines government, if this were to happen again or again, they'd probably step in because anything that takes jobs out of the Philippines, wow, the government's not on board with that. And we have maybe 60,000 employers in Australia and I've seen this one time. One. One single one time. 20 years. 60,000 employers. So, I just feel like I need to make you aware of like, here's the risk. I think he had to pay some back pay. I don't know what this employer had to pay. I don't know if he challenged it in court. I don't really know. There's nothing— I can't find anything online that follows it up. This was a single government agency that made a judgment call. It is not the law in Australia. And it was an isolated incident. As far as I can tell. Maybe it won't be. That is the current state of compliance. What do you need to do? Well, you need to treat people fairly. Do you submit a 1099? No, you do not submit a 1099. There's no way to even submit a 1099 because they don't have a US ID number. There's no way for them to get a US ID number or an Australian ID number or a UK ID number. Does your country have a tax treaty with the Philippines? Probably. When I looked a number of years ago, I'm pretty sure I found it for Australia and Canada and the UK. You can't find it for the EU because the EU didn't exist years ago, I doubt they have created a tax treaty with the Philippines. Individual countries may have. I didn't look at every single country, but a tax treaty just means they're responsible for their own taxes. You're responsible for your own, not theirs. So then now let's get into taxes. How do taxes work? We talked about compliance. I've done this for a lot of years and have been with multiple accountants, and they have all handled this the same way. There is a line item on our other deductions for our business. Like when you file your taxes, you have other deductions and it says attach a statement. So we attach a statement that has like travel expenses and supplies and miscellaneous and financial and bank fees and subcontractors. And all of the wages that we pay people in the Philippines goes under subcontractors. It's a big number now. And that's it. It's a deduction against our income, comes off of what we made. Because we had to pay out as a cost of business. Now, I haven't done this in other countries, so I don't have an answer there. However, I've given this advice across, again, a lot of people over a lot of years and have never once seen something different. Now, just because I haven't seen something different doesn't mean that what I'm doing is right and doesn't mean that you shouldn't pursue something else. However, it gives a pretty good idea of how to handle this. You don't have any compliance issues, despite what your accountant screamed, or despite what all of these 50 websites that are all trying to get you to buy their employer of record service are saying. And so that's what ChatGPT says about it, because ChatGPT only has the information it was given, and it was given this a lot of times. Now, one of the things that came up over and over again was have a contract with them. Have a contract that lays out NDA and who owns IP, intellectual property, and the relationship, an independent contractor. Everything says have a contract with them. But then everything also says that saying they're an independent contractor in a contract is worthless. Everything said that. It's like, well, why are you telling me to have a contract if the contract is worthless? But then I was also like, oh well, you're trying to sell me your employer of record. Service. So yeah, you say have a contract, which is scary, and I don't know exactly what to put in a contract that's correct, but you do because you're an employer of record. And so yeah, I should probably pay you $100 a month per person, which is completely unnecessary. Okay, so last thing is compliance in your country. What are the laws? What are the regulations? From what we have seen over the years and from reading the treaties, we can find nothing required from you. Like nothing that the US law governs that person in the Philippines. We can find no cases where that person is governed by US law except for the one in Australia, which one time. We can find no cases where this person as an independent contractor in the Philippines was required by UK law to something, something, something. We can find nothing about it. No reporting requirements, no withholding requirements. We can find nothing. What does this come down to in the end? Pay people a fair wage, treat people fairly, deduct it on your taxes. If you're willing to do those two things, pay people fairly and treat people fairly, you're probably gonna be fine in this. And I can't say you will be fine because I'm not an accountant or an attorney. You should consult yours. I've just seen it hundreds of thousands of times. Be fair to people, treat people well.