Understanding the Ins and Outs of Outsourcing in the Philippines

Changing industry landscapes and growing operating expenses urge many companies to explore cost-effective ways to boost their productivity. One option is business process outsourcing (BPO), which allows companies to reduce costs and improve efficiency. 

The Philippines is one of the most popular hubs for streamlined outsourcing services at competitive pricing. However, before reaping the benefits, you must know the ins and outs of its BPO sector.

Most importantly, you must understand outsourcing policies in the Philippines to avoid regulatory issues and ensure returns on your investment.

Let this article be the first step in planning your Philippine BPO engagement.

Reasons why the Philippines is a BPO hotspot

The Philippine BPO industry maintains its popularity because of its English-fluent and skilled talent pool. The workforce can promptly adapt to changing business requirements and work shifts while completing tasks effectively.

Cultural and linguistic affinities make quickly adjusting to client needs easy. The developing country also has a lower cost of living than other nations, such as the United States. Hence, you can save up to 90% on labor costs when hiring Filipino BPO workers.

For instance, hiring a customer service representative (CSR) from the Philippines costs $2.11 per hour. Meanwhile, their counterpart in the U.S. charges an average $17.94 hourly rate. You also do not need to worry about infrastructure expenditures because most transactions occur remotely.

Moreover, Philippine BPO firms update their information technology (IT) infrastructures to swiftly accomplish routine front- and back-office functions. They optimize the following tools to improve consumer care and deliver high-quality output:

• Omnichannel dashboards
• Customer relationship management (CRM) systems
• Robotic process automation (RPA)
• Artificial intelligence (AI) and machine learning (ML)
• Cloud computing solutions
• Workforce management platforms
• Data analytics and business intelligence tools
• Cybersecurity software

These robust technologies double BPO workers’ productivity and ability to deliver an unmatched customer experience and rapid support. They help prevent project delays and meet daily quotas. Most importantly, these solutions enable the safe processing of sensitive information.

The list of outsourcing policies in the Philippines

The Philippine outsourcing sector contributes significantly to the country’s economic growth. The IT and Business Process Management Association of the Philippines (IBPAP) expects the industry to expand to $37.87 billion in revenue in 2024. Aside from the abovementioned advantages, the sector also receives strong government support, which drives its growth.

The Philippine government enacts essential rules and regulations to oversee the outsourcing sector. These laws ensure protection and smooth business engagement between BPO companies and foreign clients.

The below sections detail the outsourcing policies in the Philippines.

Labor laws

Similar to companies from other industries, Filipino BPO firms adhere to the Labor Code of the Philippines. This law provides guidelines for implementing and monitoring employment practices and labor relations among Filipino workers.

Regardless of employment type, the legislation mandates businesses to observe and carry out the fundamental rights of Filipino employees, including:

• Promote equal work opportunities for all.
• Do not dismiss workers for unjust reasons or without due process.
• Compensate all rendered work hours accordingly.
• Enable weekly rest days and paid leaves.
• Provide monetary compensation and government-enabled benefits.
• Deploy secure and reliable infrastructure to avoid sickness, injury, or death.
• Encourage employee participation in unions and collective bargaining processes. 

Meanwhile, the following are among the employees’ government-mandated contributions and benefits:

• Night shift differential. BPO employers must implement a 10% night shift differential in workers’ regular daily salaries, especially when operating in different time zones. Employees who take shifts between 10:00 p.m. and 6:00 a.m. are entitled to this.
• Social Security System (SSS) contribution. This social insurance program provides financial assistance for workers with disabilities or illnesses. Retired individuals also benefit from this effort.
• Overtime pay. Workers completing tasks beyond eight hours receive additional compensation. Those who work on holidays and rest days secure premium overtime pay. 
• Home Development Mutual Fund (Pag-IBIG) contribution. This national savings program promotes safe and comfortable housing for private employees by offering loans. 
• 13th-month pay. The Philippine labor law requires BPO companies to provide this monetary compensation for workers who have rendered at least one month of service.
• Philippine Health Insurance Corporation (PhilHealth) contribution. The program offers affordable healthcare for full-time BPO employees in the country.
• Separation and retirement pay. The labor rule directs companies to give terminated workers their severance pay. Meanwhile, employees aged 60 and above with five years of service will receive retirement pay from their employers.
• De minimis benefits. BPO organizations can provide employees with internet connectivity, transportation, or food allowances.

Data protection and privacy regulations

The Republic of the Philippines recognizes the value of protecting confidential information and privacy for companies and customers. Thus, it enacted the Data Privacy Act of 2012 to strengthen data security. 

This critical outsourcing-related policy in the Philippines established the National Privacy Commission to:

• Oversee compliance of personal information controllers (PICs) with the law’s provisions
• Mandate the designation of data protection officers (DPO) for every BPO firm
• Handle DPO and personal data processing system registration
• Provide frameworks for organizational and technical cybersecurity strategies
• Monitor data privacy policy implementation among BPO companies
• Address data-related security incidents, complaints, and violations
• Temporarily prohibit data entry and management that threaten national security
• Collaborate with foreign data privacy authorities for cross-border transactions

Tax rules

The Philippine administration has several laws in place to manage BPO taxes. The country’s tax landscape promotes an environment conducive to increased investments and continuous growth while ensuring economic gains for the government.

The administration established the Philippine Economic Zone Authority (PEZA) to achieve streamlined tax management. This agency operates and supports the country’s economic zones for foreign investments. 

Here are the tax-focused outsourcing policies in the Philippines that influence resource allocations and financial decisions:

• Income tax holiday (ITH). PEZA, or the Board of Investments (BOI), exempts registered BPO firms from income taxes for a certain period. This benefit aims to attract foreign investors to outsource in the country.
• Special Economic Zone (SEZ) incentive. PEZA-accredited service providers enjoy various fiscal incentives. These include exemptions from local and national taxes, import duties, and value-added taxes (VAT) on imported goods and services.
• VAT advantage. BPO services delivered to international clients are considered export services and are zero-rated for VAT purposes. Service providers can claim input VAT credits on their purchases and receive refunds.
• Withholding tax. BPO organizations must withhold and remit taxes on specific income payments, such as salaries. They must adhere to applicable withholding tax rates and filing requirements to avoid costly penalties.
• Tax compliance and reporting. Service providers are required to meet several important tax-related obligations. These include keeping accurate tax records, filing tax returns on time, and making payments by the deadlines. The Bureau of Internal Revenue (BIR) imposes penalties for non-compliance.

Furthermore, the Philippine government has signed various tax treaties with other countries to avoid double taxation and promote cross-border trade and investment. The agreements provide BPO firms with benefits such as reduced withholding tax rates on income payments, subject to applicable treaty provisions.

Regulatory updates and related bills

Apart from the abovementioned outsourcing policies, legislators in the Philippines continuously explore ways to improve the nation’s BPO sector. These efforts may involve the implementation of new programs or the introduction of new policies. 

In August 2023, a lawmaker proposed a bill to enhance the protection of BPO workers, whom he identified as among the country’s economic drivers. Rep. Luis Raymund Villafuerte Jr. of Camarines Sur is the author of House Bill 8733, which suggests improvements to the working conditions of BPO employees. 

If enacted, the measure will ban understaffing or overloading and require a fair BPO worker-to-client ratio. This will allow BPO providers to maintain high-quality service without overworking their employees.

The measure will also mandate the regularization of BPO workers. It will direct providers to uphold employees’ rights to self-organization and participation in democratic exercises. 

What happens when you break the rules?

Violating outsourcing policies in the Philippines has negative legal and operational consequences. The severity of sanctions depends on the nature and extent of the cases. 

For instance, a customer care professional from a multinational BPO company based in the country faced imprisonment for one and a half years after breaching credit card accounts and stealing cash advances in 2017. The suspect was also ordered to pay a fine of ₱500,000 or $9,017 pursuant to Section 28 of the Data Privacy Act.

Besides legal proceedings and monetary penalties, here are other potential impacts of non-compliance with Philippine BPO rules and regulations:

• Violating outsourcing policies in the Philippines invalidates tax incentives. Loss of incentives leads to increased operating costs and decreased competitiveness in the market.
• Regulatory non-compliance may result in the suspension of business activities. In worst cases, the government requires the closure of facilities or the revocation of licenses. These disruptions weaken financial performance and enterprise growth.
• Not adhering to BPO rules and practices leads to missed opportunities. Companies may lose the chance to collaborate with reputable organizations and work with top clients.
• Violations of outsourcing regulations trigger increased oversight. Prolonged audits by regulatory agencies result in additional compliance costs and operational delays.

What you must do to stay compliant

A simple omission of a personal information controller (PIC) costs a fine not exceeding 

₱5 million or approximately $100,000. Companies must also spend considerable funds on lawsuits and mitigation efforts to minimize an incident’s damage to their market reputation. 

Fortunately, best practices exist to guide you in avoiding the negative impacts discussed. These steps help you and your potential BPO partner adhere to outsourcing policies in the Philippines:  

• Understand laws applicable to service agreements. Familiarize yourself with Philippine rules and regulations, such as the ones tackled here. Stay updated on any amendments to maintain compliance.
• Establish joint compliance strategies. Work closely with your provider to develop comprehensive policies and procedures that match Philippine outsourcing laws and regulations.
• Appoint contact persons who will handle your compliance efforts. Form a team of in-house and third-party workers to lead your regulatory compliance measures. 
• Implement robust compliance management systems. This artificial intelligence (AI)-powered software helps monitor regulatory activities, obligations, and risks. It proactively identifies potential areas of non-compliance.
• Maintain accurate and complete records. Keep accurate and complete records of all BPO activities. Documentation assists you in determining ways to meet data security requirements and establish accountability. 
• Execute ethical business practices. Emphasize a culture of integrity, transparency, and ethical conduct when working with a Philippine BPO company. Encourage teams to report potential violations through established channels.
• Engage with regulatory authorities and industry associations. Participate in industry forums, workshops, and seminars. These gatherings help inform your units about emerging trends and regulatory updates related to Philippine BPO laws.
• Invest in training and development. Although rare, non-compliance starts with employees. Hence, coordinate ongoing training and development programs with your provider to educate staff about outsourcing policies, regulatory requirements, and ethical considerations.

Understanding what BPO is involves knowing your future BPO partner. So, conduct thorough due diligence before entering into agreements. Evaluate a provider’s compliance with Philippine outsourcing policies and ability to meet contractual obligations.

As much as possible, seek expert legal and compliance support. Consult with your executives and legal counselors specializing in outsourcing policies in the Philippines. Ensure you know how to deal with complex compliance issues and implement risk mitigation strategies when hiring Filipino contractors.

The bottom line

Working with Philippine service providers brings multiple benefits if you know how to adapt to the country’s BPO policies and procedures. You must understand each provision, from labor rules to tax regulations, to avoid costly lawsuits and penalties. 

Learning the legalities surrounding BPO and complying with relevant laws is essential. The best practices above can help you ensure that your in-house and third-party teams produce quality output without violating rules. 

Do you want to work with a compliant and reliable Philippine BPO company? Let’s connect today to find out what we have in store for your business!