When Should You Convert Filipino Contractors to Employees? (Headcount, Tenure, Risk & Cost Triggers)

 

Author: Martin English — CEO & Founding Partner
Published: November 21, 2025
Updated: November 21, 2025
Disclosure: This article is for informational purposes only and does not constitute legal advice.

Audience & Intent

Who this guide is for

• US, AU, UK, EU founders, CFOs, COOs, HR and Legal leads with people in the Philippines

• Companies with 5–100 Filipino freelancers, contractors, or VAs doing ongoing work

• Teams that know: “At some point we should stop treating them as freelancers… we just don’t know when.”

What you’ll get

• A clear view of the headcount, tenure, risk, and cost triggers that usually mean:

  “It’s time to convert contractors into employees.”

• A simple traffic light framework (green / amber / red) for your current setup

• Practical conversion paths, especially via a Philippines Employer of Record (EOR) if you don’t have a local entity

 

TL;DR: When should you convert Filipino contractors to employees?

You should seriously consider converting Filipino contractors to employees when:

• You have 5+ people in the Philippines doing core, recurring work

• Key individuals have been with you for 12+ months on monthly retainers

• Their day-to-day reality matches employee-style tests (fixed schedule, integrated into your tools, managed by your leaders)

• Your all-in contractor spend is starting to match or exceed what EOR employment would cost

At that point, you’re carrying almost all the risk of employees with none of the legal clarity or documentation.

If you don’t have a PH entity, the cleanest fix is usually to convert the highest-risk contractors into EOR employees over a 30–90 day plan, starting with core roles and longer-tenure staff.

Key takeaways

• In the Philippines, the law looks at reality, not labels. Long-tenure, full-time “freelancers” doing core work under your control are effectively employees in substance.

• Practical conversion triggers cluster around four areas:

  • Headcount: 5–10+ contractors in PH, especially in core functions

  • Tenure: 12–24+ months of continuous engagement

  • Risk: high scores on contractor vs employee tests (control, integration, dependence)

  • Cost: contractor rates at or above compliant employee costs via EOR

• You don’t have to convert everyone at once; most companies convert in waves (pilot → core team → long tail).

• A Philippines Employer of Record (EOR) lets you convert to proper employment without opening a local entity, while keeping your existing day-to-day management.

 

Why timing matters: the hidden risks of “just one more contractor”

Many companies build their Philippine presence in stages:

1. One freelancer doing ad-hoc tasks

2. Three contractors across support, dev, and marketing

3. Ten or more people on monthly retainers, all in your Slack, all using your systems, all full-time

On paper, they’re “freelancers”.
In reality, they’re your offshore team.

If you leave conversion too long:

• Misclassification risk grows (workers treated like employees but documented as contractors)

• Dependency risk grows (key people with no formal employment protections)

• Investor and buyer scrutiny increases (especially during raises, audits or M&A)

The question is not just “should we convert?” but “when does it become irresponsible not to?”

The four trigger categories: headcount, tenure, risk, and cost

To understand your timing, you don’t need a legal treatise. You need a simple lens:

1. Headcount – How many people in PH are technically contractors?

2. Tenure – How long have they been with you continuously?

3. Risk profile – How employee-like is their arrangement in reality?

4. Cost – Are you overpaying for “contractors” compared to compliant employment?

Once those four line up in the amber/red zone, that’s your conversion signal.

Trigger 1: Headcount – how many contractors do you have in the Philippines?

For very small numbers (e.g., 1–2 genuinely part-time, project-based freelancers), staying in a contractor model can be reasonable. As headcount grows, it becomes harder to justify not having a proper employment structure.

Rules of thumb:

• 1–3 PH contractors (green)

  • Project-based or specialist roles

  • Irregular hours, not full-time, clearly not your core team

• 4–9 PH contractors (amber)

  • Some are doing core recurring roles

  • You rely on them for customer experience, code, finance, operations

• 10+ PH contractors (red)

  • You effectively run a PH team; you just haven’t formalised it

  • At this point, you should be looking seriously at EOR employment or setting up an entity (or both, in stages)

If you can’t easily list all your PH contractors and what they do, that’s already a sign you’ve outgrown the “we’ll figure it out later” phase.

Trigger 2: Tenure – how long have they been with you?

The longer someone has been with you, the harder it is to say they’re just a short-term freelancer.

Patterns to watch:

• Under 6 months (generally green)

  • Genuinely project-based or trial engagements

  • Still, watch how integrated they become

• 6–12 months (amber)

  • Long enough to feel like part of the team

  • If they’re working regular hours and doing core tasks, you’re in the grey zone

• 12–24+ months (red)

  • You’ve effectively had them in a job for a year or more

  • Long tenure + monthly retainers + internal management strongly suggests an employee relationship

A contractor who has been with you for two years, full-time, on a fixed monthly retainer is a strong candidate for conversion.

Trigger 3: Risk – how “employee-like” is their reality?

You already have tools like:

• A contractor vs employee explainer

• A 10-question self-audit checklist for Filipino freelancers

Here’s the short version. A worker is high-risk as a “contractor” if they:

• Work full-time or near full-time for you

• Have their schedule, tools and KPIs set by your team

• Are deeply embedded in your Slack/Teams, email, and internal systems

• Do core work like support, dev, finance, EA/VA, PM or key marketing

From a Philippine risk perspective, people with that profile are strong candidates for employment status.

A practical heuristic: if someone would score 7–10 out of 10 on your self-audit checklist, treat them as a priority for conversion.

Trigger 4: Cost – are you paying more for less protection?

Contractors often look cheaper in month one, but over time:

• You increase rates to retain top people

• You still carry misclassification and continuity risk

• You gain no payslips, no contributions record, and no formal employment path

At some point, your contractor spend starts to match or exceed what EOR employment would cost.

Simplified cost comparison

For each role, compare:

1. Current contractor cost

   • Monthly retainer (or average monthly spend)

   • Any informal allowances or bonuses

2. Compliant EOR employee cost

   • Gross salary (local market band)

   • Employer contributions (SSS, PhilHealth, Pag-IBIG, 13th month, leaves)

   • EOR fee (for example, a flat USD 190/employee/month admin layer)

For many roles, especially support, EA/VA and some tech roles, the gap between “contractor cost” and “EOR employee cost” is smaller than you’d expect.

When the cost gap is small but the risk gap is huge, that’s a strong trigger to convert.

Putting it together: a simple “conversion signal” table

You can think of each person or role like this:

If you see multiple ambers and reds for a given person or role, your timing question answers itself:

It’s time to plan a conversion.

Typical conversion moments by company stage

Here’s how this usually plays out in real companies.

Stage 1: “One person in Manila helps us out” (1–3 contractors)

• Scrappy, opportunistic use of a freelancer or VA

• Short-term or project-based; low immediate risk

Action:

• Keep contracts clean and project-focused

• Don’t accidentally drift into full-time, permanent, controlled work without revisiting status

Stage 2: “We basically have a PH team now” (4–9 contractors)

• Multi-role coverage: support, EA/VA, marketing, maybe some dev

• People staying 12+ months, working fixed hours, using your systems

Action:

• Run a proper self-audit across headcount, tenure, risk and cost

• Identify who is most employee-like and who is most critical to retain

• Start designing an EOR or entity-based employment structure for the medium term

Stage 3: “We run half our operations out of the Philippines” (10+ contractors)

• You depend on PH talent for daily operations, customer experience and delivery

• Long-tenure contractors in leadership or supervisory roles

• Investors, auditors or buyers are asking questions about classification

Action:

• Treat conversion as a priority project, not a side task

• Use EOR to convert key people quickly while you decide on a local entity or hybrid model

• Plan a staged migration: pilot → core team → long tail over 3–12 months

 

How to convert: EOR vs entity vs “true contractor” redesign

Once you’ve decided that the timing is now, you still need to pick the right model.

1. Convert to employees via Employer of Record (EOR)

Best when:

• You don’t have a Philippine entity

• You want to move quickly without running local payroll and HR yourself

What this looks like:

• Contractors become employees of the EOR in the Philippines

• You keep control of day-to-day work, KPIs and team structure

• The EOR runs payroll, contributions, benefits, contracts and HR admin

• You pay a single all-in invoice (salary + statutory + EOR fee)

This is usually the fastest, least disruptive way to formalise your PH team.

2. Convert to employees under your own Philippine entity

Best when:

• You already have, or are committed to setting up, a long-term PH presence

• You have the appetite and capacity to run local HR and payroll

You can:

• Incorporate a PH company

• Hire current contractors as employees directly

• Use the entity for future growth and leadership roles

Many companies still use EOR as a bridge: start with EOR, then migrate people into their own PH entity once it’s fully operational.

3. Rescope or end engagements that should stay truly independent

Not every contractor needs to become an employee.

For roles that are:

• Short-term

• Clearly project-based

• Not core to your ongoing operations

you can:

• Design tighter project briefs

• Keep control focused on outcomes, not daily methods or schedules

• Avoid building long-term dependency

This frees you to focus conversion on core, long-tenure, high-risk roles.

Designing your 30/60/90-day conversion plan

Think in phases, not a single big flip.

Days 1–30: Map and prioritise

• Inventory all PH contractors with headcount, role, hours, tenure and rate

• Run your 10-question self-audit for each person

• Flag red roles (high risk and high importance) and amber roles (emerging risk)

• Decide who must be in the first wave (for example, critical support, dev, finance, EA)

Days 31–60: Design the offer and communication

• Benchmark market salaries for PH employees in those roles

• Model total cost under EOR employment versus current contractor spend

• Draft conversion offers that keep net pay competitive and add stability and benefits

• Prepare communication (FAQs, emails, talking points) so contractors see this as an upgrade, not a downgrade

Days 61–90: Convert and stabilise

• Sign EOR employment contracts for the first-wave group

• Start running payroll and contributions under the EOR

• Track attendance, performance and satisfaction during the first 30/60/90 days

• Debrief internally and plan wave 2 for remaining amber and red roles

 

How Smart Outsourcing Solution (SOS) fits in

When we support clients on this decision, we typically:

1. Audit: run a headcount, tenure, risk and cost review of all PH contractors

2. Plan: help decide who converts when, and under which titles and salary bands

3. Execute: move priority roles into EOR employment with clear communication and minimal disruption

4. Prove it: provide a simple post-switch health check you can show to your board, investors or auditors

The goal isn’t just to tick a compliance box. It’s to build a stable, scalable team in the Philippines that you can confidently grow.

Related guides in this series

• Contractor vs Employee in the Philippines (2025): Tests, Red Flags & Fixes via EOR

• Are Your Filipino Freelancers Actually Employees? 10-Question Self-Audit Checklist

• Move Freelancers & Contractors to an Employer of Record (EOR) in the Philippines

• 30/60/90-Day Post-Switch Health Check: How to Prove Your New Philippines EOR Is Actually Compliant

 

FAQs: When to convert Filipino contractors to employees

1. Is there a specific law that tells me when I must convert?

There isn’t a single “after X months you must convert” rule. Instead, Philippine rules look at actual working conditions: control, integration, economic dependence and whether your setup looks like employment in substance.

2. What’s the biggest practical red flag?

A major red flag is multiple full-time, long-tenure contractors doing core work on fixed monthly retainers and fixed schedules. That combination looks very employee-like.

3. Do I need to convert everyone at once?

No. Most companies start with a pilot group of 5–10 key people, then extend conversion in waves as budgets and bandwidth allow.

4. Will my contractors accept conversion to employment?

Often yes, especially if their net take-home remains competitive and they gain benefits, payslips and formal employment status that help with personal finance, loans, housing or visas.

5. Is EOR just a temporary bridge?

EOR can be either a bridge or a long-term solution. Some companies use EOR permanently; others use it first, then migrate people into their own PH entity once it’s live and stable.

Next steps

If you look at your PH roster and think:

“We’ve clearly outgrown the freelancer phase.”

then your next moves are:

• Run a quick headcount, tenure, risk and cost check using this guide

• Use your 10-question self-audit to identify red and amber roles

• Talk to an EOR partner about what a 30/60/90-day conversion plan would look like for your current contractors

And if you want structured help:

Book a Contractor-to-Employee Timing Consult.
Share your PH headcount, tenure and contractor spend. We’ll map where you sit on the green/amber/red scale and outline a conversion roadmap aligned with your budget and risk appetite.