Fixed-Term vs Regular Employment Contracts When Foreign Firms Hire in the Philippines

March 28, 2026 Posted by ASEAN Briefing Written by Ayman Falak Medina Reading Time: 4 minutes

Foreign companies hiring local employees in the Philippines must determine whether roles should be structured under fixed-term or regular employment contracts. The classification affects termination flexibility, statutory benefit obligations, and workforce restructuring options as operations expand.

Contact Dezan Shira & Associates for guidance on employment compliance and workforce structuring in the Philippines

For most foreign companies, regular employment becomes the default structure for ongoing operational roles, while fixed-term contracts are generally used for project-based or time-bound assignments. Structuring contracts correctly from the outset helps reduce legal exposure and prevents employment disputes as operations scale.

Regular employment and security of tenure

Philippine labor law treats employees as regular when they perform work that is necessary or desirable to the employer’s usual business operations. Once this condition is met, the employee gains security of tenure protections under the Labor Code. For foreign companies establishing operational subsidiaries, shared service centers, or manufacturing facilities, most core roles — including management, administrative staff, and technical personnel — fall within this definition.

Security of tenure means employment cannot be terminated without legally recognized grounds such as serious misconduct, gross negligence, redundancy, or business closure. Employers must also follow formal procedural requirements before implementing dismissal, including notice and documentation.

The six-month probationary window

Employers may initially hire employees under probationary status for a maximum period of 6 months (180 days). During this period, employers assess whether the employee meets clearly defined performance standards communicated at the start of employment.

If the employee continues working beyond the six months without lawful termination, the employee automatically becomes a regular employee. This rule creates an important execution threshold for foreign companies because poor documentation of probationary evaluations may prevent termination before regular employment status takes effect.

How fixed-term and regular contracts differ in practice

Foreign firms evaluating hiring structures must assess how fixed-term and regular contracts differ in duration, termination rights, and legal exposure.

Decision Variable	Regular employment	Fixed-term employment
Legal basis	Work necessary or desirable to the employer’s business	Contract tied to a specific project or defined operational timeline
Duration	Indefinite after probationary period	Defined end date agreed by both parties
Termination flexibility	Requires just or authorized cause with due process	Employment ends upon contract expiry if valid
Security of tenure	Full protection under the Labor Code	Limited to the contract duration if legally recognized
Reclassification risk	None once properly structured	Higher if the role resembles permanent operational work
Typical use cases	Core operational staff and management roles	Project specialists and temporary implementation teams

Legal limits and reclassification risks of fixed-term contracts

Philippine jurisprudence allows fixed-term employment when the contract duration reflects a genuine operational timeline agreed upon by both parties. The Supreme Court ruling in Brent School Inc. v. Zamora confirmed that fixed-term arrangements may be lawful when employees knowingly accept a defined contract period, and the structure does not undermine statutory labor protections.

Foreign firms seeking assistance with hiring and labor compliance in the Philippines can reach out to Dezan Shira & Associates

Labor authorities nevertheless examine fixed-term contracts closely. If the role performs functions essential to the company’s ongoing business operations or if short-term contracts are repeatedly renewed, labor tribunals may classify the employee as regular despite the written contract duration. Such reclassification can create liabilities, including retroactive statutory benefits, wage adjustments, and reinstatement orders.

Employment cost exposure under regular hiring

Regular employment requires foreign employers to account for several statutory payroll obligations in addition to the base salary.

Statutory employment cost	Employer obligation	Operational implication
Social Security System (SSS)	Employer contribution reaching approximately 15 percent of the employee’s monthly salary credit	Provides retirement, disability, and social insurance coverage
PhilHealth	5 percent of salary, shared between employer and employee	Mandatory national health insurance
Home Development Mutual Fund (Pag-IBIG)	2 percent of salary contribution, subject to statutory ceilings	Housing savings and financing program
13th-Month Pay	Equivalent to one month of basic salary annually	Mandatory annual payroll obligation

These statutory obligations increase employment costs but provide workforce stability and reduce the legal exposure associated with misclassifying permanent operational roles.

Labor dispute enforcement through the NLRC

Employment disputes in the Philippines are typically handled by the National Labor Relations Commission (NLRC), which resolves complaints filed by employees against employers. If a worker challenges a fixed-term contract or alleges unlawful dismissal, the NLRC may order reinstatement, payment of back wages, and compensation for unpaid statutory benefits.

For advice on employment contracts and HR compliance in the Philippines, contact Dezan Shira & Associates

Because NLRC rulings can impose retroactive liabilities covering multiple years of employment, foreign companies must consider potential litigation exposure when deciding how employment contracts are structured.

Structuring employment contracts for foreign firms hiring in the Philippines

Foreign companies should determine whether each position supports the company’s permanent operations or a temporary project requirement. Roles tied to core business functions, such as management, administration, production, or long-term technical work, normally fall under regular employment after the probationary period. Fixed-term contracts are more suitable when the role is linked to a clearly defined assignment with a predetermined completion timeline, such as infrastructure construction, system installation, or specialist consulting.

FAQ

When does an employee become a regular employee in the Philippines?

Employees usually become regular after completing 6 months of probationary employment if they continue working and meet the required performance standards. Once regular status is acquired, the employee receives security of tenure protections under Philippine labor law.

Can foreign companies use fixed-term employment contracts in the Philippines?

Yes, but only when the role is tied to a genuine project or time-bound assignment. If the employee performs functions that are necessary to the company’s ongoing business operations, authorities may classify the employee as a regular employee regardless of the contract wording.

What happens if a fixed-term contract is misclassified?

If labor authorities determine that a fixed-term contract should have been regular employment, the employee may be reclassified as regular. Employers may then be required to provide back wages, unpaid statutory benefits, or reinstatement through decisions issued by the National Labor Relations Commission.

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