The Freelancers Protection Act: Initial Reactions

Sen. Bam Aquino recently filed Senate Bill No. 351 known as The Freelancers Protection Act. This bill comes at just the right time when many are taking advantage of mobile technology to open up more life choices for themselves through freelancing.

The Growing Freelancing Profession

Freelancing has grown considerably in recent years because of the advantages it poses and the freedom it gives people to pursue passions and a work lifestyle other than a desk job. On Upwork (formerly Elance-oDesk) alone, there are about 1.4 million Filipino freelancers.

freelancing

Why the rapid growth in freelancing?

One, it provides a flexible work schedule. Freelancers have the luxury of rearranging their work schedules around other commitments like family or other errands. For as long as they meet their deliverables on time, they are not held to an 8am to 5pm job. Work-from-home mothers, for example, are now a growing informal labor force.

Two, mobile technology has removed the boundaries of brick-and-mortar-based work and has made it so much more convenient for freelancers to work anywhere, any time. The freelancer can take on several employers as long as he is able to manage his time. This is a very practical and useful benefit as it allows individuals to maximize their earnings potential by taking on several different freelance jobs without being tied down to a fixed employer.

Three, freelancing frees the age limitations of a fixed employment. In many companies, the retirement age is 60 years old, on the average. This caps the useful life and earning capacity of a person to his retirement. Freelancing jobs allow even retirees, with the right skills, to continue working and earning.

Freelancing jobs that were non-existent decades ago are sprouting now, enabled by mobile technology – virtual assistants, content providers, data encoding specialists, digital marketing strategists, web developers, graphic designers, and so on.

It is then no wonder that many people of all ages, from the millennials to retirees, opt to be freelancers after a corporate stint or even right after college.

Why is there even a need for a Freelancers Protection Act?

Sen. Bam Aquino’s proposed bill focuses on protecting freelancers from poor or unlawful paying habits of hiring entities.

Freelancers have the freedom and flexibility that they so love but the flip side of that coin is that their cash flow is highly dependent on prompt payment. While many long-time freelancers (professional consultants, for example) may be earning comfortably, newcomer freelancers or those providing more basic services earn only based on how much they deliver. If their cash flow expectations are disrupted by bad payment practices, their quality of life suffers.

Cash flow management practices to maximize one’s money include practices such as billing at the earliest time possible and paying at the latest time possible. In fact, the practice of paying people on a Friday afternoon (after banks’ cutoff hours) may be irritating but is actually an accepted practice that ensures that the company’s money still stays with it over the weekend.

It’s a different case though with employers that purposely do not pay on time or end up not paying at all for services rendered. This is what the bill seeks to address.

Main Features of Proposed Freelancers Protection Act

SB No. 351 includes the following provisions, among others:

1. Required written contract if the engagement is at least PhP 10,000, with clear deliverables expected of the freelancer as well as the amount, date, conditions and mode of compensation.

2. Payment not later than 30 days after completion of work under the contract or due date as specified in the contract, whichever comes first

3. Protection against lowering of contract price after work has begun unless there are performance issues that are settled via a good faith agreement or there is a modification to the contract agreed to by both parties

4. Provides a process by which an aggrieved freelancer can file a complaint with the Department of Labor and Employment. Valid complaints may carry penalties up to PhP 250,000 on a non-compliant employer aside from civil penalties for every day of delay in payment.

5. Setting up of a special assistance desk or lane in every Revenue District Office (RDO) for freelancers with an officer who can assist with application, registration, processing of documents, and other inquiries.

6. Tax relief in the form of tax-free income for the first three (3) years from the freelancer’s date of registration. After the 3 years, tax rates would be:
* tax-exempt for annual income up to PhP 300,000
* 10% on annual income over PhP 300,000 but not over PhP 10 million

Initial Reactions

A law to protect freelancers is indeed timely considering the trend towards mobile and flexible work. However, there are a few more issues that Sen. Bam Aquino may want to consider when finalizing the bill.

1. Freelancing covers a wide spectrum of job types.

At the top of the tier are professional freelancers who have executive-type skills and normally have a wide client base and earn on a regular basis especially if they have retainer fees from their clients. At the bottom of the rung are work-from-home types that may have a project this month but none the next. Yet, the Bureau of Internal Revenue (BIR) reporting requirements are the same. The BIR currently does not distinguish a big-time freelancer from the often-erratic earning power of much smaller freelancers. I checked the requirements needed of a freelancer and they are intimidating:

a. Annual registration fee of PhP 500
b. Official receipts – normal minimum printing requirement is at least ten (10) booklets at a cost of PhP 800-1,500 PER BOOKLET. That is a lot of money for a small-time freelancer. I was also speaking with a freelancer friend and he said that oftentimes, multinational corporations would even require a Service Invoice aside from an official receipt. Chances are, it is requested by a corporation because, in turn, it is also required as documentation by the BIR.
c. Books of accounts – The number of books of accounts depends on whether you are non-VAT or VAT-registered. Both types will need a journal, ledger, cash receipts book, and cash disbursements book. VAT-registered freelancers have to add a subsidiary sales journal and subsidiary purchases journal. Just imagine how overwhelming these all are to non-accountant freelancers. One may even need to hire the services of a bookkeeper for this.
d. Business taxes (12% if VAT-registered; 3% if non-VAT)
e. For some expenses, the BIR appoints you as a withholding tax agent for which you need to withhold taxes depending on the nature of the expense.
f. Quarterly and annual filing and payment of income tax
g. Audited financial statements, if your gross receipts for one quarter exceed PhP 150,000
h. Local requirements such as Community Tax Certificate (CTC) and business permit

All this red tape and unnecessary expense deters smaller freelancers from even registering in the first place.

The proposed Freelancers Protection Act (under Section 25) says: “Freelancers shall file their income tax returns, VAT returns or percentage tax returns annually. Freelancers may settle their dues and fees at any BIR office, accredited bank, payment center and government financial institution.” Will the bill, by virtue of Section 28 (Repealing Clause), cancel out or replace the quarterly filing requirement currently existing?

Maybe if the BIR gets involved in a study to see if report requirements for freelancers could be reduced to the barest minimum, it would encourage more people to register and file taxes.

2. Section 6 on Retaliation is vague.

It is not clear whether the repeated use of “person” refers to the hiring party, the freelancer, or some other person outside of the two contracting parties. It appears, at least to me, that the intent of this provision is to protect the freelancer from any retaliatory action by the one hiring his services if the freelancer decides to file a complaint. There is no definition, however, of what kind of “retaliation” this Act is supposed to cover and how this provision actually protects someone from any form of retaliation.

3. The absolute taxable values can be a future issue – Since the bill’s proposed tax rates apply to absolute values of income earned (over PhP 300,000 until PhP 10 million), it will eventually have the same issues as income tax rates which are now taxing a lower income-earning class of workers than originally intended because the rates have not been adjusted for inflation for decades.

The Freelancers Protection Act is laudable. It recognizes an upcoming and growing group of freelancers who are not always adequately protected from unscrupulous practices of some entities that hire their services. However, there are refinements and clarifications that are still needed. I hope that as this bill goes through further scrutiny, the issues brought up here, and any others that may be raised during deliberations, will make this Act one that truly protects freelancers.

To read the draft Freelancers Protection Act, go to http://www.bamaquino.com/senate-bill-no-351-freelancers-protection-act/

 

This post is supported by a writing grant from the Philippine Center for Investigative Journalism (PCIJ)