As a foreigner, it doesn’t take long to realize that employment and labor laws in Colombia, just like in any other country, are complex and can be time-consuming to research what you need to know. There are a variety of legal requirements that must be fulfilled, as Colombian labor law places high value on the protection of employee rights, and failure to do so can cost you time and money. Furthermore, there are different contract and compensation choices to consider. Being aware of all available alternatives and their advantages/disadvantages can influence your business strategy before hiring an employee. To help you understand the key facts, here’s our guide to employment contracts in Colombia:
What types of employment contracts exist in Colombia?
Distinguishing between the different contracts is of vital importance. In the event of a possible contractual dispute, potential severance payments can significantly differ. For this reason, it is best to determine the most suitable type of contract before hiring workers. Colombian labor law makes no difference between local and foreign employees regarding contracts and labor rights to guarantee equal opportunities for national and foreign workers.
In Colombia, an employment relationship is established when there is (1) personal service, (2) subordination from the employee towards the alleged employer, and (3) payment as compensation for the service provided. As soon as these three requirements are met, the agreements can be recorded in a contract. Below you’ll find the contract options to choose from in Colombia, which mainly differ in their duration.
1. Indefinite/Open-Ended Contract (contrato a término indefinido)
This type of contract represents a permanent contract on a verbal or written basis without a fixed term. The employer pays benefits, vacation, social security contributions, and is liable for possible severance payments. The relationship ends when the contract is dissolved by either party.
An employer may terminate the relationship without liability if just cause is established and documented with a disciplinary process (conduct, performance, etc). If the termination is without cause, the employee is entitled to indemnification.
- For employees earning less than 10 minimum wage salaries per month (8,778,030 COP in 2020), compensation is 30 days of salary for the first year and 20 days of salary for each additional year.
- For employees earning more than 10 minimum wage salaries per month, the compensation is 20 days of salary for the first year and 15 days of salary for each additional year.
2. Fixed Term Contract (contrato a término fijo)
As the name suggests, fixed term contracts are limited in duration. The length of the contract is free for the parties to determine, but it cannot exceed a maximum of three years. However, fixed term contracts can be renewed indefinitely, unless their limit is set to less than one year. In that case, the contract cannot be extended more than three times, after which the contract can only be renewed if the contract length exceeds a period of one year.
In contrast to indefinite contracts, fixed term contracts must be put in writing. If neither the employer nor the employee submits a written employment termination notice 30 days before the contract expires, the employment contract is automatically extended.
3. Contract for Duration of Work
Contracts can also be limited to the duration of a specific project. These types of contracts expire as soon as the tasks specified in the contract have been completed. Thus, all the expected duties must be clearly defined in a written contract. Here, attention to detail is crucial. Contracts for duration of work cannot be extended beyond the completion of the project.
4. Occasional Contract
Occasional contracts represent a temporary agreement either in written or verbal form over a casual job and are limited to a maximum duration of one month. Apart from that, the labor needs to complement the regular activities of the firm.
What types of employment contracts exist in Colombia?
In Colombia, the employer is responsible for the registration of employees to the Colombian Social Security System and for the payment of salary-based social benefits. These monetary contributions from the employer are a percentage of the employee’s monthly income and are distributed as followed:
- Pension: 12%
- Health care: 8.5%
- Labor risk contribution: 0.522% to 6.96%
- Withholding Tax: 17.34%
Employees also pay a salary-based percentage of their monthly income into benefits (4% for both pension and health care for a total of 8%). Registration of foreign employees into the Colombian Social Security System is voluntary.
What salary options exist in Colombia?
As a company operating in Colombia, you have two ways of paying your employees’ monthly wage. Each has its advantages and disadvantages, and you can determine which of the options is most suitable for your company.
With a regular salary, the ordinary wage is calculated and paid separately from benefits contributions. The minimum wage in Colombia in 2020 equals COP 980,657 (approx. USD 300). On top of that, the employer must provide the employee with certain legally defined fringe benefits:
- Social Security Payments
- Monthly payroll taxes to Family Welfare Institute (ICBF), National Learning Service (SENA) and Family Compensation Fund
- Transportation expenses
- Holiday pay
- 13th-month salary
The integral salary is where all mandatory and benefits contributions are packaged into a fixed salary payment. This means that the integral salary includes fringe benefits and potential surcharges, such as overtime for evening hours, Sunday hours, public holiday hours, and extra-legal bonuses (13-month salary is not included). Integral monthly minimum wage for 2020 is COP 11,411,439 (approx. USD 3,100). 70% of the integral salary represents the basis to calculate contributions to the Colombian Social Security system. However, if 70% of the integral salary is more than 25 times the minimum wage, contributions to the social security system will be calculated on the maximum basis of 25 times the minimum wage.
This modality can only be applied for employees earning more than ten times the Colombian minimum wage. In some cases, the integral salary is a very attractive option, since it can help reduce a company’s administrative expenses.
To facilitate the process of hiring talented employees without the burden of establishing a local entity, Ongresso offers International PEO to act as your Global Employer of Record. In this service, Ongresso performs all HR related tasks – such as employee hiring/onboarding tasks, benefit administration, tax contributions, etc – allowing you to focus on your core activities.
What if I want to hire independent contractors?
Engagement with independent contractors in Colombia can be an attractive option as well, offering you a quicker and more flexible market entry. Hiring contractors can also potentially reduce tax liability, as employers are not responsible for payment of benefits.
Nevertheless, hiring foreign independent contractors doesn’t come without risk. Since they are independent by definition, the employer’s insight and control over the contractor’s activities and performance is limited. Misclassifying a contractor can also put you at risk of legal trouble if a disgruntled contractor claims they were treated as an employee and that they are deserving of back pay for benefits, and if applicable, severance pay that was not paid.
Under Colombian law, the following criteria are necessary for establishing a relationship with an independent contractor:
1. No direct subordination
The employer is allowed to examine the work done by the independent contractor, but cannot interfere in the execution of the individual tasks. Establishing a written agreement about the scope of services can help to avoid complications regarding work fulfilment. Companies may not demand any work or product related specifications outside the scope of the contract.
2. No fixed workplace or fixed hours
Colombia does not forbid a certain level of control over the working time of an independent contractor, but if you define fixed working hours or a set lunch time, your contract appears more like a normal employer-employee relationship. Make sure to keep the day-to-day work relationship flexible by guaranteeing an autonomous working environment for the contractor.
3. No fixed salary
Since there is no fixed payment for an independent contractor, payments should be based on invoices submitted by the contractor. Both parties must also pay the taxes that apply to independent contractor relationships in Colombia.
Other things to keep in mind include the duration and nature of the work performed as well as expense reimbursements. The paper trail doesn’t tell the whole story either, and it is important to make sure non-recorded activities follow the established criteria for contractors.
Each situation must be assessed separately to understand whether the relationship is truly independent. Every country has its own criteria, and it is necessary to have an understanding of local regulations.
How can I pay independent contractors from abroad?
There are two difficulties of paying independent contractors in Colombia:
Firstly, Colombia has very strict anti-money laundering regulations, which can complicate and prolong the payment process. Secondly, the more independent contractors you hire, the more time you spend on processing individual payments/transactions that need to be made each payment cycle (2 times per month).
To save our clients time and banking related headaches, we developed our International Payment Service (IPS) where you send funds to Ongresso once a month, and we make all of your payments on time according to your instructions.