Colombia is full of talent. With Medellin and Bogota becoming start-up hotspots, many global companies are flocking to Columbia to recruit employees. In this evolving professional landscape, the difference between an independent contractor and an employee has never been more significant. As businesses navigate the intricacies of employment law, understanding what's the difference between these two types of professional engagements is essential.
The question of whether a worker should be classified as an employee or an independent contractor is not just academic — it has real-world implications that touch on everything from tax obligations to workplace autonomy. In Colombia, as in many other jurisdictions, the line between the two can be nuanced but is critically important. This distinction carries with it a host of legal and financial considerations, especially concerning income tax, social security and medicare, and company control.
As we delve into the complexities of this subject, we'll explore how the degree of control a company exercises over the work can be a deciding factor, and how this affects the legal and financial responsibilities of both parties. Whether you're an entrepreneur trying to understand your responsibilities or a growing company aiming to ensure compliance with Colombian labor laws, this blog will provide clarity and guidance on navigating the independent contractor vs employee confusion across the following topics:
- Contracts
- Salary and income tax
- Work hours
- Employee benefits
- Termination and severance
- Financial penalties
Legal Definitions: Independent Contractor vs Employee in Colombia
The legal definitions of an independent contractor and an employee in Colombia are grounded in a set of factors that determine the nature of their working relationship with the employer. At the core, the distinction lies in the level of autonomy, the method of compensation, and the intention of both parties engaged in the contract.
Autonomy and Control: A defining characteristic is the degree to which a worker has control over their work. Employees typically operate under the direct supervision and control of the employer, following specific procedures and schedules set by the company.
In contrast, an independent contractor usually retains a high level of autonomy, determining how to accomplish the assigned tasks. To understand these differences in depth, check out our comprehensive guide on worker classification.
Compensation Structure: Compensation is also a determining factor. Employees usually receive a steady wage calculated by the hour or a salary, along with potential bonuses and benefits. On the other hand, independent contractors are typically paid per project or through a negotiated rate for their services. For a detailed breakdown of these payment structures, you can explore our article on compensation differences.
Contractual Intention: The intention behind the contractual agreement, often documented in the employment contract, is vital. It sets the expectation of the relationship's longevity, scope of work, and degree of integration into the company's operations. It can also affect the associated cost or hiring for the company. For a deeper understanding of how contractual intention affects worker status, review our insights on contractual intentions and legal implications.
To ensure your business adheres to these definitions, it's crucial to familiarize yourself with the official guidelines laid out by Colombia's Ministry of Labor. Their website provides the regulatory framework for classifying workers, which can be found at Ministerio del Trabajo.
Moreover, tax obligations in Colombia, such as income tax and social security contributions, hinge on these classifications. Independent contractors handle their tax payments differently compared to employees, whose contributions are typically managed by the employer. The nuances of these tax obligations can have significant implications for both parties. For more information on these tax obligations, refer to the Dirección de Impuestos y Aduanas Nacionales (DIAN).
Understanding these legal definitions is not only critical for compliance, but also impacts the financial and operational structure of your company. Misclassification can lead to penalties and fines, underscoring the importance of accurate categorization.
This is where an Employer of Record (EOR) platform like Borderless can help you navigate the key differences between independent contractors and employees. As an EOR, Borderless specializes in compliant hiring of employees and independent contractors across the globe.
Employees in Colombia
An employment relationship in Colombia is established when there is a personal service, subordination from the employee toward the employer, and payment for the service is provided.
Contracts
When entering an employer-employee relationship, contracts must be in Spanish, and if necessary, can include English. There must be a written agreement signed by both parties that includes the name, start date, length of hire, job description, termination conditions, and the type of contract. Colombia has three main types of employee contracts: indefinite, fixed term, and duration of work.
- Indefinite Contract: This is an open-ended contract that ends when it’s terminated by either party involved. Indefinite contracts in Colombia do not need to be put into writing.
- Fixed Term Contract: These types of contracts last a limited amount of time. However, upon hiring, each party can decide the duration of the contract, but ultimately, cannot set the work period past three years. Once a fixed-term contract ends, it can be renewed indefinitely. Unlike indefinite contracts, fixed-term contracts need to be put into writing. If either party in the agreement doesn’t submit a termination request 30 days before the contract ends, it is automatically extended.
- Contract for Duration of Work: Certain contracts are only limited to the duration of a project. Unlike fixed-term or indefinite contracts, these contracts are terminated as soon as the specified tasks in the contract have been properly executed.
Subordination
The standard working week for Colombian employees is 48 hours per week — eight hours a day, six days a week. Employees are entitled to one day off per week, which is typically Sunday, but the allotted day off can be adjusted as long as it’s stated in the employment contract.
Salary, Overtime and Bonuses
There are two types of salaries in Colombia: an ordinary salary and an integrated salary. The ordinary salary is higher than the minimum wage — which, as of January 2023, is COP 1,160,000.00 — and the salary and social security contributions are paid separately.
The integrated salary, however, is a fixed monthly salary that’s approximately 10 times higher than the minimum wage. With an integrated salary, everything is included: bonuses, additional payments, and benefits.
If an employee were to work overtime, they are entitled to receive at least 125% of their pay for daytime work. If they work overtime on a holiday or overnight, they are entitled to be paid a rate of 150%. Colombian employees are not to work more than two hours of overtime a day.
Colombian employees, with the exception of those on an integrated salary, are entitled to a 13th month bonus, commonly referred to as Prima de Servicios. This bonus is paid out in two installments, usually in June and September.
Benefits
Colombian employees are entitled to benefits, like vacation, maternity leave, paternity leave, and sick leave. For paid time off, employees are entitled to 15 days of paid leave each year. In addition, Colombia observes 18 public holidays during which employees are not required to work.
Female employees are entitled to maternity leave; they’re able to take 18 weeks fully paid. Maternity leave can start two weeks before the due date. Fathers are allowed to take two weeks of paternity leave; however, the mother can transfer the last six weeks of their maternity leave to the father if they wish to do so. Maternity and paternity leave are paid through the employer who is later reimbursed by social security.
If an employee is unable to work due to illness or injury, the employer is required to pay them their usual wages during the first two days of absence. If the employee is absent for longer than three days, sick pay is then covered by social security at a rate of 66.67%. These payments cannot exceed 180 days.
Additional leaves employees are entitled to include trade union leave, bereavement leave for up to five days, and voting leave.
Taxes
Employees typically have their income tax withheld by their employer, ensuring compliance with Colombian tax laws.
Social Security and Medicare Contributions
For employees, contributions to Social Security and Medicare (or healthcare) are usually managed and contributed to by the employer.
Colombian employers pay up to 38.2% for social security contributions. This consists of 8.5% for health insurance, 12% for pension, 4% to 9% for payroll tax, and up to 8.7% for professional risk coverage. For integrated salaries, social security contributions are based on 70% of the employee's income.
Termination and Severance Pay
If an employee is dismissed without cause, or if the employee voluntarily ends employment, severance pay is required. The exact amount of severance is dependent on the seniority of the employee and their salary.
Colombia has no unemployment insurance. For employees who do not receive an integrated salary and are terminated, employers are required to pay them a Cesantias, which is an annual amount that’s equal to a monthly salary. In addition to their monthly salary, a Cesantias is paid out to the employee with a 12% interest rate.
Independent Contractors in Colombia
Colombian independent contractors have flexibility in their work. Unlike employees, they do not operate under the direct subordination of their employer. Independent contractors work for themselves and provide their service to other legal entities.
Contracts
Written contracts are not required when entering into a working relationship with an independent contractor in Colombia. These relationships can exist without formal documentation. However, many Colombian independent contractors choose to sign an agreement. If a contract is established, it is a service agreement, whereas employees work under an employment agreement.
Subordination
The Colombian government does not require independent contractors to work a certain amount of hours. If independent contractors have set working hours or have a set break throughout the day, the working relationship may be more along the lines of employer-employee.
The hiring party does not have any control or any say over the independent contractors’ work. They cannot intervene with the contractors’ work or other tasks. As long as the contractor completes their projects and their work is satisfactory, they are free to work with other clients and on other projects. The ideal working relationship to have with a contractor is a flexible and autonomous one.
Salary
Independent contractors are not entitled to a minimum wage or fixed salary. If independent contractors are paid a fixed salary, it blurs the lines of the working relationship and may appear to be employer-employee. Remuneration and compensation are decided and agreed upon by both parties. Rather than be on the organization’s payroll, independent contractors must submit an invoice to be paid.
Benefits
Do independent contractors get paid vacation? According to The Colombian Labor Code, independent contractors are not entitled to any benefits or statutory protections.
Taxes
Independent contractors in Colombia are required to file taxes at the end of every year. This means that with every payment the independent contractor receives, they must set money aside in order to pay their tax contribution. Each year, independent contractors need to submit an annual income statement to the Registro Unico Tributario (RUT) and any other additional receipts from foreign companies. They’re also required to contribute to the General Social Security System on a monthly basis.
Foreign companies that hire independent contractors in Colombia do not need to report payments to the Direcćion de Impuestos y Aduanas Nacionales de Colombia (National Directorate of Taxes and Customs). However, if they have a branch in Colombia, they are considered a permanent establishment, and reporting payments is required.
Social Security and Medicare Contributions
Independent contractors must make these contributions themselves, which requires a clear understanding of their obligations under Colombian law. More information on these contributions and how to manage them can be found on the Colombian Social Security Administration's website.
Termination and Severance
Independent contractors are not entitled to receive severance payments, and their contracts can be terminated at any point unless otherwise stated in the written agreement.
Case Studies: Real-World Implications of Worker Classification in Colombia
Case Study 1: The Misclassified Contractor
Imagine a software development company that hired Maria as an independent contractor. Despite the initial agreement, Maria found herself working full-time hours, using company equipment, and adhering strictly to the company's project management system — much like an employee.
However, as an "independent contractor," she received no health benefits, pension contributions, or paid holidays. When Maria challenged her classification, a legal review found that she met many criteria that should classify her as an employee. As a result, the company faced back payments for social security contributions and was forced to reclassify Maria and several other workers.
Case Study 2: Employee Benefits Misunderstanding
A graphic design firm employed Sofia as a full-time employee. Sofia was under the impression that, as an employee, her employer would contribute to her pension plan. However, due to a misunderstanding and a lack of clear communication, she discovered that her contract did not stipulate employer pension contributions.
This case underscores the necessity for clarity regarding employee benefits from both the employer and the worker, as well as the consequences of making assumptions about terms not clearly outlined in the in employment contract.
Frequently Asked Questions About Worker Classification in Colombia
How does company control differ between an independent contractor and an employee?
Company control varies significantly, with employees working under direct supervision, while independent contractors have more control over their work methods. For more details on labor norms, refer to the Ministry of Labor's guidelines.
Are there any specific laws in Colombia that define the relationship between an independent contractor and a company?
Yes, the Colombian labor law defines these relationships.
What are the risks of misclassifying an employee as an independent contractor in Colombia?
Misclassification can result in penalties and back payments. The Ministry of Labor provides resources on proper classification.
Can an independent contractor be eligible for employee benefits such as a pension plan or healthcare in Colombia?
Independent contractors are not typically eligible for employee benefits and need to arrange for their own pension and health insurance, which can be done through Colpensiones for pensions, and the Ministry of Health and Social Protection for health insurance options.
How do income taxes differ for an independent contractor versus an employee?
Employees have taxes withheld by employers, while independent contractors self-report and pay taxes directly through DIAN.
What's the difference in job security between an independent contractor and an employee in Colombia?
Employees typically have more protections under labor laws, while contractors have more flexible arrangements but less security. For information on employment protection, check the Ministry of Labor's resources.
Navigating Distinctions With The Help Of An Employer of Record
Understanding the differences between an independent contractor and an employee in Colombia is of paramount importance. The distinctions are not merely semantic; they carry significant legal, financial, and operational implications that can profoundly impact both parties involved.
The correct classification is pivotal to ensuring compliance with Colombian labor and tax laws. Failing to accurately categorize workers can lead to costly legal challenges, penalties, and damage to reputation. As Colombia's labor landscape continues to evolve, staying updated with the latest regulations and guidelines is essential to mitigate risks and foster a compliant working environment.
In this rapidly changing global economy, the lines between traditional employment and contractual work can often blur. However, armed with the right knowledge and resources, businesses and workers can navigate these distinctions with clarity and confidence.
This is where an Employer of Record (EOR) can be of help. An employer of record service can help you understand all the legal requirements needed to hire an employee in Columbia. An EOR will handle everything needed to keep you compliant when hiring and classifying workers.
It's not just about compliance — it's about fostering transparent, ethical, and mutually beneficial working relationships in the Colombian workforce.
Why Borderless?
How do you ensure you’re correctly classifying workers as employees or independent contractors? Borderless is here to help you navigate each jurisdiction’s legal employment landscape to establish clear contracts with your staff. Whether you're working with contractors, employees, or some mix of both, Borderless can help you keep track of who's who while staying on top of compliance, payroll, and taxes.
Book a demo with our experts to embark on this journey together!
Disclaimer: Borderless does not provide legal services or legal advice to anyone. This includes customers, contractors, employees, partners, and the general public. We are not lawyers or paralegals. Please read our full disclaimer here.
