a. Factors that Determine Who is an Employee and Who is an Independent Contractor
The main element that distinguishes an employment relationship from a commercial or civil one is subordination, which has been understood by the Colombian Constitutional Court as the “permanent juridical power by means of which the employer directs the labor activity of the employee, through the issuance of orders and instructions and the imposition of regulations regarding the manner in which the employee must carry its functions and comply with its obligations”.2
Accordingly, subordination is the distinctive element of employment relationships. In contrast, the lack of it derives from the autonomy of the person who is rendering his/her services. Thus, under services contracts:
• the contractor assumes all risks ans operates with its own resources; and
• the contractor acts with full economic, technical and administrative autonomy.
This distinction is applicable regardless of what the parties may have agreed in writing. Colombian labor legislation is governed by the primacy of reality principle (meaning one has to look at the reality of the relationship), according to which an employment agreement is deemed to exist in those situations whereby an individual undertakes to render a personal service to another individual or a corporate entity, under a relationship of continuous dependence or subordination to the individual or corporate entity, receiving remuneration as consideration.
Therefore, an employment agreement is deemed to exist when the three above mentioned factors, specifically the rendering of a personal service, continued dependence or subordination, and remuneration exist concurrently. An employment agreement does not cease to exist simply because of the name given to it, or any other conditions or modalities that may be added to it.
Colombian laws and case law clearly state that no matter what the parties agree upon in writing, what is really important is the manner in which the services are actually rendered.
Accordingly, and from the labor perspective, an individual who agrees with another person or with a legal entity to execute some specific tasks without being subordinated to the contacting party will be considered to be an independent contractor. In this regards, the following are the inherent characteristics of a service agreement to be rendered by an individual:
• the contracted tasks have a determined price;
• the contractor assumes the inherent risks involved in the execution of the contracted services;
• the contractor makes use of his/her own resources both (technical, economic, financial and/or human), for the performance of the contracted activites; and
• the contractor has full technical and administrative autonomy in order to manage his/her staff.
b. General Differences in Tax Treatment
Usually, for tax purposes, individuals in Colombia are classified in one of two tax categories, namely residents or non-residents.
An individual is considered to be a tax resident when they have spent over 183 days in Colombia in a 365 day period. In addition to this, individuals with Colombian citizenship are considered to be tax residents if certain criteria are met (i.e. amount of income sourced in Colombia or assets held in Colombia, the individual’s country of residence, family’s country of residence, etc.).
These categories are important because Colombian tax residents are subject to income tax on their worldwide income and equity, while non-residents are only subject to income tax over their Colombian source income.
Given the recent tax reform (Law 1819 of December 29, 2016), the income obtained by a Colombian tax resident will be taxed on a different basis and rates, depending on the schedule in which such income is classified.
In this sense, the labor schedule is applicable to the income derived from: (i) a labor contract; or (ii) the income obtained working as an independent contractor, provided he/she does not hire two or more individuals associated with the service rendered for a period of at least 90 days. Such income would be subject to taxation at progressive marginal rates of 0%, 19%, 28% and 33%, depending on the amount of such income received by the individual. Some legal deductions in this schedule are allowed, but they cannot exceed 40% of the taxable income, without exceeding in any case a total of 5.040 UVT (approx. COP159.208.560 / USD53.070).
There is also a non-labor income schedule that is applicable, among others, to the income obtained by those independent contractors who hire two or more individuals associated with the service rendered for a period of at least 90 days. Such income would be subject to taxation at progressive marginal rates of 0%, 10%, 20%, 30%, 33% and 35%, depending on the amount of such income received by the individual. Again, some legal deductions in this schedule can also be made, but these deductions cannot exceed 10% of the net taxable income, without exceeding in any case a total of 1.000 UVT (approx. COP31.589.000 / USD10.530).
The rate of ‘withholding tax’ applicable to payments made by an employer to an individual will vary depending on the amount of income obtained by the individual during the respective month. In this sense, progressive marginal rates of 0%, 19%, 28% and 33% are applicable to the gross payments, minus allowed deductions (i.e. mandatory health and pension contributions, voluntary contributions to private pension funds, 25% of the net income which is considered exempt, etc.). These withholding tax rates are also applicable to those individuals who earn their income as independent contractors who do not hire two or more individuals associated with the service rendered.
In the event that a person earns his / her income as an independent contractor and does hire two or more individuals associated with the service rendered, such income would be subject to an 11% withholding tax if the contractor is obliged to file an income tax return. Otherwise, a 10% withholding tax is applicable.
All Colombian employers are responsible for the payment of payroll taxes, which are contributions that every employer has to make for each one of its employees who earn more than 10 minimal monthly legal wages (approx. COP 7.377.170/ USD2.460). Such payments have to be made on the basis of the salary at a 3% rate destined to the Colombian Family Welfare Institute (Instituto Colombiano de Bienestar Familiar – “ICBF”), 2% destined to the National Apprenticeship Service (Servicio Nacional de Aprendizaje – “SENA”) and a 4% destined to the Family Compensation Funds (Cajas de Compensación Familiar). The payroll taxes only have to be paid for the individuals that work under a labor contract. The payroll taxes do not have to be paid for those individuals working as independent contractors.
As previously mentioned, non-residents are only subject to Colombian income tax over their Colombian source income.
Non-residents are not obliged to file an income tax return if all of their Colombian source income was subject to withholding tax. Generally, all payments made by Colombian employers or companies to non-resident individuals are subject to withholding tax.
In light of the recent tax reform, the withholding tax rate for non-residents is 15% of their gross income. Therefore, the payments made to non-resident individuals for personal services rendered through a labor contract or as an independent contractor, would be subject to a 15% withholding tax over the gross payment, which will be the final tax due in Colombia, since such individuals would not be obliged to file an income tax return.
c. Differences in Benefit Entitlement
Employment relationships are governed by the Colombian Labor Code, which establishes several legal benefits to employees depending on the amount of their salary and the fact that such salary is ordinary or all-inclusive. Employees earning more the thirteen monthly minimum wages (“SMLMV”) can agree with their employer to have an all-inclusive salary which means that they will not be entitled to fringe benefits. For 2017, the SMLMV was fixed on COP 737,717.
On the other hand, since the Colombian Labor Code is not applicable to commercial or civil relationships such as those governed by services agreements, independent contractors do not have the benefits or the rights to which employees are entitled. They will only have the payments and benefits agreed upon in their services agreement.
Colombian labor law establishes the following benefits for employees under an employment agreement:
Transportation Aid: This is a monthly aid provided by the employer to employees who earn less than 2 SMLMV (COP 1,475,434 for 2017) and who have to commute by their own means. The monthly amount of the transportation aid is established annually by the National Government (COP 83,140 for 2017);
Dress and Footwear: Three times a year, the employer must provide one pair of shoes and one set of work wear clothes to employees who earn less than 2 SMLMV;
Severance Payment (“Cesantías”): Employees who receive an ordinary salary are entitled to a severance payment, which is one month’s salary per year, or proportional to the time worked. The severance payment must be deposited in the severance fund chosen by the employee. Severance payments can only be withdrawn or paid directly to the employee at the termination of the employment or in some specific cases related to housing or studies;
Interest on Severance: Employees who receive an ordinary salary are entitled to interest on their severance payment, equivalent to an annual rate of 12% of the severance, or a proportion if the employee worked for less than 12 months during the year. This payment is received directly by the employee at the end of each calendar year or on termination of employment;
Premium Services: A monthly salary paid in 2 installments, being 15 days of salary on the last day of June, and the remaining 15 days of salary during the first twenty days of December; and
Vacations: 15 days of paid rest for each year of service, which can also be paid pro rata to the time during which the employee worked.
These benefits are granted by virtue of the law and apply in every labor relationship. However an employer may also decide to grant additional benefits to employees, such as bonuses, food vouchers, and other kinds of benefits, which may be given or removed,
depending on any agreements made between the parties, or in a non-unionized collective agreement (“pacto colectivo”).
Additionally, if the employees are unionized, they will also have the benefits and prerogatives established within the corresponding collective bargaining agreement.
In contrast, independent contractors are not entitled to receive legal benefits established by labor law. Independent contractors are entitled to the fees agreed between the parties which are not even limited to a minimum wage. In this sense, it is important to highlight the fact that the work relationship between the contracting party and the contractor is of a civil or commercial nature, and the benefits the contractor is entitled to will depend on the specific agreement between the parties and not on any labor regulation.
d. Differences in Protection from Termination
With the exception of labor stability rights (security of employment) cases and collective dismissals, any employment agreement may be unilaterally terminated by the employer without cause (redundancy) by paying a legal indemnification depending on the:
• time for services for indefinite term contracts;
• time remaining for the occurence of the established date;
• termination of the completion of the hired task in cases of fixed term employment agreements; or
• the duration of a specific task.
As per the stability rights and prohibition of collective dismissals, protection from termi-nation for employees depends on the condition or employment status of the individual and/or the type of agreement. As mentioned earlier, any employment agreement can be terminated unilaterally by an employee, by paying them a legal indemnification, however there are some restrictions related to:
• the health condition of the employee;
• the fact that the employee is part of a union and his/her position within the union;
• workplace harassment cases; and
• the number of employees1 contracts that can be terminated by redundancy.
With the exception of the termination of the contracts of unionized employees (which can also be terminated with the authorization of a labor judge), prior authorization from the Ministry of Labor is required for unilateral termination of the contracts of employees with stability (or security of employment) rights derived from their health limitations, pregnancy or because they have made a complaint of workplace harassment. In these cases, the employer must argue that the cause for termination was fair and request approval from the labor inspector. Without such authorization, the termination will not be valid and the employee may claim reinstatement before a labor judge and/or a constitutional judge.
In union matters, the union’s board of directors and the members of the commission of claims will have permanent stability rights during their employment; the founders of the union will have the same right for six months from the incorporation of the union. In the event of a collective dispute, the employees involved cannot be terminated without cause; however authorization form the Ministry of Labor is not required.
In addition, Colombian labor laws establish a limit to the number of employment contracts that can be terminated due to redundancy, and as a result of this a company cannot dismiss, without cause, more than a certain number of employees within a period of six months without prior authorization from the Ministry of Labor. These limits depend on the number of employees employed by the company, and failure to comply with the limits will result in the declaration of the existence of a collective dismissal.
If the Ministry of Labor decides that a collective dismissal exists, all employees terminated without cause during the restricted period must be reinstated.
In any of the reinstatement scenarios mentioned above, the employer must pay salaries, fringe benefits, social security contributions and payroll taxes as of the date of termination until the effective date of reinstatement.
Protection from termination for independent contractors is limited to what may have been agreed upon in their services agreements. However, if an independent contractor is terminated and he/she manages to prove before a labor or constitutional judge that he/she was rendering services under a de facto employment relationship, the re-characterized employee will have the protection granted to employees pursuant to the Colombian labor laws mentioned in section II d i.
As previously mentioned, independent contractors are not governed by labor regulations, but by civil, commercial or public laws. In this sense, they are not entitled to labor legal compensations or stability rights at termination, except in the case of extreme necessity derived from health complications.
If the independent contractor is in a situation of extreme necessity because of his/her health complications, the contracting party shall not terminate or refuse to renew the contract based on the health condition of the contractor. In this case, the contractor may file a constitutional action where the constitutional judge will have to determine if (a) the contractor’s integrity (or employment status) is at risk because of the termination, and (b) the termination or non-renewal was based on a discriminatory act from the contracting party in consideration of the contractor’s health condition.3
If it was expressly agreed in the service agreement that some type of compensation or economic penalty for failure to comply with the obligations will be payable, the party who fails to comply with their obligations will need to pay the agreed compensation.
On the other hand, there is a specific kind of services agreement, being the commercial agency agreement, which will be set out in section II f (Other Ramifications of Classification). In the event of termination of the commercial agency agreement, for any cause, the commercial agent is entitled to a commercial severance equivalent to one twelfth of the average commission, royalty or profit earned by the agent during the last three years, multiplied by the number of years of duration of the agreement, or to the average of all sums received if the duration of the agreement if shorter.
Moreover, if the commercial agency agreement is terminated without cause, the commercial agent would be entitled to an equitable indemnification which shall be assessed in court where the agent will have to evidence the damages suffered upon termination.
e. Local Limitations on Use of Independent Contractors
According to the current regulations, it is possible for an individual or legal entity to arrange for one or several activities to be carried out by means of a services agreement. The essential characteristics of an independent contractor are:
- they are an individual or legal entity;
- they carry out one or several activities or the provision of services for the benefit of third parties;
- that the work or services require the payment of a set or determinable price;
- that the contractor assumes all the risks and operates with his own means; and
- that the contractor acts with full technical, financial, administrative and managerial autonomy. Given that the independent contractors will provide their services in an independent and proper manner without risk of re-characterization, there is one recent limitation to the use of independent contractors established by Decree 583 of 2016.
Pursuant to this Decree, companies are not allowed to outsource the provision of services related to their core business activities whenever the constitutional and legal rights of the outsourced employees are affected.
Core business activities could be defined as those related to the production of goods or the rendering of services characteristic of the company that are essential for the development of its business because without them the operation of the company would be affected.
In addition, it would be necessary that the outsourcing company does not comply with its legal and constitutional obligations towards its own employees in order for the outsourcing to be deemed illegal.
As a consequence, companies and public entities are not allowed to hire personnel for the development of their core business activities through any form of intermediation, such as independent contractors or co-operatives of associated work. Yet, in Colombia the provision of personnel through temporary services companies is allowed, but only in the cases authorized by law.
f. Other Ramifications of Classification
Associated Labor Cooperatives
In addition to independent contractors and temporary employees, there is a third category of co-operated employee which belongs to Associated Labor Cooperatives, which are non-profit organizations which bring together people who participate in management and make economic contributions, including their own work, to the cooperative. The aim of cooperatives is to produce goods, carry out works or provide services in common, through processes or sub-processes. Likewise, cooperatives have ownership of all the means of production and/or labor, such as the facilities, equipment, machines and technology. Associated work is ruled by its own statutes, and thus the regulation laid down by the Colombian Labor Code does not apply to them.
Associated Labor Co-operatives are explicitly prohibited from acting as labor intermediaries or to provide workers, under penalty of sanctions, which may be of up to 5000 SMLMV (COP 3,688,585,000 for 2017) both for the co-operative and the beneficiary of the services.
According to the Colombian Commerce Code, a commercial agency agreement is a contract under which an agent shall promote and exploit (in an independent and stable way) the business of the principal within a specific territory in Colombia, acting as a representative or agent of a national or foreign entrepreneur.
In accordance with Colombian case law and legal doctrine, the main elements of a commercial agency contract are that the:
• agent must be independent;
• relationship between the agent and the principal must be stable;
• agent must have engaged to promote or exploit the business of the principal;
• agent must act for the account and benefit of the principal; and
• agent must receive a monetary compensation for its services.
Whenever the elements of the commercial agency agreement are present in the execution of a commercial relationship, a de facto agency will be deemed to exist, and therefore, the commercial agency provisions incorporated in the Colombian Commerce Code shall apply regardless of the existence or not of a written agreement between the agent and the entrepreneur.
Upon termination of the agreement, the agent has the right to receive from the principal the following statutory payments:
• commercial severance payment (cesantia commercial); and
• equitable indemnification if the termination takes place without cause.
These payments are explained in section II d ii.
g. Leased or Seconded Employees
Temporary services companies
Companies in Colombia can only hire the provision of temporary personnel through temporary services companies in certain circumstances, namely:
• occasional, accidental or transitory tasks, as those described in Article 6 of the Colombian Labor Code;
• replacing personnel on vacations, lisenses or medical leaves; and
• to respond to increases in production, transportation, sales of products and merchandises, crop periods and the rendering of services for a term of six (6) months renewable for another six (6) months.
It is important to highlight that according to labor solidarity, as set out in Colombian labor laws, means that unless a temporary services company has complied with social security contributions in a timely manner, the beneficiary of the services (the company) can be held jointly and severally liable with the temporary services company for the salaries, social security contributions and/or social benefits to which employees are entitled to.
Labor laws state that if the legal term provided for hiring temporary personnel is exceeded, the temporary services company will be deemed as a simple intermediary and the beneficiary company will be deemed to be the real employer of those temporary employees who exceed the legal term. Therefore, if the legal term is exceeded, the beneficiary company will be liable for all labor payments due and could be subject to fines from the Ministry of Labor of up to 100 SMLMV (COP 73,771,700 for 2017) during the time the transgression continues, plus a sole fine of up to 5000 SMLM (COP 3,688,585,000 for 2017) for the violation of general labor laws.
Pursuant to Colombian labor laws, companies are allowed to outsource different kinds of services or processes through a third party provider, as long as such activities are not part of the core business of the contracting party.
In these cases the outsourcing company will autonomously perform all technical and administrative activities for which it was hired. This means that the contracting party is not authorized to give orders to the outsourcing company, nor its employees on the time, mode, place and amount of work.
Only general instructions can be given on how the services should be performed, which is why the conditions for the execution of the contract should be set out in the same document or services agreement, which guarantees the delivery of the service under the guidelines previously defined for the operation.
When this type of engagement is used, the outsourcing company is the sole employer of the employees rendering services for the contracting company, and as such, the outsourcing company will be bound to comply with all applicable legal obligations in Colombia as the employer.
It is important to highlight that Colombian labor law states that, unless the outsourcing company has complied with labor and social security obligations in a complete and timely manner, the contracting company can be held jointly and severally liable with the outsourcing company for all labor and social security payments employees are entitled to.
In the event that the employees of the outsourcing company develop the contracted services without acting independently and instead follow direct orders from the contracting company, it is very possible that the three elements of a working relationship (salary, personal activity and subordination), will be present forcing the companies to comply with all obligations arising from them, in addition to claims brought by employees.
h. Regulations of the Different Categories of Contracts
All employment relationships are governed by the Colombian Labor Code and its complementary laws and decrees. Such regulations are mandatory, meaning that parties to an employment agreement cannot agree conditions less favorable for employee than those set out in law.
As a consequence of this, employees are not allowed to give away their minimum rights granted by the constitution and the Colombian labor laws. In addition, employment conditions such as salary, cannot be unilaterally modified by an employer in a disadvantageous way to the employee.
As per the different categories of contracts, the Colombian labor legislation provides for four types of employment agreements, dependent on their agreed duration:
Indefinite term employment agreement: The duration of this type of agreement is indefinite and is not determined by the parties or by the nature of the work for which the employee is hired. Unless there is an express provision otherwise, employment agreements are understood to be open-ended.
Fixed term employment agreement: These agreements must be set out in writing and can be for a term of up to three years, renewable indefinitely. In the case of fixed-term agreements for less than a year, the parties can agree to renew it successively but after the third renewal, the term of the agreement cannot be less than one year, and any subsequent renewal must be made for at least one year. In order to terminate this type of employment agreement on grounds of contract expiration, the employer must notify the employee of its intention not to renew the contract, at least 30 days prior to the expiration date of the agreement or its current extension. In the absence of such notice, the agreement will automatically be renewed for a period equal to the initially agreed duration.
Agreement for the Duration of the Work: In this type of agreement, the duration is determined by the time required to perform the work that the employee was hired to do. The agreement must be written and the work or activity must be clearly detailed in order to determine when the agreement is due to expire. This type of contract cannot be renewed.
Occasional, accidental or temporary contract: This type of contract cannot exceed one calendar month in duration and is characterized by satisfying the extraordinary needs of the company. The purpose of this type of contract is for the temporary or special needs of the employer, as opposed to the core business activity of the employer.
Civil, commercial and public law regulates services agreements with individuals and companies. Each branch of law sets out special powers and regulations depending on the needs and nature of the service.
From a tax law perspective, independent contractors are classified as:
• independent workers self-employed individuals who are not bound by a contract and their remunaration consists of fees, commissions or servoces.
• independent contractors bound by a services agreement, and their remuneration consists of fees and/or commissions.