labor regulation for hiring

Labor regulation for hiring employees in Colombia

In this document, you will find a general summary of Colombia’s labor regulations for hiring local staff by a company in Colombia. 

  1. RELEVANT LABOR PROVISIONS

Section 127 of the Colombian Labor Code points out the following: 

Salary is not only ordinary remuneration, fixed or variable, but also everything that the employee receives in money or in kind as direct remuneration, in any form or denomination, for the service provided, including extra salaries, regular bonuses, overtime, pay for work during mandatory resting days, and commissions.

Section 128 of the Colombian Labor Code states:  

Payments that do not constitute salary are the sums that occasionally and at the simple generosity of the employer are received by the employee, such as bonuses, occasional rewards, profit sharing, surpluses of joint ownership companies or cooperatives and amounts the employee receives in cash or in kind not for his benefit, or to increase his equity, but to properly perform his duties, such as entertainment and transportation expenses, and work supplies.  Fringe benefits under titles VIII and IX, as well as benefits agreed by contract to not constitute salary, such as vacation pay, meals, lodging and Christmas bonuses, are not considered salary. 

In connection with Section 128 of the Colombian Labor Code, Section 17 of Law 344 of 1996 establishes the following:

By effect of the provisions of Section 128 of the Colombian Labor Code, modified by Section 15 of Law 50 of 1990, it is understood that agreements between employers and employees regarding payments that do not constitute salary, as well as payments for transportation allowances, do not form part of the base to calculate contributions to the National Learning Service – SENA, the  Colombian Institute of Family Well-being – ICBF, the family allowance regime, and social security as established by Law 100 of 1993. 

  1. LABOR OBLIGATIONS OF HIRING LOCAL STAFF BY A COMPANY 

2.1 Payments that should not constitute salary 

Employee payments that constitute salary for Colombian purposes

Payments that constitute salary are those that provide direct remuneration for services (e.g., productivity bonuses, bonuses for meeting sales goals, bonuses for achievements, etc.)

Also customary allowances agreed by convention or contractually granted by the employer, in those cases in which the employer and its employees have not made a “non-salary” agreement regarding the same. 

Employee payments that do not constitute salary for Colombian purposes

The following payments do not constitute salary:

– Payments based on the employer’s simple generosity and distributed occasionally (e.g., premiums, bonuses and rewards given in occasional basis);

– Profit sharing payments;

– Payments to facilitate the execution of the employees’ duties (e.g., transportation and work supplies); and

– “Extralegal” benefits provided to employees on a permanent basis under a “non-salary” agreement.  In general, these benefits include meals allowances, education allowances, extralegal premiums, and prepaid healthcare allowances.  Such agreed-upon non-salary payments are also excluded from labor obligations and do not have to be taken into account in the computation of social security tax if they do not exceed 40% of the monthly payment, otherwise, the difference will be the basis for Social Security payment. It is important to note that the “non-salary agreement” must be very specific and must be executed in writing and signed by both the employer and employee.

It is necessary to point out that an agreement between an employer and employee regarding non-salary payments will not be upheld, if the payments or benefits applicable to the employee are direct remuneration for services performed, as such could represent regular premiums for productivity, overtime payments, payment for work during mandatory resting days, commissions, bonuses for accomplishing sales goals set by the employer, incentives for complying with commercial deadlines, etc. 

If a company and its employees expressly agree that certain payments will not constitute salary, such payments should be excluded from the calculation of labor obligations, professional risk insurance (workman’s compensation/ARL), fringe benefits (e.g., severance or “cesantía,” service bonuses, etc), payroll tax contributions (SENA, ICBF, Family Compensation Board) and social security contributions (pension plan and health). These subjects are explained as it follows.

Note: According with Law 1393 Article 30 indicates that payments that do not constitute salary cannot exceed 40% of the remuneration. If it exceeds, it such payments should be included from the calculation of Social Security tax (Health contributions, Pension plan contributions and Professional risk) 

Items 2.1.1 through 2.1.4.3 listed below apply only to “salaries” and they should not apply to non-salary remuneration provided to the employee. 

2.1.1 Professional risk  – (ARL)

Section 2 of Decree 1295 (1994) states that the main purpose of the professional risk system, among others, is to protect employees in the case of temporary or permanent disability resulting from a work accident, or professional disease or death.  Pursuant to this decree, employers must cover the risks of national and foreign employees that are parties to an employment contract.

The employer must contribute a percentage of the employee’s salary to the professional risk system.  Percentages range between 0.522% and 6.96%, according to the risk level assigned to the employee’s work.  This contribution only applies to the employer. The base for the calculation totals the employee’s salary up to 25 minimum monthly salaries.  If the employee earns an integral salary (as defined below), the base totals 70% of the employee’s monthly salary up to 25 minimum monthly salaries.

 2.1.2 Payroll contributions regulations

The payment of payroll taxes is an obligation of employers domiciled in Colombia.  Act 21 of 1982 provides that all employers that engage one or more permanent employees must pay payroll taxes at a rate of 9% of total monthly payroll.

In the case of an integral salary (as defined below), the calculation base totals 70% of the employee’s salary.

 If a Company has an employee of less than 10 minimum wages ($ 8,778,020 for the year 2020), the employer will not pay 5% to payroll contributions. 

2.1.3 Fringe benefits 

  1. a) Severance Payment (Cesantía): For the duration of an employment agreement and at the termination of the employment contract, severance payments consist of one month’s salary per year of work (based on the last month’s salary, provided it has not been modified during the last three months). If the salary was modified, the average salary over the last 12 months is taken into account to determine the annual “cesantía.”

This payment has to be deposited in an account of the “cesantía” fund selected by the employee for his or her benefit.  Deposits must be made by February 15th of the following year to which the “cesantía” pertains.  For example, the “cesantía” for 2020 must be deposited by February 15, 2021.

  1. b) Interest of severance payment: Interest totaling 12% of the outstanding “cesantía” balance at December 31st accrues each year. Such interest is payable directly to the employee in January of the following year or on a pro-rata basis upon termination of the employment contract..
  1. c) Service Bonus (Prima Legal): The service bonus consists of one month’s salary per year, half of which is payable in June and half of which is payable in December. The bonus is proportional to the time worked during a calendar semester.
  1. d) Vacation: Vacation consists of 15 working days per year or a proportion of the time worked.

2.1.4 Social Security tax

All employees in Colombia, either national or foreign, must be enrolled in the Social Security System.  The Social Security System provides benefits to the insured and his/her dependents in case of occupational accidents, sickness, retirement, old-age pension and death.

The following social contributions are currently in force: 

2.1.4.1 Health contributions

The Social Security regulations state that all inhabitants of the country must be affiliated to the health system. The contributions guarantee the obligatory health plan for the employee and some members of his/her family.

The health contribution totals 12.5% of the monthly salary received.  In every case, the base salary will total at least of one minimum monthly salary[1].  The maximum base wage totals 25 minimum monthly salaries.

For employees with integral salaries, the calculation base will total 70% of the salary up to 25 minimum monthly salaries. 

Of the total health contribution, 2/3 is assumed by the employer (8.5% of the monthly salary) and 1/3 is assumed by the employee (4% of the monthly salary).

An employee’s mandatory health contributions are not considered taxable income to the employee.

If a Company has an employee of less than 10 minimum wages ($ 8,778,020 for the year 2020), the employer will not pay 8.5%.

2.1.4.2 Pension plan contributions 

Generally, all workers must be affiliated to the mandatory pension plan.

A foreign employee could be affiliated to the pension system on a voluntary basis if he or she maintains a pension fund in his/her home country. In other words, it is not mandatory for him/her to make pension contributions if he/she maintains a pension fund at home.

Contributions to the pension plan for 2020 are based on 16% of the employee’s base salary.  The employee assumes a contribution of 4% of his/her base salary and the employer assumes a contribution of 12% of the employee’s base salary.

Contributions for employees with integral salaries are based on 70% of the salary up to 25 minimum monthly salaries. Likewise, the calculation base for employees earning ordinary salaries may not exceed 25 minimum monthly salaries.

Mandatory pension contributions made by an employee to a Colombian pension plan are not treated as taxable income to the employee.

 2.1.4.3 Solidarity pension fund contributions

Contributions to the solidarity pension system are based on 1% of an employee’s salary base and must be paid by employees who earn more than four minimum monthly salaries (SLMV[2]).  An employee who earns 16 SLMV or more has to pay an additional contribution ranging from 0.2% to 1% of his/her salary.  These contributions are the complete responsibility of the employee and are not taxable to the employee.

  1. Types of employment remuneration in force in Colombia 

Two types of salaries may be received by an employee in Colombia. 

Ordinary Salary:  An employee who receives an ordinary salary is entitled to receive, in addition to a fixed or variable monthly salary, the following benefits: severance payments (“cesantía”); interest totaling 12% of the outstanding balance of “cesantía” at December 31 each year; service bonus (prima legal), and vacation pay (see discussion above regarding these fringe benefits).

Integral Salary: When an employee earns a salary higher than 10 times the minimum monthly salary[3], he/she may agree with the employer to receive an integral salary, which may not be lower than 10 minimum monthly salaries plus a benefit factor amounting to no less than 30% of the employee’s salary (the minimum integral salary totals COP11,411,426 or approximately USD3,084 for 2020).  The benefit factor covers the severance payments or “cesantías,” interest on the “cesantía,” and the service bonus. The benefit factor does not cover vacation pay, health and pension contributions, and professional risk contributions.

In the case of employees who earn an integral salary, an agreement between the employer and employee regarding non-salary payments will only affect social security contributions (health and pension), payroll tax (SENA, ICBF, Family Compensation Board) and contributions to the system of professional risk (ARL), since these employees already receive fringe benefits (severance/”cesantía,” service bonuses, etc).  Then non-salary payments for employees who earn integral salaries should not be taken into account when calculating social security contributions (health and pension), payroll tax, and contributions to the system of professional risk (ARL).

3.2. Withholding tax upon employment payments 

All Colombian employers have to apply withholding taxes on the payments arising from an employment relationship; the rate of this withholding will vary from 0% up to 39% depending on the amount of the employee’s salary. At this point, Colombian regulations permit the diminishing of the withholding tax base with some items; among others we can quote the following: indirect payments, payments for meals, contribution to pension funds, etc. 

[1] COP 877,802 or approximately USD237 for 2020

[2] COP3,511,208 or approximately USD948 for 2020

[3] COP8,778,020 or approximately USD2,372 for 2020

claudia benito sanabria

Por: Claudia Benito– Socia Servicios Financieros

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