Hire in Colombia with Confidence

Any business hiring in Colombia should understand the important legal distinction between who classifies as an independent contractor and who can be hired as an employee. Fines or penalties may be issued to businesses who are hiring independent contractors under the guise of employment. 

Understanding the distinctions between employees and independent contractors is critical to compliantly engaging workers in Colombia. It is important to work with a partner like Worksuite to ensure you put in place an engagement framework that accurately classifies freelancers as independent contractors for you and lets you know when freelance talent must be engaged as an independent contractor or employed directly. 

This is critical to compliantly engaging workers in Colombia and thereby avoiding severe legal, financial, and other penalties. 

Colombian law distinguishes between employees and independent contractors (although, unlike many countries, Colombia doesn’t distinguish between citizens and foreign nationals regarding employment laws and labor rights). Employees work under an “employment agreement” while hiring contractors involves establishing a “services agreement”. An employee undertakes work in exchange for a fixed salary, while a contractor is hired and paid for achieving a specific end result as stipulated in their contract.

Under Colombian law, the level of direction and supervision (“legal subordination”) of the individual is the key criterion in making this distinction. According to the Colombian Constitutional Court, 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 how the employee must carry its functions and comply with its obligations”. In short, employees work under close supervision whereas contractors enjoy far greater freedom in how they achieve the results required of their contract.

If the real substance of the company-contractor relationship proves to effectively be an employment relationship, the hiring company may suffer legal and financial penalties (including payroll taxes). It is therefore important to leverage an employment service partner like Worksuite when hiring in Colombia to ensure that independent contractors fall under the correct working relationship with your business.

• Who is an Independent Contractor?

Colombian law outlines three primary elements determining that an individual is an employee: (1) the individual provides a service to another legal entity, (2) the individual receives compensation in return, and (3) the individual operates under continuous and direct subordination to the employer (i.e., “legal subordination”). This means that legal subordination is the key criterion for distinguishing an employee from an independent contractor. In reality, however, this can be difficult to determine and therefore a range of additional factors may be looked at. Essentially, an individual contractor:

• Does not have fixed hours of work that are determined by the hiring company.
• Can choose the location from which to work.
• Assumes all risks related to carrying out the work specified in the contract.
• Provides their own equipment, rather than receive it from the hiring company.
• Can be (or is expected to be) dismissed once the contracted work is complete. 
• Is not integrated into the hiring company’s organizational structure.
• Can refuse to perform a task (unless that task is part of their contract).
• Is not entitled to a minimum amount of work or a minimum amount of pay.
• Is not listed on the hiring company’s normal payroll.

There are multiple business structures available in Colombia. There are four main categories under which independent contractors typically operate: 

• Natural Person (Persona natural comerciante): This is the basic category under which someone can operate as an independent contractor. Under this category, an individual has complete liability for all aspects of his/her commercial activities. Contractors must register in the Single Tax Registry (RUT) to become incorporated.
• Sole Proprietorship (Empresa Unipersonal): The empresa unipersonal is a separate legal entity from the owner, with each possessing separate assets. Sole proprietorships are identified by the appendage “Empresa Unipersonal” or “EU” after their name.
• Simplified Stock Company (Sociedad por Acciones Simplificadas, or ‘SAS’): SAS is the most popular type of legal business entity in Colombia, largely due to its simplified administrative and legal requirements and processes. SAS companies require only a single shareholder and no board of directors and offer limited liability.
• Limited Liability Companies: There are also various limited liability company structures available. These include: nominal Limited Liability Company (Sociedad de Responsabilidad Limitada, or ‘LTDA’); Limited Company (Sociedad Anónima, or ‘S.A.’); Simple Limited Company (Sociedad en Comandita Simple, or ‘S. en C.’); and Limited Company by Shares (Sociedad en Comandita por Acciones, or ‘S.C.A.’)

There are two main types of contracting models for working with independent contractors in Colombia.

A. Direct engagement of the contractor as self-employed or registered via their own company. Under this model, the hiring company engages directly with an independent contractor – either as an individual sole trader or as a limited company (see above) – and establishes a direct contract for the provision of services. The hiring company then pays the independent contractor directly, under the terms of the contract.

B. Third party. These firms come in two forms and both are specially designed to vet and engage freelancers compliantly as either contract employees or independent contractors on your behalf.

• Temporary services agency: Here, the hiring company engages with a temp agency, which in turn supplies one of its own independent contractors to deliver the contracted services. The hiring company pays the temp agency directly, under the terms of the contract. The contract is, therefore, between the hiring company and the agency, while the agency pays the independent contractor through a separate contractual arrangement. Colombian law limits the circumstances under which temp agencies can provide workers.
• Umbrella company: Independent contractors can also work through an umbrella company. This turns a ‘self-employed’ individual into a legal ‘employee’ of the umbrella company itself. The contractual relationship is between the umbrella company and the client, with the umbrella company running payroll and administration for the independent contractor. The umbrella company invoices the client directly while paying the contractor via PAYE as a standard employee. Umbrella companies levy a fee on the contractor to cover their costs.
• Hiring partner: The hiring company can also work with a hiring partner who helps them vet potential independent contractors, set up contracts, ensure the contractor is properly classified, onboard and manage contractors, and make payments to them. 

Companies hiring independent contractors in Colombia should avoid making payments directly through their payroll system. Beyond these guidelines, there are no specific legal requirements related to paying contractors in Colombia. The contract should stipulate the preferred payment method agreed upon by both parties.

The tax year aligns with the calendar year (1 January to 31 December). Employees’ income tax is deducted from their salary at source by their employer. Colombia uses tax units (Unidad de Valor Tributario, or UVT) rather than absolute income brackets to calculate income tax. 1 UVT is equivalent to 36,308 Colombian pesos (COP). The tax rate ranges from 19% (between 1,090-1,700 UVT) to 39% (31,000 UVT and above). Contractors must file and pay their own income taxes. If operating as an incorporated company, the Corporate Income Tax (CIT) is typically a flat rate of 35% (as of 2022). The deadline for filing tax returns varies but is usually in March or April. Taxes can be filed online at the Directorate of National Taxes and Customs (DIAN) e-portal. Taxes can be paid via online bank transfer or at any bank branch.

Regarding social security, employees pay 4% in pension contributions, with employers paying 12%; 4% in health contributions, with employers paying 8.5%; and 1-2% to the Solidarity Pension Fund (if the employee earns more than four times the minimum wage). Employers also pay 0.522%-6.96% towards cover for professional risks (Aportes de Riesgos Profesionales). Independent contractors handle their own income taxes and social security contributions, with nothing being withheld by the hiring company. Contractors who also work as employees (although not for the same company) may not need to pay additional social security contributions where this is already covered by the employment deductions.