Colombia’s Labor Reform is a Negative for Nearshore

Colombia’s proposed labor reform has sparked intense debate about its impact on the country’s competitiveness, particularly in key sectors such as the Nearshore industry.

Colombian President Gustavo Petro, has introduced at least three major social reforms to Congress during his administration. But only the pension system law has made it through the most critical stages of review and become law.

Opposition has been a strong against Petro’s initiatives, some of which were key platforms during his presidential campaign. The labor reform is one of them. Unlike the pension system law, the labor reform has seen significant opposition, as NSAM reported earlier.

In this context, it is very likely that the labor reform will be approved, but with significant revisions. In fact, during the two debates it has already passed in the House of Representatives, the law has had some modifications, and next year it will have to pass three more debates in the Senate.

Experts worry the proposal will damage Colombia’s ability to attract and retain investment. According to Pilar Cerón, Managing Director and Founding Partner of Xtrategy US LLC, a boutique FDI and corporate expansion firm, “When the rules of the game for investors change, as the labor reform does, it has an immediate impact on the investment climate.” Investors typically react negatively to changes that affect previously stable conditions, a concept known in investment circles as the level playing field.

Rising labor costs, such as a 75% to 100% increase in overtime pay or changes in night shift hours, could pose challenges to sectors that rely on labor-intensive work, such as outsourcing and BPO.

Economic Competitiveness

Historically, Colombia has been an attractive destination for foreign investment in the nearshore sector due to its pool of skilled talent, high median age of the population, and competitive wages. In terms of labor regulation, the country is on par with other regions.

“Colombia’s legal framework is one of the most protectionist in the world. However, by seeking to provide greater protection and guarantees for workers, the labor reform could have a negative impact,” Carolina Porras, partner and head of the labor department at Philippi, Prietocarrizosa Ferrero DU & Uría, told Colombian newspaper La República.

“Although it was important to update the labor code, the problem with the reform is that many variables are being changed at the same time, which significantly increases the burden on employers,” said Cerón.

Proposed revisions to Colombia labor law, impacting Nearshore:

• Increase in holiday and Sunday pay from 75% to 100%.
• Change in night work hours from 21:00 to 19:00
• The apprenticeship contract will become a work contract with the right to be paid; apprentices will earn 60% of the minimum wage during training and 100% during productive periods.
• More opportunities for paid leave.
• Reduction of working hours from 48 to 42 hours per week.
• Regulation of contractors and freelance contracts, remote work and work through digital platforms.

A Question of Declining Productivity 

One of the main objections to the current labor reform debate is the lack of tools to increase productivity. Juan Carlos Guataqui, an economist specializing in labor policy, explains that “it is essential to consider that labor costs for formal employment in Colombia are high, while labor productivity is low. However, especially in the case of Colombia, the logic of the nearshore location requires a combination of qualified human resources and high productivity.”

According to the World Economic Forum, 50 percent of workers will need to acquire new skills to keep their jobs by 2025, but only 21 percent of Colombia’s workforce has minimal digital skills. “This lag leaves Colombia vulnerable in the wake of rapid global automation,” said Ana Karina Quessep, executive director of the Colombian BPO Association (BPrO). “Without a framework that promotes skills development, the inequality gap will widen, leaving more than 4.5 million workers without the tools they need to compete in tomorrow’s job market.”

Global Trends and Labor Flexibility

Two labor-related trends are discussed: rigid versus flexible. “Labor flexibility is a global trend. Phenomena as remote work or digital nomadism, which surged after COVID, are here to stay. In this context, it would be a mistake to return to a rigid labor regime. The global trend toward remote work requires a global talent pool, so the question is how flexible does Colombia want to be?” notes Cerón.

This reform seems outdated, turning its back common enablers involving freelance or flexible work models and does not address existing shortcomings within the labor system. “Consciously or unconsciously, younger generations have internalized their work behavior to cope with the rigidities within Colombia’s labor institutions. They do not look for salaried jobs or seek long-term employment; they manage their retirement and health contributions as independent workers,” says Guataqui. “In a sense, innovation and creativity are taking place in other sectors where both labor productivity and hiring mechanisms are different,” he concludes.

Reform in Progress

Despite the alarms raised by the labor reform, upcoming discussions in the Senate will require the government to negotiate contentious points and convince public opinion on progressive issues such as reducing working hours – a trend that has been shown to increase productivity in other countries – or increasing paid leave options, such as paternity leave, in accordance with more advanced labor laws.

According to experts, the Reform is going to pass and no significant changes are expected in the document. “We have to get used to the idea that many of the things that are in it are the final version,” says Germán Benítez, Labor, Social Security and Immigration Manager at PwC. “Unfortunately, there had not been a proper debate in the House of Representatives. At the beginning, the academics were called, several actors of the labor market were called, but they were not properly listened to. If they were listened, the reform would have had a more middle nuance, not so much of formalization, but of job creation, which is ultimately what is needed, but that did not happen.”

That is why many sectors consider that government lost the chance to make important changes for workers, as pointed out by Ana Karina Quessep of BPro, “Labor reform that does not include youth inclusion, labor flexibility, and digital transformation is a missed opportunity for Colombia.”