Hiring and Firing in the Nearshore’s Hottest Market

Colombia’s efforts to pull in US$11.5 billion in foreign investment, centered around its “Friendshoring” initiative, offer clear signs that efforts to strengthen the country’s knowledge export services industry are generating great returns for the national economy. 

But companies entering the country still need to know the basics for setting up shop. A vital aspect of this process is talent attraction, hiring and, if necessary, firing. 

Following on from our look at Mexico and Costa Rica, Nearshore Americas has chatted to two labor law and employment experts on the Colombian market to find out what companies need to know to hire talent in the country.

Companies used to dealing with well-understood labor law in the US can struggle to grasp the full range of labor law requirements that certain Latin American countries mandate. In Colombia, however, clarity prevails, says Carlos Rueda, Labor Relationships Leader for Lean Solutions Group, a Floridian Nearshore company with offices in Colombia and Guatemala.

“Colombian labor regulations have very clear guidelines that must be complied with at the moment of initiating an employment relationship, the conditions that this type of contracts must have, the responsibilities that both the company and the worker have,” he said. 

Hiring in Colombia

Prior to offering potential employees contracts, foreign companies should register a legal vehicle, of which there are five different types.

“First of all, it’s convenient to have a legal vehicle for companies wanting to operate in Colombia. Colombian law requires that if a company operates here it must have a vehicle, which could be a subsidiary company or branch, for example. But paying social security contributions and taxes is also far easier to do with this vehicle,” explained Juan Carlos Palau, General Director at Bogota-based Juan Carlos Palau Abogados.

After this, companies must choose which form of employment agreement they choose to work within when hiring talent. There are two main forms: the service agreement and the employment contract, which can be fixed-term or indefinite. The service agreement is an independent agreement between the employer and employee in which the employing party does not have the same requirements of payments, like employee social security contributions or severance pay should the relationship sour. However, if employers choose to contract under the service agreement model yet the employee provides labor as they would under an employment contract, the service agreement will be seen as an employment contract under law. 

“Given the tax requirements and social security contributions, labor contracts increase the costs of hiring employees by about 30%,” explained Palau. “But this is the route I always advise my clients to choose. The ambivalence and risk associated with service agreements means that in almost all cases when disputes go to court, employers are forced to pay if a judge finds that the elements of a traditional labor relationship exists.”

Firing in Colombia

There is a strict process that must be followed by companies should they seek to terminate an employment contract. Termination can be made with or without just cause. The employer will be required to offer proof for the reason of termination with a just cause. 

First, the disciplinary process must be opened. “The employee must be informed of the reasons for which the case has been opened, listing the faults incurred as well as the articles of the internal work regulations that constitute this as a fault,” said Rueda.

Then, a ‘citation to discharge’ must be given to the employee in which “the employee is informed of the date and time he or she must appear to hear their version of the facts reported as misconduct, and the evidence provided must be attached,” Rueda added.

“The ambivalence and risk associated with service agreements means that in almost all cases when disputes go to court, employers are forced to pay if a judge finds that the elements of a traditional labor relationship exists.” — Juan Carlos Palau

Afterwards comes the discharge diligence where “the employer asks a series of questions to the employee to better understand the facts and consequences of the offense committed”, before the resolution of the process, “a document in which the employee is notified that the employment contract is terminated due to the offense committed. In this case it is important for the employer to verify the seriousness of the offense committed by the employee as well as to check if he or she has previous sanctions for other offenses,” he said.

If the employer is able to prove each step of this process it is not required to make any form of severance payment to the employee.

“In the case of termination without just cause, whereby employer and employee unilaterally agree to terminate the employment relationship, the employer must pay an indemnity,” Rueda explained.

The indemnity payment will depend on the type of employment contract; indefinite or fixed term. Under the requirements of termination of an indefinite contract, the employer must provide 30 days’ salary for employees who have earned 10 monthly wage payments. If the worker has more, they must receive the initial 30 days’ salary plus an additional 20 days’ salary for every extra year worked. 

On a fixed-term contract, the employee must receive the rest of the wages they would have been owed had they worked the entire length of the contract. 

Other Considerations

There are essential but unique bonuses paid out to workers in Colombia. 

First is the service bonus, a “benefit that corresponds to one month’s salary and is paid in two parts to the worker, the first on June 30 and the second on December 20 of each year. In the event that the worker has not worked the full semester, the service bonus will be paid proportional to the time worked,” explained Rueda. 

Colombia also has very robust overtime and unsocial hours payment requirements. When employees are required to work overnight or on Sundays, they are to be paid more than the normal rate. However, legislation has been made flexible and companies can arrange shifts to avoid these costs, said Palau.