Colombia is known for the Sierra Nevada de Santa Marta as well as the Andes range and the capital, Bogota. Although it is a growing area to do business, Colombia employment laws strongly favor employees. When you establish Colombia payroll, you’ll need to have a strong understanding of these laws before you hire employees, add them to the payroll, and start operating your subsidiary.

Colombia types of compensation

Labor law in Colombia stipulates a 42-hour ordinary workweek. This is the final target under the phased reduction set by Law 2101 of 2021. However, compensation type and structure should be stated in the work contract. The most common types of compensation are:

  • Ordinary salary: fixed amount.
  • Variable salary: performance-based salary.
  • Integrated salary: usually assigned higher roles and includes legal benefits and eventual overtime pay.

Depending on the compensation structure, the employees may be entitled to overtime pay (except those receiving an integrated salary), in which cases the following rates apply:

  • Overtime during the day: 125% of hourly rate
  • Overtime during the night: 175% of hourly rate
  • Nighttime surcharge: 35% over the ordinary hourly rate for ordinary night work
  • Sunday or public holiday surcharge: 75% over the ordinary hourly rate. Night work or overtime may add further surcharges.

Legal benefits in Colombia

Colombia-based employees are entitled to 3 basic benefits that together are known as the Prestaciones Sociales. They include:

  • Legal services bonus (prima legal de servicios): Equivalent to 30 days of salary per year, payable in two installments: 15 days by June 30 and 15 days within the first 20 days of December. It is paid based on worked days during the semester in which calculation takes place.
  • Vacations: Every worker is entitled to 15 consecutive working days of paid annual vacation for each year of service; any outstanding balance should be paid upon termination.
  • Unemployment aid: Mandatory pay that is credited to a fund of the employee’s choosing. It is equal to one month’s salary for each year of service, or proportionally for partial years. Employers also owe 12% annual interest on accrued cesantías.

Taxation rules in Colombia

Colombia has a variety of taxation rules you need to follow when establishing payroll. For example, employers are required to make social security payments that include:

  • Health: Employers generally pay 8.5% of the employee’s contribution base income for health social security. Employees pay 4%. Some employers may be exempt from the employer health contribution for employees earning less than 10 times the monthly legal minimum wage.
  • Occupational risk: The employer must fully pay ARL occupational risk contributions. Rates vary by risk class and generally range from 0.522% to 6.960% of salary.
  • Family welfare fund: Employers generally contribute 9% of payroll to parafiscal funds: 4% to Caja de Compensación Familiar, 3% to ICBF, and 2% to SENA. Some exemptions may apply to ICBF and SENA contributions.

Employers also need to contribute 12% of an employee’s contribution base salary to a pension program. On top of that, Colombia has a progressive income tax system expressed in Tax Value Units (UVT). Employees with taxable income above 31,000 UVT reach the maximum marginal tax rate of 39%. The COP threshold changes each year because the UVT is adjusted annually.

Colombia payroll options

Four main options are available to establish Colombia payroll. Not every Colombia payroll option is right for your subsidiary, so it’s essential to weigh the pros and cons of each:

  • Local Colombia payroll outsourcing: You can work with a payroll outsourcing company located in Colombia. This option takes the burden of payroll off your shoulders, but as the employer, you are still liable for mistakes.
  • Internal: Operating a sizeable internal payroll is easier for large companies with a commitment to Colombia. It requires establishing an entire HR team for your company in Colombia.
  • Employer of record: Finally, you can choose to use an employer of record in Colombia. G-P simplifies global payroll with accurate and legally compliant payment options through the industry’s leading platform.

How to establish a payroll in Colombia

Before establishing a Colombia payroll, companies need some personal information from employees such as their passports, proof of health insurance coverage, and bank statements. Employees also have tax registration requirements before employers can add them to the payroll. Employees need employment contracts, social security registration, public health coverage registration, severance fund registration, and workers insurance.

Entitlement and termination terms

Before employees start working, it’s best practice to draft a strong employment contract with all entitlement and termination terms. An employment contract can be terminated by either the employee or the employer even without proven just cause. Severance pay is compulsory in Colombia, and employees with a contract for an indefinite term must receive:

  • Employees on an indefinite-term contract receiving a monthly salary that is less than 10 minimum salaries: (a) 30 days of salary for the first year or less and (b) 20 days for each subsequent year, prorated for partial years.
  • Employees with 10 legal monthly minimum wages or more: (a) 20 days of salary for the first year or less and (b) 15 days of salary for each subsequent year of service, calculated proportionally for any partial year. Ordinary final amounts due must also be paid separately.

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