If you are considering an engagement with an independent contractor who resides in Colombia, it is important to understand how Colombian law treats the independent contractor relationship. While there are broad similarities between US and Colombian law in this regard, there are some key differences as well. Companies that fail to proactively address the relevant legal considerations can face costs and headaches that far outweigh the minimal burdens of structuring a sound independent contractor relationship.
Key Considerations: Hiring Independent Contractors in Colombia
In Colombia, as in the US, an independent contractor is someone who performs services for a company outside of the traditional employment relationship. Proper classification of independent contractors working in Colombia is critical, as companies that wrongfully treat employees as independent contractors can face potential litigation (in Colombia) and additional liability for taxes and compensation.
Are you thinking about hiring a Colombian citizen or a US expat who resides in Colombia as an independent contractor? If so, here are some key considerations to keep in mind.
1. A Written Agreement Is Not a Prerequisite to Establish an Independent Contractor or Employment Relationship in Colombia.
Similar to the US, in Colombia it is not necessary to enter into a written agreement in order to establish an independent contractor or employment relationship. Both can exist without formal documentation, although there are several reasons why companies will want to have Colombian independent contractors sign an agreement.
2. Colombian Authorities Consider a List of Factors to Determine Whether Workers Are Properly Classified as Independent Contractors.
When deciding whether a foreign company should treat workers residing in Colombia as independent contractors or employees, the Colombian authorities consider a list of factors. There is no “magic bullet” for establishing an independent contractor relationship, and companies must adequately address each of these factors to avoid having their Colombia-based workers classified as employees. This, too, is similar to the Internal Revenue Service’s (IRS) approach in the US, though the list of factors emphasized in Colombia is different. For example:
Important Factors for Establishing an Independent Contractor Relationship in Colombia
- Control Over the Independent Contractor’s Work: The independent contractor’s work can be subject to inspection; however, the hiring company cannot interfere with the execution of the contractor’s individual tasks. Limited requirements can be established by written agreement, but companies may not demand any specific requirements outside of the parties’ written contract.
- Control Over Working Hours: While there is not necessarily a prohibition on asserting some level of control over an independent contractor’s working hours, the more control the hiring company asserts (e.g., by dictating a worker’s hours on an ongoing basis, or specifying a time for lunch breaks), the more likely it is that the relationship will be classified as employer-employee.
- Method of Payment: In order to avoid the appearance of an independent contractor being paid a wage or salary, all payments should be based on invoices submitted by the independent contractor. Both parties must also pay the taxes that apply to independent contractors’ services in Colombia.
Factors that are De-Emphasized Under Colombian Law
- Duration of the Relationship: There are no limitations on the duration of the relationship between a Colombian independent contractor and a foreign company.
- Nature of the Work Performed: Foreign companies may engage Colombian independent contractors to perform any services that may legally be performed under Colombian law.
- Reimbursement of Expenses: If provided for in the parties’ agreement, a foreign company can reimburse a Colombian independent contractor’s expenses without triggering concerns about employment status.
3. Foreign Companies Do Not Have To Report Payments to Colombian Independent Contractors to DIAN.
Under Colombian law, in principle, foreign companies that hire domestic independent contractors in Colombia do not have to report payments to the National Directorate of Taxes and Customs (Dirección de Impuestos y Aduanas Nacionales de Colombia, or “DIAN”). However, this will be necessary if foreign companies have branches (entities incorporated as subsidiaries) or if they can be classified as permanent establishments (fixed business place).
Independent contractors must register with DIAN through Unique Tax Register (Registro Único Tributario, or “RUT”), and they must submit annual income statements documenting all receipts from foreign companies. In Colombia, the banks also report foreign transfers to DIAN, and any discrepancies between reported payments are likely to raise questions about the propriety of the relationship between the company and the independent contractor.
4. Payments to Colombian Independent Contractors are Not Regulated, But They Should Be Documented Appropriately.
Colombia has a foreign exchange regime regulated by the Colombian Central Bank. This regime has two different markets: the foreign exchange market (which require transfers to be processed through the Central Bank) and the non-regulated market. Incoming payments to independent contractors fall into the non-regulated market, so they do not need to be processed through the Central Bank. However, to avoid unnecessary questions, it is best for US-based companies to document the purpose and nature of their payments to independent contractors who reside on Colombian soil. This is done through the use of the Central Bank’s Form No. 5, which provides documentation for payments to service providers and transfers that are not investments.
5. Colombian Independent Contractors Own Any Intellectual Property They Create, Unless an Agreement Says Otherwise.
In the US, independent contractors own any intellectual property (IP) they create:
- unless there is a written agreement that transfers ownership to the contracting entity, or
- with regard to certain types of IP – if there is a written agreement establishing that the independent contractor’s work product is a “work made for hire.”
The IP regime in Colombia is similar. If a US company fails to enter into an independent contractor agreement that adequately provides for a transfer of IP rights in accordance with Colombian law, the independent contractor will retain ownership and be free to make use of the IP in providing services to other contracting entities.
6. Colombian Authorities Are Aggressively Enforcing Foreign Company’s Payroll Tax Obligations.
Avoiding payroll taxes is often a primary objective when hiring independent contractors as opposed to employees. While companies that properly classify their workers as independent contractors can lawfully avoid payroll taxes, companies that improperly classify their employees can face liability for back taxes, interest and other penalties.
In Colombia, the Pension and Social Securities Unit (the Unidad De Gestión Pensional y Parafiscal or “UGPP”) is aggressively enforcing both national and foreign companies’ payroll tax obligations in order to bolster the nation’s social security funding. As a result, companies that improperly classify Colombia-based workers as independent contractors are likely to receive inquiries from the UGPP. Besides, the UGPP controls that independent contractors declare and pay their fees to the social security system.
7. Colombian Employees Can Sue for Compensation and Benefits.
In addition to facing scrutiny from the UGPP, US-based companies that improperly classify Colombian workers can also face lawsuits from their employees. In Colombia, employees are entitled to vacation, social security, and other benefits. Companies that fail to pay these benefits as a result of improper classification can be held legally and financially accountable.
In light of these considerations, it is critical for US-based companies that hire Colombian independent contractors to use comprehensive independent contractor agreements. For additional tips on hiring foreign independent contractors, we encourage you to read:
- 8 Things You Should Know Before Hiring a Foreign Independent Contractor
- The Ultimate Guide to Hiring a Foreign Independent Contractor
Personal thanks to María Ximena Monclou and Juan Manuel Velásquez of Pacto Abogados for sharing their expertise in Colombian business laws. Please contact them for professional legal services in Colombia at contacto@pactoabogados.co.
Contact Jiah Kim & Associates
If you are thinking about hiring a Colombian independent contractor and have questions or need a custom-tailored independent contractor agreement, you can contact Jiah Kim & Associates to schedule an initial consultation. To speak with an attorney in confidence, please call (646) 389-5065 or inquire online today.
This blog post is written for educational and general information purposes only, and does not constitute specific legal advice. You understand that there is no attorney-client relationship between you and the blog publisher. This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.