Employee vs. Freelancer: Which Should You Hire?

COLOMBIA EDITION: JANUARY 2025 UPDATE

When hiring talent in Colombia, it is essential to understand the key distinctions between employees and contractors (freelancers) to ensure compliance with Colombian labor laws and make informed decisions based on your business needs. Misclassification can result in significant legal and financial risks.

At first glance, hiring either or seem similar—both perform tasks for your business. Yet, the nature of their relationship with your company and the legal obligations are distinct.

This guide provides a comprehensive overview of the differences, including legal definitions, regulations, and practical considerations.

INTRODUCTION

Deciding whether to hire an independent contractor or an employee in Colombia mainly depends on your business needs, budget, and long-term goals. Understanding the legal requirements and benefits can help you make the most informed decision.

Legal Definitions

EMPLOYEES

Employees in Colombia have a formal labor relationship regulated by the Colombian Labor Code. Employers must comply with strict labor laws, provide mandatory benefits, and adhere to employment agreements, which are typically indefinite or fixed-term contracts.

CONTRACTORS/FREELANCERS

Contractors, often referred to as “independent workers,” provide specific services under a commercial agreement, such as a service or consultancy contract. They are not subject to direct control or subordination by the company and are responsible for managing their own taxes, health, and pension contributions.

Types of Contracts

In Colombia, employment relationships are governed by the Código Sustantivo del Trabajo, which outlines various types of contracts.

FOR EMPLOYEES

Indefinite Term Contract (Contrato a Término Indefinido)

The most common type of employment contract, where the employment duration is not defined. Compliance with labor laws and providing benefits like health insurance and severance pay are obligatory.

Fixed Term Contract (Contrato a Término Fijo)

A contract with a specified duration, which can be renewed. Similar to indefinite term contracts but with a defined end date. Adds flexibility for short-term projects.

FOR INDEPENDENT CONTRACTORS

Service Contractor Agreement (Contrato de Prestación de Servicios)

This contract is exclusively used for hiring independent contractors to perform specific tasks within a defined period. Misclassification can lead to legal penalties. Contractors are not integrated into the company culture.

Relationships & Obligations

EMPLOYEE

Nature of Relationship: Employees work under the direction and control of the employer. They have set working hours, receive regular wages, and use the company’s tools and resources.
Legal Obligations: Employers must adhere to labor laws, which include providing benefits such as health insurance, paid leave, and severance pay. Employers are also responsible for payroll taxes and social security contributions.
Examples: Full-time staff, part-time staff, and long-term contract workers.

Mandatory Benefits

Employers in Colombia must provide employees with the following benefits:

Health and Pension Contributions: 12.5% for health and 16% for pensions (shared between employer and employee).
Severance (Cesantías): Equivalent to one month’s salary per year.
Interest on Severance: 12% annual interest on severance funds.
Prima de Servicios: A biannual bonus equivalent to one month’s salary.
Vacations: 15 paid days of leave for every year worked.
Transportation Assistance: For employees earning less than two minimum wages.

INDEPENDENT CONTRACTORS

Nature of Relationship: Independent contractors operate as self-employed individuals who offer services to businesses under a specific contract. They have control over how, when, and where they work, and they typically provide their own tools and resources.
Legal Obligations: Contractors are responsible for their own taxes and social security contributions. They are not entitled to employee benefits like health insurance, paid leave, or severance.
Examples: Freelancers, consultants, and project-based workers.

Challenges and Considerations

FOR EMPLOYEES

Misclassification Risks: Misclassifying an employee as a contractor can lead to fines, back payments for benefits, and other legal repercussions.
Compliance Costs: Managing compliance for employees can be resource-intensive but necessary to avoid penalties.

FOR INDEPENDENT CONTRACTORS

Lack of Stability: No access to severance or unemployment benefits.
Administrative Burden: Responsible for managing their own taxes and social security contributions.

Recent Changes as of 2025

Increased Minimum Wage: As of January 2025, Colombia’s minimum wage increased to COP 1,350,000, affecting all employment agreements and transportation assistance thresholds.
Digital Platforms: New regulations now require platforms hiring freelancers to comply with stricter reporting and classification standards.

Using an Employer of Record (EOR)

An Employer of Record (EOR) like Recruitable can simplify the hiring process, ensuring compliance with local labor laws and reducing administrative burdens.

Compliance: Ensures all hires comply with Colombian labor laws, reducing the risk of legal issues.
Payroll and Taxes: Handles payroll processing, tax payments, and benefits administration.
Contracts and Onboarding: Manages employment contracts and streamlines the onboarding process.
Cost Efficiency: Avoids the need to set up a local entity, saving on set-up and operational costs.

Responding to Common Myths and Assumptions

1: “Contractors are always cheaper than employees.”

While contractors don’t require benefits, their higher hourly rates and lack of stability can sometimes offset cost savings.

2: “Contractors can’t be held accountable like employees.”

With a well-drafted commercial contract, contractors can be held accountable for deliverables, timelines, and quality.

3: “Employees are always a better long-term investment.”

Not necessarily—contractors bring flexibility and expertise for evolving business needs.

4: "Employees are too expensive for small businesses."

Hiring employees can be more costly, but the long-term benefits of loyalty can provide significant value, especially in roles critical to your business's success.

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