Employment Contracts vs. Service Contracts in Colombia: How to Avoid Misclassification
Any employer, startup, businessman and company working in Colombian territory often face a key legal decision: should they hire local talent under an employment contract or a service contract? At first glance, service contracts might seem simpler and cheaper — no payroll, fewer obligations, and more flexibility, but this shortcut often backfires. If a service contract is reclassified by a labor judge as an employment relationship, the employer can suddenly face years of back pay, social security contributions, penalties, and even labor lawsuits.
In Colombia, the distinction between employment and service contracts is not about the title of the agreement, but about the real nature of the working relationship, so understanding the difference is crucial to avoid costly missteps.
What Defines an Employment Contract in Colombia?
An employment contract exists when three key elements are present:
- Personal Service – The worker must personally carry out the tasks; they cannot delegate freely.
- Subordination – The company controls how, when, and where the work is performed. This includes schedules, reporting lines, performance reviews and disciplinary authority.
- Payment of Remuneration – The worker receives compensation for their services, usually in the form of a salary, compensation, or any form of payment, with no regards of how its labeled.
If these elements co-exist, the law considers the relationship an employment contract — even if both parties signed a “service contract”.
Employer Obligations Under an Employment Contract
Under an employment contract, employers must comply with Colombia’s labor law, which includes:
- Enrolling the worker in social security (health, pension, and occupational risk insurance).
- Paying parafiscal contributions (SENA, ICBF, Family Compensation Funds) (see more details in our Payroll Article)
- Granting benefits such as vacations, severance (cesantĂas), and severance interests.
- Following termination rules, including just cause or severance payments.
Failure to comply can trigger claims, audits, and financial penalties.
What Is a Service Contract?
A service contract (“contrato de prestaciĂłn de servicios”) is a civil or commercial agreement used for independent contractors, consultants, and professionals who provide a specific service.
Key characteristics include:
- The contractor works independently, without subordination.
- The contractor manages their own schedule, tools, and resources.
- The company pays for results, not for time or presence.
- Social security payments (health, pension, and occupational risk) are the contractor’s responsibility, not the company’s.
Service contracts are useful for short-term projects, advisory work, or roles that don’t require integration into the company’s day-to-day operations.
Why Misclassification Is a Serious Risk
Many foreign companies believe they can reduce costs by using service contracts for roles that actually function like employment. But if a dispute arises, Colombian labor judges apply the principle of “primacy of reality over form”:
⚠️It doesn’t matter what the contract says — what matters is how the relationship works in practice, and Colombian judges tend to be unforgiving. There is even Case Law suggesting all contractors must be registered as merchants in the Chamber of Commerce to be considered as such ⚠️
If the relationship has the elements of an employment contract, a judge will reclassify it, and the company may be required to pay:
| Risk | What It Means in Practice |
|---|---|
| Back pay of benefits | Vacations, severance, interest on severance, and service bonuses. |
| Retroactive social security contributions | Pension, health, and risk insurance for the entire period. |
| Parafiscal contributions | Payments to SENA, ICBF, and Family Compensation Funds. |
| Fines and penalties | For late or missing contributions – up to one day of salary per every day of delay, although this can be settled and dropped by the employee |
| Labor claims and litigation | Including reinstatement or indemnification. |
In some cases, companies have ended up paying double what they would have spent by setting up payroll correctly from the start because many of these rights are inalienable ⚠️
How to Avoid Misclassification
Foreign employers can protect themselves by:
- Assessing the real nature of the role before choosing a contract type.
- Using service contracts only for truly independent work.
- Ensuring contractors issue invoices and pay their own contributions by requesting a copy of their monthly social security payments in the PILA format
- Establishing local payroll (via a subsidiary, branch, or an Employer of Record) for roles that involve subordination.
- Getting contracts reviewed by local legal counsel before signing.
Final Thoughts
Hiring talent in Colombia is an opportunity to tap into a skilled workforce at competitive costs. But the decision between an employment contract and a service contract must be made carefully. A misstep in classification can transform a simple working arrangement into a multi-year liability. Ultimately, if you fail to hire according to your true needs, there will always be a legal liability that, in the most severe cases, can hinder your entire business model.
At Colombia Legal Edge, we help foreign companies structure contracts that are legally sound, compliant, and aligned with business goals, while keeping your revenue as our top priotity.