Outsourcing 2019 Second Edition Comparisons

Last Updated October 28, 2019

Law and Practice

Authors



Baker McKenzie S.A.S. is a full-service law firm, and the office in Bogota is part of a regional antitrust group team at Baker McKenzie from where we implement and develop cross-selling strategies, training sessions and academic events with colleagues in Latin America, North America and Europe. In particular, Carolina Pardo leads the practice across the region with a team composed by two senior associates, three medium associates, two junior associates, and one auxiliary. The team advises clients in antitrust aspects of a transaction or an investigation but at the same time early in the process, it is in a position to adopt data protection safeguards, expertise in anti-corruption matters and practical issues discussed with the M&A/Trade and Commerce teams or with partners in other jurisdictions. The firm's key practice areas are corporate, labour, TMT, and compliance.

In the BP Outsourcing market in Colombia, IT Outsourcing represents more than 40% of the services. IT Outsourcing has become a remarkable service in Colombia. For example, leasing IT equipment and computers is now a popular option for companies of all sizes due to financial and tax advantages. In addition, contracting an outside organisation to provide technical support – for instance, help desks – has shown multiple benefits.

Internal support may have a tremendous impact on productivity at different levels and having a customer service resource can be a key driver of customer retention. Likewise, outsourcing digital data storage and backups can often be more secure than saving data on internal network services, laptops and mobile devices. Nevertheless, this data is likely to contain either personal information or confidential company information, so mitigating the risks of data breaches is still a remarkable challenge.

Although having an international workforce can make a company more competitive, it can also lead to compliance breaches if workers are not adequately trained and managed. Organisations can struggle to navigate through a multitude of challenges, from compliance with local regulations and day-to-day HR services, to resolving cross-border issues that impact a company's workforce in a way both manages risk and drives efficiency.

In this scenario, it is common to find multinational employers hiring local vendors in Colombia that support their business in activities such as payroll, recruiting, accounting, marketing, transportation, cafeteria, packing, maintenance, among others.

BP outsourcing has grown significantly in Colombia on the past years, especially in Bogotá, an average of 19% annually for the past seven years. The strategic location of the city, the low cost of workforce, and the support from the Government to develop this industry, are key factor for the consolidation of the market not only in Colombia but also as a leader in LATAM. Now, Colombia holds the fourth place in the LATAM BPO market, after Brazil, Mexico and Costa Rica.

Blockchain has supported a variety of applications throughout the world, such as smart contracts, asset registries and financial transactions. However, in Colombia, there is a widespread lack of understanding as to how Blockchain works. Since it represents a significant change from the traditional ways of doing things, Blockchain has not become popular. Indeed, there are not any Blockchain regulations and the Central Bank of Colombia has shown scepticism towards this new technology, especially because of money laundering ("ML") risks created by the anonymity of the users. As for AI and robotics, there is still a long path for growth. Therefore, there is not sufficient information on the impact of these new technologies in the market, as there is still a lot of room for development.

Nevertheless, last year a pilot project tried to demonstrate how to use Blockchain as a tool to design a more secure, easy and cheap voting method. The project, in cooperation with the mayor´s office of Bogotá, used Blockchain in order to elect the Student Council representatives in three different public schools. Furthermore, in April, a Centre for the Study of the Fourth Revolution in Latin America opened in Medellin. The purpose of this Centre is the study, investigation, and development of AI, IoT and Blockchain in Colombia and Latin America. Hence, this is a good example of the how the country is starting to look into these new technologies and its benefits, and towards the possibility of becoming a leader in Latin America. Additionally, the number of Bitcoins ATMs, which allows a person to buy and sell bitcoins for cash, have increased significantly in the recent years.

On the other hand, in the HR space, a number of disruptors are leading the way, harnessing AI in recruitment by using talent analytics and employee screening, exploring biometric logins and, on the more extreme side, monitoring employees’ emotions to optimise workflow by use of headgear with EEG sensors, which are still not common between employers in Colombia. Without doubt, the impact of technology, and in particular automation, robotics and AI on the workplace is a game changer, revealing major future skills shortages, accelerating the need for retraining and redeployment of labour and, fundamentally transforming jobs and the nature of work itself. This is an issue for all employers to watch closely and develop a strategy on.

Notwithstanding the above, as employers adapt to and benefit from technical advancements in the workplace, the right to disconnect made headway in Colombia in 2018, as we saw rulings from the Constitutional Court protecting employees' ability to "switch off" outside of working hours.

In February, Colombia Fintech (Colombian Fintechs' Association) and consultancy firm Open Vector (whose directors are responsible for establishing open banking in the UK – the first country in the world to do so), signed a memorandum of understanding for the development of open banking in Colombia. If success, open banking would create a whole new market for third-party financial services based on public APIs, including the possibility of outsourcing of financial services.

Due to the alarming statistics and in order to decrease differential gaps, Colombia is betting on Diversity and Inclusion (“D&I”) in the labour market, for being this a differential that is being considered by clients during the negotiations; currently proposals are involving concerns about diversity, equal employment opportunity and labour and human rights.

Consequently, diversity and inclusion is a hot topic amongst the Colombian labour community. The Companies seem to be aware of the results and recognise that D&I programs improve productivity, commitment, and increase loyalty and overall productivity. Having a heterogeneous team with a diversity of habits, tastes, ages and needs, allows to understand the services that are being demanded and shortens the distance between the Company and the clients, improving the understanding of who the clients are, what they want, how they want it, and when they want it.

Colombia is one of the countries with most anti-discrimination laws in Latin America. There are very specific laws, as the anti-discrimination Law that criminalises discrimination, as well as more general laws, such as the Law 1010 of 2006 (law on harassment at work) that forces the Companies to have a workplace regulation that provides actions to prevent discrimination, and the 1618 Statutory Law of 2013 that guarantees the full exercise of the rights of people with disabilities. Colombia also has a relevant legislation in terms of men and women's participation in the public administration, is Law 581 of 2000 (the quota law), which aims to ensure female participation in upper public administration positions. Additionally, in an effort to be more accommodating of working parents, the Ministry of Health issued Resolution 2423 of 2018, which sets out the parameters for the operation and technical specifications of nursing rooms in workplaces. Companies with assets above 1,500 minimum monthly legal wages (roughly COP1.24 billion for 2019) or those with lower assets but over 50 female employees must comply with this resolution.

Regardless of the I&D programs, particularly promoted by multinational Companies, to provide tools to promote the hiring of young people, women, ethnic minorities or people with some degree of disability, inequality is still evident in Colombia, principally in medium or small Companies, which still do not have enough infrastructure to effectively implement I&D programs that improves the Companies standing.

Irrespective of the above, momentum is growing on multiple fronts towards a workplace that is more equitable and accountable. Illustrated by developments in the gender pay equity space, where we also saw newly created or further strengthened protection against sexual harassment across the globe in the wake of the #MeToo movement and a general impetus to raise the lowest common denominator in relation to basic employment protection, Colombia is likely to introduce new regulations on gender equality on the workplace. 

Finally, it is important to mention that Colombia and Venezuela have broken their diplomatic relationship many times during the last decade, and since February 2019, the Venezuelan Consulates in Colombia are closed. The latter has caused that many children whose parents are Venezuelan citizens not domiciled in Colombia (ie, not holding a migrant or resident visa), lack of civil registry.

In August 2019, the Colombian government adopted an exceptional measure to regulate immigration situation of children born in Colombia since August 19, 2015, who lack of civil registration in Venezuela. Exceptionally, the Colombia government will grant the Colombian citizenship to children born in Colombia between August 19, 2015 and August 19, 2021, as long as during this period, the child’s parents does not hold a migrant or resident visa, and demonstrate they only hold the Venezuelan citizenship.

This measure will open a new window for Venezuelan citizens under irregular permanence, to become holders a resident visa for being parents of a Colombian citizen. Under the resident visa, these Venezuelan citizens will obtain a broad work permit in Colombia and may eventually become Colombian citizens as well.

Colombian labour law allows outsourcing under certain conditions.

Companies can execute outsourcing agreements with temporary services agencies, for the provision of personnel or staffing services, with specialised companies, for the provision of independent services, and in limited cases, with Co-operatives of Associative work.

Temporary Services Agencies

Temporary services agencies have special regulation and a single corporate purpose that is to provide employees to third companies on a temporary basis and only in the following cases:

  • in the event of occasional, accidental or transitory jobs for a maximum term of one month;
  • to replace personnel in vacations, leaves, disabilities or maternity; and
  • in case of increases in the production, transport, sales of products or merchandise and for the rendering of services (for a maximum term of one year).

Under this figure of staffing of personnel, subordination is delegated to the hiring entity and it is allowed for a maximum term of one year.   

What is actually not allowed in accordance with applicable outsourcing legislation is the execution of intermediation activities (eg, supply of personnel) which are only reserved to duly authorised Temporary Services Agencies. The fact that a legal entity, different from a legally authorised Temporary Services Agency, engages in labour intermediation activities under the pretext of being executing outsourcing activities, triggers the exposure of fines from the Ministry of Labour as described in our comments to the following questions.

Specialised Companies

Companies are allowed to outsource part of its business structure by hiring a third party in charge of rendering the outsourced services, when hiring services for a determined fee, and when the third company assumes all risks derived from the hired services, has its own tools and elements, and acts with technical and administrative autonomy. Hiring independent contractors is possible as long as the relationship between the hiring entity and the outsourced personnel is not proper of an employment relation.

The hiring party is considered as joint and severally liable with the outsourced party (in this case the services provider company) for the salaries, fringe benefits and indemnities of the outsourced personnel when the independent services hired are not foreign to the normal economic activity of the hiring party.

In Colombia, companies are legally allowed to outsource core and non-core related activities. What varies is not the possibility/legal ability of having vendors or hiring services, but the level of responsibility of the Contracting Party; when outsourced activities are related to the hiring entity's core business, it will be jointly and severally liable of all employment obligations towards the employees of the vendor or entity providing the service, that have been assigned to the outsourced service hired by the Contracting Party.

Therefore, if the corporate purpose of the hiring entity relates to the service hired then both companies will be jointly and severally liable with the outsourced personnel and such liability will be extended to subcontractors of the outsourcing company.

It is very clear that for joint and several liability to be declared judicially, it is not enough to establish that there is a third party (in this case the hiring entity) benefiting from the services provided by an independent contractor employer, but additionally it is necessary to prove that those services hired, of which the beneficiary of the work or the contracting of the service is favoured, are not strange to the tasks performed by the beneficiary for the fulfilment of its corporate purpose. Therefore, it is necessary to prove in Court that the beneficiary of the work, being able to personally perform the work (not to be strange to the work done in its day to day operation), decides not to do it and subcontract in order to another person, natural or legal, be the one who does it.

There is no legal definition of "core" vs "non-core" activities. The Supreme Court of Justice is very extensive when analysing activities considered as related, connected or complementary vs foreign or non-core business. In the end, this would depend on the subjective criteria of the Judge deciding on a specific case.

Bear in mind that this joint and several liability only exists when there is a judicial ruling ordering it and when the contractor did not comply its obligations vis-à-vis the employees whose services somehow benefited the company.

Co-operatives of Associative Work

Co-operatives can be used in presence of true independent activities or external processes or they can be managed –with a level of risk- by minimising subordination elements. Personnel associated to a Co-operative are not covered by labour legislation rather they receive compensations provided by their internal regulations which are less beneficial than the payments provided by labour legislation. When hiring with Co-operatives labour risks are always present. The burden of proof to evidence the existence of independence and autonomy inherent to a commercial relationship (instead of labour subordination) will rely on the hiring entity and the Co-operative. Associates will just need to claim the existence of a labour agreement, alleging the subordination activities and the absence of participation in Co-operative´s administrative and financial activities. Legal assumptions will work in favour of the claimant associates.

General

In the case of temporary service agencies and a co-operative of associate work, the hiring entity must not directly subordinate service provider employees, as this would trigger a high risk that the hiring entity is considered the employer of outsourced personnel. Under outsourcing and co-operatives, subordination is not delegated and they shall be true direct employers of the outsourced personnel. 

The following behaviours from the hiring entity will be an indicator of the existence of an employment relationship with outsourced personnel upon a judicial claim or administrative investigation:

  • grant typical labour benefits to service provider employees similar or identical to the ones granted to its employees (eg, transportation or meal allowances);
  • give direct orders in writing to service provider employees (eg, via email);
  • certify the existence of an employment agreement between the hiring entity and the service provider employees;
  • provide work materials and tools to service provider employees to perform the contracted services;
  • allow service provider employees to fill out hiring entity's forms and reports; and
  • reprimand service provider employees in writing and, generally, avoid any actions that may be considered as involving subordination.

Mandatory ML and Financing of Terrorism prevention systems ("AML/CFT") in the real sector restrict the outsourcing of some specifics duties that an obligated entity's Compliance Officers must carry out internally. For example, it is not possible to delegate to a third party the identification of suspicious transactions and their subsequent report before the UIAF (Financial Information and Analysis Entity). The Compliance Officer, and only said employee, can decide, according to their experience and professional criteria, whether an operation can be classified as unusual or as suspicious, and if applicable, if it should be reported to the authorities.

Outsourcing hiring by an obligated entity to implement an AML/CFT must follow proper due diligence on that vendor, as over any other kind of vendor. Considering that must of the ML/FT risk is created in the contractual performance of third parties, obligated entities must perform serious and deep background and due diligence checks on those third parties that would act for or represent them within the market.

Transferring or transmitting data of data subjects residing in Colombia to other countries is not allowed, unless the receiver country does ensure an adequate level of protection. The Superintendence of Industry and Commerce (known in Spanish as "Superintendencia de Industria y Comercio", the Colombian Data Protection Authority), on its External Circular, has set forth a list of countries it considers that ensure an adequate level of protection. Nevertheless, even if the receiver country is not included in such list, the transfer or transmission of data is possible if the data subject provides their prior, express and informed consent of their data to be transferred to a country which may have not the same level of protection than Colombia.

In general, when a controller uses a processor, there must be a contract that sets forth the details of the scope of the processing, the activities that the processor will perform on behalf of the controller and the obligations of both parties before the Data Subject.

Through this contract, the processor will undertake to apply the controller's Data Privacy Policy, as well as to process the data according to the purpose authorised to the controller by the data subject. Additionally, the processor must undertake to process the information in accordance with the legal principles applicable to personal data processing and to protect and maintain the confidentiality of such data.

In case of hiring temporary services agencies exceeding the limits established by law the hiring company can face the following risks a judicial claim filed by the seconded employees, in which the hiring company can be declared as their true and unique employer and administrative fines imposed by the Ministry of Work, which can rise up to 5000 minimum legal monthly salaries. When the hiring entity has a union, those claims are more frequent.

Outsourcing an independent services company, when in reality it acts as a staffing agency or a mere intermediary, may entail that the agreement executed with the outsourced entity is deemed as a sham by administrative or judicial authorities in Colombia.

Under litigation outsourced personnel will most likely claim the payment of salary differences for a three year term, fringe benefits re-liquidation for a three year term, vacation re-liquidation for a four year term, extra-legal benefits recognition for a three year term, severance adjustment and pension quotations re-liquidation for all the time of services. Such claims are common in Colombia against the hiring entity and with the inclusion of penalty indemnities for up to five years of salary.

The hiring entity may also be subject to the following economic exposure:

  • Entities collecting social security quotations and payroll taxes could also file a claim against the hiring entity to collect the relevant quotations for a maximum term of five years. In addition, the Special Administrative Unit of Pension Management and Payroll Taxes Quotations of the Social Protection -UGPP- can also initiate an investigation to collect the relevant quotations and may impose an economic penalty that can add up to 60% of the collected quotations.
  • Administrative fines imposed by the Ministry of Work, that can add up to 5000 statutory minimum monthly salaries. It can also entail joint and several liability. The minimum monthly salary is set every year by an agreement between the employers' associations and the employees. For the year 2019, the minimum monthly salary is set at COP828.116 (around USD266), which implies that the penalties can range between COP828.116 and COP4.14 million (around USD1.19 million).

The enforceability of these limitations was enhanced with the signing of the Free Trade Agreement between Colombia and the US Government, under which the Colombian Government committed to eliminate all illegal forms of labour lending.

Essentially, agreements according to which service provider personnel will perform “permanent activities” for hiring entity must not undermine employment rights of the involved employees. Governmental authorities apply a broad interpretation and consider as “permanent activities” even those activities that, in practice, are not truly related to the core business of hiring entity. Also, they have enacted regulations providing a list of “indicative behaviours” that are likely to constitute illegal labour lending/outsourcing activities.

The officials from the Ministry of Work are duly trained to track illegal outsourcing and fines have increased considerably. Numbers of officials has also increased, resulting in a higher number of investigations regarding outsourcing to multinational companies.

Headcount or corporate policies regarding limitations to direct employee hiring or hiring freeze are not valid to exonerate illegal outsourcing.

As previously mentioned, the Ministry of Labour can start preliminary reviews and sanction procedures because of illegal outsourcing. In this process, the Ministry of Labour will review and answer the following questions on a case-by-case scenario:

  • are there any workers rendering services in the company without being directly hired? - Are there any workers rendering services in the company though an independent services agreement; and
  • is the outsourced personnel rendering services through a temporary services agency? If not, the Ministry shall review the following points:
    1. On what terms is the service provided;
    2. Is the contractor performing the same activities and functions than the ones performed by the employees that are directly hired by the company;
    3. Has the outsourced personnel of the contractor ever been directly hired by the company? - Has the outsourced personnel of the contractor ever been hired by another company/agency that rendered or renders services to the beneficiary company;
    4. Is the contractor independent in its financial conditions;
    5. Is the contractor linked economically or in corporate terms to the company;
    6. Is the contractor autonomous;
    7. Is the contractor the one who executes the subordination to the outsourced personnel (or the beneficiary company);
    8. Who gives the instructions to the employees (the contractor or the beneficiary company);
    9. Has the contractor fulfilled its labour obligations? – Have these obligations ever been assumed by the beneficiary company; and
    10. Have the beneficiary company and the contractor broken any labour laws with their relationship?

In accordance with these questions and their answers, during the procedure carried by the Ministry of Labour, the Ministry will be especially aware of evidence that proves the following:

  • the outsourcing service is being rendered by a contractor that is not a temporary service agency;
  • the contractor is not authorised to provide this service;
  • the employment and the recruitment service is being render by a company that is not authorized to render this service;
  • the contractor is working as an intermediary;
  • the contractor is not autonomous;
  • the subordination is executed by the beneficiary company;
  • the temporary service agency is rendering a service that has not been authorised; and
  • the provision of the service affects constitutional and legal rights of the workers.

According to the Colombian Data Protection Regime, personal data must be processed based on the prior, express and informed consent of the data subject. This consent must be given freely and must be specific, informed and unambiguous. Moreover, data subjects are entitled to require a controller to rectify any errors in their personal data or withdraw the consent at any moment.

When data controllers authorised third parties to process personal data, it is important to bear in mind that in Colombia, we refer to two different ways in which such data can be shared with third parties, transfer and transmission. The difference between one and other relies on who the data controller is and which privacy policy applies to the data processing. In the case of transferring data, the original data controller shares data with a new controller. Then, it needs to obtain a new express and informed consent from the data subject and to disclose its privacy policy. In the case of transmissions, the controller remains the same and it only needs to disclose to the data subject that there is a possibility of sharing data with a third party. In the latter case, data will be processed under the same privacy policy and purposes authorised by the data subject within its prior, express and informed consent to the controller.

Outsourcing agreements are normally structured as Services Agreements in Colombia, which is the standard contract type customarily used for outsourcing arrangements. There is no specific "model" or "template" for this kind of agreement, since they can be freely negotiated and entered into in a tailor-made fashion, depending on the specific needs of the parties and in exercise of their legally acknowledged free will and autonomy. Furthermore, as outsourcing agreements are "atypical" under Colombian law, this means they are not specifically regulated, thus there is no existing "model" for this purpose.

While it is most common to opt for a services agreement to structure outsourcing relationships in Colombia, such relationships can also be formalised through the execution of other kinds of agreements such as:

  • commercial agency agreements, for a party personally to undertake the exploitation of the business or a portion thereof of another party;
  • supply agreements, for a steady supply of services that are ultimately sold;
  • mandate agreements, for a party to undertake certain activities for the benefit of another part, either with or without the ability to represent the latter; and
  • joint ventures, to the extent there is indeed a common venture to be exploited or pursued by both parties (which may not normally be a part of a traditional outsourcing scheme).

The modern workforce is evolving as the pace of technological change and need for agility increases. Employers around the world, and Colombian employers are not an exception, are working to have a fit-for-purpose workforce while protecting business interests and navigating across many areas of regulation including employment, remuneration and benefits, mobility, data privacy/protection, tax and protection of confidential information/trade secrets. Nevertheless, the rewards of adopting new staffing models, be it crowd working, employee sharing, fixed-term staffing or other such models, are considerable.

There are several regulations that aim to protect the rights of consumers in Colombia. When you sell or provide goods or services to an end-consumer online, or via other means of distance communication (eg, by telephone or mail order), the consumer has the right to return the item or cancel the service within five business days. This is referred to as the cooling-off period.

Likewise, in Colombia, regarding the guarantee, there is a several and joint liability between the importer, the manufacturer, the retailer and any other participant in the chain of value. In the case of defects, the good must be fixed, repaired, or replaced. Reimbursement of the product price is not mandatory under Colombian Law. However, when a repeated failure prevents the consumer from enjoying the goods under the conditions in which they were acquired, the goods must be replaced, or the money paid reimbursed.

Termination clauses are negotiated and agreed upon freely by the parties in each particular contract. However, for contracts with a fixed term, unilateral early termination should ideally only be allowed upon the occurrence of events expressly (or implicitly, in case of a contractual breach) categorised as "just causes". The latter takes into account that setting a fixed term aims to guarantee a specific stability expectation of both parties to a contract and that, in principle, early termination based on mere convenience should not be allowed. The general position of the Colombian judicial Courts on this matter is in line with the above. There have been several cases where the party who terminated a fixed-term agreement early, based merely on its convenience, has been compelled to pay the other party compensation equivalent to the value of the remaining portion of the agreement.

We recommend a clause under which the services agreement can be terminated with prior written notice at any time. A 30-day notice is customary.

As a matter of principle, damages payable in case of a breach of a contract are aimed at compensating the party that has suffered a loss so they are placed in the situation they would have been in, if the contract had been fully complied with.

Accordingly, the general rule, under Colombian law, is that only proven direct and certain damages originated in a breach of contract are payable, regardless of whether the breach is caused by simple negligence, gross negligence or wilful misconduct. Damages must be certain, if they are to be payable. If only the risk or possibility of a damage exists, then the damage would be uncertain and would not be payable. However, damages do not necessarily have to already have been suffered in order to be payable: damages that will be consolidated in the future can be considered payable if it can be proven that they will be suffered by the plaintiff

Although only direct damages are payable under Colombian law, determination of whether a damage is direct or indirect varies depending on the nature of the relevant contract. Colombian Courts consider that a direct damage is a necessary consequence of the breach (ie, a loss by the non-breaching party that would not have occurred but for the negligent breach of the breaching party), which could not have been avoided by the non-breaching party. Therefore, damages that could be avoided if the non-breaching party had acted diligently will not be payable.

Within the notion of direct damages, two types of compensation are recognised:

  • Actual damages (daño emergente) are the real losses incurred by the injured party because of the breach. Actual damages normally depend on specific acts on the part of the breaching party, and therefore may be reasonably anticipated and controlled to a significant extent in many contracts.
  • Loss of profit (lucro cesante) consists on the benefit that would derive from the contract and that the injured party will cease to obtain as a consequence of the breach. A court will normally understand that a loss of profit is what the non-breaching party would have gained if it had invested its money in a business other than the one underlying the breached contract. Therefore, interest on sums of money is the most common form in which loss of profit can be proven and awarded.

The characterisation of loss of profit as a type of direct damage is proper to civil law jurisdictions, as in most common law jurisdictions it is treated as an indirect damage.

As a general rule, only damages that were foreseen or foreseeable at the time of the contract are payable. Normally this requirement is based on the possibility of the breaching party rationally anticipating the extent of damages that the breach could cause. However, if the breach of contract is a consequence of gross negligence or wilful misconduct, the breaching party shall be liable for all proven direct damages, whether foreseen or unforeseen, foreseeable or unforeseeable.

The Colombian damages regime is aimed exclusively at compensating the losses suffered by a party as a direct consequence of a contractual breach. Therefore, unless expressly agreed otherwise, a party to an agreement will not be liable for indirect or consequential damages, nor for punitive or exemplary damages, even in cases of gross negligence or wilful misconduct.

Outsourcing contracts in Colombia do not have implied terms. As a general rule, terms of outsourcing agreements are negotiated and agreed upon freely by the parties in each particular contract.

If the outsourcing constitutes a business transfer, the in-scope employees will transfer by operation of law to the Service Provider on existing terms and conditions of employment (an employer substitution occurs).

The employer substitution is a legal figure that operates regardless of the will of the former or new employer, or even of the employees. It is a special protection granted by law for the employees in the cases where their employer is substituted by another one for any reason. In these events, laws remain in full force and effect employment agreements, in the same conditions, with the same seniority and with the same benefits held before being employed by the new employer, without the agreements being terminated, modified or suspended for the sole reason of the transfer. For this substitution to have full effect, the consent of the employees is not necessary; they cannot validly reject or refuse the change of employer. 

It is a protection that applies by operation of law, whenever the following conditions are met:

  • that there is a change of an employer for another, for any reason;
  • that there is a continuity in the execution of the activities or the economic activity; and
  • that the employees continue executing the same activity within the new employer.

When a company (former employer) performs an operation by means of which all or part of its business is transferred to another legal entity (new employer), the employer substitution will occur for those employees tied to the transferred part of the business or the transferred assets. 

Now, although the new employer is forced to acknowledge the transferred employees the salary and labour entitlements in the same terms and conditions they were receiving them at the former employer on the date of the substitution. However, the new employer can legally negotiate with them a new structure of employment conditions and benefits. 

The most relevant aspect of the employer substitution is the assumption of responsibilities regarding the employment obligations and liabilities. In this case, former and new employer will be considered joint and severally liable for the obligations and liabilities of the transferred employees due up to the date of the employer substitution (closing date). The new employer will also be directly liable for the obligations that becomes due and actionable after that date. Former and new employers may agree on modifications regarding this assumption of general liability, but these agreements cannot be enforced against the employees and cannot affect their rights. These agreements will only be enforceable between the former and new employer.

The employer substitution does not trigger the payment of any indemnity or severance. The only payment accrued is the unemployment aid and then only if the transferred employee wishes to receive it. In this case, the former employer shall pay the transferred employees the unemployment aid held by it and that has not yet been deposited in the relevant Unemployment Aid Fund to which the transferred employees selected to be affiliated. Regarding the unemployment aid that has been deposited, the former employer shall provide the employees an authorisation, addressed to the Unemployment Aid Fund, so they can withdraw what is deposited there, if so they wish.

Both former and new employers, in this case, would have to comply with a series of obligations before and after the occurrence of the employer substitution, in order to maintain the continuity in the fulfilment of the employment relations with the employees and to ensure coverage of the payment of their employment rights and entitlements. These obligations include notifying the social security entities of the employer substitution (change of employer in the entities for each employee), the changes of employer, withdrawals and new engagements of employees in the system entities, notification to the Unemployment Aid Funds, the transfer of employment liabilities and the definition of responsibilities.

Former employers may not exercise any type of subordination on the transferred employees, once they are employed by the new employer. Doing so would imply the risk that, upon litigation, a labour judge can deem that what always really existed was an employment relationship between the transferred employees and former employer and not with new employer, resulting in an order to pay the employees the labour accruals not paid while they were employed by new employer. These employees could also argue the coexistence of employment agreements, one with new employer and one with former employer during the same period, in which case they would receive all applicable and unpaid employment payments for each one of the agreements.

In all other cases (if employer substitution does not occur), the service provider is not obligated to employ in-scope employees, but it may be commercially agreed between the hiring entity and service provider. In this scenario, the transfer of the in-scope employees to the services provider will require the employee's consent and acceptance (tripartite agreement).

However, the transfer of the hiring entity's employees to the service provider for the rendering of services, that are directly or indirectly related to hiring entity’s corporate purposes or business, is considered as one of the activities that “indicate” the existence of an illegal labour lending activity.

In Colombia, employer substitution occurs automatically and by virtue of law. No consent of the employees or prior consultation with representatives, trade unions or any works council is required, unless agreed otherwise between the employer and its employees by means of employment agreement, collective bargaining agreement, or other.

In practice, even though no mandatory consultation or notice is required, it is advisable to give notice to the employees advising them on the effective date of the substitution and the name of the new employer, or when occurred, if notice is given after the transaction takes place.

In-scope employees may transfer from Customer to Service Provider via:

  • employer substitution, ie, automatic transfer;
  • assignment of employment agreements; or
  • termination and rehire.

Employer Substitution

An employer substitution takes place automatically whenever there is a “change of an employer for another”. This would be the case in a business unit transfer involving a transfer of assets), no matter what the cause may be (such as a sale of assets, sale of a division or business unit, sale of the commercial establishment), provided that the nature of the business transferred does not suffer any essential variation and that the employees continue to perform their services. Substitution of employers entails an automatic transfer. The general rule is that the former and the new employer are jointly and severally liable for all labour obligations related to the existing employment agreements at the time the employer substitution takes place. The new employer is responsible for the obligations that come into effect after the substitution occurs.

Assignment of the Employment Agreements

In the absence of an automatic transfer, the customer and the service provider may agree to assign employment agreements of in-scope employees from customer to service provider, subject to the affected employees’ prior consent. Save for this requirement, the assignment has the same effects as an employer substitution and Service Provider would become the new employer of the in-scope employees.

Termination of the Employment Agreements and Rehire by the New Employer

In an outsourcing scenario, in-scope employees may also be transferred from customer to service provider by a termination/rehire procedure. A customer can terminate the employment agreements (either without cause or with the employees’ consents) and pay the employees all mandatory separation payments, including potential severances. Obtaining the employees’ consent is advisable in order to minimise the risk of unfair dismissal claims. A service provider would execute new employment agreements with the employees and would not be required to honour seniority.

In Colombia, the transfer of suppliers, including outsourcing providers in an asset deal, are transferred to the buyer through the assignment of the specific agreement, provided that the assignment is not restricted in terms of the agreement.

In practice, if the transaction is structured as an asset purchase, which entails the transfer of personnel, it is considered an employer substitution if the parties have not previously assigned or terminated the employment agreements. This operates automatically, by virtue of law, upon the execution of an asset purchase agreement and the transfer of personnel.

The main effects of the employer substitution are the following:

  • the employment agreements of employees are not modified, suspended or terminated, and all risks, duties and liabilities will transfer to the purchaser;
  • the purchaser must match the salaries and benefits the employees were receiving.
  • if the incoming employees have enjoyed different employment benefits compared with those of the purchaser’s existing employees in comparable job roles (in terms of rank/seniority, skills, qualifications, etc), the purchaser could be forced to harmonise these by offering all employees the most favourable conditions (unless otherwise agreed with all employees — “old” and “new”);
  • all employees’ seniority must be maintained for all legal purposes;
  • the seller’s pension liability will be transferred to the purchaser; and
  • the former and new employer would be considered jointly and severally liable for all labour obligations relating to the existing employment agreements (for both target and purchaser) at the time the employer substitution takes place, and the new employer will be responsible for the obligations that come into effect after the substitution occurs. If the new employer assumes payments regarding labour obligations that the old employer was forced to recognise, then the new employer can recover them from the old employer, unless otherwise agreed.

The transferred employees will not be legally entitled to refuse the change of employer or to demand payment of any social benefit or redundancy or severance pay due as a result of an employer substitution. If they do not wish to work for the new employer, they can resign, as any employee is legally entitled to do.

Baker McKenzie S.A.S.

Avenida 82 No. 10 - 62, Piso 7
Bogotá
D.C. 110221
Colombia

+57 1 634 1666

+57 1 376 2211

Evelyn.Romero@bakermckenzie.com www.bakermckenzie.com
Author Business Card

Law and Practice in Colombia

Authors



Baker McKenzie S.A.S. is a full-service law firm, and the office in Bogota is part of a regional antitrust group team at Baker McKenzie from where we implement and develop cross-selling strategies, training sessions and academic events with colleagues in Latin America, North America and Europe. In particular, Carolina Pardo leads the practice across the region with a team composed by two senior associates, three medium associates, two junior associates, and one auxiliary. The team advises clients in antitrust aspects of a transaction or an investigation but at the same time early in the process, it is in a position to adopt data protection safeguards, expertise in anti-corruption matters and practical issues discussed with the M&A/Trade and Commerce teams or with partners in other jurisdictions. The firm's key practice areas are corporate, labour, TMT, and compliance.