What Are “Wage-Exclusion Agreements” and What Are Their Limits?

In accordance with article 127 of the Colombian Labor Code, anything workers receive as a direct compensation for the service they provide must be considered wages, regardless of whether it is paid in money or in-kind, or the type or name given to this payment. However, it is possible for employers to grant other occasional sums to workers in order to achieve the full performance of their duties, without seeking to grant benefits to workers or grow their wealth. Likewise, it is possible for the parties to expressly agree to grant certain benefits or aids to workers, either regularly or occasional, without these being considered as part of their salary, since these sums are not intended to remunerate the work they perform; this is known as a “Wage-Exclusion Agreement” and these payments may not exceed 40% of the total remuneration received by workers[1].

With respect to these agreements, the Colombian Supreme Court of Justice, in judgment SL5159-2018, and reiterated in judgment SL5146-2020, recalled that these can only apply to those payments that, despite not directly compensating work, in the absence of a previous wage-exclusion agreement, could generate discussions and confusion regarding their nature, that is, whether they constitute salary or not. Such is the case of extralegal bonuses for food, room or clothing, holidays or Christmas, among others. Thus, employers will have the burden of demonstrating that these payments, despite being regular and/or habitual, do not have the direct purpose of remunerating the services of workers or growing their wealth, but instead have a different objective, such as guaranteeing the fulfillment of tasks or covering certain needs. This is necessary because employers do not include these sums in the payment of social security contributions (pension, health, workers’ compensation administrators) or social benefits (legal bonuses, severance and its interests, legally mandated work uniforms), since the basis for calculating these payments is solely the sum that does constitute wages. Therefore, in the event that the existence of a duly executed wage-exclusion agreement cannot be proved, the employer will be obliged to pay workers, as compensation, a sum equal to the last daily wage for each day of delay in the payments of these sums (contributions and social benefits), in accordance with the provisions of article 65 of the Colombian Labor Code.

Consequently, on March 23, the Colombian Supreme Court of Justice analyzed an appeal against a judgment that declared two (2) companies jointly and severally liable, for an ineffective wage-exclusion agreement. In this regard, the Court argued that even though the worker freely agreed to execute this agreement, it is not possible to exclude from her salary any amount that, by its nature, essence and purpose constitutes salary, more so if the employer cannot demonstrate that these payments do not have the purpose of remunerating the services of the worker. In other words, the employer, through a wage-exclusion agreement, wanted to exclude sums that were constitutive of salary since they compensated the work performed by the worker. Additionally, the Court recalled that, in these cases workers must file their claim within 24 months following the termination of the labor agreement. Otherwise, workers are no entitled to the compensation established in article 65 of the Colombian Labor but only default interest accrued from the termination of the contract.

For the specific case, the worker had worked with a company for 13 years under an open-ended labor contract, after which she was notified that the employer would be replaced by another company. However, before this replacement was made, the worker executed an additional clause to the contract through which she would be granted a monthly remuneration plus a “non-salary benefit” that would not be included in the basis for calculating social benefits and contributions to the social security system. This clause, despite the employer substitution, was in force until the moment of termination of the contract. In this regard, the Court recalled that article 69, paragraph 1, of the Colombian Labor Code establishes that previous and current employers are jointly and severally liable for any obligations that at the date of substitution are enforceable against the previous employer. It is for this reason that the determination made by the court of appeals to declare both companies jointly and severally liable and order them to pay the sums owed along with the default interest, was correct, which is why the Court decided to confirm the ruling.

At BéndiksenLaw we can help you draft, review and modify the employment contracts of your workers to ensure full compliance with the regulatory provisions on labor matters. We can also settle any of your doubts regarding this or any other labor issue. Contact us.

[1] Council of State, Fourth Section, File No. 05001-23-33-000-2016-02496-01(25185) of December 9, 2021, C.P. Dr. Milton Chaves García.