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The Proposed “Law of First Employment” – Towards Formalization, Through Incentives, A National Database, and Regulatory Reforms

December 18, 2010

One of the great challenges facing the modernizing Colombia is the formalization of employment. Proponents of the US-Colombia Trade Promotion Agreement and other free trade deals have argued they will bring about more and better employment, boosting trade and development. Informal employment has cost the health care financing system in Colombia dearly, while formal employment brings not only needed payment into the system, but modern worker benefits and protections. Increased formal employment is needed on a massive scale to reduce income inequality and cement gains is social stability.

President Santos has formally proposed to the Colombian Congress a major piece of legislation designed to bring about more formal employment, called the Law of First Employment. It is a very serious effort to rise to this enormous challenge.

The proposed law has four parts. Chapter I deals with stimulating first employment, focusing on young people under the age of 28 and in the agricultural sector as well as three specific states. The law directs the creation of incentives for businesses to formalize employment through micro credit and credit oriented programs (both in urban and rural sectors) for youths under age 28, professionals, technicians, leading to formalization and generation of business, employment and telecommuting, using tools such as tax breaks, capital assistance, grace periods, training programs, technical assistance and expert advice. The bill directs special programs to be established in the agricultural sector, and in the states of Amazonas, Guainia, and Vaupes.

The bill eases new small businesses into the tax system on a gradual basis, with no income tax payable during the first two years, only 25% of the tax due in the third year, 50% in the fourth, 75% in the fifth, and normal taxation in the sixth and subsequent years (and more favorable rates of progression in the states of Amazonas, Guainia, and Vaupes. Comparable discounts will apply to the “parafiscal” payments – health insurance, social security, and the like. Discounts also apply for the generation of new employment of persons under age 28.

Changes made to the nation’s labor laws by the bill are intended to speed and reduce the complexity of procedures for the posting of new jobs and improved salaries and to reduce red tape.

Chapter II focuses on the insolvency laws, and purports to simplify and reduce expense in procedures for the liquidation of enterprises, making a large number of changes to Law 1116 of 2006, the Corporate Insolvency Regime.  A translation and explanation of these changes can be found here.

Chapter III purports to cut red tape and simplify bureaucratic procedures in a number of other areas of the law, primarily relating to employee benefits.  Chapter IV will establish a national employment database.

Overall, the ambitious legislation will be best understood as the incentives for hiring, and the national employment database, are implemented in the near future. Presumably, they will be very positive overall for business in building a climate of legalization and formalization. The legislation is undoubtedly another very positive, pro-business sign that Colombia’s political leaders are doing the hard work of modernizing their economy to continue to reap the benefits of, and to lock in, the gradual end of the civil and narco-trafficking wars.

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