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The payment of interest on severance payments is one of the obligations that Colombian companies must comply with during the first month of each year. The payment of these is a labor obligation consisting of the profit on the total value of severance payments, which must be paid directly through payroll to the employees.

This obligation is enshrined in Decree 116 of 1976, which regulates Law 52 of 1975, in which the national government grants this annual benefit to the country’s employees, and regulates in detail how it must be paid, at what time, on what percentage it must be paid and the penalties for non-payment.
In order to avoid and prevent inconveniences or penalties regarding this benefit, below you will find a simple way to understand and comply with it:
How is severance interest paid?
Interest on severance payments must be paid directly to the employee, unlike the severance payments that must be deposited in one of the funds located in the country.
This interest is calculated on 12% per annum of the total value of severance payments, and is taken as an accumulated balance as of December 31 of the year worked; however, in the event that the employee has not worked the entire year with the company, such interest must be calculated in proportion to the time worked.
In order to avoid any type of mistake when making this liquidation, the following formula can be applied, as follows:

(Accrued severance payments x days worked x 0.12) /360= Interest on severance payments
  • It is important to take into account that, in order to calculate this interest, the amount corresponding to the payment of severance payments must first be taken into account.
  • If the employee has worked the entire year, the value of 360 is established.

When is severance interest paid?
Law 52 of 1975 establishes the appropriate time to pay them depending on the worker’s case:
1st situation: If the employment contract is in force, interest on severance payments must be paid no later than January 31 of each year, and is calculated on the balance determined up to December 31 of the previous year.
2nd Situation: If the employment contract is definitively liquidated, the employee must be paid, together with the liquidation, the interest on the severance pay on the date of termination of the contract, in accordance with the provisions of Article 65 of the Substantive Labor Code.
3rd Situation: If the employee requests a partial payment of severance payments, interest on these must also be paid, in proportion, and the law allows for payment to be made within the month following the payment of said partial settlement.
4° Situation: If the form of remuneration of the employee is modified by integral salary, which as minimum corresponds to 10 smlmv, the law does not stipulate a determined term, however, it can be interpreted by the stipulations of article 132 C.S.T, that these interests will be paid with the liquidation caused up to the date of the change, and this can be paid the following month with the payroll that corresponds to the concepts liquidated of the previous salary.
What happens if the interest is not paid on time?
Complying with the deadlines stipulated by law is a very important obligation for employers, since the law establishes that the penalty for not paying interest on time corresponds to the equal value of the interest and must be paid in the same manner, i.e. directly to the employee.
However, an important note must be made regarding the latter, and it is that this sanction does not operate as of right, that is to say, only by the simple claim of the employee, on the contrary, he/she must go to court to force the employer to pay it, which will generally be a judge of small labor cases who will be in charge of settling the conflict.
In conclusion, it is of vital importance to understand the operation of this labor obligation and its consequences, in order to prevent them and thus save the maximum time, money and resources of the company, which can be optimized in other projects and goals, to achieve this it is necessary to have the proper and effective advice of a good lawyer and a good accountant, who hand in hand can help to give a proper application and compliance with this obligation with workers.
By: María Camila Álvarez Castaño
Publisher: Santiago Pinzon Sosa

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