The Legal Considerations of an EOR

Thinking of using an EOR in South Africa? Here are some of the key legal factors to consider.

Hiring employees in South Africa can be a great way to minimize labour costs, access new talent, or expand into a new market. However, the process can be complex, costly, and comes with a host of legal considerations. From managing tax obligations to complying with employment law, there are plenty of hazards that can easily trip up foreign companies. An EOR can help you navigate some of those complexities, but before you do anything, you need to understand your legal and regulatory responsibilities.

Defining an employer of record

There are many different types of support organisations available for companies looking to hire in South Africa, including Employers of Record (EOR, Agents of Record (AOR), and professional employers organisations (PEO). They share many similarities, so much so that they can be easily confused. Many articles will refer to them in the same way. However, they contain many legal differences that need to be accounted for.

• EOR: An EOR takes on full legal liability as the official employer. It is responsible for paying wages and satisfying all tax requirements. You will pay a fee to the EOR, which covers the employee costs and the EOR fee. However, from a legal standpoint, you have no clear connection to the employee. That means if there is a problem, it is the EOR will be held accountable.
• PEO: A PEO works in much the same way but uses a shared employment model, which can create confusion about which company is responsible for which aspect of the employee relationship. Generally speaking, the POA takes on responsibility for the legal administration of the employment relationship while the hiring company manages the workload. However, legal responsibility ultimately lies with you as the hiring company. You will need a legal entity within South Africa to manage the employment, and you will be held responsible for any problems that arise.
• AOR: An agent of record is useful for managing freelancers. It handles key duties such as screening, onboarding, and managing the payment of invoices. However, there is no legal liability. Freelancers and contractors themselves will be responsible for paying all their tax obligations. The main benefit of an AOR is that it can advise you on the classification of freelancers. As working relationships become more regular, it’s easy for freelancers to look and feel much like full–time employees. If the tax authorities deem a freelancer to be a defector employee, you may be liable to punitive fines and, in extreme cases, criminal prosecution.

The biggest benefit of an EOR is the clarity of responsibility it brings. The rules around brokered employment activities can be complicated, especially if the working relationship lasts for more than three months. Before that time, the agent would be considered the legal employer, but after that time, responsibility should then shift to the hiring company.

Non-compliance can lead to a range of fines or compensation orders to ensure both the hiring company and the agent have fulfilled all their legal responsibilities.

Ambiguity around the employer status can add complexities. An EOR avoids this by clearly establishing that it, rather than the hiring company, will be the legal employer for however long the working relationship lasts.

Labour laws

EORs can be particularly useful in navigating differences in labour laws within South Africa. Generally speaking, these are more liberal than in some Western economies with better protection for workers, stronger unions, and a clearer commitment to equal opportunities in the workplace, including provisions such as affirmative action.

The constitution guarantees fair labour rights for everyone, including the right to join trade unions, the right to strike, and protections against discrimination.

Labour laws in the country dépend on the following acts.

• Labour Relations Act (1995): The main law governing the employment relationship, which covers collective bargaining, dispute resolution, dismissal procedures, strikes and lock out and protections against any unfair labour practices. It protects workers and ensures they are protected against any discrimination based on union involvement, whistleblowing, or pregnancy.
• Basic Conditions of Employment Act, 1997: This sets the basic conditions of employment, including maximum working hours of 45 hours per week, annual leave entitlements of 15 working days, sick leave, family leave and termination procedures.
• Employment Equity Act 1998: South Africa’s laws work to eliminate discrimination and unfair practices in the workplace and include affirmative action for black people, women and people with disabilities. All employers have to submit employment equity plans and report on their progress.

In general, employment laws are a little more liberal than in the UK. Employees have more rights and have been more willing to take strike action. Fines for non–compliance can be high, and there are many instances of foreign companies running into unintentional non–compliance problems.

One critical law to get your head around includes the classification of workers, particularly the distinction between freelancers and contractors and full-time employees. With the world of work becoming more flexible and the rise of remote working, the line between freelancer and full-time employee can become blurred.

Some firms take advantage of this by seeking to present workers who are, to all intents and purposes, employees as freelancers to avoid tax obligations. The government has tightened restrictions on this practice in recent times and companies face high fines and potential criminal conviction if they are found to have breached these rules repeatedly or intentionally.

Legal protections with an employer of record

Using an employer of record (EOR) provides a combination of expert legal advice and legal protections that can help you avoid any legal complications. The EOR’s status as the legal employer also provides full legal protection in the event of any compliance problems.

The EOR’s specialist HR experience will also be vital in helping you to manage your team. It takes on the administrative load of handling your workforce, leaving you to focus on your business strategy and more profitable, growth-oriented activities. In a more complex world in which businesses have to react quickly, having that expert support on hand can be critical.