EOR Basics
An employer of record is a good way to minimise the costs and simplify the process of hiring staff in South Africa.
Hiring employees in South Africa can be a great way to minimise labour costs, access new talent or expand into a new market, but it can be difficult, complicated and in some cases expensive. Employees need an employer, which will need to comply with all local labour laws and pay all taxes owed. Setting up a foreign subsidiary takes time and involves substantial resources. Even then, it’s easy to make critical errors when working in an unfamiliar environment.
That’s why many companies choose to work with an employer of record (EOR), at least in the early days. An EOR is a third-party entity within South Africa which can serve as the legal employer for all your locally based staff. The EOR handles all the legal and administrative details of the employment relationship, including onboarding, paying taxes, providing employee benefits, filing reports and ensuring compliance with local labour laws. As the legal employer, the EOR also assumes full legal liability for any compliance issues that might arise.
This can be extremely valuable for you, as the hiring company, as it protects you from any unintentional breaches of the rules. For example, the 2003 case of August Lapple Versus Jarett showed that South African employers were subject to South African labour laws even if decisions were taken outside the country. The case arose when the company sought to dismiss the managing director of its South African subsidiary. He took the case to the Bargaining Council for the Motor Industry in South Africa, relying on stronger labour protection laws than in Germany. However, the employer argued that South African law did not apply as the decision to dismiss Lapple had been taken in its German HQ. The arbitrator ruled that the Bargaining Council had legitimate jurisdiction, demonstrating that foreign employers are subject to South African labour laws if their workers are in South Africa.
Employing people within South Africa, therefore, can be a regulatory risk, which is why an EOR can help. As well as providing dedicated sector-specific expertise, its status as a legal employer protects your company from legal liability and provides clarity about where ultimate responsibility lies.
Working with an EOR also allows you to concentrate on more strategic matters aside from the daily administrative load of hiring, firing and managing employees. It’s also a way to quickly scale your workforce up and down, adding resources as and when you need to. Because it serves as the employer, you will also not need to set up a legal entity within South Africa with all the costs that come with it.
Alternatives to EORs
In addition to an EOR, several other organisations can support your expansion, including a Professional Employers Organisation (PEO) and an Agent of Record (AOR).
PEOs are most commonly confused with EORs because they work in a very similar way – namely, the PEO handles the practical and administrative duties of the employment while you concentrate on the day-to-day working relationship, such as assigning tasks and monitoring performance.
The crucial difference is that a PEO uses a shared employment model, which means you’ll still need a legal entity within the country. The shared model can also create confusion about where ultimate legal liability lies. The authorities are keen to manage relationships that look like brokered employment, such as through agencies. Generally speaking, an employee hired through an agency will be the responsibility of that agency only for the first three months of employment. Beyond that, responsibility passes on to the hiring company.
Ultimately, to avoid any compliance risks, legal liability for the employees will rest with you. In other words, when working with a PEO, you hand over all control over the employment relationship while retaining legal responsibility.
An agent of record, meanwhile, is focused primarily on freelance and contract workers. It handles all the details of freelancer engagement, including screening, recruiting, onboarding, worker classification and invoices.
An AOR can be extremely helpful in making sure your freelancers are classified correctly and that you don’t encounter any compliance questions about disguised employment, namely, making it appear as if de facto employees are freelancers to avoid tax obligations.
This practice has become relatively common in recent times, as businesses seek to optimise their expenses and reduce their tax bills. Fines can be high with criminal prosecution for extreme, repeated or intentional breaches.
South African labour laws
South Africa’s labour regulations tend to be somewhat more liberal than in the West. In part that’s a result of its history which has prompted stronger provisions for equal opportunity including affirmative action in some cases.
Unions are also stronger which leads to stronger worker protections. As a hiring business you will have to make sure you comply with working hour regulations and provide employees with all their legal entitlements such as annual leave.
There are also strict provisions about employee classification. The government is keen to crack down on all instances of disguised employment in which companies seek to present defector employees as contractors to save on tax obligations.
Employees will generally be people who have set working times and conditions and a regular salary. Contractors will work on an ad hoc basis, have control of their own working time. However, as the working relationships with contractors evolve, they can look more and more like employees. Understanding where the line should be drawn can be tricky. Fines for non-compliance can be high, with criminal prosecutions for repeated or intentional breaches.
An EOR can help you keep track of all these regulations and any changes that come into force. It can provide advice on worker classification and onboarding and help you structure your team accordingly. EORs may help you work with combined teams, incorporating both freelancers and full-time employees, ensuring each one is treated correctly and all the relevant reports are made to the tax authorities.
The EOR market is reacting to the emergence of new economic and technological trends. It’s offering more comprehensive services with greater levels of flexibility and control over the employment process. It’s like having your HR team with the bonus that the team takes on full legal liability for all your workers.
Whether you’re looking to expand into a new territory, build your workforce or reduce labour costs, an EOR can be a great way to get access to expert support and full legal protection.
