EOR Basics
If you’re expanding into South Africa, you’ll need to manage your employees. These are two of the most common options.
In today’s international marketplace, companies are routinely working with diverse teams of professionals, based in many different countries under different types of contracts. Digital communication has made it easier than ever to communicate across borders. However, each country comes with a host of regulatory requirements about how employees should be managed. Without a full understanding of the laws, it’s easy to make mistakes that can lead to conflict with lawmakers.
Employing people in South Africa
To be an employer in South Africa, you need to have a legal entity in the country that will have full legal liability for each employee. You’ll have to manage PAYE, pay employer-side taxes, provide employee benefits, and make sure you comply with all labour laws. Compared to the UK, South Africa’s labour regulations are relatively liberal with stronger protections for worker rights, and more robust provisions on equal opportunities. Furthermore, laws will be subject to constant change, and regulators have certain expectations about how reports should be made. As a foreign company with only a basic understanding of local laws, keeping up with these changes can be difficult.
EORs and PEOs
To overcome these challenges, companies often resort to third-party entities to manage the employment process for them. For basic outsourcing services, companies might go through a business process outsourcing (BPO) provider, which has readily available employees able to take on a certain business function, such as call centres. This is limited and is usually a way to save money with simple low low-skilled business operations. However, this does not provide the same level of flexibility and control that businesses need in order to manage a multi-disciplinary South African-based team of professionals.
Traditionally, the only way to do this would have been to set up a legal entity within South Africa with all the costs and risks that come with it. Companies would have to set up a complete infrastructure within South Africa, complete with support staff to manage employees. It was highly expensive and could take time to set up.
EORs and PEOs have both been hyped as potential alternatives. Both offer the same basic proposition – they will handle all the details of the employment process, including managing payroll, annual leave, benefits, payment of taxes, and reporting to the tax authorities. Indeed, both are often lumped in under the same definition. However, they differ in several important ways.
A Professional Employers Organisation is a third-party company that manages the legal and administrative side of the employment relationship. In other words, they will effectively serve as your human resources department, managing everything from onboarding to payment of wages and management of holiday entitlements. As the hiring company, you will be free to concentrate on the day-to-day working relationship, such as assigning tasks and monitoring performance.
At first sight, an EOR does much the same thing. It takes on all responsibility for HR duties and leaving you to focus on more profitable matters. Both offer the benefit of their dedicated expertise backed by specialist HR technology to manage the full employment process.
However, a key difference is the status of the employee. An EOR assumed full legal responsibility and liability for the employees. As well as handling all administrative functions, they will be held accountable for any compliance problems in employment.
A PEO, on the other hand, operates a shared employment model. Both you and the PEO will be the employers, with you handling the work and the PEO handling the admin. That’s an important differentiation because it gives you full protection for all your South African-based workers. Equally importantly, it provides the South African authorities with clear transparency about which entity assumes legal responsibility for the employee.
Shared employment models, on the other hand, can blur the lines. The authorities will scrutinize anything they see as brokered employment services – such as hiring a de facto employee through a third-party agency. Any employee hired through a third party will need to be your responsibility as a hiring company once they have been with you for more than three months.
With a PEO, therefore, you will still have ultimate legal responsibility for all filings related to the employee. That means you sacrifice any legal protections and will need a legal entity within the country.
Compared to an EOR, then, a PEO can leave you somewhat exposed legally and forces you to move more slowly with your recruitment. With an EOR, on the other hand, all you have to do is pay the fees, and you’ll be ready to go.
A PEO will be more suitable for a company that already has a legal entity within South Africa and simply wants to outsource its main HR function. It is often described as providing you with more control over the hiring and firing of employees, with some EORs leaving you to make do with the workers that the EOR provides.
However, today EORs provide much more detailed support with hiring, allowing you to tailor your team to your liking. Specialist HR software can also be available to provide detailed analytics on all your operations, giving you in-depth insights into your operations.
EORs can also provide support for workers on many different types of contracts. As work becomes more diverse and remote UK companies are increasingly working with overseas freelancers. These might normally have been handled either directly or through an Agent of Record, which handles freelance teams. However, EORs can now offer AOR services, allowing you to manage both employees and contractors according to their treatment under law.
The cost of PEOs and EORs
PEOs will normally be paid in one of several ways:
- A flat fee per employee, such as £100 per employee per month.
- A percentage of the overall payroll, such as 10%.
- Additional costs for services such as software, background checks, customised training, or additional health benefits.
On top of that, you will also have to pay the employee’s salary and retain all legal liability as the employer.
EORs will normally be paid similarly – either a flat fee per employee or a percentage of the payroll. As the employer, the EOR will pay their salary, but will pass this on in costs. In other words, you’ll end up paying the full salary plus the EOR’s fees.
The overall level of the fee may vary depending on the level of services offered or the seniority of the employees. In general, international EORs that take on legal liability as the employer will charge a little more than PEO.
This has led some people to suggest that an EOR is better in the short term to manage a market entry before switching to a direct employment model by setting up a legal entity. However, removing the need to set up a business and hire a full support team can mean that an EOR can remain a high-quality and effective option in the long term. As always, context is crucial in these matters, and the choice between an EOR, PEO, or any other option will depend on your own company, your location, and your business requirements.
Whatever option you choose, though, South Africa offers a host of opportunities for hiring companies. It provides access to a new market, a chance to deepen your talent pool, and to benefit from lower overall labour costs. An EOR opens up that market to companies of all sizes, allowing them to move more quickly, more affordably, and with a lower regulatory risk.
