EOR Basics
A growing overseas team can be a handful. To keep things in order, you can benefit from the support of a trusted partner. Here are some options.
According to recent data, UK companies can unlock savings of up to 50% by outsourcing some operations to South Africa. Others are sourcing high-quality professionals across a wide range of different sectors, from PR and marketing to software design and financial management. They are drawn not just by the lower cost of labour, but South Africa’s skilled workforce, language match and convenient time zones.
However, as the overseas team increases, managing them becomes much more complicated. To cope with this, hiring companies might traditionally have employed them directly or engaged the services of a BPO company. The first option is expensive, especially if you have to set up a new legal entity in the country, while the second gives you limited control and flexibility. BPO companies give you no control over who you hire and are typically limited to only certain sectors, such as call centres or customer support. In an attempt to control costs while staying on the right side of the law, companies are forming partnerships with specialist companies focused on managing workers. Three of the most common options are:
- Employers of Record (EOR).
- Agents of Record (AOR).
- Professional Employers Organisation (PEO).
Each option comes with its pros and cons, but they all serve the same goal – to help you access the South African labour in the most affordable and cost-compliant way possible.
Employer of Record (EOR)
If you intend to hire full-time employees in South Africa, an employer of record can be the simplest and most cost-effective option. An EOR serves as the legal employer for tax purposes of your South African workers, which means they handle all the legal and administrative duties of an employer, including onboarding, drawing up contracts, managing payroll, providing employee benefits and paying employer-side taxes. The EOR will also have to ensure all labour laws are protected, especially around benefits, annual leave and worker protections.
The EOR’s status as the legal employer is the key ingredient. Not only does the EOR handle the admin work, but it also has legal liability for all employment matters. Therefore, if there are any problems with the authorities, it will be the EOR rather than you, the hiring business, which will be fined.
It also means that you don’t need to set up a legal entity within South Africa. If you’re new to the market, therefore, this is the perfect way to get started quickly. Rather than setting up a company, hiring a team including accountants, HR experts and legal teams, you simply contact an EOR, tell them what you need and get started. It’s faster, less risky and much easier.
Key features of an EOR, therefore, include:
A full employer model in which the EOR has full legal liability.
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Lower costs
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Greater flexibility
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Ability to scale capacity up or down as needed.
It can be used in a wide range of situations such as:
- Outsourcing business processes
- Expanding into new markets
- Acquiring new talent to supplement domestic teams.
An EOR will be paid with fees covering the cost of processing employment, including wages and taxes, plus a service fee, which will typically be a portion of each employee’s wages. Some EORs will also offer additional fees for services such as specialist HR software and recruitment support.
Professional Employers Organisation (PEO)
A PEO works in much the same way as an EOR. Indeed, at a superficial scale, it can be hard to tell the difference. Like EORs, AORs will handle the legal and admin side of the employment. However, this is a shared employment model with the PEO taking on responsibility for the admin and you handling the day-to-day relationship, such as assigning work and dealing with any performance issues. In effect, it’s like having your HR team without as many of the overheads.
The big difference of the shared employment model will be that you still need to set up a foreign subsidiary, which of course takes time, effort and money. The main benefit of this model is that it can give you more control over who you hire and bring into the business. However, confusion about legal liability can create problems. With both you and the PEO company being legal employers, the tax authorities will want clarity over where responsibility lies. They are keen to address issues of employment brokerage solutions, which can be seen as a way to reduce tax liabilities.
When working with an AOR, ultimate responsibility and legal liability rest with you as the hiring company, and you should be completely clear with the authorities about the structure of your partnership with a PEO.
Key features of a PEO, therefore, include:
Shared employment model.
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Full control over hiring.
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Outsourcing HR responsibilities.
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Legal liability for legal compliance
This is an excellent opportunity for companies of a certain size that already have a legal presence in the country. However, setting up the relationship with a PEO can take longer than an EOR, which means it might not be as useful if you need to hire people quickly or scale services. Uncertainties about legal responsibility mean you have to be fully transparent about the relationship and which party is responsible for what part of the process.
Agent of Record
AORs are more geared towards freelance relationships. South Africa offers plenty of opportunities for companies looking to source new talent and build working relationships with contractors. As relationships evolve, and you take on more freelancers, an AOR can help reduce complexity by handling the details of the relationships, including onboarding, verification of don’rker classification to ensure you don’t encounter problems of disguised employment.
EORs will often have an AOR function in which they can manage freelance and full-time worker contracts. The EOR will then pay freelancers and manage their workload, but if they start to resemble full-time employees can advise you about when to change the relationship.
Key features of an AOR include:
- No need to set up a legal entity as long as the arrangements are only freelance.
- Ability to manage onboarding and classification of workers.
- Legal expertise to make sure all overseas freelancers are managed according to the law.
You may use them if you’re initially working with a growing team of freelancers. While individual contractors can be handled and paid directly.
