EOR Basics
Employer of Record and Professional Employers Organisations are just two of the ways businesses are hiring staff in South Africa.
South Africa’s growing economy is churning out more and more talented individuals across all areas of industry. With wages being much cheaper in South Africa than in most Western countries, it represents a great opportunity for businesses to reduce their talent sourcing costs while also deepening their talent pool. However, those companies that choose to hire in South Africa will have to navigate the complexities of South Africa’s labour market. However, those that do may need support from a local organisation with expertise in the legal and regulatory landscape.
Two of the most common ways to do this are by using an employer of record (EOR) or a Professional Employers Organisation (PEO). Both operate on a similar principle by offloading the work of your HR function to a separate third party. To many people, the terms will be used interchangeably to describe the same kind of work. However, there are key differences between an EOR and a PEO that you need to consider before choosing the best option for you.
How an EOR works
An Employer of Record is a third-party company that legally employs staff on your behalf. From a practical perspective, that means they handle everything from sourcing and onboarding to paying, managing, reporting, and PAYE, ongoing employment disputes, and, when necessary, termination of contracts.
The key to EOR services is that they assume legal employer status and all the responsibilities that come with it. This offers you protection while also providing the benefit of the EOR’s dedicated expertise in local employment regulations.
Using an EOR is a great option if you want to save the expense of setting up a legal entity in the country or need to scale up an employment presence in South Africa quickly with minimal costs or legal exposure. It’s a useful option for companies that have limited financial resources or are just moving into South Africa.
For example, if you are planning to launch a product or service in South Africa, an EOR can be a good, low-risk way to work without the upfront costs of a foreign subsidiary. You can scale up or down as you need. For example, if things go well, you can quickly build your local team, but if things don’t work out as hoped, you can scale back and reduce your exposure.
How a PEO works
A Professional Employer Organisation, on the other hand, does many of the same things. It handles all the duties of an HR team, which means onboarding, worker classification, managing PAYE, and all other administrative requirements. You have full control over the day-to-day working relationship.
The main difference is that the PEO works on a co-employment model in which you share employment status. This means you still need to have a legal entity in the country and will have the final responsibility for compliance with all legal requirements.
While an EOR can be a quick and easy way to get started, a relationship with a PEO will take more time to set up and require clarity over which entity has the final responsibility for which aspects of the employment relationship.
A PEO, therefore, tends to be a good option for an established, large company that already has a legal entity in the country. It gives you full control over the employment while taking over the hard work associated with manual HR administration.
Legal considerations
When choosing to work with an EOR or PEO, you need to make sure you comply with all aspects of employment law, particularly surrounding issues of brokered employment.
South Africa manages employment law with the Labour Relations Act and the Basic Conditions of Employment Act, which ensure employee rights are protected.
The government has set up restrictions around practices of labour broking that demand complete clarity over the obligations of employment. A shared employment model can muddy the waters and create confusion. Any inconsistencies with classification can cause legal disputes, leading to penalties.
With an EOR, the working relationship is much clearer than with PEO. The EOR manages the employment, so it is responsible for paying the employee, drawing up legally compliant contracts, managing PATE, UIF, and SDL compliance. Any errors in these will be the responsibility of the EOR, which means that you, as the hiring company, are fully protected.
EOR versus PEO – Which is better
Which of these options is better will depend on your company, the way you are set up, and what you’re looking to get from hiring staff in South Africa. An EOR is certainly simple, safer, and in the first instance, more affordable.
Without the need to take on any responsibility as the employer, you simply engage the EOR’s services, and they will handle the employment side. Each EOR will have its terms of engagement, but it will generally involve paying a fee based on how many employees you have. Some EORs will offer a scalable fee structure with the level of payments rising with the level of support on offer. For example, prices may start with a basic tier progressing to more advanced options, which offer more support over the hiring process.
PEOs offer more control, but confusion over where liability for the employees lies can lead to legal disputes with the regulators. Drawing up contracts can take more time while making it a less agile approach.
It’s better used for companies that are looking to reduce their administrative expenses by effectively outsourcing their HR operations to a third party.
Both PEOs and EORs are becoming more common as demand for their services rises. However, this is a rapidly evolving market. The requirements of the regulators are constantly changing, which means you need to continuously review your operations. An EOR represents the fastest, easiest, and in most cases the cheapest way to manage your staff in South Africa.
At FutureTeams, we offer a wide range of EOR services to international clients. To find out more about what we can offer, feel free to get in touch or download a free PDF guide.
