EOR Basics
South Africa is an exciting and lucrative market, but making your product work can be risky and expensive.
The business world is changing at an unprecedented rate. It’s becoming increasingly international, thanks to the internet, which is opening up trade opportunities for businesses of all sizes. Today, even small and medium-sized businesses are looking to expand into new territories and markets. One of the most lucrative is South Africa. Not only does it benefit from a growing economy and a thriving market with a familiar consumer profile, but it can also serve as a gateway into a much larger market across Africa.
About South Africa
After a decade of economic stagnation and political instability, and the turbulence of COVID-19, South Africa’s economy is showing promising signs. GDP is picking up, and investment in education is paying off with a rising number of people graduating with degrees or professional qualifications.
Consumer demand is growing, and with South Africa being the second biggest economy in Africa, behind only Nigeria, it’s attracting interest from brands around the world looking for new market opportunities.
South Africa represents a particularly tempting proposition due to its location and highly diverse culture, including a mixture of British, European, and African influences. The market will have many similarities to companies in the West, but enough differences to serve as a useful preparation for further expansion into Africa. Make it here, and you can gain the contacts and connections to help you move further into the contract.
The promise of South Africa has already tempted many of the world’s biggest brands, such as the UK’s Pet a Manger, Ticketmaster, and JD Sports have either expanded or made plans to expand shortly. However, success can’t be guaranteed. Brands such as Top Shop, Tesco, Zara, and Walmart have all struggled to gain a permanent foothold in the country.
Where the big names go, the smaller names follow. Digital technologies and lower barriers to international trade are tempting small and medium-sized businesses into the market. However, if the risks of expansion are high for the big brands, they can be even more severe for SMEs. Launching a new product on the market is extremely expensive and fraught with difficulties, with no guarantee of success. Investment is front-loaded with revenue, sometimes coming years down the line.
Operating in foreign markets can be extremely difficult. Each market has its own nuances with different competitors and consumer preferences. Just because your product or service has been successful at home doesn’t mean the same strategy will work when you move into this new country.
Before expanding, therefore, you will need to lay the groundwork, research the market, and understand local regulations. For that, you’ll need to engage the services of local experts who can help you understand the market opportunities and provide administrative or legal support. All that will be expensive and traditionally involves hiring people and setting up foreign subsidiaries.
The only way businesses of limited means can make it work is to find a cheaper and lower-risk approach, and one way to do that is with an employer of record.
How an EOR works
The great value of an employer of record is that it removes the need to set up a subsidiary and, in so doing, significantly reduces the risks of expanding into a new market. The EOR will be registered as the legal employer for all workers in South Africa, which means they take on the administrative work of the employment, including onboarding, managing PAYE, complying with all labour laws, and keeping up with reports to the tax authorities. Crucially, it also means that the EOR retains full legal liability for all employees, which means you’re protected from any inadvertent compliance problems.
EOR costs consist of the regular employee-related expenses, including wages, the cost of providing benefits, and employer taxes, plus a service fee, which will typically be a percentage of the salary. Additional fees can include the provision of employment software or support with talent sourcing.
On a per-employer basis, therefore, you will be paying a premium in the form of payments to the EOR for the services and legal protection it provides.
Working through an overseas intermediary will also raise questions about the level of control you have over the employees and legal compliance. South African authorities will often scrutinise relationships that appear to be brokered employment. They want to see clear definitions about which entity is responsible for which aspect of compliance. An EOR relationship should be unequivocal in that the EOR is the registered employer and will be responsible for meeting all legal and compliance obligations. That should be enough to satisfy the authorities.
In terms of control over the employee relationship, EORs are delivering more personal services to provide extensive support in recruitment and facilitating the management of day-to-day employment. The best EORs will effectively take on the role of your HR department, while you work directly with your employees.
Employing someone directly, in the traditional manner through a foreign subsidiary, will still give you complete autonomy, but it comes with several disadvantages, including the cost of setting up that entity and hiring ongoing support staff in the form of HR specialists, accountants, and legal experts. Without the support of an EOR, you may also suffer from a lack of local and industry-specific expertise. As a locally based company, the EOR will know the industry better and where to source relevant talent.
Expanding into South Africa
At the very least, therefore, an EOR serves as a good first step in any South African expansion. It can reduce the up-front costs of getting started and hiring South African employees. It allows for rapid hiring and scaling of operations without all the administrative work of setting up a legal entity and conducting a talent search. For many functions, such as customer service, the EOR may already have employees ready to be assigned to your company.
It reduces the risks of expanding in the early days, giving you the chance to quickly exit if the expansion does not go as planned. For example, if there turns out to be no market for your product or if you can’t find a price point that satisfies customers while delivering sustainable profits, you can simply back out with minimal damage.
However, businesses are increasingly realising the benefits of long-term engagement with EORs. The ongoing support, flexibility, and scalability on offer from an EOR can provide a long-term partnership to support all your employment operations in South Africa. Whether you’re looking to underpin an expansion or simply outsource certain operations, an EOR can be a successful and profitable partner now and into the future.
For more information, why not download our free PDF guide?
