EOR Basics
Businesses in the West are turning to Employer of Records to broaden their talent pools and streamline their operating costs.
If you’re considering hiring in South Africa, you may have already looked at using an employer of record (EOR). These companies serve as intermediaries between the hiring company and their South African-based workers. They promise the prospect of a more affordable, safer, and flexible way to hire people in South Africa without the need to set up a legal entity such as a foreign subsidiary. However, this sector is constantly evolving both in terms of the level of services they offer and how they are treated under the law.
What is an EOR?
An EOR is a third party that serves as the legal employer for your staff in South Africa. These companies are being set up to cater to the growing number of companies from around the world looking to access South Africa’s growing and talented workforce. Businesses are drawn to South Africa by the prospect of cheaper labour costs and highly professional workers capable of delivering savings across high-value job roles.
The EOR takes on the administrative burden and legal responsibilities of your workforce. In other words, it will be responsible for onboarding new staff, paying their wages, employer-side taxes, and any benefits that come as part of the job role.
Crucially, from your perspective, the EOR has all legal responsibilities and liabilities as the employer. In other words, the EOR has to make sure all employees receive their entitlements, are classified correctly, taxes are paid on time, and all reports are made to the relevant authorities in the correct format.
What are the benefits of an EOR?
Working with an EOR comes with multiple benefits.
- It’s cheaper: Because the EOR is the legal employer, you don’t need to set up a legal entity in South Africa. As such, you save on setting up a company, paying for premises, and any supporting employees such as accountants, legal experts, or HR teams.
- It’s quicker: Without the need to set up a subsidiary, working with an EOR can be quick and straightforward. All you have to do is choose your EOR partner, pay the fees, and you’re ready to go. There’s no need to worry about setting up a legal relationship, as would be needed when using other options, such as a Professional Employers Organisation (PEO), which requires a legal entity.
- It’s safer: Working in a foreign country exposes you and your business to all sorts of regulatory and compliance risks. Remember, you’ll be working in a foreign country with its own set of requirements. Without a full understanding of the laws of thatcountry, you can easily make mistakes or fail to adjust to changes to the rules.
- It’s more flexible: With an EOR, you can use as much or as little as you need. You can scale up services if you want to increase your presence in South Africa or scale back if you need to reduce it.
An EOR offers you the benefit of local experts with a full understanding of the law. They take on the burden of your workers leaving you to focus on the more profitable tasks of growing your business.
How EORs work
In practice, the relationship with an EOR will depend on the company involved and the level of support on offer. A typical working relationship might involve the following format:
- Step 1: You contact the EOR with your job specifications and requirements.
- Step 2: The EOR can either supply you with existing employees assigned to your business or help you source people with the skills you need.
- Step 3: The EOR will handle the onboarding process, such as checking right to work and taxation requirements, and will ensure the employee is correctly registered.
- Step 4: As the employment continues, the EOR will handle the day-to-day admin of the employment relationship, which means paying salary, withholding taxes, and making sure all employee benefits are provided and that all employment laws are satisfied.
- Step 5: From your perspective, you can treat these employees the same as your workers. The EOR effectively involves outsourcing the HR function and liabilities to a third party.
What to consider
When choosing an EOR, it’s important to find a company that can provide a close match to your business and your strategic objectives. That means finding a company with expertise in your relevant sector. Some industries, such as hospitality, have their reporting requirements and obligations, which means you need an EOR with full industry-specific knowledge.
Each EOR will offer varying levels of support. A common query about EORs is the level of control they offer over your employees. Because they are not directly employed by you as a company, there may be a degree of separation that affects the value you get. They will not be deeply embedded into the fabric of your company and may lack a certain level of understanding about your products, services, or company offerings.
However, as this sector grows, EORs are providing more in-depth levels of support. This can involve support in the recruitment process, helping you to find the people with the skills you need in much the same way as you would if you were employing them directly.
Some EORs will offer minimum benefits to employees, which can be limiting if you intend to be more generous. However, some EORs may offer the prospect of flexibility over the level of benefits on offer.
Paying EORs
To pay EORs, you will first have to make sure that all the employee costs are covered – namely, the wages, taxes, and benefits. These are simply costs that get passed on to you with the EOR not making any profit.
Their revenue comes from the service fee, which is normally a flat fee based on a percentage of each employee’s wages. Other additional fees may be available for extra services such as software, more advanced support, and more generous benefit packages.
Legal treatment of EORs
When working with a third party, you may need to be careful about how the relationship looks to the authorities. Concerns have been raised about how employment brokerage services are treated in tax terms. Problems arise when there is confusion about which entity is responsible for what part of the employment. This can be a problem for shared employment options in which the boundaries of responsibilities can become blurred.
When working with an EOR, the responsibilities should be clear, with the EOR managing all the legal compliance issues. This avoids any ambivalence about the relationship and keeps the tax authorities.
An EOR, therefore, represents a fast, affordable, and low-risk way to hire staff in South Africa. It provides full support to help you access people with the skills you need to build your team. To find out more about how EORs work, feel free to download our handy guide.
