The modern workplace is going global. Employer of record services are crucial to making that happen.
Such has been the pace of change over the past few years that it can be easy to forget how much the workplace has been transformed. Digital technology has globalised the modern workforce. Today, any business can pick from a pool of talent that stretches far beyond its local environment. Remote working has become the norm. Location no longer matters. With instant messaging and video conferencing allowing real-time collaboration with teams in multiple locations, your next hire could literally come from anywhere.
The economic implications of this new world are immense. If you’re a UK business struggling to find a software developer at a price you can afford, you can now tap labour markets in other countries. If you’re a worker in one of those countries, struggling to find opportunities in your home market, all you need is a computer and an internet connection, and you could be working with that company tomorrow. It’s a fast-paced and agile world in which technology is bringing together businesses and top talent to the benefit of all.
One of the most popular destinations for Western businesses is South Africa. With only a couple of hours difference in time, a low cost of labour and a highly educated workforce, it’s the perfect option. Digital infrastructure has come on in leaps and bounds, and the government has proactively set out to encourage foreign companies to hire talent within South Africa.
With unemployment still in double digits, this inward investment is critical in attracting the high-paying jobs South Africa needs to grow. The government is therefore keen to make the environment as appealing as possible, with the introduction of various incentive schemes that reward foreign companies based on the number of jobs they create in the country.
For this strategy to work, though, all parties involved, from workers to the South African government and the hiring companies themselves, need the process to be as smooth as possible. Intermediary companies such as Employers of Record (EOR) play a crucial role in facilitating that investment.
How EORs work
An Employer of Record sits between the worker and the overseas hiring company. It serves as the official employer of the worker, but makes that worker available to the hiring company. As the employer, the EOR is responsible for paying salaries, PAYE, providing employee benefits and making sure all paperwork is filed with the relevant authorities on time and in the expected format.
The EOR then passes on those costs to the hiring company with the addition of a fee. This might be anything between 10 and 20% of the salary, depending on the type of work being outsourced. Some EORs may charge additional fees for extra services, such as help with recruitment or access to specialist recruitment software.
The hiring company benefits from access to highly talented professionals, legal protection, and the specialist HR expertise of the EOR. From the tax authorities’ perspective, the EOR is the full legal employer of that worker, which gives them full legal liability for the employment. For the hiring company, this protects them from any legal risk and avoids the need to set up a legal entity within the country with all the costs and administrative work that can bring. The EOR manages all the HR related duties, freeing the hiring company to concentrate on the work at hand.
In a practical sense, the working relationship may be like any other employee. As the hiring company, you could assign work, provide feedback and monitor progress. You may choose to operate your outsourced employees either in isolation or as a supplement to your internal team, with meetings being conducted over video.
When to use an EOR in South Africa
Using an EOR is therefore simpler, safer and easier than hiring full-time employees in South Africa. It allows you to hire people with a minimal upfront investment, which reduces your capital risk exposure.
For example, if expanding into South Africa, an EOR helps you recruit a team on the ground to help get you established. This will be a chance to determine if there is a market for your product or service without going all in on setting up a foreign subsidiary. If your business goes well, you can scale up quickly. If not, you can scale back to rethink your strategy.
Put simply. It reduces the costs of expansion and, as such, the risks. It allows you to respond quickly to changing market conditions, which helps you capitalise on any opportunities and minimize your exposure to threats.
Costs and regulations
For all the benefits of EORs, you should consider the costs and regulatory treatment. With an EOR, you’ll be paying a premium on each employee for as long as the engagement lasts. Hiring directly means you’re only paying the salary, although you may also have to factor in the cost of employee side taxes, employee benefits, hiring administrative staff and renting out premises.
You’ll also need to be wholly clear about the working relationship you have with the EOR. The authorities like to see clear specifications about which entity is legally responsible for the employment. When signing the agreement, you’ll need to make sure this is set out explicitly to avoid any chance of being held liable for taxes.
So, should you use an EOR in South Africa?
EORs certainly offer value for money in many situations. Whether it’s right to use one or not will often depend on your specific circumstances. If you already have a legal entity set up in South Africa with sufficient infrastructure to support recruitment, then it might be cheaper to employ people directly. However, for foreign companies without a legal presence, an EOR can
be a gateway into the rich and growing talent pool of South Africa.
Whether planning an expansion or looking to outsource key business functions, EORs can enable your business to move more quickly, while reducing up-front costs and legal risks. They play an important role in opening up the South African economy to inward investment and facilitating growth for all.