Trying to choose between an Employer of Record company and going direct to contractors? We’ve broken down the key differences.
If you’re hiring workers in South Africa you will have to ensure the working relationship is managed according to all legal requirements. This can be expensive and time-consuming and, if you get things wrong, you could be liable to hefty penalties. There are many different ways to engage with workers. While many will start by hiring independent contractors, this can require substantial administration especially if you decide to continue the working relationship indefinitely. Hiring an Employer of Record company can be an easier and more convenient way to manage all your working requirements.
Contractor Vs EOR
Independent freelancers or contractors can be hired to do any task. The number of freelancers in South Africa is growing and they are being used in more and more sectors. As the world of business becomes more flexible having a pool of freelancers available can be a good way to access talented experts as and when you need them.
An employer of record (EOR), meanwhile is a legal entity set up within South Africa to serve as the worker’s employer. They are often used by foreign companies looking to outsource operations in South Africa and need support managing the working relationship. There is no need to have a legal entity in South Africa, which makes it a great option for new entrants into this sector.
Whether you choose a contractor or EOR, therefore, will depend on the needs of your business. However, it’s important to understand the key differences between the two.
1. Employment status
A contractor is self-employed which means they will have to handle all their tax liabilities and legal responsibilities themselves. As a client business, your only obligation is to pay their invoice each time.
You will not be responsible for PAYE and you will not have to pay any holiday or sick pay. It’s a simple business engagement between two working parties.
2. Legal and compliance responsibility
Whenever you’re engaging with workers in South Africa it’s important to familiarise yourself with all relevant regulations.
Any company hiring people in South Africa must take into account three main employment laws.
• The Basic Conditions of Employment Act 75 of 1997: This covers all key issues such as working time, the termination of employment and annual leave.
• The Labour Relations Act: The most important law to take into account is the Labour Relations Act which manages worker rights and covers issues such as disputes and strikes.
• Employment Equality Act: As the name implies this requires all companies to offer equal opportunities in the workplace.
An Employer of Record will handle all legal and compliance requirements for that worker. For all legal purposes, they will be the legal employer of that person and will ensure that employment is conducted with full regard to employment law in South Africa. However, you will continue to work and communicate directly with the employee.
You will pay the EOR a regular payment and they will handle the wages and taxes of their employee.
With a contractor, you have a full legal responsibility to ensure you handle that contract by South African law. Although they will handle all their taxes you should make sure they understand their obligations and that they comply with the law.
You may also need to take out professional indemnity insurance to cover any errors made by the contractor. Although they will be a separate worker, you could be liable for any errors they make in the course of their work.
Onboarding, payroll, and benefits
When dealing with employees you will have to undergo a full onboarding process and manage all payroll and employee benefits. An EOR will handle all this for you and ensure employees receive at least the minimum benefits they are entitled to. If you want to offer more, you will be able to arrange that with the EOR.
With a contractor, the onboarding process is much more straightforward. The working relationship will be much looser with the contractor being responsible for how they go about fulfilling their duties.
Risk of worker misclassification
Whatever way you choose to work with contractors, it’s important to make sure you a clear about the working relationship. Disguised employment is a very real issue in South Africa and the government is at pains to crack down on companies who bend or break the rules.
Using contractors over employees can seem to be a more cost-effective approach. It gives
the employee more freedom and means that you, as a company, will not have to manage payroll or offer benefits to the worker.
Some companies have been known to engage people in much the same way as they would as employees but label them as freelancers.
However, there are many ways in which the government might spot this. For example, a contractor who works every day for a company and has to attend the office would, to the regulators, look very much like a disguised employee.
Misclassification of workers can result in fines and companies being forced to pay back pay if a worker has lost out. In addition to that, the reputational damage associated with noncompliance can be significant.
Any worker who believes they have been misclassified could also seek legal redress against you.
Maintaining the correct worker classification can be difficult, especially as a relationship with a contractor evolves. What might start as ad-hoc work can grow into a day-to-day working relationship. As a company, you should regularly review all relationships with contractors to make sure you are still sticking to the rules.
An EOR, meanwhile, handles the classifications for you. They will ensure all payroll has been satisfied and that all employment laws have been followed. It shifts the burden for compliance from your shoulders and allows you to concentrate on business.
Tax withholding and filing
A contractor must handle all tax and filing duties themselves. As a freelancer, they should be made aware of their obligations to avoid any confusion about who owes what in terms of tax.
When you’re an employer, you will withhold all tax contributions through the pay packet and make sure you have made all statutory contributions. You will have to ensure you provide minimum benefits such as sick pay and annual leave.
An EOR will manage that for you, reducing the burden of administration and the risk of making a mistake.
Cost
Costs can vary depending on how you are working with the contractor and their payment rates. In general, you will work with them on an ad-hoc basis. You’ll agree on payment terms for each contract and will work either on an hourly rate or a quote for each task.
Whether or not this is more expensive than having an employee will vary from one case to
another. In many cases, there will be an assumption that the day-to-day costs of hiring a freelancer will be higher than an employee over the same period, but with freelancers, you only pay for what you use.
If you work regularly with a contractor, therefore, it can be worth bringing them on board as a full-time employee.
For that, you will have to pay their taxes and all statutory contributions. Additional costs can mount up in the admin work done to manage pay, benefit, and tax obligations.
An EOR will pay for all that. However, in return, you will pay for those services. It’s worth doing a little research to get a side-by-side comparison for each option.
Administrative burden
When hiring a contractor, they will be responsible for handling their admin, such as tax obligations but you will be responsible for reporting that relationship and making sure each worker is classified correctly.
An EOR shifts the administrative burden away from your shoulders. They handle everything from onboarding to managing benefits and filing taxes.
Employment stability
Full-time employment is generally more stable than freelancing. When engaging with a contractor you can terminate the working relationship at any time. With employees you have to ensure you’ve abided by all employment rights, allowing for adequate notice periods. In the event of redundancies, you will also have to shoulder any severance payments.
Ultimately, the choice between an EOR and a contractor will depend on your company’s situation and the type of work. In general the more regular the work, the more likely it is that you’ll want to go for full employment. When that happens, working with an EOR can be the easiest and most effective way you tick all compliance obligations and manage the working relationship going forward. It removes the burden of administration from your shoulders and reduces the ongoing risk of non-compliance.
To find out more about contractor vs EOR issues download our free guide.
