If you’re using an EOR in South Africa, you’ll need to understand the implications surrounding local employment laws.
The rise of remote working has triggered a growing interest in Employer of Record Services (EOR) within South Africa and elsewhere. Businesses are looking to South Africa to access new talent, reduce employment costs and broaden their horizons. In an increasingly globalised world, it’s becoming much more common to be working with multi-national and multi-disciplinary teams. Having an EOR can be a great way to avoid the need to set up an entity and reduce your exposure to the inevitable regulatory risks that come from hiring foreign employees.
How EORs work
An employer of record services as the legal employer of all South African-based workers. It will be responsible for paying wages, employer-side taxes, filing reports with HMRC, and providing worker benefits and entitlements. As the legal employer, it also has full legal liability under South African law.
The key benefits of working with an EOR in South Africa are the fact that you are protected from any liability and that you don’t need to shoulder the costs and administrative work of setting up a legal entity in the country, such as a local branch. The EOR also reduces the costs and workload of managing your employees and provides full support in understanding local laws and expectations.
In general, the South African government has been welcoming of EORs and the BPO sector in general. By lowering the cost of employing South African workers, they reduce the barriers to entry and facilitate inward investment. They have helped to bring more jobs into the economy, giving South Africa’s rising generation of graduate professionals access to the high-paying jobs they need to satisfy their ambitions. This, in turn, keeps talent and their tax contributions within the South African economy rather than forcing them to look abroad.
Even so, there are significant legal and regulatory considerations to think about before embarking on any engagement.
Employment law in South Africa
The first consideration will be the differences in employment law between South Africa and the UK. In general, South Africa’s legal framework is relatively similar to the West. However, unions tend to be stronger, and there are slightly stronger protections for employee rights than in the UK. South Africa also has more robust provisions for equal opportunities and affirmative action.
The Employment Equity Act (EEA) OF 1998 means that any companies with more than 50 employees should take measures to ensure that individuals from designated groups, such as black people, women, or those with disabilities, have equal opportunities in the workplace. Businesses have to implement an employment equity plan and implement measures to identify any discrimination.
As per section 13 of the act, to achieve employment equity, a company might implement measures of affirmative action via consultation with its employees.
Hiring companies will also have to maintain close awareness of employee classification. The tax authorities in South Africa have begun to clamp down on instances of disguised employment, such as when a company attempts to present an employee as if they were freelance contractors. If you
regularly work with contractors, you will need to make sure that each of them is classified correctly and the relationship doesn’t stray into territory that the authorities might deem full-time employment.
When employing directly, foreign companies would have to be aware of these laws and make sure they updated their working practices to account for any changes in the law. However, when working through an EOR, this should be taken care of automatically. The EOR provides the benefit of its dedicated in-house expertise to help you find people with the skills you need. In the case of contractors and worker classification, the EOR can provide services covering both freelancers and full-time employees, including giving you advice on when a freelancer should be considered full-time.
Legal treatment of EORs
When signing an EOR contract, you will also need to make sure that the contract itself protects you from legal liability. If you, as the hiring company, are found to be either a sole or co-employer of the South African workers, you may have to register a legal entity to become a legal employer in South Africa.
The Companies Act 71 of 2008 states that any non-resident company may have to register with Companies House if it conducts business within South Africa. The act states that if you are involved in a ‘pattern of activities South Africa for six months or more, this would lead the authorities to conclude that you intended to continually engage in businesses inside South Africa and as such would be deemed to be party to an employment contract.
When choosing an EOR, therefore, you should make sure you both have clarity about the type of work being done, where the work is being done (namely within South Africa or in your home country) and how that might be treated by the South African tax authorities. Service level agreements should clearly state the obligations and employment status of each entity in all situations. In some instances, SLAs might indemnify the EOR against any liability for legal contraventions by the foreign company. This could leave you legally liable, which would undermine the key reason for engaging with an EOR in the first place.
Hiring an EOR, therefore, can be a great way to reduce the cost of hiring employees in South Africa. However, as with anything, you need to set your objectives carefully and fully scrutinise any legal paperwork. Make sure you fully understand the details of any contracts you sign, how the relationship will be treated under the law and how this treatment might vary over time. Think about how you will be engaging with the workers and where their work will be done. For example, will these be activities in South Africa, or will they be contributing to work in your home country?
At the same time, it’s important to consider both the short and long-term costs of working through an EOR. On a per-employee basis, the wages will be supplemented with a fee for the EOR for handling the working relationship. This will generally be between 10 and 15% of the overall salary of the EOR, depending on the arrangement you have with the EOR. On the flip side, the EOR will save you the cost and hassle of setting up a legal entity within South Africa with all the work and expense that come with it. Consider these costs and benchmark them against the EOR to determine the right option for you.
