An employer of record provides a safe and affordable way to hire employees in South Africa, but you need to understand all the costs.
As employers seek to streamline hiring costs, UK businesses are looking to offshore increasingly skilled jobs to South Africa. According to a recent report in the Telegraph, businesses are making the move due to recent tax changes, along with other cost pressures, which are pushing them to cut costs. However, an increasingly competitive business climate means they need highly skilled individuals to help drive their business forward.
South Africa appears to present the perfect answer. The country is just a couple of hours ahead of UK time, which makes for a good match with the working day and offers a highly educated workforce with skilled professionals in all sorts of sectors. South Africa’s growing economy is developing a global reputation across all sectors, but particularly in technology, finance, and marketing. Most importantly of all, though, for UK businesses is the cost of hiring employees.
Average wages are about 50% lower than in the UK, while employer tax obligations are also much lower. Exact wage levels vary depending on the sector and the city, but whichever way you look at it, South African employees represent an attractive proposition to UK businesses. They are skilled, highly ambitious, and available to work. For small and medium-sized businesses managing tight budgets or struggling with talent acquisition, looking to South Africa makes perfect sense.
They are further encouraged by the rise of digital technology and remote working. Today, professionals routinely collaborate across video conferencing platforms in real time. Working with a professional in Cape Town is a little different from working with one of your existing employees from home.
Hiring staff in South Africa, therefore, appears to make sense in terms of talent sourcing and cost. However, before you start recruiting South African employees, you’ll want to know how much it’s all going to cost.
The answer to that question depends on how many people you intend to hire and whether you intend to employ them directly. The cheapest and simplest option is to start working with freelancers. They can be hired on an ad hoc basis from one project to another. Independent contractors are responsible for their own tax affairs, which means there are no employer-side taxes to worry about or any other employer obligations. However, for more regular working arrangements, you may run into worker classification issues. As with many other countries, the South African government is keen to clamp down on practices it sees as disguised employment – namely, seeking to present default employees as independent contractors. Any workers who are providing ongoing regular services could fall into this category, which is why it might make sense to move to full-time employment.
That in itself comes with a host of other expenses. To employ people directly, you’ll need to set up a legal entity with all the expenses and risks that come with it. You’ll also either have to employ support staff to manage the HR or find a specialist company to outsource HR operations. Either way, you’ll still be liable for employer-side taxes and providing entitlements such as annual leave.
It all adds up to quite a commitment, particularly if you’re unsure whether your commitment to South Africa is going to be long-term. A more affordable approach, however, can come by working with an Employer of Record (EOR).
What is an Employer of Record?
An EOR is a third-party entity within South Africa that serves as the legal employer for all your South African-based workers. The EOR handles the administrative duties such as onboarding, managing PAYE, providing employee benefits, drawing up contracts, managing disciplinary procedures, and, when the time comes, terminating contracts. Crucially, from your point of view, the EOR has full legal liability for the employees, which means they handle all reporting to the tax authorities and pay employer-side taxes.
It’s an efficient, convenient, and affordable way to hire staff in South Africa. It means you don’t need to set up a legal entity and can scale up your operations by hiring employees much more quickly than if you were managing the entire process yourself. It’s a particularly effective option for any company looking to dip its toes into the South African labour market.
How much does an EOR cost?
Of course, all those services do come with associated costs. The EOR will pass on the costs of the employment onto you as a business – in other words, the full salary and any employer taxes, as well as a service fee. This will vary depending on the individual company and the type of work being done, but will typically average out at between 10 and 20% of the employee’s salary.
On an individual basis, therefore, each employee comes with a small premium, which is why some will argue that over the long term, it might be cheaper to hire staff directly. However, for that 10% premium, you avoid the costs of setting up a subsidiary, hiring any support staff, and providing employee benefits. The EOR will also shield you from any legal liability, which eliminates the inevitable compliance risks that can come from working with foreign employees in an unfamiliar market. Employment law in South Africa has subtle but important differences from the UK, and with regulations constantly changing, it’s all too easy to make a mistake.
EORs can also help you find additional support opportunities that further improve the cost/benefit analysis of hiring South African employees. The South African government offers a range of support packages aimed at foreign companies that create jobs for South African workers. Separate cities may also have their own support programmes, which may offer further savings as well as other packages for businesses that have a particular commitment to equal opportunities.
The expertise and insights of an EOR, therefore, can help you unlock further savings and opportunities that might not have been immediately apparent. For those businesses looking to optimise their business costs, therefore, EORs can be the opportunity they need.
