EORs provide a cost-effective way to hire workers in South Africa. Here’s how much it could cost?
With an increasingly uncertain economy and spiralling business costs, companies are looking for innovative ways to save money. Hiring employees in overseas countries such as South Africa is one way to build a multi-talented team while making the most of discounted labour costs. However, hiring employees in a separate country comes with its own set of costs and risks, which is why many businesses are turning to Employers of Record. These intermediaries give you a fast and effective way to hire talent overseas without setting up a legal entity, but in the long term, will the costs be worth it?
As so often, the answer is – it depends. When calculating the cost of using an EOR in South Africa, you’ll need to consider a host of factors, from the individual wages, EOR fees and other associated costs such as admin and compliance.
What an EOR does
An employer of record serves as an intermediary between you and your workers. It serves as the legal employer for those workers in South Africa for tax purposes, which means it will assume full legal responsibility and liability for your South African-based workforce. It handles all the admin of the employment relationship, including PAYE, onboarding, managing contracts, providing employee benefits and making sure all tax is paid.
Meanwhile, you handle the day-to-day working relationship, including the assignment of projects. In all practical respects, it’s a lot like having a regular employee with the added benefit that someone else is handling the paperwork and has legal responsibility if anything goes wrong.
EORs are commonly used by companies that want to be able to move quickly without significant overhead. Because your workers all have a registered legal employer in the country, there is no need to set up a legal entity to employ them, with all the time and expense that comes with it. It’s a perfect way to hire people quickly, enabling you to react in a fast and agile manner to the evolving business landscape as it happens.
How is an EOR paid?
EORs are generally paid in two ways: passed-on costs and fees. It will firstly pass on all the costs of the employment, including wages and employer-side taxes. On top of that, it will charge a set fee which varies depending on the type of work being outsourced. In most cases, this will be between 10 and 20% of the employee’s overall salary.
Other associated costs may also be incurred for additional extras such as additional support, specialist HR software or recruitment support. Many EORs will offer tiered services with varying levels of support depending on your chosen tier.
How EORs compare with other options
Aside from EORs, there are several other options you might choose from. The first is to employ people directly. This gives you full control over the working relationship, but it does involve the cost of setting up a legal entity in the country and puts full legal liability on you as the employer. This can be a better option for those companies looking for long-term stable workforces that are unlikely to change quickly. Compared to an EOR, this is slower and, in the early days at least, is more expensive.
Professional Employers Organisations (PEOs) are often conflated with EORs. However, they operate on a shared employment model, which means you retain legal liability and accountability for the
employment. In short, the PEO serves as an outsourced HR team taking care of all the legal and administrative duties of the employment. It reduces the admin cost and burden, but you will still have to set up a legal subsidiary.
A third option is to use an agent of record. They are generally used when working with teams of freelancers. They handle details such as background checks, onboarding and the payment of invoices. However, the tax and legal side is handled by the freelancers themselves.
Many EOR companies will also have an AOR function, enabling you to handle all freelancers through the AOR and full-time employees through the PEO.
The risks of non-compliance
On top of these considerations, you should also remember something else – the associated costs of all the risks EORs help you to mitigate. When you engage with an EOR, you get the full advantage of its expertise. EORs have dedicated HR professionals with in-depth legal knowledge of South African employment law. They help you with everything from filing all financial reports correctly and on time to worker classification and making sure you’ve complied with the latest employment regulations.
That can be more valuable than you initially imagine. Complying with regulations in a different country can be complicated with a high risk of error. Laws evolve, and reporting expectations change. It’s all too easy for a foreign company with limited experience of the market to inadvertently make an error.
South African labour laws can be complex, with important differences from the UK. Generally speaking, worker protections are stronger with specific measures for equal opportunities and affirmative action.
Equally, regulators have been clamping down on worker misclassification, especially those instances of disguised employment – namely when companies attempt to present defector employees as if they are freelancers for tax purposes. Companies deemed to have been in breach of these rules can face heavy fines, with criminal action being taken against the most serious offenders.
Having locally based specialists, therefore backed up by state-of-the-art technology, can help you avoid these pitfalls. Furthermore, having a separate company take care of all the admin with the associated costs that come with it brings further savings. You may be paying a slight premium for the employees you have on your books, but you won’t have to spend on hiring a separate HR or finance team to support your employees.
The overall cost calculation, therefore, is far from straightforward. You spend more per employee on the upfront fee, but you save money by avoiding the need to set up a foreign subsidiary and reducing potential compliance costs. For all these reasons, using an EOR can provide valuable cost savings right the way down the value chain.
