South Africa is fast establishing itself as a business process outsourcing hub but if you’re looking to hire people, you have to ensure they are paid correctly.
A diverse and highly qualified workforce, a welcoming business environment and a relatively low cost of doing business make South Africa one of the most attractive business process outsourcing locations in the world – one that is fast-challenging traditional powerhouses such as India or the Philippines. Businesses from across Europe, the US, Australia, and the Middle East are pumping millions into the country and creating thousands of jobs. If you’re one of them then you need to understand the best ways to make sure all employees are classified correctly.
The basics
First, let’s understand the basics:
• Payment timings: As an employer, you should make sure all employees are paid within seven days of the end of a payment period. In practical terms, you should have a set date every month or week and make sure all employees understand when their wages will be processed. Failure to adhere to a set date could cause compliance issues and will have your employees looking elsewhere. There is no set payroll cycle but this will normally be established in the employment contract and could be monthly, weekly, or even daily. In most cases, employees will expect to be paid monthly on the 25th day of each month.
• How to pay: Paying employees can be done in the same ways as in most other countries – namely cash, cheque, or bank transfer. However, South Africa has a relatively high number of so-called unbanked individuals. Almost a quarter of people are not in the system according to an analysis from Oxford Business Group which means it may be difficult to pay them with a conventional bank transfer. It will often be worth having various payment options so people can be paid in a way that works for them. If paying people in cash or cheque you should make payments in the workplace during working hours so you have a clear record of the payment taking place and confirmation of receipt. As with most other countries, employees will expect a payslip on each payday.
• Employer deductions: As an employer, you will be responsible for deducting money from each employee’s wage packet for things such as PAYE, UIF, or any pension fund contributions. You will not normally be able to make any other deductions without written consent.
• 13th-month salary: A 13th-month payment is a discretionary extra payment that comes in December. It is like a bonus. There is no statutory requirement to pay it, but it is traditional in South Africa and is often seen as an expected benefit. How much you pay is up to you, but it is often equivalent to a month’s salary.
• Working time: The standard working week is 45 hours. If an employee works longer, they should be entitled to overtime pay. This is limited to a maximum of ten hours per week.
• Minimum wage: South Africa has a minimum wage set at 27.48 ZAR per hour, which will normally add up to around 4,397 ZAR per month for a typical 40-hour work week. Any overtime beyond contracted hours will have to be paid at the same time as the regular wage.
Working with contractors
Rapidly improving global IT infrastructure means it’s much easier to work with freelancers and contractors. The working relationship tends to be much looser without the obligations to manage PAYE or other deductions or provide employee benefits.
The working arrangement will be on a contract-by-contract basis and payment will be by arrangement. Contractors will normally submit an invoice once the work has been done which you can pay in several ways including:
• International bank transfer: A standard way is to arrange a wire transfer from your bank. This might be subject to delays or additional fees depending on the policy of your bank. You could try to set up a local bank to manage all payments and make payments from your main account to a South African account and then onward to the contractor.
• International payment platforms: Digital technology has facilitated the growth of international payment platforms. These small and innovative fintech startups represent an agile alternative to the traditional banking model. They offer a fast and affordable way to quickly send money overseas. Services such as Wise will enable users to benefit from low fees and the bank-to-bank exchange rate which can result in significant savings over time.
• Mobile transactions: With many contractors in South Africa not having a regular bank account, mobile banking apps offer a way to send money directly via a mobile phone. It is an increasingly popular option across Africa.
• Money orders: International money orders represent a traditional and old-school approach of sending money directly through a service such as Western Union to be picked up physically. Money orders are slow and involve wire fees and unfavorable exchange rates, but they may be appropriate for anyone who does not have a bank account.
Whether you choose to hire full-time employees or stick with contractors will depend on your particular strategy and the type of work you’re outsourcing. For example, a growing number of businesses are casting their net wider to search for freelance staff. Video conferencing solutions such as Zoom and instant messaging services mean location is not as important as once it was.
Other companies may initially begin with ad-hoc contracts with freelancers before progressing toward a full-time model.
Whatever option you take you need to stay compliant with all relevant employment regulations particularly how employees are categorized. The government is keen to crack down on practices it sees as disguised employment in which firms try to avoid statutory obligations by classifying defector employees as freelancers.
The ire of the authorities may be drawn if they see workers who are regularly working at an office or appear to be working exclusively with a certain company. High fines can be imposed for noncompliance so companies need to make sure they get all the details right.
Doing so for a foreign company can be difficult which is why many companies outsourcing clients may choose to work through an employment intermediary such as an Employer or Record or a Professional Employer’s Association.
An employer of record will serve as the legal employer of your South African-based staff and will handle all the legal and administrative requirements of the employment. Because they are the employer, they will handle deductions such as PAYE, and manage holiday pay, benefits, and any disciplinary processes. As the legal employer, they will also assume all liability for employees so any compliance issues will be down to them.
A PEO, on the other hand, does much the same role as an EOR, but employment is split between you as the hiring company and the PEO. They will manage the legal and administrative side while you handle the day-to-day management of the employees.
The advantage of these is that they avoid the need for a local entity such as a subsidiary and will handle all the work involved with handling employment. They will take on the work of the HR department, to free you up to focus on driving your business operations forward.
For a more long-term arrangement, though, you may want to take on the additional expense of setting up a South African branch or a local subsidiary. Setting up legal entities will be expensive and involve the hiring of local staff but it will give you more control.
If you’re only using freelance staff, agents of record can help take on the onboarding classification and day-to-day management of staff. Their local knowledge can help manage regulatory compliance and ensure the correct classification of all contractors.
Cost of labor
Wages in South Africa will tend to be much lower than in Europe, the US, Australia, or the Middle East and while they might be higher than in traditional powerhouses such as India, they still represent a considerable discount compared to domestically based workforce.
The cost of living is low with Cape Town Durban and Johannesburg being among the cheapest cities to live in the world. All that means that while a growing economy and rising living costs are driving up wages, South African workers can still afford relatively lower wages compared to other countries and this is likely to continue.
Within that, though, there is some regional variation. Durban and Cape Town in particular are known for being low-cost and with a vibrant highly educated workforce making them ideal outsourcing destinations.
In addition to local pay rates, it can be worthwhile looking at all available government support. In 2023 the BPO industry was credited for creating almost 20,000 jobs and the authorities are keen to encourage further investment with a range of tax breaks, incentives, and grants to companies looking to employ South Africans. These incentives have been credited for bringing overall outsourcing costs in South Africa down to a level comparable with some of the lowest-cost options.
When looking to pay employees in South Africa, therefore, there is a range of factors that might influence your decision. As a business, it pays to do your homework, understand the rules, and make sure you have all the support in place to classify and pay your employees correctly.
