EORs can offer a low-cost, fast and convenient way to build overseas teams. Here’s all you know about the rules governing EORs
The rise of remote working and the increasingly globalised nature of the modern workforce mean the use of employers of record is growing. This is an increasingly common way to hire professionals in foreign countries such as South Africa, without the need to create a full legal entity. To some, it’s been billed as a low-risk risk quick pass to overseas recruitment, giving you access to South Africa’s labour force without having to worry about the regulatory implications. Even so, this should not be regarded as a free pass. EORs are governed by strict rules and procedures. You’ll need full transparency around the working relationship to show that you have met all your legal obligations in full. Here’s a full explanation of the regulatory requirements when you engage with EORs and the questions you need to answer.
Employer status
The first question regards the legal employer of the workers. South Africa’s regulators will scrutinise arrangements deemed to be brokered employment. In general, they want clear legal clarification of which entity should be regarded as the legal employer and which one should be paying all the taxes.
With an EOR, the responsibilities should be clear. The worker will provide services to you as the hiring company, but his or her employer will be the EOR. It will therefore assume all duties such as withholding tax, paying PAYE, making contributions for the Skills Development Levy and UIF and complying fully with labour relations rules. Any contract should clearly state where those obligations lie to avoid any unnecessary confusion. Unless explicitly stated in the contract, you, the hiring company, could become regarded as the rightful employer with all the responsibilities that come with it. If you view the EOR’s role as simply being to handle the admin, you could be setting yourself up for a fall.
As an employer, therefore, the EOR will have the following responsibilities.
To register for PAYE and VAT. The EOR will have to withhold tax from wage packets and make all statutory contribution payments by monthly deadlines.
Pay social levies, including contributions to the unemployment insurance fund and the skills development levies.
Register for compensation insurance and report any workplace injuries that occur.
Comply with labour laws, including minimum standards for hours of work, annual leave, notice, and severance. It will have to comply with all equality laws and provide protection against unfair dismissal.
Ensure work permits are in place for any employees who are foreign nationals.
As the legal employer, the EOR will have responsibility and liability for all these tasks. Failure to meet deadlines or meet the expectations of regulators will result in the levy of fines and other compliance action.
The key benefit of using an EOR is that your company is fully protected from any legal liability if something does go wrong.
Company status
When setting out the relationship between the EOR and your company, clarity is a must. If you’re not careful, EORs could potentially come under provisions for temporary employment services (TES). Also known as employment brokerages, these are subject to strict legislation under the Labour Relations Act (LRA).
A temporary employment service company is defined under South African law as a company that:
Provides persons to a client for employment.
Provides services or work for the client
In simple terms, a TES is an employment agent that places workers with client companies. The agency workers provide work for the client, but the TES is responsible for paying them.
The government has ramped up scrutiny of TES companies in recent times and will closely monitor contractual agreements between EORs and client companies. If the authorities feel the relationship meets the definition of a TES, the EOR will have to comply with all registration and reporting requirements that are intended for labour brokers.
When drawing up the contract, you should ensure that the model defining which entity controls the workflow and the nature and duration of the working relationship meet local rules and avoid any TES classification problems.
In theory, using an EOR should shield you from any tax liabilities, but this might not always be the case. If you don’t clarify the relationship, you may be liable for some corporation tax. This question hinges on where decisions are made and on physical premises. It’s always worth making sure all these provisions have been accounted for in any EOR contract.
A client company may also encounter issues if the contract is deemed by the authorities to conceal the true employment status. In this case, it could be possible for both and EOR and the hiring company to be held liable for unpaid wages, benefits or statutory contributions. It’s worth running due diligence on the EOR’s history of compliance and security, insurance and registration measures.
In summary, EORs are extremely useful and can help you control costs and reduce the barriers to working with overseas workers. However, before signing on the dotted line, it’s worth checking the following things
Confirm the registration status of the EOR and that it has all the required unemployment cover
Have a look at a sample contract of engagement.
Check the filing history of the EOR and look for any compliance problems.
Ensure all liabilities and responsibilities are clearly defined in the contract.
As long as you have complete clarity over the working relationship, you should be set for a profitable and successful relationship. Working with an EOR does not eliminate employer responsibilities; it simply shifts them onto the shoulders of the EOR. Problems may still arise for hiring companies through their links to the EOR.
Throughout everything, the crucial thing to remember is clarity and transparency. The tax authorities need to be completely confident that the relationship is clear and above board and that all required filings are being made on time and by the correct entity. All this should be clearly established as early as possible when signing an agreement.
