When building a workforce in South Africa, you can handle them in three ways – an EOR, AOR or PEO, as well as employing them directly.
Since the birth of the Industrial Revolution, technology has been making the world smaller. International barriers have been broken down, and the world of business has become progressively globalised. Today, even the workforce has gone international, with companies routinely working with multinational and multidisciplinary teams working in many different countries. Digital transformation has opened the door for remote working and enabled businesses to source top talent from anywhere in the world.
Countries such as South Africa have attracted the attention of recruiters looking to capitalise on an attractive combination of low labour costs and a highly talented workforce, but as your international workforce grows, you’ll need a way to keep them all in check. In this article, we’ll look at some of the best options.
Direct employment
I you intend to hire a team of people full-time, the conventional approach would be to employ them directly. This gives you full control over the hiring and selection process and allows you to build a team with an in-depth understanding of your business, its objectives and your services.
To do this, you need to set up a legal entity in the country that can be registered as an employer. You’ll have to pay all relevant taxes, file reports on time and make sure you comply with all relevant employment laws.
The downside of this is the cost of setting up the subsidiary and the risk of non-compliance. Employment law in South Africa comes with its own nuances. Maintaining a full understanding of the law in a foreign country and keeping up with regulatory changes can be difficult, and foreign companies have often encountered unintentional non-compliance problems.
Overall, direct employment does give you full control over the employment relationship and helps you build a team to your own liking, but it does come with additional costs and complexities. You will also probably have to hire a full support team of administrators to provide HR, legal and financial support to manage all your employees.
Professional Employers Organisation (PEO)
To offset compliance risks, you may want to hire a Professional Employers Organisation. This is like effectively outsourcing the HR function to another company. It uses a shared employment model in which the PEO handles the administrative function, such as processing PAYE, making financial reports, drawing up contracts and making sure wages are paid on time, and you deal with the day-to-day working relationship, such as assigning tasks, managing workflows and providing feedback.
With this approach, you can offload the administrative burden and costs of dealing with HR admin onto a specialist third party. You will benefit from the PEO’s specialist expertise, as well as state of the art HR related technology, to ensure you understand the regulatory requirements of working in South Africa and to avoid any unintentional compliance problems.
The downside is that you still need a legal entity. The tax authorities will also want full clarity on which entity is the legal employer for tax purposes. Questions about employment brokerage may be raised, which means you’ll have to maintain complete clarity in the contracts about whether liability and responsibility lie.
Ultimately, it should be you, as the hiring company, who has full responsibility and legal liability. This should be explicitly laid out in the contract documentation.
Employer of Record
If you’d like to avoid setting up a legal entity, an employer of record (EOR) will be the way to go. This is similar to a PEO, and the two are often mixed up. However, full legal liability and responsibility for the employee lies with the EOR. It will be responsible for managing the employment, paying taxes, ensuring labour law compliance and filing all relevant reports.
For all tax and legal purposes, the EOR is the full-time employer of the worker, but from a practical standpoint, you handle the work relationship in much the same way as you would with any other employee.
This is a fast and flexible way to scale up your team. There’s no need to wait for a recruitment process; you can just sign the agreement with the EOR, and you’ll be ready to go. Likewise, if you want to scale back volume, you can do this whenever you like without going through a lengthy redundancy process.
It’s often seen as a great short-term option for companies that are just making their way into the South African labour market or those for whom the future remains highly uncertain. For example, if you’re planning a market expansion into South Africa, this can be a great way to test the waters to see if there is sufficient appetite for your business.
Any expansion comes with risks and expenses. You’ll need a locally based team on the ground, which generally means having a foreign subsidiary to handle your South African employees. With this approach, the costs are front-loaded, with any revenue only coming further down the line.
An EOR allows you to move quickly and only hire as many employees as you need to get things done. If you find fertile ground for your business, you can easily add more resources, but if things go wrong, you can scale back, save costs, and, if necessary, exit the market with minimal damage.
While some will see this as primarily a short-term approach, the market is evolving, and EORs are providing businesses with much more control over recruitment and the selection of workers. Tiered services also allow businesses to select how much support they want to receive. There is no reason that you can’t forge a successful and profitable long-term relationship with an EOR as your team grows.
Agent of Record
If you’re working with freelancers or contractors, an agent of record can provide administrative support with paying invoices and advice on worker classification. This is effective if you work with a substantial number of freelancers on an ad hoc basis.
An AOR helps with onboarding, background checks, drawing up contracts and making sure invoices are paid on time, leaving you free to focus on the work being done.
I you have a hybrid team, it can be a good idea to combine EOR and AOR services to make sure all workers are handled correctly and in compliance wth labour laws. Some companies offer both of these services, allowing you to handle hybrid and multidisciplinary teams within the same company.
Your choice of partner will depend on your own circumstances, your company structure and your strategic goals when hiring workers in South Africa. If you already have a legal presence in the country, then direct employment or using a PEO would be a straightforward way to build your team.
For those who are yet to set up an entity, then using an EOR is a fast, cost-effective and efficient way to get started.
