An employer of record reduces the administrative burden and costs of hiring professionals in South Africa. Here’s when to use one.
Expanding your recruitment scope to South Africa can benefit your business in a myriad of ways. Whether you’re looking to launch a service in a new country, find new talent, or take advantage of lower labour costs, South Africa’s labour market is a valuable way to help you meet your key business goals. Once you’ve hired your team, though, you need a way to manage it, which is where an Employer of Record comes in.
An EOR is a legal entity that helps you hire workers in foreign countries without having to set up a legal entity. It’s a way to hire more quickly and cheaply and avoid the regulatory burden and risks that come with registering as a legal employer. For tax purposes, the EOR will be the registered employer, which means it will handle details such as paying employee taxes, filing accounts, complying with labour regulations and providing employee entitlements. It’s a safe, fast and convenient way to build your team. Here are some of the situations in which an EOR will be most valuable.
You want to reduce labour costs.
The first and most obvious will be if you want to reduce labour costs. South Africa’s cost of living is significantly lower than in the UK, and that translates into wages. The extent of the discount depends on the type of work being sourced. Generally speaking low low-skilled jobs tend to be much cheaper, with the gap narrowing the higher up the skills tree you go. Even so, salaries at that end tend to be between 50% and 70% of levels in the UK, which makes this a good way to save money.
As a part of that calculation, you’ll also have to consider the EOR fee. This will normally be around 10 to 20% on top of the employment costs of the worker. This will add a premium to the cost of each employer.
Against that, though, you should also consider savings from not having to manage the admin or employ HR professionals.
You want legal protection.
A key benefit of an EOR is that it protects you from legal liability. Employers have to register with the authorities, pay monthly contributions, comply with labour laws and file accounts on time. Failure to do any of that on time or correctly can lead to a fine.
Companies that fail to manage the classification of workers correctly or breach worker rights can also face severe penalties, including criminal action in some extreme cases.
EORs firstly reduce the chances of that happening thanks to their specialist HR expertise and shield you from responsibility if it does. However, care needs to be taken when setting up the contracts to make sure the working relationship is clearly stated and responsibilities are aligned. Any vagaries in the contract could leave you exposed to joint liability or some corporate taxes.
You want to access new talent.
EORs are a cheap and quick way to widen your talent search beyond your local area. Your business will live and die on the strength of the talent in your team, but finding people with the skills you need can be tough. An EOR can open up a completely new labour market, giving you a wider selection of people to choose from.
South Africa’s workforce has a reputation for its diversity, high levels of skills and qualifications.
With wages being lower in South Africa, it’s also a chance to access top talent at a more affordable price. An EOR avoids supplementary costs such as setting up a legal entity within South Africa and gives you all the tools you need to manage the workflow effectively without exposure to legal liability.
You need to move quickly.
Hiring employees directly can be a long and cumbersome process. You have to find the right people, complete background checks, run several rounds of interviews and then go through an onboarding process.
With an EOR, you can start building your team right away. It’s perfect if you want to react to a market opportunity.
Likewise, if your future staffing needs are uncertain, an EOR provides the flexibility to react to changing needs and adjust the number of workers accordingly. For example, if you have fluctuating seasonal needs, you can bring on more people to cope with spikes and scale back in quieter times. It allows you to be agile and reactive and ensures you only pay for as much as you need.
You’re planning a market expansion.
South Africa is an extremely appealing proposition for a market expansion. It’s known as the gateway to Africa and is a thriving market in its own right. Its culture is a heady mix of European and African, which means there will be enough similarities to ensure your product has a fighting chance, but enough differences to help you adapt your service offering to the African market. Making it in South Africa and even more lucrative markets across the entire continent may open up.
However, expansion comes with a host of risks. Even the biggest companies in the world have fallen flat with ill-conceived expansion plans. South Africa may be similar in many ways to Europe, but it contains critical differences. Labour laws are stronger with better protections for workers. Attitudes are slightly different. As with any new market, it has its own established companies that occupy their own places in the market.
Any expansion comes with a high risk of failure. If you decide to employ people directly, you have to make a sizeable upfront investment by establishing a company, hiring people, and setting up a physical premises. Costs will all be front-loaded with no certainty of any return. It can be a costly gamble if things go wrong.
Using an EOR is a cheaper and safer way to work. It gives you space to test the market to see if there is an appetite for your business. If things go better than expected, then you can scale operations back. If not, then you’ll have limited your exposure to downside risk.
Choosing your EOR partner
These are just some of the use cases in which an EOR can be a benefit. The market is evolving, and EORs are upgrading their offerings to keep pace. They now offer more flexibility in pricing and service offerings with options such as tiered support packages. This enables them to offer more personalised services that tailor the service offering to the company in question.
With that, though, it pays to be clear about the working relationship with an EOR. The authorities are scrutinising relationships between foreign hiring companies and domestic third parties. Any inconsistencies or ambiguities in the contract about the working relationship or the allocation of responsibility could change the way your company is treated and leave you exposed to tax contributions.
