South Africa’s thriving economy and diverse talent pool are seeing companies from all over the world outsource a wider range of roles.
Companies in the West have long outsourced certain functions to other countries. However, while previously the main aim was to cut labor costs, the rise of digital technology and the growth of remote working has transformed outsourcing strategies. Today the focus is much more than just cost reduction. It’s about finding talented people from around the world who can collaborate with domestic teams across a range of professions. While companies might previously have outsourced basic functions such as customer service, today they are looking for all sorts of highly skilled professions with one of the most common being developers.
At the same time, the emphasis is shifting from low-cost countries such as India to more sophisticated economies such as South Africa. Here, a combination of a diverse, skilled and talented workforce can help companies broaden their talent pool while optimizing costs. So, If you want to outsource developers to South Africa, here are a few answers to commonly asked questions.
1. Why hire offshore developers in South Africa?
Outsourcing in South Africa has grown considerably in the last few years. The company has one of the fastest growing business process outsourcing markets in the world with companies of all sizes looking to outsource key operations. They are drawn by several factors including:
• Access to a bigger talent pool: Digital communications allow businesses to widen their talent pool. Today businesses routinely collaborate with multidisciplinary teams based in many different parts of the world. By doing so, even relatively small companies can work with professionals from anywhere in the world. No longer does a firm have to draw from its local area or even country. It can choose people with the skills they need regardless of where they live. For disciplines such as software development where skills can be in short supply, outsourcing can often unlock talent that was previously inaccessible.
• Cost-effective: Labor costs in South Africa may not be as low as some of the traditional low-cost outsourcing destinations, but they still represent a significant discount on the West. Companies can save between 45% and 60% on costs once labor costs, exchange rates and the cost of living are taken into account. Unlike other low-cost destinations, though, that doesn’t mean sacrificing quality. South Africa has a highly educated talent pool of professionals with a thriving class of expert software developers. They are footloose and keen to offer their skills internationally. International companies, therefore, benefit from a talented, highly qualified, and enthusiastic pool of potential developers.
• Limited language barrier: One of the most common complaints about outsourcing has traditionally been the language barrier. That does not exist in South Africa. English is widely spoken across the country, which makes communication no more
difficult than in domestic countries.
• No time zone differences: South Africa’s time zone matches up well with markets in Europe and the UK. A six-hour difference with Washington DC represents a slightly bigger hurdle but overlapping workdays mean there is still significant scope for regular communications.
2. Where to start when hiring offshore developers?
When hiring offshore developers, you need to ensure you have a clear idea of your needs and goals. Start by outlining your goals and objectives. Why are you looking for developers offshore and what are you looking for from these new developers?
Next, determine how you will communicate with them. Developers will normally be integral members of the team. A clear method for communication will need to be set up to ensure your team can communicate their needs clearly and concisely to the developers. Digital tools such as instant messaging and video conferencing offer a fast and cost-effective way to do that but there can still be friction when compared to domestic and onsite workers.
Finally, you need to shape the working relationship. Will you engage them on a full-time, part-time, or freelance basis? Each option will have its pros and cons and the best choice for you will depend on what you want from them.
3. Do I have to pay taxes for independent contractors?
The great benefit of independent contractors is that you do not have to withhold taxes from their paychecks. Freelancers are responsible for all their own taxes. However, when outsourcing developers in South Africa regularly it can be more efficient to employ them directly.
4. How do I stay legally compliant with hiring independent contractors?
One of the most important considerations will be financial and legal obligations. Each company has its own set of labor and tax regulations. To avoid falling afoul of any of these it’s worth familiarising yourself with the latest regulations. However, for foreign companies that can be challenging.
Regulations are changing all the time. Keeping up with them can be a full-time occupation. Without local experts in place, it can be all too easy to have compliance issues. Any company found to have failed to meet its obligations can be subject to hefty penalties.
To avoid compliance issues, it’s helpful to have dedicated local experts. One good way to do this is with a specialist intermediary to take on some or all of your local employment obligations.
Options include:
• Employer of Record: An EOR is a cost-effective way to manage South African employees. They will act as their legal employer which means they assume legal responsibility and will handle all legal and administrative duties for each employer. There is no need to establish a legal entity in the country which makes it an ideal option when making your first outsourcing moves.
• Agent of Record: An agent of record manages the relationship between you, as the hiring company, and your independent contractors. An AOR can assist with sourcing talented freelancers and will handle the day-to-day working relationship. They can help with issues such as invoicing, making sure people get paid on time, and handling expenses. They can also represent your company when negotiating with third parties.
• Professional Employer’s Organization: A PEO handles the administrative requirements of day-to-day employment obligations. It will process payroll, pay taxes, and ensure South African employees are all properly classified. Unlike an EOR, legal liabilities for the employees are shared between you and the PEO. You will also need to have an established legal entity in the country.
5. How to pay independent contractors?
When working with independent contractors, you have several options for payment. The first is to engage with them directly. They submit an invoice and you will pay it. The biggest complication comes when transferring money from one destination to another.
A standard approach would be to use bank transfers using SWIFT. This is faster and easier than ever and many South African banks offer online services. However, transfers from overseas may be subject to delay and transfer fees. Alternatively, you can set up a domestic bank in South Africa and use that to pay all locally-based contractors.
International money orders are similar to checks and involve sending money physically through services such as Western Union. This can be slow and expensive and may be subject to fees and unfavorable exchange rates. However, they are still a common option when the recipient doesn’t have a bank account of their own.
For faster and cheaper services online money transfer services such as Wise offer faster and cheaper ways to send money overseas. These online platforms were set up as
alternatives to traditional banks. However, not all of these services are available in South Africa so it pays to check availability.
To reduce the headache involved with contractor payments, a local organization such as an AOR can act as an intermediary ensuring all contractors are paid properly and invoices satisfied. Some companies offer the ability to pay independent contractors alongside full-time employees, greatly reducing the administrative burden of dealing with mixed workforces.
6. When should I hire employees vs contractors?
Last but not least, when outsourcing developers in South Africa, you should consider whether to hire employees or contractors. Each option has its costs and benefits. Employees will be full-time time which means you’ll be liable for processing their taxes, fulfilling all labor laws, and ensuring all employees receive their full entitlements.
Many developers work on a freelance basis and will be hired – initially at least – as independent contractors. This can be simpler and more flexible. You only pay for the services you use, and the contractor will be responsible for their taxation obligations.
However, on a job-by-job basis, contractors tend to be more expensive than employees. When working regularly with contractors, you may also run into classification issues. The South African government is keen to stop instances of disguised employment in which companies falsely classify employees as contractors to save on their legal obligations. If a contractor is working regularly and is required to attend an office, the authorities may determine that they have been misclassified which could put you in line for a substantial penalty.
When working with contractors regularly, therefore, it can be most cost-effective and less risky to engage them as employees. For that, you’ll either need to establish a legal entity in the country or work with an intermediary in the form of an employer of record.
Start hiring independent contractors in South Africa
If you’re looking to hire independent contractors in South Africa FutureTeams can provide all the support and assistance you need. We can cover all legal and administrative requirements and protect you from any unintentional compliance issues.
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