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South Africa: Engaging workers via ’employers of record’ has both advantages and risks

11 October 2023
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Overview

  • This is the first article in a series on employee mobility.
  • Foreign companies without a permanent establishment in South Africa have been showing growing interest in using ‘Employer of Record’(EoR) service providers to engage workers in this country.
  • This trend, where the EoR provider employs the individual in South Africa directly and then assigns the person’s services to the foreign company for a fee, is a natural outcome of the increase in remote working arrangements globally.
  • Yet while EoR arrangements have definite advantages for international organisations looking to attract and retain top talent in South Africa, there is another side to them too: employment law risks in South Africa.

Foreign companies without a permanent establishment in South Africa have been showing growing interest in using ‘Employer of Record’ (EoR) service providers to engage workers in this country. This trend, where the EoR provider employs the individual in South Africa directly and then assigns the person’s services to the foreign company for a fee, is a natural outcome of the increase in remote working arrangements globally. Yet while EoR arrangements have definite advantages for international organisations looking to attract and retain top talent in South Africa, there is another side to them too: employment law risks in South Africa.

Reduced costs and less administration

The most prominent advantage of using an EoR is that it minimises the costs and administrative burdens associated with direct employment in South Africa, especially around tax and compliance management.

Another important advantage is that foreign companies can hire and onboard workers in South Africa on an expedited basis.

A third advantage is that an EoR structure may reduce the risk of employment claims by employees, who may be inclined to sue the EoR and not the client directly.

However, this will depend on the terms and conditions of the agreement between the EoR and the client/foreign company, such as whether there are relevant indemnities that protect the EoR from liability. Further, the client could still be exposed to risk in this regard as it may be considered a co-employer under South African law.

Both the EoR and the client/foreign company may be found to be employers of the worker in South Africa regardless of any service level agreement in place between them. This is because our Courts generally adopt a substance over form approach, which means they will look beyond the terms of an agreement to determine who the true employer of the worker is.

As such, the foreign company would not be without risk of employment claims in South Africa.

Obligation to register as a company could be triggered

If the foreign company is found to be the sole or co-employer of the worker in South Africa, it will be deemed to be a party to an employment contract in South Africa. This would then trigger its obligation to register an external company (sometimes known as a branch) with the Companies and Intellectual Property Commission (CIPC).

In terms of the Companies Act 71 of 2008, a non-resident company has to register as an external company in South Africa with the CIPC if it conducts business within South Africa (i.e. ‘it is party to one or more employment contracts within South Africa’ or ’if the foreign company is engaging or has engaged in a course or pattern of activities within South Africa over a period of six months, such as would lead a person to reasonably conclude that the company intended to continually engage in business within South Africa’).

Other employment law risks to consider

Service level agreements between the client and the EoR may include clauses indemnifying the EoR against all employment-related claims and liability (including any order of compensation for unfair dismissals), thereby placing all the employment-related risk on the client. This can very well undermine the intention of the client to enter into such an arrangement in the first place. As such, service level agreements in this regard should be carefully considered.

In addition, despite the EoR arrangement, the worker may be deemed to be an employee if the deeming provisions that apply to temporary employment services, as set out in our Labour Relations Act 1995 (LRA), are triggered. This would be the case where the worker earns below the earnings threshold prescribed by the Minister of Labour, currently ZAR 241 110.59 per annum.

If the deeming provisions are triggered, the worker will for all intents and purposes be treated as an employee of the foreign company. The employee will thus be entitled to no less favourable terms and conditions of employment than the other employees of the foreign company.

This also means that the worker can institute claims against the foreign company directly in the event of any unfair dismissal or unfair labour practice dispute as contemplated in terms of the LRA. Whether the deeming provisions would apply would need to be determined in light of all of the relevant facts and circumstances.

EoR implications for South African companies looking abroad

From another angle, South African companies looking to engage employers of record overseas should be aware of the laws applicable in the relevant jurisdiction. In certain jurisdictions, the use of employers of record is highly regulated. Specialist legal advice on intellectual property, tax and employment law should therefore be sought in those foreign jurisdictions, including a careful consideration as to the possibility of creating a permanent establishment.

In the circumstances, while an EoR arrangement may seem an attractive way to engage workers in South Africa, or for a South African employer to engage employees overseas, such arrangements may have significant employment law consequences if implemented without seeking legal advice.