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Why EOR Providers Need to be more Active

Updated: Sep 27, 2022

International companies looking to employ South Africans for their operations often turn to suppliers of Employment-of-Record services to legitimately employ people locally. These contracts take on a variety of forms, but typically they reside either under the mantle of “employee” or that of “independent contractor”. When entering such agreements, it is vitally important that the correct contract is entered into as these have far-reaching consequences for the correct treatment of workers and for the withholding of taxes. The penalties for not complying fully to local regulations are significant and may even result in incarceration of the guilty parties.

Three main tests have been applied by the courts to identify a contract of employment, namely the control test, the organisation test and the dominant impression test. These tests distinguish between an employee and an independent contractor. Typically, the courts will look at the following factors, namely:

1. The degree of control that the putative employer has over the manner in which the work is performed;

2. the worker's opportunities for profit or loss dependent on his managerial skill;

3. the worker's investment in equipment or material, or his employment of other workers; and

4. the degree of skill required to complete the work.

This means that an independent contract that is concluded with someone who operates under the control of the ultimate employer and is typically paid a fixed amount and needs to use the equipment of the ‘employer’, irrespective of the amount of skill utlised, would be considered incorrectly classified and regarded by the South African Revenue Services and the Labour Regulators as an “employee”. The former would expect that the correct employee taxes are withheld, and the latter that the necessary protection is afforded the employee and that the required reporting is done. Failure to comply would result in major penalties and even incarceration.

Furthermore, South African legislation offers further protection to people employed by South African companies in that it regards people earning below a certain amount, automatically as employees making it nigh impossible to classify such persons as independent contractors. To make matters even more complicated, the laws contain so-called “deeming provisions” that allow authorities to allocate employment status, if in their consideration, the facts of the matter point to an employer-employee relationship, which in some instances, have led both the professional employment organisation and its client to be considered jointly liable for any breaches of legislation.

Getting the classification correct at the onset will not only ensure that the correct taxes are withheld, but that the appropriate protection is offered to the employee and the employer under the various labour laws. These laws extend beyond the treatment of workers to include regulations that stipulate employment equity considerations and how many foreign workers may be employed by any one legal entity. However, the EOR needs to ensure that an ongoing basis, this classification, and conformance to labour laws is upheld.

Organisations are by nature dynamic, and things change daily, affecting the correctness of the classification and adherence to regulations. For instance, the independent contractors may start out by using their own equipment to complete the work but may have to resort alter to using the company’s equipment, for a plethora of reasons. Or the company may decide to renew fixed-term contracts for reasons other than a delay in the completion of the original assignment, something that could mean that the relationship starts to take on a more permanent arrangement and therefore, that the contractor now becomes wholly dependent on the client for his/her income. This means that the independent contractor classification is no longer valid and would need to be substituted with an employment agreement.

Recent developments in the EOR industry have seen the spawning of a myriad of technology companies who have successfully codified the onboarding requirements that rely largely on the interpretation of the laws at the time of creation of their applications. The upshot of this is that they can offer EOR services at an industrial scale across multiple geographies. The question that remains, however, is whether they can ensure that evolving laws and precedents across these vary varied in-country regulations are constantly updated and whether each contract is closely monitored over time to ensure that the relationship has not changed to warrant reclassification?

In the final analysis, being an employer of record is a mammoth responsibility that requires ongoing and active participation of the service provider in very close collaboration with their clients. To do so, it needs to remain well-versed in the application legislation in each of the countries in which it offers such services, as well as active account management. These are all things that mitigate against multi-country involvement, and which inevitably push up both the costs and risks associated with the provision of these services. In South Africa, it is most unlikely that this risk will not pass onto the end-client.

Offshore companies looking to employ people in South Africa would be well-advised to choose their EOR supplier carefully to ensure that the necessary attention if given to the unique in-country regulations and their enforcement if they are to avoid nasty surprises and huge penalties.

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