The global shift towards remote work has made the Employer of Record (EOR) model an attractive solution for international companies looking to hire South African talent. It allows businesses to onboard staff quickly without establishing a local entity.
However, many international companies and local providers make a critical error: they use the EOR structure to engage workers as “independent contractors” rather than permanent employees. This practice exposes both the foreign client and the EOR provider to significant legal and tax liabilities under South African law.
At Welman Attorneys Inc., we regularly advise businesses on the complexities of cross-border employment. If you are using an EOR to manage independent contractors in South Africa, you need to understand the risks of deemed employment.
The Substance Over Form Approach
South African labour law is highly protective of workers. When determining whether a person is an employee or an independent contractor, our courts and the Commission for Conciliation, Mediation and Arbitration (CCMA) do not simply look at the title of the contract.
They apply a “substance over form” approach. This means that even if a worker signs a service level agreement stating they are an independent contractor, the law may still classify them as an employee if the reality of the working relationship suggests otherwise.
Section 200A of the Labour Relations Act (LRA) outlines the presumption of employment. A worker is presumed to be an employee if any one of the following factors is present:
- The manner in which they work is subject to the control or direction of another person.
- Their hours of work are subject to the control or direction of another person.
- They form part of the organisation's standard operations.
- They have worked for the other person for an average of at least 40 hours per month over the last three months.
- They are economically dependent on the person for whom they work.
- They are provided with tools of trade or work equipment.
- They only work for one person.
When an international company uses an EOR to hire a “contractor” but dictates their daily tasks, requires them to use company software, and expects them to work standard office hours, that worker is almost certainly a deemed employee.
The Risks for the Foreign Company
Many international businesses assume that by using an EOR, they have completely outsourced their legal liability. This is a dangerous misconception.
1. Co-Employment Liability
If the CCMA determines that the worker is a deemed employee, the foreign company may be found to be a co-employer alongside the EOR. This means the international business can be held directly liable for unfair dismissal claims, severance pay, and statutory benefits.
2. Triggering Permanent Establishment
Perhaps the most severe risk for a foreign company is the tax implication. If the South African Revenue Service (SARS) determines that the foreign company is a co-employer of workers in South Africa, it may trigger a “permanent establishment.”
This would require the foreign company to register an external company (a branch) with the Companies and Intellectual Property Commission (CIPC) and potentially expose their global revenue to South African corporate tax.
The Risks for the EOR Provider
EOR providers who facilitate these misclassified contractor arrangements are also in the firing line.
1. Statutory Deductions and Penalties
As the entity paying the worker, the EOR is responsible for statutory deductions. If SARS reclassifies the independent contractor as an employee, the EOR will be liable for unpaid PAYE (Pay As You Earn), Unemployment Insurance Fund (UIF) contributions, and Skills Development Levies (SDL), along with severe penalties and interest.
2. Employment Disputes
Because the EOR is the local contracting party, disgruntled workers will inevitably direct their CCMA disputes against the EOR provider. Defending these claims is costly, time-consuming, and damages the provider’s reputation.
Structuring the Relationship Correctly
The EOR model is a powerful tool for global expansion, but it must be executed with strict adherence to South African labour and tax laws. Attempting to bypass these laws by misclassifying workers as independent contractors is a short-term strategy that almost always results in long-term financial pain.
If you need to engage freelancers or independent contractors, you require a specialised payroll and compliance structure that mitigates these specific risks under the Fourth Schedule to the Income Tax Act.
Whether you are an international company expanding into South Africa, an EOR provider looking to secure your operations, or a business engaging independent contractors, expert legal guidance is essential.
Contact Welman Attorneys Inc. today to ensure your employment structures are compliant, secure, and legally sound.
Welman Attorneys Inc. is a boutique labour law firm based in Pretoria. For enquiries about cross-border employment and EOR structuring, contact james@welman.co.za or call 012 881 0072.