Employer of Record or Setting Up an Entity: Comparing Costs

Expanding into Africa can be a challenging undertaking for any business. From navigating the complex legal landscape to understanding local cultural norms, there are a lot of factors to consider. One of the most important considerations is how to handle employment and remuneration in a compliant manner. Many companies are faced with the choice of partnering with an Employer of Record (EOR) or setting up an entity in Africa. In this article, we'll explore the difference in cost between these two options and why it's critical to have a partner with a proper grasp of the law when expanding into Africa.

Employer of Record vs. Setting Up an Entity

Before we dive into the costs associated with each option, let's first define what an Employer of Record (EOR) is. An EOR is a third-party company that acts as the official employer of a business's staff in a given country. This means that the EOR is responsible for all employment-related matters, including payroll, benefits, and compliance with local labour laws. Essentially, an EOR takes care of all the administrative tasks associated with hiring and managing staff in a foreign country.

On the other hand, setting up an entity in Africa involves establishing a legal presence in the country. This could mean opening a branch office, a subsidiary, or a joint venture. Once the entity is established, the business would be responsible for all employment-related matters, including payroll, benefits, and compliance with local labour laws. While this option offers more control over the hiring process, it also comes with greater legal and financial obligations.

Costs Associated with Each Option

Now that we understand the difference between partnering with an EOR and setting up an entity, let's explore the costs associated with each option. According to a study by PwC, setting up an entity in Africa can cost anywhere from $50,000 to $250,000, depending on the country and the type of entity. This includes costs such as legal fees, registration fees, and ongoing compliance costs.

On the other hand, partnering with an EOR typically involves a one-time setup fee and ongoing service fees. The setup fee can vary depending on the country and the EOR. Ongoing service fees are typically based on the number of employees.

Reputational Costs of Non-Compliance

While the financial costs of setting up an entity in Africa are significant, the reputational costs of non-compliance can be even more damaging. Companies that fail to comply with local labour laws can face fines, legal action, and damage to their brand reputation. For example, in South Africa, failure to comply with the Protection of Personal Information Act (POPIA) can result in fines of up to R10 million or 10 years in prison.

Companies need a reliable partner in Africa who can navigate the complex and ever-evolving compliance landscape on their behalf. Working with an Employer of Record is critical to ensure that businesses remain fully compliant and avoid any legal, financial or reputational issues that may arise due to non-compliance.

Mark Du Preez, Head of Legal and Compliance at Africa HR Solutions

The Benefits of an EOR outweigh the cost

Expanding into Africa is a significant undertaking that requires careful consideration of all the options available. While setting up an entity in Africa offers more control over the hiring process, it also comes with greater legal and financial obligations. Partnering with an EOR, on the other hand, offers a cost-effective and efficient way to expand into Africa while ensuring compliance with local labour laws. Ultimately, companies must weigh the costs and benefits of each option to determine the best approach for their specific needs. However, one thing is clear: having a proper grasp of the law when expanding into Africa is critical to avoid legal, financial, and reputational issues.