If you are evaluating whether an EOR is the right long-term structure for your business, there are a few areas that deserve scrutiny.
What Does an EOR Do?
Before examining the potential downsides, it is worth being precise about the model itself.
When you use an Employer of Record, the EOR becomes the legal employer on paper. It signs the employment contracts, runs payroll, handles statutory contributions, and carries the compliance obligations under local employment laws. You retain full operational control: you direct the employee’s work, manage their performance, and decide what they do each day.
The EOR is the employer on paper; you are the employer in practice.
Downside 1: The cost stops making sense as headcount grows
EOR pricing is typically structured as a fixed monthly fee per employee, or a percentage of the employee’s total cost to company (CTC). Either model works efficiently when headcount is small. The problem is that the fee typically does not reduce as the arrangement matures.
For a single hire or a small distributed team, the EOR cost is easy to justify. You are paying for speed, compliance infrastructure, and the avoidance of entity setup costs. The trade-off is clear and favourable.
The calculation changes once you have a stable team in a single jurisdiction. At that point, you are paying a recurring per-head premium for a compliance infrastructure that a registered entity would provide at a lower ongoing cost.
The crossover point varies by country and provider, but a commonly cited threshold is 15 to 20 employees in a single jurisdiction. Beyond that, the monthly EOR fees typically exceed the annualised cost of running a local entity directly.
Downside 2: You give up meaningful control over contracts, culture and HR policy
An EOR operates within its own employment framework. The contracts it issues, the benefits it administers and the processes it follows are largely standardised. That standardisation is part of what makes the model efficient, but it can also be a genuine constraint.
Where the loss of control shows up most
- Employment contracts: the EOR issues contracts compliant with local law, but within its own template. Custom IP and confidentiality clauses may be difficult or impossible to include.
- Benefits and incentives: bespoke benefits and incentive structures, like medical aid scheme contributions, can be hard to implement through a third-party employer. The EOR administers what it can manage at scale.
- Onboarding and offboarding: these processes belong to the EOR, not to you. The employee’s first formal interaction is with a third party, which can undermine the experience you are trying to create.
This matters most for roles that are senior or where the employment terms are genuinely unique. For a market-entry hire, the limitation is manageable. For a country head or a revenue-generating executive, it is a more significant constraint.
Downside 3: Legal risk does not disappear because another company is the employer
South Africa’s Labour Relations Act (LRA) contains specific provisions for temporary employment services (TES), which is how EOR arrangements are often classified under local law. Section 198A introduced the concept of “deemed employment,” and its application depends on the employee’s earnings and the nature of the work.
The Cliffe Dekker Hofmeyr Temporary Employment Services Guideline sets out the position clearly:
“In instances where TES employees earn below the threshold; do not perform temporary services as defined in the LRA and where the TES employee is assigned to the client for longer than three-months; not as a substitute for a temporarily absent employee of the client; nor assigned to a particular work category designated by a collective agreement or sectoral determination as a temporary service; then the TES employee is deemed to be the employee of the client and the client is deemed to be the employer of the TES employee.”
As of 1 May 2026, the annual earnings threshold sits at R269,600.90. Employees earning below that figure who are placed with a client for more than three months in a non-temporary capacity may be deemed employees of the client, not the EOR, regardless of what the contract says.
What this means in practice
Imagine you hire a junior operations coordinator through an EOR at a salary of R200,000 per year. That figure sits below the R269,600.90 earnings threshold. The EOR issues the contract and runs payroll. Three months pass, then six, then twelve. The role is permanent in everything but name – the employee works full-time, follows your internal processes, and reports to your management team.
Under section 198A, that employee may now be deemed yours, and not the EOR’s. The fact that a third-party company issued the contract does not override the legal reality of how the arrangement actually operates. If that employee were to bring an unfair dismissal claim, or if a CCMA dispute arose, the client company could find itself treated as the employer regardless of what the paperwork says.
Contrast that with an employee earning R350,000 per year. They sit above the threshold, so the deeming provision does not apply in the same way. The EOR retains the legal employer status, and the client company’s exposure is more limited.
The way to reduce deeming risk is to ensure the work is genuinely project-based or time-limited. Avoid embedding the person in your day-to-day management structure, and document the nature of the placement from the outset.
Downside 4: Exiting the model is harder than entering it
One of the EOR model’s selling points is speed of entry. What is less often discussed is the friction of exit.
If your business grows in a country and you decide to move employees onto a direct entity, the transition involves more than a change of payroll provider. Employment contracts need to be reissued, tax registrations need to be transferred, and the employee’s statutory entitlements need to be preserved correctly under local law. Done poorly, this creates disruption for employees and compliance exposure for the business.
The risk is not that the transition is impossible. It is that businesses enter EOR arrangements without a clear view of when and how they would exit, and then find themselves locked into a cost structure they have outgrown.
The Bottom Line
Beyond the financial exposure, payroll compliance failures damage trust with employees. IRP5 errors mean staff cannot file their personal tax returns accurately, which can trigger SARS queries on their side through no fault of their own.
Late or incorrect payslips leave employees unable to verify what they have been paid or apply for credit. UIF registration gaps mean that if someone is retrenched or takes maternity leave, they may find they cannot claim the benefits they believed they were entitled to. These are not abstract compliance issues; they are real consequences for real people, and they affect morale, retention, and your reputation as an employer.