Rising operating costs and economic uncertainty are pushing SMEs to reconsider whether permanent staff or contractors offer the smarter path to growth.
Image: Supplied
South African SMEs are increasingly reassessing how they grow their teams as rising operating costs, economic uncertainty and stubbornly high unemployment force businesses to become more cautious with hiring decisions.
According to the latest Quarterly Labour Force Survey from Statistics South Africa, the country’s official unemployment rate climbed to 32.9% in the first quarter of 2025, while formal sector employment declined by 245 000 jobs during the same period.
At the same time, SMEs continue to play a vital role in the economy, contributing an estimated 60% of employment and accounting for the majority of formal businesses in South Africa.
Against this backdrop, many business owners are weighing whether to hire permanent employees or rely more heavily on contractors to maintain flexibility while managing costs.
Lula Chief Credit and Capital Officer Garth Rossiter said the decision goes far beyond comparing salaries.
“Payroll is often the single biggest cost line item for SMEs, particularly in uncertain economic conditions,” said Rossiter.
Lula Chief Credit and Capital Officer Garth Rossiter
Image: Supplied.
“Business owners are balancing the need to grow with the need to remain financially resilient. That’s why the hiring versus contracting decision has become such an important strategic conversation.”
Rossiter explained that many SMEs underestimate the full financial burden associated with permanent employment.
“Hiring a permanent employee comes with a range of additional costs: statutory contributions, onboarding, equipment, software licences, management time and cultural integration,” he said.
“There’s also the risk associated with hiring the wrong person, which can be incredibly costly in terms of time, productivity and operational disruption.”
Recent findings from the South African Chamber of Commerce and Industry and Absa Small Business Growth Index showed that many SMEs remain focused on survival rather than aggressive expansion as transport, utility and input costs continue to rise.
Rossiter said these pressures are contributing to growing interest in flexible workforce models.
“Contractors can make a lot of sense for SMEs entering new markets, launching new products or taking on specialised short term projects,” he said.
“It allows businesses to test opportunities and access critical skills without immediately committing to long term fixed costs.”
However, Rossiter warned that businesses should avoid becoming overly dependent on contractors at the expense of long term stability.
“Businesses still need institutional knowledge, culture and continuity,” he said.
“Core functions that drive long term value should ultimately sit with people who are invested in the business over the long term.”
Despite the caution surrounding recruitment, Rossiter noted that hiring activity still remains one of the clearest indicators of SME confidence and growth ambition.
“We’re seeing more SMEs looking for growth funding to support expansion plans and build teams,” he said.
“That’s generally a positive sign because recruitment usually reflects optimism about future demand and market opportunity.”
For SME owners considering their next hire, Rossiter advised against making rushed or reactive staffing decisions.
“Don’t hire simply for the sake of hiring,” he said.
“The real question is whether the role is core to the future of the business and whether the timing is right. It’s far better to spend time finding the right person than rushing into the wrong hire.”
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