Handling payments can be a challenge in any setting. It involves knowing and complying with local laws and regulations, ensuring that deadlines are met and taxes are paid. It is such a crucial task that often, companies have entire departments dedicated to managing payroll or, sometimes, even hire specialised companies to ensure everything runs smoothly.
After all, salary payments are essential, and the ramification of your key asset: your employees either not being paid on time or not at all, is something that no business ever wants to face!
The challenge is even more significant when managing a global workforce.
With remote working becoming increasingly more common, your current workforce may well include some who have emigrated to other climes, or you are hiring people abroad. Both routes provide excellent opportunities to retain key personnel, find new talent, cut costs, and diversify your business. However, companies looking to engage people in different countries must take into account local country labor laws, local taxes, and diverse payment concerns, including currency fluctuations and banking systems.
Handling payroll effectively and efficiently is crucial to running a successful business. It requires a combination of accurate record-keeping, attention to detail, and compliance with ever-increasing complex laws and regulations.
This article will cover some of the essential aspects of managing international payroll and explain just a few of the key traps that companies should avoid through careful management when hiring abroad.
What is an international global payroll?
Payroll is simple, yes?
No. If only it were….
Country-dependent payroll is a regulatory requirement for companies seeking to engage with key individuals in return for financial recompense.
In short, the employer must ensure that they operate a recognised country-specific procedure to record, calculate, report, and collect from each employee live details of each person’s wages, bonuses, benefits, stock awards, deductions, social security, and taxes.
For the employee, if this is done correctly, then they go home at the end of each pay period with money credited to their bank account, which has already been subject to taxes and social security. Effectively, what hits the account belongs to the employee.
The actual payroll preparation process may involve calculating the amount of pay each employee is due based on the number of hours or days they worked, the hourly or daily pay rate, and any overtime or bonus pay. Payroll also involves calculating benefits, salary discounts, premiums, pension contributions, and legally-enforced deductions. The employer acts as an agent for the various authorities and then remits the deductions to each relevant source on behalf of the employee.
In addition, in many countries, there is a legal requirement to provide the employee with a formal payslip setting out the gross pay, all detailed deductions, and the net sum. Today it is commonplace for such payslips to be in electronic format. At the end of each local country tax year, the employer may also issue an annual payslip to each employee showing the effect of all activities throughout that period. This data is also submitted to the authorities.
The ultimate goal of payroll is to ensure that employees are paid accurately and on time while also complying with all applicable laws and regulations.
International payroll is the same process but adjusted on a country-by-country basis to fit the local laws. The most challenging part of managing an international payroll is understanding and complying with the local legislation, ensuring that employees receive what they are due and that benefits are adequately reported, maintained, and remitted.
How to set up an international payroll process?
Setting up an international payroll process can be complex and time-consuming, but it is essential for companies that have employees working in multiple countries.
Here are the steps your company is likely to follow when hiring people abroad:
1. Research laws and regulations
Before hiring people abroad, it is vital that you are fully aware of the laws and regulations of each country where you plan to operate. This includes understanding local tax laws, payroll regulations, and labour laws, including statutory, legal and customary contractual requirements, right-to-work rules, work permit registrations, working time directives, and collective bargaining agreements, to name a few.
2. Choose a payroll provider
The easiest way to avoid problems and ensure compliance with laws and regulations should be by working with a payroll provider that has expertise in global payroll administration and can help you navigate the complexities of international payroll.
However, choose wisely! The appointment of a professional third party to manage your local country compliance does not remove liability from your company or your officers, despite the fact that you may not always know the right questions to ask. Unfair as it may seem, you should aim to control your risk by seeking references and questioning technical knowledge.
3. Establish a payroll process for each country
Each country will have its own set of requirements for payroll, so you will need to develop a procedure that complies with local regulations. Simple process? In theory, yes, you should be able to adopt an online software solution. However, remember the old adage about “rubbish in = rubbish out!” The software package only goes so far. Pay attention to the other contributing factors to a successful international payroll operation. Consider, amongst others, country-specific banking services, tax registrations and filings, statutory and legal licenses, and so forth.
This approach can be made more accessible by working with an international payroll provider or an Employer of Record. Just don’t forget that these are your people, and you want to retain them while at the same time keeping your risks low. As discussed before, certain options will fall foul of the Permanent Establishment regulations, leaving your Parent Company with significant financial penalties and your officers with potential criminal charges.
4. Calculate pay and benefits
When calculating the remuneration package, your international HR team will add value when considering aspects such as benchmarking. In addition to this input, you should consider the local country pay requirements impacting both the package and the social security liabilities. Added complications will arise when handling expats, particularly those operating under various expat tax treatments and those to which a certificate of coverage applies.
Having established the full package per employee, the payroll calculations can then begin. Determine the pay and benefits employees are entitled to receive based on each country’s local laws and regulations. This may include calculating variable elements such as overtime pay, bonuses, and employee benefits.
Since each country has its rules regarding mandatory benefits and contributions, it is important to pay attention to what the requirements are and what authorities should pay when it comes to employment benefits.
5. Deduct taxes
Tax regulations can vary depending on the country or territory. Don’t assume the same rules of your main region can be applied to different locations. Calculate and withhold the appropriate taxes and deductions for each employee.
Take a similar approach to social security. In effect, this is another form of tax, and your payroll operations must comply with the prevailing laws.
6. Deduct other charges
Depending upon the employee, you may be required to make deductions for superannuation or other forms of pension contributions. In some countries, the employer must also contribute to the employee’s scheme. This is a cost often forgotten when budgeting for overseas employees.
Where you recruit postgraduates, you may also be required to make deductions from payroll to repay country-specific student loans. Indeed, this can go further for all employees where a legal order is passed to enable an element of an employee’s salary to be deducted for some other purpose (such as child maintenance, debt repayments, and so forth).
7. Remit funds to the appropriate authorities
As discussed above, each country requires the payment of contributions to local authorities according to labour and tax regulations. You will need to make timely payments of taxes and other deductions to the appropriate agencies and tax authorities in each country in which you operate or have employees.
This will apply across all aspects, from taxes and social security to legal orders, benefits, and pensions, to name a few. Failure to pay on time will, in some cases, lead to financial penalties on you, the Company.
8. Keep accurate records
A crucial part of managing payroll, whether local or international, is keeping compliant records of all payroll transactions.
For tax and social security purposes, you should store information reflecting the full audit trail of your payroll process. That cuts across permanent data (static information about the employee) through to procedural data (authorisations, cut-off dates, source of information, source of funding, calculations, statutory reports, and all relevant filings).
It is not unusual for a local territory authority to inspect and audit your records. Failure to properly maintain will, in all likelihood, lead to financial penalties.
By following these steps, you are on your way to establishing an international payroll operation that complies with each country’s laws and regulations, ensuring that your employees are informed, paid accurately, and, most importantly, on time.
What to consider when hiring abroad and managing international payroll
Managing payroll can be difficult, irrespective of the number of employees you have. When taking into account that these employees might be distributed across the world, the challenge becomes even more of a headache.
Alongside local laws and regulations, there are some issues you should keep in mind when hiring and paying employees abroad.
Minimum wage and benefits
Every country maintains its own rules when it comes to an agreed minimum wage and hourly pay rates. In some countries, the minimum wage can also vary by state. For example, there is no federal minimum wage in the United States, meaning it is up to individual states to determine the amount employees must be paid by the hour. Whereas, when we look across the European Union, despite the commonality of laws, the pay scales vary considerably. In January 2023, the rates across the EU ranged from 399 Euros per month in Bulgaria to 2,387 Euros per month in Luxembourg.
As we discussed, benefits will also vary according to country or state. Some countries will require a business to cover health insurance costs, clothing, transportation, and even food costs for employees on working days. Companies looking to hire people abroad must be fully aware of these specific rules or hire a global payroll provider that will be able to manage these issues for your business.
Maximum working hours
Another aspect that local laws and regulations will cover is the maximum number of hours an employee can work every week. A common approach states that people can work a maximum of 40 hours a week. Some countries permit 48 or even 52 hours of work per week. In others, the employees are able to sign a waiver removing them from the restrictions.
Work hours might also be limited depending on visa situation, age, seniority, discipline, industry or level of education.
Some countries have discussed lowering the maximum working hours allowed weekly, testing a 4-day working week, or a move to agile working. For a business to stay at the forefront in both onboarding and retaining the right people, they need to stay up to date with the changing global employment climate.
Length of contract term
The variance in onboarding, offboarding, and retention terms for employees is significant across different jurisdictions. Don’t forget that although your employee joined you on your home turf, they later moved to another country. As a result, their contractual rights will, in most cases, fall under the laws of that new jurisdiction.
That means considering carefully the three key stages of an employee lifecycle: onboarding, nurturing, and offboarding. If you get this wrong, the costs can be substantial, both financially and in brand damage. Here’s an example to help paint a clearer picture:
A senior North American executive [A] was employed by a US corporation.
During A’s career, they were sent to London, UK.
In year four of that period of employment in the UK, the employer chose to offboard A.
They did so in a manner compliant with US employment laws pertinent to the US corporation’s location.
They did not do so in line with UK employment law.
Result: Employment tribunal case leading to one full year’s salary to A plus both parties’ legal fees all paid by the US corporation. Had A been transferred back to the US and then the actions carried out after an appropriate period, the costs would have been but a fraction.
Also, consider the varying forms of contract terms, differentiating between permanent and temporary employees. Amongst the temporary employees, then consider fractional, project-led, ad hoc, and long-term. Each brings with it a range of concerns and risks.
We’ve mentioned earlier how important it is to keep up with tax laws and regulations. When working with employees in different countries, you will, in all likelihood, be dealing with different tax laws, rates, reporting, and deadlines.
Some countries will require that employers calculate, collect and pay over taxes, social security, and other related deductions. Others place the onus on the employees.
Almost all, however, require you to have carried out a level of diligence on your employee to ensure that they have a right to be in the territory and work there and also are registered with the appropriate bodies for filings.
Bank fees, risks, and exchange rates
An essential part of hiring abroad is being able to pay employees. To pay your people in other countries, you may need to remit money in different currencies, often dealing with local banks, fees, delayed payments, excessive deductions, and exchange rates. Indeed, in some countries, without a local country bank account, you are unable to comply with the regulations.
You will typically have little to no control over the banks’ international payment transfer fees or the exchange rate charges that they apply to your funds. Few businesses (outside of the multinationals) operate a treasury management service in-house.
But it is essential to be on the ball when it comes to handling your finances. As a growing organisation, you want to ensure that your funds last as long as possible. Your funds are to expand your business: not to pay the banks.
Before hiring people in different countries, consider what currency you will adopt to pay the employee; who will carry the currency exchange risk; how do you mitigate your charges, and what is the optimum way to maintain control over your finances.
There will also be complications if you attempt to make payments in currencies that are on the published prohibited lists or make payments to individuals resident in prohibited locations. Do your homework first before you onboard the employee!
All of these hurdles can be eased by working with an Employer of Record or international payroll provider, which will be aware of limitations, rates, and fees in the countries you want to operate in. You are also looking for a provider that can remove much of the uncertainty and leave the control in your hands. Done properly, international payroll payments are not as painful as they may appear!
Communication with employees
Your employees are your key asset.
Clear communication is key. However, be sure of your facts and local key information before you begin that dialogue. It is possible to innocently commit yourself to contract terms in some locations when you think you were having an open discussion prior to reaching an agreement!
Here’s another example situation:
A friendly initial discussion with potential new employee B in Belgium led to the American employer unintentionally setting up an enforceable contractual agreement to pay B at XXXX Euros per year. Due to the spread of payments in Belgian payrolls (divided by 13.92 for local contracts), this led to B receiving more than the employer had ever intended or budgeted to pay.
When you know you are on solid ground, ongoing communication is key to your long-distance operations. Your international payroll team will work with you to be ahead of the game with any changes that you need to consider, whether those are compulsory or culturally significant. Especially helpful when you need language skills added into the mix!
Data storage and privacy are significant areas of risk all over the world. Most countries are currently operating under some form of data protection law. In Europe: GDPR; in the US: CCPA and in Japan: APPI. These laws are constantly developing, and for a number of countries, there is a move to seek synergy. It is an area requiring constant monitoring across your locations.
As the underlying essence is the protection of personal data then, it is clear that payroll information falls firmly into the mix. We will return to this in detail in a separate article. However, at this stage, when considering payroll operations, remember that your company must comply with the given legislation per territory.
In practice, this relates not just to the management of the payroll records but the whole lifecycle.
Main areas to consider would include: source of data; only for the eyes of those who have a genuine and provable need to access it; always encrypted; maintenance of records in secure storage again with necessary-only access; ability to respond to subject access requests from employees; knowledge of how to act when instructed on removal of data; reporting of breaches, and more.
A risk register would be operated as best practice as part of your international expansion plans. Data Protection would fall within this section, and your appointed representation (in some countries referred to as a Data Protection Officer) would be the final point within your organization. Remember, outsourcing payroll to a third party does not remove your company’s ultimate liabilities.
Just like with labour and tax laws, you must be fully aware of what these rules require and protect your employees’ data – at home and abroad. Keeping communication about payroll encrypted is always a good idea, storing only that required by law.
Why work with an international payroll provider?
We have touched upon the key points you need to know and consider when working with employees in different countries.
Done properly, working with an international payroll provider can help your business with these challenges and keep your risks to a minimum. You effectively need a trained, professional scout ahead of you as you forge your expansion plans.
Your chosen international payroll provider should be a professional team that specialises in all aspects of global people management, from onboarding through to offboarding, from direct hires to global PEO to corporate acquisitions.
With the right provider, companies can be assured they are complying with legal requirements in different countries, operating in a proactive manner, and managing risk.
The services offered by an international payroll provider typically include:
Onboarding – local employment contracts; right-to-work checks; work permits; relocation; expat tax treatments; reference checks; consultations on acquisitions, etc.
Nurturing – all aspects of monthly payroll services; regular human resources services including benefits management; support for employees; communications; appraisals; absences; agile working; benchmarking; consultations; disciplinary and so forth
Offboarding – consultations; contracts; communications; payment calculations.
Benefits of working with an international payroll provider
Working with an international payroll provider can offer several benefits. Including:
International payroll providers have the expertise and resources to ensure your company will comply with different labour laws, payroll and tax laws, regulatory requirements, and data protection in each country where your business employs or plans to hire people. This helps companies avoid penalties and fines and reduce risk.
2. Time and Cost Savings
If you are unsure what to ask in a given jurisdiction, it becomes impossible to manage cost or risk.
Your international payroll provider will be skilled in handling payroll for employees in multiple countries, thereby freeing up your time and resources to focus on your core business.
3. Improved Data Management
International payroll providers maintain compliant systems for the management of personal data in accordance with each country or jurisdiction’s laws. As they work across multiple clients, they bring to the table additional “on the ground” expertise.
Under strict and comprehensive data protection laws, working with an international payroll provider can also reduce your risk of being in breach of local regulations.
International payroll providers can, country dependent, tailor their services to meet a company’s specific needs, including integrating payroll data with existing systems and processes.
5. Access to expertise
Companies that deal with international payroll or are experts in managing people abroad should have a deep understanding of local labour laws, payroll and tax laws, regulations, and practices.
By working with such a company, you can consult with them and ensure your employees’ effective management across the three lifecycle stages of Onboarding, Nurturing, and Offboarding.
They should also be one of your early points of contact as a sounding board when you think of a new location for expansion!
Companies can ensure a consistent and standardised approach to payroll and benefits across countries with an international payroll and HR provider. This helps to promote fairness and equity for all employees, including when there is the need to move people around through the creation and implementation of a global mobility program.
Handling and managing international payrolls can appear daunting. It is particularly more complicated when a company has a number of employees covered by different laws, regulations, and tax requirements.
If learning about (and staying up to date with) every law and local demand seems impossible, international payroll providers can help your business move forward with your focus remaining on your growth plans and the provider’s focus on your compliance.
Hiring a professional payroll provider to handle these aspects of your legal obligations can ensure that you will be informed, in control of your own business, comply with local laws, limit your risk to fines and penalties, and can focus on the growth and success of your core business. Interested in finding out more? Then contact us today to see how we can help you manage your international payroll.