A Guide to International Global Payroll for Companies
Whether we like it or not, remote working is here to stay. More companies are embracing the opportunities a global workforce gives them, making the necessities of the pandemic a new reality. But with that new reality come a few challenges.
Managing a global workforce tends to be the most spoken about issue faced by companies, but an often overlooked aspect of that is payment and compensation. Especially for companies hiring an international team for the first time, global payroll can be quite the challenge. Companies will have to take into account numerous labour laws attached to the staff they hire, alongside taxes and payment methods. Keeping that in mind, having to manage global payroll processes all while maintaining compliancy is even tougher.
This is our thorough guide to international global payroll for companies looking to expand their workforce across borders. We'll be covering everything you'll need to know about international payroll- from what it means to the challenges you'll face, and the best ways to overcome those challenges of managing a global payroll.
What Is an International Payroll
As business people, we should all be familiar with what a payroll is. It’s the process where the business (usually through HR) has to calculate the earnings of each of their employees, including withholding the right amount for income and other taxes (like National Insurance in the UK). Payroll also involves managing benefits, bonuses, commission and expenses. Payroll processes also involve record management such as keeping employee records, keeping track of hours worked and the amount of leave taken.
International payroll, on the other hand, is the same thing but on a global scale. It’s the process of regular payroll but repeated for each foreign employee or independent contractor that you hire. The most complicated aspect of managing a global payroll is ensuring that it remains compliant throughout all the countries that you have hired from – keeping well within the bounds of local labour laws. This, of course, all while keeping on top of payroll management itself.
How to Set Up International Payroll
If your company is planning to handle everything relating to your international global payroll in-house, then you should be aware of the most important steps to take regarding how to set it up. Being able to manage international payroll in-house efficiently is absolutely possible when you put your mind to it. Although the steps themselves are relatively straightforward, it does become increasingly complicated the more staff you’re planning to employ globally, especially when they are based in different countries.
Keep in mind that all these steps are as important as the other, and skipping any of them puts your company at risk of serious legal implications. Here’s a quick overview of the nine steps you need to take if you want to set up an international payroll:
1. Learn local laws
The primary and most important step of this process is to thoroughly learn and understand the local labour laws of the country you wish to hire from. Getting up to speed with the labour laws early allows you to see the steps you need to take to hire and maintain staff in specific countries before you spend a penny. This step also requires you to keep informed with any tax laws that may apply to your company and the employees that you want to hire. The team in-charge of managing international payroll in your company should learn these laws deeply enough to be able to smoothly integrate them into your global payroll processes.
2. Create a local entity
When employing people from countries outside your base of operations, you need to establish a local entity in order to be legally viewed as their employer. Pay attention to where you would like to hire, because certain regions like the EU only require you to establish an entity in one of their member states rather than each that you’re planning to hire from. Even if you’re only hiring a single person from a foreign country, you’ll still need to go through the process of establishing an entity.
3. Gather and manage data
Once you’ve established your entity and started hiring, you need to gather all the appropriate data for each member of your international team in order to process payroll. This normally includes full names, addresses, payment information, tax details, among other things. What details you’ll need highly depend on your country of operation, so, once again, make sure that you are deeply familiar with the local labour laws.
4. Ensure employment eligibility
Different countries have different terms for whether a person is eligible to work. Things can start to get a little tricky when you’re hiring people who are not from the country that they are based in. Therefore, hiring those people may serve legal implications not just for your staff but the company itself. In the world of “digital nomads”, this is a very real possibility as certain countries do not allow any business to be conducted while a person is on a tourist or visitor visa. So make sure that the person you’re planning to hire is definitely allowed to work where they are based, to avoid some hefty fines.
5. Set up payment periods
When you’ve sorted out the previous four steps and your employees are settled within your company’s systems, it’s time to set up the process needed to pay them. Paying independent contractors is a lot more straightforward compared to having to pay individual employees based across the globe since payment periods tend to be confirmed upfront. However, certain countries have different timelines of processing payroll – we’ll discuss some of these cases in a future section. So, be sure to pay attention to this when you’ve hired your global workforce.
6. Ensure payments have been processed and received correctly
While this step isn’t related to keeping within local laws, it’s important for overall employee trust. Whenever you’ve made a payment to your international workforce, you should be proactive in ensuring that the money has been received on their end. Any issues in payment should be addressed as soon as they’re found and a smooth-sailing payment process is a must. Hiccups in the process that lead to your employees getting paid, such as delayed payments or paying them the incorrect amount, can cause a massive strain on the employer-employee relationship.
7. Inform local tax authorities
As an established local entity, your company has the duty to inform the local tax authorities on every payment that has been made within their jurisdiction. This includes deductions for income tax or other relevant taxes. Keeping the authorities up-to-date on your employees allows them to do their job with keeping track of their residents and ensuring that the right amount has been deducted from any payments made.
8. Stay up-to-date with local laws and regulations
Possibly the most complicated step of this process is to ensure that your in-house payroll team stays up-to-date with the ever-changing landscape that is labour law. It’s absolutely crucial to keep track of any changes that are made to the laws of the countries you’re operating in to ensure that your payroll remains compliant. You must stay informed of the ever-changing landscape of employment law, tax law, and the relationships between different jurisdictions in order to make the appropriate adjustments to your payroll procedures whenever necessary.
9. Repeat the process
Once you’ve completed the steps necessary to set up international global payroll in one country, you need to repeat the process for each country that you are planning to hire from. Remember: The more employees that you hire from different countries, the tougher it will be for you to manage your company’s international payroll. Be sure that you’re hiring the right people to manage your global payroll to ensure that you don’t face any legal issues as you continue to operate your business abroad.
What to Consider When Managing International Payroll
Now that we’ve taken you through the relevant steps needed to set up international payroll, let’s discuss the issues that are unique to global payroll. If you’re seriously considering hiring on a global scale to enjoy the many benefits of globalisation, there are a number of things that you need to keep in mind to ensure that you don’t face any legal issues along the way. Here are the biggest things you need to consider when managing an international payroll:
1. Local laws and regulations
Each new market that you enter has their own labour and tax laws that can be very different to the ones you are familiar with in your country of operations. This complicates things when you’re considering expanding your business into other countries, or even when you’re just hiring staff with no intention to do other types of business. Within each country that you hire from, there are a handful of things that you need to be aware of:
• Minimum wage
Not only do different countries have different minimum wages, there are countries that have minimum wage variance between their own states and it’s important to figure this out as much in advance as possible. In the US, there is no federal minimum wage law, so it’s up to the individual states to determine what they are. The same applies to the EU. Germany has a different minimum wage rate compared to Bulgaria or Greece, for example.
• Maximum working hours
A majority of countries maintain a classic 40-hour work week, but some put a cap on the maximum hours a company is allowed to assign their worker to 48 hours per week. South Korea has a maximum working cap of a whopping 52 hours per week! With many western countries realising the terrible effects of overworked and burnt out employees, certain governments such as Chile are considering lowering that maximum cap.
• Employment status definitions
Whether or not you’re planning to simply hire a workforce that consists of only independent contractors, you need to be aware of, is it even a legal status in the country that you're planning to hire from. There are some countries, particularly in the eastern-side of the world, that carry zero distinction between who is classed as an “independent contractor” and those classed as an “employee”. In fact, in countries like China, those are one in the same which means that you aren’t able to avoid establishing a local entity should you be seeking to engage with workers there.
• Employee benefits
Continuing on the running theme of this article… There are different statutory employee benefits in different countries. Some countries have them embedded into their laws while others leave it completely to the discretion of businesses to deploy any benefits to their employees. However, benefits are a great way to not just attract top talent, but to keep them, too. So once you’ve covered the basics – health insurance, annual paid leave, maternal and paternal leave, plus pension contributions – consider adding further benefits to your payroll, so long as they are compliant under local labour laws.
• Tax rates and deadlines
Not all countries have the same tax rates, and they certainly don’t follow the same tax deadlines as their neighbours may. Some countries have their annual tax deadline in April while some of them are much earlier in the year. This is why it’s important to ensure that you’re keeping informed on the local labour and tax laws of the countries you’re planning to hire from so that you maintain compliance with international payroll processes as well as keeping yourself from any legal issues and heavy fines.
2. Local and international tax laws
This issue becomes especially important if you’re a US-based company or if you’re looking into hiring US-based workers. Many countries in the world have double taxation treaties between one another in order to avoid their citizens having to pay tax twice. But there are also some that don’t, hence why it’s key to be aware of what tax jurisdictions your worker may fall under by confirming their nationality regardless of where they may be working from.
Although independent contractors manage their own tax payments, your company also may have the responsibility to declare the working relationship between the company and the worker. For example, US companies engaging with a foreign workforce need to ensure that they fill out Form W-8BEN to certify that the worker is neither a US-citizen nor that they are performing work within the US.
We’ve touched upon this before, but different countries have different regulations regarding compensating your workers. Aside from needing to be aware of minimum wage, some countries have varying regulations and customs on when and how labourers should be paid.
Australia, for example, relies heavily on weekly salary payments. Only in recent years have companies been able to choose to pay their workers either weekly or monthly but it should be noted that a majority of expenses, such as rent and bills, still have to be paid weekly. This is why it’s important to take note of any country that might not have the same wage custom that you’re used to.
Another thing to keep in mind is how you should pay your global workforce. Despite wide-spread digitalisation of financial systems worldwide, there are still certain countries where employees need to be paid in physical cheques and some countries, like the US, where some workers prefer to be paid completely in cheques or a mixture of cheques and direct deposits.
4. Bank fees and exchange rates
In order to pay your international team, it is more likely than not that you’ll have to send money across borders. International bank transfers tend to be rife with fees, ranging from $20 to even $100 per transaction. The fee completely depends on the bank that the company decides to engage with and what its fee structure is.
This might be why an increasing number of small businesses are looking to financial providers like Wise to pay their international workforce. The selling point of these services is the drastically reduced transfer fees that their users will face, making sending money across borders a lot less costly.
However, exchange rates are another issue that you need to keep in mind when managing international payroll. Working with international employees means having to deal with many foreign currencies at once – with some being a lot more volatile than others. Not only do you have to manage expectations with your employees, but with yourself too as you might find that you’re paying less during certain months while others might have you paying more. An important thing to do in this case is to manage expectations beforehand by discussing with your employee or contractor in which currency they would prefer to be paid.
5. Data protection
Everyone knows that data protection laws in Europe are some of the strictest in the world. But what you might not realise is that those regulations cover payroll-related data as well and companies can find themselves in a bit of trouble should they be lax in any way. GDPR in the EU and CCPA in the US protect extremely sensitive information such as payroll data and there are heavy penalties for violations.
Becoming aware of any data protection laws within the countries you’ve hired in is extremely important, not just for the company itself but for its employees, too. Ensure that all communications regarding payroll are encrypted and that any unnecessary data is deleted. If there are any third-parties involved in the payroll process, such as global payroll services, then have the legal agreements in place to ensure compliance and for legal protections to be put in place.
International Payroll Challenges and How to Avoid Them
There are several difficulties that arise only when dealing with payroll on a global scale, as opposed to simply operating domestically. However, if you want your company to enjoy the many advantages that having a global workforce can bring, you need to make sure that your global payroll is compliant. Let’s take you through each of those challenges and then discuss the best way you can avoid them altogether.
1. Ensuring compliance
Having to comply with labour and tax laws within your original base of operations can be complicated enough but with a global workforce, this compilation is multiplied. The biggest challenge faced by companies with international employees is to ensure that their payroll remains compliant. With labour laws changing often, especially in developing countries, having to keep a finger on the pulse is key. Adapting and updating your payroll process to keep up with those changing policies is crucial.
2. Paying employees on time and in full
As we mentioned earlier, there are countries that have vastly different compensation systems and customs than what you might be accustomed to. That being said, with the varying compensation systems you may face, paying your international workforce fully and on-time can get quite complicated. Keeping tabs on payroll and managing it effectively is not an easy feat, either.
3. Making sure all data regulations are met
One of the most sensitive pieces of information a company has is their employee payroll. With varying rules regarding data protection around the globe, it’s crucial that global companies practice the highest standards of data security when managing their international global payroll. This becomes ever-more difficult if your company is planning to use several different systems to manage payroll.
4. Keeping payroll up to date
Taking into account the various regulations and customs, one of the key things that needs to happen when utilising a global workforce is ensuring that payroll records are kept up-to-date. Having updated records is crucial to prove compliance should your company ever be faced with an audit, regardless of location. Keeping your records up-to-date also ensures that you are fully aware of not just legislation but also that your employees are properly compensated in a timely manner.
5. Managing resources
Another challenge of keeping a global payroll is that a company will have to allocate both time and money towards managing it – both extremely valuable resources in business. It can get costly to purchase specialty systems to maintain payroll records and even more so to hire a specialised in-house team that manages payroll. For small- to medium-sized companies, managing international payroll in-house may not be a great long-term solution.
How to avoid international payroll challenges
The best way to avoid facing the global payroll challenges we’ve mentioned above and get straight to enjoying the benefits of engaging with an international workforce is to outsource international payroll tasks by engaging with a global payroll company. You may have seen the terms “employer of record” (EOR) or “professional employer organisation” (PEO) floating around the business sphere. These companies are exactly who you need to get in contact with!
These companies are experts in the world of international global payroll and have their finger on the pulse of changing legislations worldwide. They would be able to ensure that you can properly manage your global workforce and pay them compliantly. With payroll tasks out of the way, engaging with these companies would also be allowing you to utilise precious resources where it matters the most: your business.
How to Outsource International Payroll
There is one way you can outsource your international payroll duties: engaging with a global payroll company. For this, two types of companies exist – PEOs and EORs that we briefly mentioned earlier. While these companies essentially do the offer the same services, there is a significant difference between them, which will touch upon in this section.
Professional Employer Organisation
In a nutshell, Professional Employer Organizations, or PEOs, aid small and medium-sized businesses with their HR needs. They handle payroll, benefits, and employment legislation for their organisation. Companies that use a PEO will co-employ the workforce since the PEO "lease" people to the company. However, companies that seek to engage with PEOs should keep in mind that they will need to establish a local entity within the companies that they wish to hire from.
Employer of Record
EORs are third-party organisations that serve as an employer to a company’s workforce. Like PEOs, they operate only to provide employers with labour and to administer HR on their behalf – including payroll, benefits administration, and compliance. They exist outside the company's legal jurisdiction, preventing them from paying employment-related fees associated with employing and managing staff or workers — a cost-saving frequently greater than a PEO could offer. One big thing to note is that companies that engage with an EOR do not have to establish entities in other countries since the EOR acts as the legal employer of any person the company wishes to employ.
Benefits of Outsourcing International Payroll
If you run a small- to medium-sized business, there are plenty of reasons why you should outsource international payroll duties to a global payroll company. However, depending on your needs, you may decide to engage with an EOR or a PEO to ease your business burdens. Let’s go through the many benefits you can enjoy when you outsource international payroll to the experts:
1. Global compliance guaranteed
Global payroll companies are specialists in their craft. One of the best things they do is to ensure that your global payroll process forever remains compliant so long as you remain engaged with them. You won’t have to hire multiple in-house teams to keep up to date with changing legislation around the world, especially if you decide to hire employees across multiple regions.
2. Save resources
Being able to outsource international payroll tasks means being able to free up resources to concentrate on the main parts of your business. As we’ve mentioned before, managing a global payroll within the company can get incredibly time-consuming and, thus, costly. Engaging with a global payroll provider will ensure that all your needs are met at a fraction of the cost of hiring an in-house team, allowing you to save your much-needed resources.
3. Less risk
Professional global payroll services know how important data protection is when it comes to managing an international workforce. These services utilise modern systems and security protections to ensure that the data of the company that they engage with is always secure. This is a massive benefit which alleviates the risk of facing super heavy fines in regards to data protection laws, on top of reducing the risks of breaking labour and tax laws wherever the company wishes to hire talent.
4. Regional expertise
Perhaps the biggest benefit of engaging with a global payroll service is the regional expertise that they offer. Companies like EORs are highly attuned to any laws and customs of any company that you’d want to hire from. Engaging with first-class EORs especially will allow you to gain access to a high-quality global talent pool that you can hire to work on your own team. Plus, they can help you manage your international workforce, too.
The Importance of Compliant Payroll
As you seek to reap the many benefits of globalisation, you need to keep aware of the importance of maintaining a compliant global payroll process. Being negligent on this can put your company at risk of facing heavy penalties that you might not even be able to afford if you’re a small- to medium-sized business. We’ve taken you through the steps of setting up international payroll, plus the many challenges that you can face when managing it.
Hopefully, now you’ve become familiar with everything that you need to know regarding international global payroll and why it’s important to be compliant regardless of your base of operations. If not, you can always engage with expert global payroll services like EORs who can help you through international payroll processing and ensure that your payroll remains compliant as you engage with great talent around the world.