As your company grows and expands into new countries, hiring international teams will require you to establish global payroll systems so you can sort payments across borders.
This is a pretty decisive step for your business—you're expanding your potential reach, revenue, and future growth.
However, with all the tech advancements we have made collectively, international payrolls are not yet as seamless as they should be. According to the Global Payroll Management Institute (GPMI), one of the "most complex tasks regarding overseas expansion" is managing global payroll.
That means you need to have a game plan down pat before you even have to pay international employees. Trial and error will cost you precious time and money, and those are two significant resources that every business should strive to conserve as much as they can.
Victory loves preparation, so in this piece, we’ll help you understand:
- What global payroll is
- Some common challenges businesses face
- Compelling reasons to outsource your global payroll
- Global payroll models
- The benefits of implementing global payroll solutions
- Best practices for maintaining full compliance with all relevant legislation affecting your business
There’s a lot to talk about, so let’s jump right in.
What is global payroll?
Let’s do a little breakdown here. First, payroll calculates each employee's earnings, withholding the appropriate income and social taxes, managing bonuses, commissions, and benefits, and delivering the correct payment to the employee.
It also entails maintaining employee records, making payments to all necessary stakeholders (such as tax authorities), and keeping track of work hours and paid time off.
The global payroll process is the same but repeated for each country where your business has employees or independent contractors. We’re talking about varying levels of complexity.
Tax and labor laws and statutory payroll requirements differ significantly from one country to the next. Keeping track of multiple payment streams (pun intended) can quickly become messy and overwhelming.
If your payroll systems cannot keep up with changes in each country, your company may face compliance issues and potential penalties.
Because a successful business is the product of the synergy between several different components, one mishap can create a domino effect that will reduce productivity and, consequently, revenue at your company. Disaster!
So, if the global payroll process is such a hard nut to crack, how do you go about it? Well, it starts with a choice between two models.
Global payroll models
There are two global payroll service models to choose from:
- Wholly-owned model: This entails companies opening offices in required countries and managing global payroll in-house. This model is appealing because it is easily integrated and controlled by the main arm. Businesses can hire local payroll experts familiar with the country's labor laws, rules, and culture and assimilate them into the mainstream staff and operations. But of course, this can be an expensive process, especially as you hire talent from more countries.
- Aggregate model: Companies select aggregators (global payroll providers) who, once hired, collaborate with local vendors to provide the company with a centralized payroll solution.
Both of these models have their perks, but they are not without flaws.
A wholly-owned model will make you overly reliant on local experts, as you must completely trust them to comply with domestic laws. At the same time, this model requires your team to maintain relationships with locals, which can be difficult if there’s a language barrier.
On the other hand, an aggregator is easier to manage and quick to get off the ground.
But aggregators tend to prolong the communication process because they have to relay feedback to you and vendors before every decision is made.
However, the aggregate model is ideal for most businesses because it facilitates more transparency and flexibility than the wholly-owned model. Your ad-hoc staff realizes that their contracts are not permanent, and there may be competition for their roles, so there is more incentive to outperform any contenders and deliver the best results.
Still, no matter which model you opt for, global payroll solutions have similar challenges. Let’s look at some of the things to expect and deal with beforehand:
The challenges of setting up global payroll
As a company looking to handle global payroll on its own, there are a handful of significant roadblocks you’re bound to encounter. Here are some of the biggest ones:
The most difficult challenge when it comes to paying employees around the world is doing so legally. Your company must ensure that they fully understand the laws of each country, which can vary in several different ways. This is where hiring or consulting with local experts in each country comes in. They will help you understand the rule book in their respective regions and help you draw up game plans that do not go against the rules.
Generally, regardless of the region, your entity should be legally registered and have a taxable structure that complies with labor laws fully. This must be completed before you begin company operations and onboarding employees and contractors who intend to work for you.
2. Data protection and management
Managing personal data and sensitive information requires an airtight security structure, especially in this age of data breaches and their costly implications (just ask Facebook).
It’s the 2020s, so spreadsheets and unencrypted email threads will no longer suffice; instead, invest in encrypted email service and take cybersecurity seriously.
3. Lack of robust global payroll governance
After implementing a working solution for global payroll, most businesses fail to create structures to maintain the system’s efficiency. Governance ensures that the strategic objectives and design principles are implemented and tracks subsequent execution to identify loopholes and review processes where need be.
Most companies simply run with the first model that works, neglecting to monitor the evolution of the market at large and update their payroll system accordingly. That’s a quick recipe for failure, but your business can avoid it if you:
- Exhaustively define and allocate payroll ownership roles and responsibilities
- Design a management system to assure you of payroll risk management across all your affiliates
- Develop appropriate best practices for your payroll policies
- Periodically conduct payroll process control assessment reviews
4. Cultural differences
Diversity in the workforce is noble and has its advantages, but it also comes with its own set of problems. Some of them are to be expected, and some fly over your radar until you encounter them.
To save you that unpleasant surprise, here are cultural difference issues to expect of a global workforce:
- Calendar: Local holidays and working days will differ across countries, not to talk of differing religious and cultural holidays.
- Currency: Some countries have frequent currency fluctuations due to economic instability, and your payroll team needs to keep tabs on that to pay remote workers an appropriate amount.
- Internet connection: Signal strength and bandwidth vary significantly between countries. This can cause delays in delivery and epileptic communication at multiple points.
- Language: Even though English is the modern-day business lingo, some highly skilled workers still require assistance. Also, look out for nuances and colloquialism in language; for instance, door-to-door salespeople are referred to as "solicitors" in the United States, while the same term refers to lawyers in the United Kingdom. At least both places can agree that a visit from either of these is usually unwelcome.
- Time zones: Time differences make scheduling meetings and completing time-sensitive tasks difficult.
Benefits of implementing a global payroll solution
There are numerous reasons to use a global payroll solution, regardless of complexity:
A put-together global payroll solution makes for integrated, synergic processes. There’s a designated team with cut-out objectives, so it’s easier to maintain accountability and track progress. Also, knowledge of payroll processes from the local to the international level will give them the confidence to set goals and scale the business.
A comprehensive and efficient payroll system streamlines the workflow, relieving employees of manual labor and juggling multiple spreadsheets. This means they can save the time spent sorting payslips and instead devote their time and skills to work they’re more skilled at.
Better reporting and analytics
Having a single, secure location to store your payroll data will finally allow you to run more comprehensive reporting and analytics on your global processes. You can get immediate access to current and historical payment data and use that to make informed decisions about the next steps.
A global payroll system that works will eliminate the need for additional staff and, subsequently, unnecessary fees. International payroll (at least the good kind) determines the most efficient way to pay employees and manage multiple currencies, saving you costs and charges that may seem small for one-time payments but ultimately compound into huge expenses because of the repetitive nature of payments.
Saving time is truly priceless, and managing the entire payroll from a single source eliminates the extra touch points.
How to establish a global payroll system
There are several approaches to setting up an international payroll system:
1. Employer of Record services (EOR)
An EOR is a human resources outsourcing solution that handles payroll in a specific country on your behalf. This enables global expansion without the need to establish an office in each employee's home country just to handle local payroll. Aside from payroll, EOR remotely manages the hiring process, allowing you to select top talent from each country while outsourcing administrative tasks.
2. Choosing a Professional Employer Organization (PEO)
In function, a PEO is similar to an EOR; they serve as your human resources department, but you retain more control and are the legal employer. EOR, on the other hand, assumes full legal liability for employees and freelancers.
If you're wondering which of the two approaches is better for your company, you should check out our EOR vs. PEO comparison.
3. Outsourcing to independent contractors
Hiring independent contractors or freelancers is significantly less expensive and time-consuming. This is a good option if you need someone to do work that isn't directly related to your expertise.
However, you should keep in mind that not all non-employees are the same. It is essential to understand the distinctions and spell them out in individual agreements because you could get in trouble with the authorities in case of a mix-up. It could be interpreted as intentional because it is easier (and cheaper) to pay contractors rather than employees.
4. Establishing an in-house payroll unit
If you don't want to outsource your payroll and workforce management, you can establish your own payroll management offices in various countries.
For that to work out as seamlessly as possible, automation is the name of the game. Opt for cloud-based payroll software that can update employee data in real-time from multiple data points. This will simplify and integrate workflows and compensate for communication and time zone barriers.
Best practices for managing your global payroll system
Once you perfect a global payroll system, you have to track and monitor the process to ensure that things run smoothly. Here are some of the issues you should take super seriously:
Stay up-to-date with all the relevant regulations
If you keep things in-house, invest the necessary time and resources in keeping your team's skills in top shape. This includes everything from reading industry publications to obtaining formal qualifications and credentials to validate their expertise.
Falling behind legislative developments, whether domestically or internationally, is a sure recipe for failure. If you don't keep internal knowledge and systems up to date, it's easy to become non-compliant with laws that your processes previously complied with.
Work with professionals
Using a specialized agency's infrastructure, systems, and expertise relieves your organization of many administrative burdens.
Instead of investing significant time and money in upskilling your in-house team in an ever-changing legal landscape, you can hire experts whose careers rely on developing and maintaining this expertise.
Have good record-keeping practices
Accurate and complete data is the foundation of effective payroll, and staying on top of it prevents many potential problems. Every piece of information in employee records must be current. This includes information such as role, pay level, address, identifying information, and more.
Audit trails should also be kept to ensure that your overall accounts are accurate and accountable.
Differentiate between employees and independent contractors
If your company needs to pay employees or contractors in another country, create clear and written relationship boundaries to determine whether the workers are employees or contractors. You’ll save your company the time and money you would otherwise have to spend on foreign legal battles.
Pay employees on time
The heart of a positive and respectful professional relationship is paying your employees on time, in full, every time. And, while this may not appear to be directly related to compliance issues, non-compliance problems can quickly engulf internal resources and create tension that’ll reduce job satisfaction and slow down productivity.
Observe data protection laws
Employee data storage, use, and transfer are subject to increasingly stringent and complex data protection legislation, and the penalties for breaking such laws can be severe.
Don't fall into the trap of believing that internal systems that knowingly violate data security will go unnoticed. Instead, devote time to ensuring that such safeguards are in place at all levels of your internal processes.
Be aware that when it comes to international payroll, things become even more complicated. You must ensure full and mutual compliance, given the likelihood that you will be transferring data abroad and potentially storing data about individuals on servers outside of their home countries.
We’ll help you pay your dues
Technology provides your business the invaluable privilege to hire talent across borders, and it would be such a shame not to tap into that great opportunity because of payroll issues.
Let Oyster manage your payroll with our solutions that save money, reduce risk, and provide insights to drive your business forward. Contact us today to get started with simplifying global payroll.
Oyster is a global employment platform designed to enable visionary HR leaders to find, hire, pay, manage, develop and take care of a thriving global workforce. It lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.
Oyster enables hiring anywhere in the world with reliable, compliant payroll, and great local benefits and perks.