By Globalization Partners
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Hiring international teams and setting up global payroll is a definitive step for your company – you’re increasing your potential reach, revenue, and future growth. However, some companies choose to learn as they go rather than pay international employees compliantly from the start.
According to the Global Payroll Management Institute (GPMI), running global payroll is one of the “most complex tasks regarding overseas expansion.”
Victory loves preparation, and part of the victory when hiring global employees is achieving compliance. To achieve compliance, you must learn:
- The difference between paying local and international employees.
- The challenges of global payroll.
- How to manage global payroll.
- Your options for running global payroll.
- Take the time to review each step before creating global payroll. Understanding all that is involved and knowing all your options is the difference between companies’ success and failure on the international stage.
What is global payroll?
Global payroll is paying your international employees compliantly in their respective countries. Employees doing the same job in different countries will receive different compensation. Depending on the territory, compliant global payroll involves:
Making the mandatory tax deductions
Income taxes are the norm in most countries, including federal income taxes and regional/state income taxes. One of the most vital aspects of running global payroll is ensuring that you understand all local tax laws.
When you avoid investigations, audits, and penalties, you maintain a good image with local authorities and make sure that nationals know you are a serious employer to attract top talent.Employees doing the same job in different countries will receive different compensation. Click To Tweet
Paying social security
A requirement for employees in most countries, social security charges vary from country to country. In France, for example, the average charge is 45 percent, while South Africa does not charge employers any social security.
In some countries, both employers and employees must make payments towards social security. In Austria, on the other hand, social security contributions are paid partly by the employer and the employee.
Providing mandatory benefits
Besides any benefits that you wish to offer your international employees, employers must provide mandatory benefits in some countries. In Mexico, employers must pay the employee’s social security and government healthcare.
In Germany, pension contributions include 18.6 percent of the employee’s gross salary, with the employer and employee each paying half.
How can your company manage global payroll?
According to GPMI, there are four fundamental steps for managing global payroll.
1. Global payroll strategy
Establishing a clear strategy should be the first step in the process, as this will ensure success. When creating a strategy, you should address:
- Technology and processes
Having a strategy makes sure that your whole payroll team knows what to do and where the company stands.
2. Global payroll governance
Once you have your strategy, it is time to create a set of rules and boundaries. According to GPMI, “Global payroll requires strong governance to ensure control and compliance, adherence to international laws and regulations, and internal, external, and nonfinancial standards.”
3. Global payroll operating model
An operating model addresses the actual function of your global payroll. It involves:
- Technology: This refers to any platforms that you will use to manage your payroll.
- Data utilization: Establish how employee data will be kept and security details.
- Third parties: If you are working with payroll providers, you need to describe what the relationship entails, how your employees should communicate with them, and what steps employees should follow.
- Working methods: This involves your company’s approach to payroll and more specific details about when employees in each country will be paid and how.
4. Global payroll operations
This includes pre-payroll, payroll run, and post payroll activities — key processes recognized by payroll professionals. Other processes include having risk and control reviews, functional management, and continuous improvement initiatives.
One significant aspect of your global operations will revolve around data and privacy protection. In today’s digital world, companies must emphasize data protection.
What are the challenges of setting up global payroll?
According to Forbes and payroll provider ADP, there are five significant challenges companies may face when managing global payroll.
Without a doubt, the most complex challenge when paying employees globally is doing it compliantly. Your company must make sure that they have a complete understanding of the laws in each country. This involves employing or consulting local experts in each country.Without a doubt, the most complex challenge when paying employees globally is doing it compliantly. Click To Tweet
2. Adapting locally:
Once you have employees in a new country, there will be changes to laws from one jurisdiction to another, even moving throughout that country. Therefore, it’s important to prepare for possible legal changes when hiring international employees, even within the same country.
For example, in Italy, each city or town decides what its percentage tax should be. These taxes are the company’s responsibility to understand and abide by.
3. Data protection
As previously mentioned, data protection is a significant part of global payroll. It also presents a significant challenge for companies looking to protect multiple international employees.
This task is even more complex today with policies such as the General Data Protection Regulation (GDPR) in the EU., Brazil’s Lei Geral de Proteção de Dados (LGPD), and Singapore’s Personal Data Protection Act (PDPA).
4. The cultural divide
Payroll is not simply about dollars and cents; the human element will always represent a challenge, especially when dealing with new cultures and understanding relationship dynamics in a new environment. Culture goes beyond just nationality — your company has its culture that must be shared with international employees and international partners.
Global payroll governance can help you align your entire organization, regardless of where your employees are located. The challenge is to define this internally before venturing out onto the global stage.
In addition to these challenges, global payroll teams are also now adjusting to new integrated systems. While these systems help save a lot of time and effort, they also require learning new skills to keep up with technology.
How do you set up global payroll?
First, you need to register your company in the countries in which you want to expand or hire internationally. Setting up an international entity should go hand –in hand with hiring local staff to run human resources, legal, and financial operations.
Running your global payroll will require different specialists and teams. According to GPMI, you should include members in the following teams:
These teams require several professionals:
In the event your operations grow globally, hiring for additional roles may be helpful, such as a chief operating officer, global implementation director, project management director, and operations director.
Setting up a global entity and global payroll is a time-consuming endeavor that requires resources. It is essential to invest the necessary time to learn the lay of the land before you start hiring and paying international employees.
What are your options if your company can’t afford to set up global payroll?
Not all companies have the time and resources to hire global experts and set up international payroll. Even if you do have the time and resources available, if you are in a race against the competition, you’re going to fall behind as you complete this cumbersome process.
The good news is that global payroll providers and partners are ready to help you avoid the pitfalls that come with establishing and managing global payroll. Among your options, the Employer of Record (EOR) solution can not only help you overcome obstacles, but also empower your entire global operations.
How can an EOR become your global payroll solution?
An EOR has global entities set up in-country equipped with local experts. As the legal employer, the EOR handles payroll, benefits, taxes, and HR functions. This allows your company to hire across the globe quickly without the need to set up a single international entity or hire any payroll experts.
Risk is also managed because the EOR is 100 percent responsible for international administration, compliance, and data protection. This means that your company is free to focus entirely on day-to-day activities and managing your employees.