Having remote employees or freelancers in different countries adds several layers of complexity to the administrative tasks. The multinational payroll process is especially challenging and often time-consuming, with foreign labor and employment laws, taxes, local currency, languages, time zones, and working hours that vary from one place to another. Multiply this with each country your workers come from, and you get a recipe for chaos.
The first step to avoid this (and possible penalties to go along) is to get informed about the global payroll ins and outs — and this is just the right spot for that!
Below you’ll find a guide to the global payroll process:
- What is global payroll (and how it differs from the regular, single-country payroll)?
- How does global payroll work?
- Types of global payroll, explained
- Difficulties that may arise with global payroll
- Benefits of global payroll
- The service to bring you the benefits, without the hassle
What is global payroll?
The term “payroll” refers to the payments companies and employers make to their employees and the fleet of independent contractors/ freelancers they work with. It’s handled by human resources or financial experts, or whole departments for the bigger companies. Payroll provider needs to possess know-how in various areas:
- Wage calculation, distribution, and payslips
- Tax payments and rules: withholding the right amount for FICA Taxes (Social Security, Medicare, Medicare surtax)
- Labor laws, especially related to worker status, bonuses, paid days off, overtime, commissions, financial benefits
- Payroll data processing
- Employee, freelancer, and independent contractor invoicing
- Using the tech stack required to do all of the above, and handling the related fees
Now, think all of this — but global.
As we mentioned in the introduction, payroll professionals need to cover everything described above simultaneously, on a much larger scale, and make sure the employers stay compliant in each new market. Non-compliance penalties go really high, and some may even result in shutdowns and jail time in case the IRS determines it was for the purpose of tax evasion!
Misclassification of employees as independent contractors is one such example. It can be interpreted as intentional because it’s easier to pay workers as contractors instead of giving them employee status.
Global payroll issues and challenges
Accurate payroll means a lot more than handing out payslips; to fully comply with local labor laws, your entity in all of the countries should be two things (in this order):
- Correct legal registration
- Taxable structure — following the previous point
This needs to be done before you start the company operations and begin onboarding the employees and contractors intending to work for you.
Data management and security
General Data Protection Regulation (GDPR) dictates that you manage the personal data and sensitive information with the added layer of protection.
Spreadsheets and any old email won’t do it anymore — acquire encrypted email service, for starters, and take cybersecurity seriously.
Hiring a global workforce presents employers with unique challenges at each step:
- Time zones — hour differences make it difficult to schedule meetings or complete any time-sensitive task
- Calendar — local holidays and working days won’t be the same in Catholic and Orthodox countries, let alone other religions
- Currency — payroll team needs to keep their eyes on a day to day currency fluctuations, and pay the remote workers an appropriate amount
- Language — despite the English language being the modern-day business Esperanto, some highly skilled workers still need some help; services such as Grammarly may help overcome this issue
- Internet connection — signal strength and presence varies greatly from one country to another, and some are known for notoriously bad Internet; this may cause delays and frustration at multiple points
How does global payroll work?
There are several ways to establish an international payroll system:
- Using Employer of Record services (EOR) — EOR is an HR outsourcing solution that takes care of the payroll management in a certain country on your behalf. This way, global expansion is possible without the need to set up an office in each employees’ country just to handle local payroll. In addition to payroll, EOR also manages the hiring process remotely, allowing you to pick top talent from each country and outsource the administrative tasks.
- Opting for Professional Employer Organization (PEO) — PEO is similar to EOR in function; they work as your HRs, but you retain a greater level of control and are legally the employer. EOR, on the other hand, takes full legal responsibility for employees and freelancers.
Take a look at our comparison between EOR and PEO and learn all the differences, so you can make the best choice for your business needs!
- Using non-employee services — hiring independent contractors/ freelancers/ sole proprietors is way cheaper and less demanding. This is a great option if you need someone to do the work which is non-essential to your area of expertise — for example, if you sell office equipment but need SEO services for your online presence. In this case, your own HR department/ specialist is enough since there is less work to be done.
Bear in mind that not all of the non-employees have the same status — independent contractors and sole proprietors are not exactly the same!
- In-house payroll operations and workforce management — if you’re not fond of outsourcing, you have two options:
a) Setting up your own offices in multiple countries
b) Centralised payroll processing
For both options, automation is the name of the game. The payroll software should be cloud-based, and update the employee data pouring from multiple data points in real-time. This will streamline the workflows and make it up for the language, time zone and distance barriers.
The good news is, the global payroll definition always remains the same, whichever of these four options you choose. There are, however, different models of global payroll — explained in the next chapter.
Global payroll models
There are two global payroll service models available:
- Wholly-owned model — companies will set up their offices in necessary countries and manage the international payroll in-house. This model is appealing because the employers have an opportunity to hire local payroll experts, familiar with the country’s local labor laws, rules, and culture. A local payroll service provider is quick to adapt to shifts in local tax and labor laws.
- Aggregate model — companies will pick the aggregators; these are global payroll providers who, once they’re hired, themselves team up with local vendors (accounting/ law/specialized HR firms) and provide the company with a centralized payroll platform.
Both of these models may work terrific, but come with some flaws as well.
A wholly-owned model will leave you too dependent on local experts, as you need to completely trust them with compliance to the domestic laws. At the same time, this model means that your team will have to take care of relationships with locals, and the language barrier can make things difficult.
Still, the wholly-owned model is more flexible than the aggregate model, as you communicate with the local vendors directly. The aggregate model doesn’t allow quick changes in contracts and the scope of services. Aggregators are another step in communication, making it slower — since you need to speak to them first, then they have to consult the local vendors and wait for their response, and only then get back to you.
Need more info on global payroll? Browse through our dedicated blog section!