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Today, more and more companies are taking advantage of the rise in remote work to hire talented workers overseas. But while this can bring a range of benefits to a business looking to expand globally, it also comes with risk.
Managing your global payroll compliantly and legally isn’t impossible — but it does require some preparation. In this article, we’ll take you through the risks and pitfalls you need to be aware of, provide some solutions for different situations, and explore the benefits of investing in a compliant global payroll solution.
Ready? Let’s get started.
What is global payroll?
Global payroll is the process of paying workers who live in a different country from the one where your organisation is based. And, as you might expect, it’s not as simple as just transferring funds into their bank accounts.
If you want to operate your global payroll compliantly, you need to take into account local tax codes, labour laws, and regulations around things like expenses, bonuses and benefits. If you don’t, you could be putting your company at risk of increased costs,, damage to your reputation and even legal consequences.
5 global payroll compliance challenges
Large companies with huge global footprints may have the structure and internal expertise needed to compliantly manage global payroll without a problem. But if you’re a small or medium business, you probably don’t have those resources.
And even the big players sometimes get things wrong: a report from just last month found that sports apparel giant Nike could be fined USD 530 million for misclassifying workers around the world, for example.
The point is, global payroll comes with a lot of compliance challenges. Here are some of the major hurdles you might encounter if you hire workers overseas:
- Local labour laws
Each country has its own set of labour laws that employers need to abide by. They cover things like:
- Minimum wages
- Paid leave
- Mandatory benefits
- Maximum working hours
- Working conditions
- Collective bargaining
But there’s not always a simple playbook you can turn to to find out what you need to know. In fact, a country’s labour laws might be cobbled together from a mixture of written legislation, case law and rules set by various regulatory bodies.
In other words, there’s a lot to get your head around — especially if you want to hire workers in multiple countries. And that’s not to mention the fact that these laws change frequently… and not keeping up could lead to fines and other negative consequences that you really want to avoid.
- Payroll taxes
Most of the time, employers are expected to withhold taxes from payments they make to employees and make tax payments to governments. But each country operates differently, and you need to know exactly how this works so you don’t get fined.
Worse, these laws are constantly changing, and keeping up with them can be a struggle — especially if you have workers in multiple countries.
- Employee misclassification
If you’re expanding internationally or just hiring a few people overseas, you might be tempted to take them on as independent contractors rather than employees. Many organisations see this as a way of getting around local laws and regulations when it comes to hiring workers abroad. Others use this as a temporary sticking plaster solution while they’re waiting to set up a legal entity in the country in question.
But extreme caution is needed here. Because contractors are typically not entitled to the same rights and protections as permanent employees, governments take employee misclassification very seriously. Trying to pass off your employees as contractors to get around labour laws can have serious consequences.
We recently talked about some of the potential consequences of getting this wrong in our article about the EU’s proposed new rules on platform workers, including Spanish delivery platform Glovo being fined €79 million and Uber being forced to pay over €17 million in damages and lost salary.
Put simply, misclassifying workers is not something you want to mess around with — and that’s without even mentioning the retention issues and reputational damage that these types of cases can cause in the long run.
- Permanent establishment risk
Permanent establishment is a tax concept for when a company has a stable and ongoing presence in a country. And sometimes, even having a few employees in a location can be enough to trigger it.
Here’s the problem: if your company is deemed to have permanent establishment in a country, you could be liable for corporate taxes there. Since your home country likely expects you to pay these taxes too, that means you could end up paying tax twice on the same income. You don’t need us to tell you that’s something you want to avoid if you can.
- Data security
At first glance, you might not think international payroll has much to do with data security. But when you’re sending any data — payroll data included — across borders, you have a responsibility to protect it. In fact, you need to make sure you’re compliant with data protection laws in every country where that data will be collected, stored, processed and used.
For example, companies operating within the EU need to be compliant with the General Data Protection Regulation (GDPR) — even if they only have a few workers in an EU country.
How to simplify your global payroll
While compliantly managing global payroll can be difficult, some organisations do manage to do it on their own. Usually, that means setting up a legal entity in the countries where they want to hire workers. They also typically need to engage local experts in local labour law and tax legislation to help them understand how everything works.
If you think all of this sounds expensive and complicated, you’re right. Usually, this is only possible for the largest organisations. And even for those big players, the time, effort and expense of opening a legal entity might not be worthwhile if they only want to engage a handful of workers.
Luckily, payroll providers like CXC can help companies of all sizes to manage global payroll legally and compliantly — without the hassle and expense that’s usually involved. The solutions these companies can offer you vary depending on whether or not you have a legal entity in the country where you want to hire.
If you have a legal entity
If you own a legal entity in the country in question but still need help processing payroll, your best option is to work with a PEO, or professional employment organisation. This type of provider can facilitate the processing and payment of payroll for your local workers, including calculating and withholding taxes, administering benefits, generating payslips and ensuring you’re in compliance with the relevant laws and regulations.
If you don’t have a legal entity
If you don’t have a legal entity in the country and don’t want to set one up — perhaps because of the cost and time involved — you can engage an Employer of Record (EoR) to engage workers on your behalf.
In this situation, the EoR acts as your workers’ legal employer and handles everything related to payroll, tax compliance and benefits on your behalf. You’ll still be in control of the day-to-day management of your workers — but you won’t need to deal with the hassle of keeping your global payroll compliant.
Benefits of investing in global payroll compliance
Global payroll compliance can be difficult, and it’s easy to see why some organisations are tempted to cut corners. But putting some proper thought into how you manage your global payroll is well worth the time and effort.
Here are some reasons why investing in compliant global payroll practices is a good idea:
Avoids legal risks and liability
Most obviously, ensuring your global payroll is compliant helps you avoid the fines, penalties and legal trouble that can come from non-compliance. International employers often make mistakes that could cost them anywhere from a hefty fine to their whole business — even if they didn’t do it on purpose.
Examples include misclassifying workers, failing to comply with things like minimum wage requirements, and mistakes with workers’ compensation. But here’s the thing: all of these things are easy enough to avoid if you have the right tools in place.
As a multinational corporation, there’s no getting around the fact that you’ll have to deal with rules and regulations around employment in several different countries. But when you invest in global payroll compliance, you can minimise legal risks and fees.
Increases trust from consumers, partners, workers and clients
It’s well-established that customers prefer brands that treat their employees well. And in this internet age, it’s easy enough for consumers to find out if you have a history of payroll errors or late payments, for example.
The same goes for your partners, clients, and the workers themselves. Put simply, when people see that your organisation is serious about following government and compliance policies, they’re much more likely to trust you and want to work with you.
Cuts costs by creating a centralised payroll system
When companies don’t put the proper time and effort into global payroll compliance, they typically end up with messy systems cobbled together through various different suppliers and solutions. This can result in cost inefficiencies and an inconsistent experience for contractors.
Working with an experienced provider for your global payroll can help you to put a consistent system in place. That means all contractors will receive the same positive payroll experience — and greatly simplifies things from your perspective too.
For example, many global payroll providers (including CXC) will issue you with a single invoice in the currency of your choice. They’ll then pay workers in their local currency, wherever they’re located. You’ll get a single point of contact, and a centralised payroll system that doesn’t leave the door open to risk and errors.
Investing in international payroll can help you to get back control of your payroll costs, and save money by managing everything through one system. And working with a provider can also help you save money you might have spent on unnecessary legal fees due to unintentional non-compliance.
Increases security
Processing payroll internationally means transferring confidential information from one country to another — which puts you at risk of security breaches. But you can reduce this risk by investing in compliant global payroll, either by enlisting an experienced partner or by putting the right systems in place yourself.
CXC’s global payroll solutions
At CXC, we offer payroll solutions to our clients in more than 100 countries worldwide. Whether you need an EoR to take on the legal and administrative burden of employing your workers, or just need a payroll provider to manage payments for your employees, we can help.
In a world of constantly changing regulations and increasingly complex international requirements, we’re proud to provide a simple, effective payroll service that just… works.
Want to learn more about how we could help your organisation? Speak to our team today.
