The Complexities of Cross Border Payroll Payments: A Guide for Global Companies
Erez Greenberg| Mar 23, 2023
As more and more companies are operating across borders, a larger percentage of their employees are spread out across different countries. As a result, cross border payroll payments have become a crucial aspect of managing these international workforces.
In a survey of more than 3,700 SMEs (small and medium enterprises) conducted by Mastercard, nearly 60% of the companies said they increased their use of cross border payments during the COVID-19 pandemic.
The pandemic is credited with pushing the global payments landscape years ahead, but cross border payroll payments remain a complex and challenging operation that any international company could use guidance on.
Cross border payroll payments are wages or salaries paid by an employer from one country to employees in other countries.
The added layer of the cross border complexity to the payroll process, means that employers must comply with tax and labor laws in several countries, deal with foreign currency exchange rates, and navigate varying banking regulations.
The challenges and complexities of cross-border payroll payments
Cross-border payroll payments can present several challenges and complexities for employers. Here are some of the main ones:
Currency exchange rates
Currency exchange rates can be a significant challenge when it comes to cross border payroll payments. For one thing, employers must convert the currency they’re using to the currency of the country where their employee is based, which can result in additional fees and transaction costs.
In addition, currency exchange rates are constantly changing, which means that the amount of money paid to the employee can vary depending on the exchange rate at the time of the transaction.
This can make it difficult for employers to accurately calculate the amount to pay their global employees. Employers may also need to consider the tax implications of currency exchange rates, as fluctuations in the exchange rate can affect the amount of taxes that must be paid in the employer’s home country and the country where the employee is based.
Differences in payment regulations
Different countries have different legal and regulatory requirements that must be met when making cross border payroll payments. For example, some countries require certain types of payment methods, such as bank transfers or electronic payments, while others allow for other payment options, such as paper checks.
Failure to comply with these laws and regulations can result in fines or legal repercussions.
Some countries have specific regulations governing payment processing, such as transaction limits or requirements for payment processors to be licensed or registered. Payment processing times can also vary significantly from one country to another, which can impact the time it takes to process cross border payroll payments.
Taxation rules – how much tax must be withheld from employee paychecks, how often taxes must be paid, and how taxes are remitted to the government – can vary widely from country to country, making it challenging to process cross border payroll payments.
Another challenge related to taxes is double taxation, which occurs when an employee’s income is subject to taxes in both their home country and the country where they work.
Many countries have tax treaties in place to help prevent double taxation and ensure that employees are only taxed in one country.
For example, if a U.S. company is paying its employees in Canada. Without a tax treaty between the two countries, the income would be subject to taxation in both the U.S. and Canada, resulting in double taxation. However, the tax treaty between the U.S. and Canada provides guidelines for how the income will be taxed, ensuring that the income paid to the Canadian employees is only taxed once.
Note that these treaties can be complex, and it’s essential to understand how they apply to your specific situation to avoid overpaying or underpaying taxes.
Finally, cross border payroll payments can also create challenges related to tax reporting. Employers must understand the tax reporting requirements in each country where they have employees and ensure that they are complying with these requirements.
Some countries have a less developed banking system, which can make the process of cross border payroll payments more complex. For example, cross border payroll payments can be vulnerable to payment fraud attempts, where unauthorized individuals try to divert payments or steal sensitive financial information.
If a banking system doesn’t implement security measures to protect against payment fraud, employees might be impacted by fraudulent activities.
Another aspect of cross border payroll payments which involves banks is compliance. Banks may be required to verify the identities of individuals making or receiving payments to comply with anti-money laundering (AML) regulations or know-your-customer (KYC) requirements.
Banks must also comply with local regulations related to payment processing, such as reporting requirements or restrictions on the types of payments that can be processed.
Lastly, banks may charge fees for cross border payroll payments, which can impact the amount of money that employees receive. These can include fees for currency exchange, which vary depending on the currency being exchanged, the amount of money being exchanged, and the bank’s exchange rate;
Transaction fees, which can be based on a percentage of the payment amount or a flat fee per transaction;
Correspondent bank fees, charged by banks that facilitate cross border payments between two banks that do not have a direct relationship with each other; and hidden fees, which can include fees for currency conversion, intermediary banks, or payment routing, among others.
Global payroll processing requires the exchange of documentation, such as contracts, tax forms, and payment instructions. If these documents are not in a language that both the employer and employee can understand, there may be delays or errors in payment processing.
This can be especially challenging when dealing with local tax authorities or regulatory bodies that require specific documentation in a particular language.
Making cross border payroll payments often involves coordination between different time zones. For example, if an employer is based in New York and has employees in India, there may be a 9.5-hour time difference between the two locations.
This can create challenges when it comes to processing payroll payments, as the employer may need to wait until business hours in India to initiate the payment.
Time zone differences can also create challenges when it comes to scheduling payments. Employers must ensure that payments are initiated in time for them to be processed and received by employees on time.
If an employer is based in the United States and has employees in Belgium, they may need to initiate payments earlier in the day to ensure that they are processed on time due to the time zone difference.
Payment tracking is another problem when employers have employees in different time zones. Employers may need to track payments across multiple time zones, which can make it difficult to know when a payment has been initiated, processed, and received.
This can create challenges when it comes to reconciling payments and ensuring that employees have been paid correctly.
Cross border payroll payments involve the exchange of sensitive employee data, such as employee names, addresses, and banking information. Employers must ensure that this data is transferred in compliance with local data privacy laws and regulations.
Growing demand for cross border payments
Cross border payments are not a new practice. They facilitated the development of the global economy from the get-go, enabling international trade and investment. But in the last couple of years, cross border employment is catching up to cross border commerce, increasing the share of global payroll payments in international disbursements.
According to a recent survey conducted by Indeed Hiring Lab in seven European countries and the UK, 64% of executives at nearly 3,000 companies said they are likely to hire foreign nationals. This is especially true in the U.K., where 74% said they sought to hire foreign employees.
The demand for foreign workers is enticing millions of people to look for work outside their home countries; data from hundreds of millions of job searches and postings on Indeed shows that between 2019 and 2022, almost 800 million cross border job searches were carried out.
The different methods for cross border payroll payments
There are several methods for cross border payroll payments, including:
International wire transfer
This is the most common method for cross border payroll payments: the employer sends the payment electronically from their bank account to the employee’s bank account.
- Convenience: international wire transfers are relatively easy to initiate and can be done online or through a bank.
- Speed: wire transfers can be processed quickly, especially if the transfer is between banks that have a pre-existing relationship.
- Security: wire transfers are generally secure and can be tracked through the banking system, reducing the risk of fraud or errors.
- Wide availability: most banks offer wire transfer services, making it easy to transfer funds to employees in different countries.
- Cost: wire transfers can be expensive, especially for small payments, due to fees charged by banks and other intermediaries involved in the transfer.
- Currency conversion: if the payment is made in a different currency than the employer’s account, the bank may charge additional fees for currency conversion.
- Time-zone differences: if the transfer is made across different time zones, it can take longer to process and may be subject to cut-off times for wire transfers.
- Regulatory requirements: wire transfers are subject to regulatory requirements and may require additional documentation or information to comply with anti-money laundering or other regulations.
- Errors: wire transfers can be prone to errors, such as incorrect account information or incomplete documentation, which can delay or prevent the payment from being processed.
A payroll card is a prepaid card on which an employer loads an employee’s wages or salary each payday instead of traditional paychecks or direct deposits.
- Cost-effective: payroll cards can be a more cost-effective option than other cross border payroll payment methods, such as wire transfers or international bank drafts.
- Improved financial inclusion: payroll cards can be an effective way to provide access to financial services for employees who may not have a bank account.
- Limited acceptance: in some countries, payroll cards may have limited acceptance, making them less attractive as a cross border payroll payment method.
- Fees: payroll cards can come with fees for transactions, ATM withdrawals, or balance inquiries, which can eat into employees’ wages.
- Exchange rate risks: employers using payroll cards for cross border payroll payments may be subject to exchange rate risks, as the value of the payments may fluctuate depending on currency exchange rates.
International bank draft.
A bank draft is a payment issued by a bank on behalf of the payer – the employer in this case – which allows another bank to draw funds directly from the bank issuing the draft.
- Acceptance: international bank drafts are widely accepted and recognized as a legitimate payment method, making them a useful option for cross border payroll payments.
- Accurate payment amounts: international bank drafts ensure that the payment amount is accurate and reflects the agreed-upon payroll amount.
- Time-consuming process: international bank drafts often require extensive documentation and verification before they can be processed.
- High fees: international bank drafts can come with high fees, including processing fees, wire transfer fees, and currency conversion fees, which can add up and make them a more expensive option than other payment methods.
Commonly available via apps for smart devices, eWallets are digital wallets that allow users to store and manage their funds online.
- Low fees: eWallets often have low transaction fees compared to other cross border payroll payment methods, such as wire transfers or international bank drafts.
- Faster processing times: compared to traditional payment methods, eWallets offer faster processing times, resulting in faster access to funds for employees.
- Limited acceptance: not all businesses and online merchants accept all digital wallet payments, making it less appealing for employees as a payroll payment method.
- Currency conversion fees: while some eWallets support multiple currencies, others charge currency conversion fees when funds are transferred between currencies.
The role of technology in streamlining the process of cross border payroll payments
Most payroll companies outsource the delivery of payroll payments. Third-party payment providers tend to use rails that were not designed for payroll payments. As a result, payroll payments often pick up hidden fees.
These fees go toward covering the costs of multiple banks – which are involved in the process to provide global coverage – and are usually deducted from the employee’s salary, meaning payroll managers can never be sure exactly how much of an employee’s salary will arrive in their bank accounts.
Cross border payroll payments also require security checks at each location. So the more stops along the way, the more delays in payment delivery.
And if the funds aren’t marked as salary payments by the payment company, the money may land at the bank on time but not be cleared until the bank can be sure about the source and purpose of the transfer.
Another problem in the current cross border payroll payments landscape is the lack of automation. When payments are outsourced, there is always a manual handover between the company handling the payroll and the company delivering the payroll payments, making the process prone to errors.
Fortunately, recent advances in payments technology allow businesses to streamline the process of cross border payroll payments.
A Payments technology that’s embedded into a global payroll platform can automate the payroll process, ensure that payments are marked on delivery (reducing time for screenings and preventing credit-score issues), and provide full value transfer, meaning your employees receive every cent they are entitled to without dealing with additional charges.
Manage cross border payroll payments effectively
Adopting a dedicated technology for global payroll payments – like Papaya Global – can make the process of paying your global workforce faster, smoother, and more reliable.
Papaya Global has built the first fully automated global payroll and payments platform, which streamlines KYC processes, supports all categories of employment, and allows businesses to process global payroll and make payments to employees, authorities, and benefits vendors through a single dashboard.
Schedule a demo today to hear more about it.
How are cross-border payments settled?
Cross border payments are settled through a process that involves multiple parties and steps, including the initiation of payment (when the sender provides the payment details to their bank or payment service provider), authorization (when the bank or payment service provider authorizes the payment), routing (the payment is routed through one or more intermediaries to reach the recipient’s bank), conversion (if the payment involves different currencies), reception (the recipient’s bank receives the payment and credits it to the recipient’s account), and notification (the recipient is notified that the payment has been received).
What are cross-border transactions examples?
Cross border transactions refer to any financial transaction that involves parties from different countries. These transactions can take many different forms, including international wire transfers, international credit card transactions, international trade payments, payments in online marketplaces, and more.
How does cross-border ACH work?
ACH stands for Automated Clearing House, an electronic payment network used to transfer funds between bank accounts in the US. Cross border ACH refers to using the ACH network to make electronic payments between bank accounts located in different countries. After the sender initiates the payment, it is sent to an ACH operator that handles cross border payments, who verifies the payment information and routes it to the recipient’s bank for clearance and settlement. The recipient’s bank then notifies them that the payment has been received and deposited into their account.
How long does a cross-border transaction take?
Cross border transactions can take anywhere from a few hours to several days to be completed, depending on the following factors: payment method, country of origin and destination, currency conversion (if needed), and compliance requirements.