If you can’t find the right talent in your country, then simply hire them overseas. While many decades ago this would have been seen as a last resort, nowadays hiring managers don’t think twice about sourcing employees from abroad. But when it’s time to pay international employees, it’s best to proceed with caution. That’s because there are several ways to pay international employees and different employment, tax and compliance requirements to consider.
4 Steps to pay your global workforce
Once you’ve found your new superstar illustrator in Estonia or your amazing translator in China, it’s time for your HR team to get to work. That’s right, before your new international employees get started, your company will need to complete some tasks of their own, including:
1. Deciding on how to hire your employee
That means deciding between hiring your new international employees by:
- Registering an in-country partner or local entity where the employee lives and works, then hiring them directly.
- Using employer of record (EOR) to hire the employees on your company’s behalf.
- Classifying them as independent contractors instead of traditional employees.
2. Giving your employees the correct classification
Are your worker’s employees or independent contractors? In countries like the United Kingdom, for example, there is a legal distinction between workers such as independent contractors and sole proprietors. Knowing the difference is essential for staying legally compliant and will help you cover your employee’s benefits correctly.
3. Selecting what kind of services you need
Next, you’ll need to determine what kind of HR tools you’ll need to manage your new international team members. What kind of international payroll software or expertise will you use? Do you need to hire new HR experts to manage your increased headcount or will an EOR be a better option.
4. Determine your expansion budget
Your expansion budget may determine which way to hire and eventually pay your international employees. For example, opening an entity can be a pricey option but, if your workforce is large enough, it will make financial sense in the long run.
Financially, using an EOR is usually a middle-of-the-road option. That’s because it’s not as expensive as opening an entity and it’s as cost-efficient as paying your international employees as contractors. Despite this, using an EOR is often the best option for hiring full-time employees quickly and compliantly.
As previously mentioned, paying international employees as contractors is the cheapest option but also the riskiest. Incorrectly classifying employees as contractors, whether intentional or not, could land your company in serious trouble due to misclassification legislation.
Setting up a local entity vs global PEO vs contractor
Let’s look at how you can pay international employees. To start with, by setting up your own local legal entity.
Establishing a local entity
One way to pay your staff overseas is by establishing a local entity where your employees live and work. There are three main types of local entities which you can create: a representative office, a branch office, or a foreign subsidiary.
A representative office is quick and simple to set up but has its limitations. For example, setting up a representative office doesn’t let you employ individuals in revenue-generating roles like sales and management.
A branch office is more flexible than a representative office, but set-up costs can be expensive. Additionally, it can take can much longer to establish.
A foreign subsidiary can be cost-effective to set up but can be time-consuming to manage. Even better, a foreign subsidiary gives your company access to additional benefits such local tax rebates.
Engaging the services of a global PEO
A global PEO means global professional employer organization and is a company that handles responsibilities such as hiring, onboarding and payroll management on another company’s behalf. Also known as Global Employment Organisations (GEOs) and Employment of Record (EORs), PEOs will perform these tasks while ensuring that your company stays legally compliant with local laws and regulations. Your company can outsource your payroll responsibilities to your chosen PEO and they’ll take care of everything from paying your employee’s basic salary, covering health insurance to handling tax deductions.
Paying your international employees as contractors
You may be able to pay some of your international employees as contractors instead of traditional employees. However, you must correctly classify your employees in order to stay compliant and avoid any fines or legal penalties.
Employment law will differ from one country to the next so it’s always best practice to research every new territory where you have international employees. For example, in Germany, you might be legally required to turn your contractors into full-time employees after 18 months. In this scenario, you’d need to open an entity or work with an EOR.
Another reasons to do your research is the risk of misclassification. Companies can be fined heavily for incorrectly paying overseas contractors as employees or vice versa. Some organisations engage in underhand tactics like this to save money by denying their employees certain paid allowances and benefits. So, if a German company intentionally side-steps the 18-month rule, it could have to pay four years’ worth of social security arrears with 12% interest.
Contractors are usually paid by the hour or per project and they usually handle paying their own taxes and insurance. Contractors are also not entitled to any employment benefits such as sick leave and paid time off.
What are the challenges for businesses when paying international employees?
Once you’ve chosen between establishing a local entity, using a PEO or paying your employees as international contractors, there are other factors to consider such as:
What currency to use when you’re paying international employees
It may be best to pay your workers in their local currency where possible. That way, it’s easier from them to access and they won’t be at the mercy of poor exchange rates. On your part, you’ll want to prevent under or overpaying your staff by monitoring currency fluctuations and exchange rates. This will help you make accurate calculations of salaries and bonuses.
Working hours and time zones
It’s important to know if there are any limits to daily, weekly or monthly working hours in the countries your employees work. That way, you can work out and follow any overtime benefits you’ll need to provide while complying with local labor laws. You’ll even need to research working days. While countries like Spain operate a Monday to Friday work week, others like Israel have a Sunday through Thursday culture. Understanding time zones too will help you know when best to contact your employees and when not to.
Some countries require that their employees get paid for an extra month or two, thus bringing payment instalments to 13 or 14 instead of 12 months. 13th and 14th-month pay is the payment of an additional month or two’s salary during the financial year. It’s a common practice around the world in countries like Greece and Portugal, but there are some variations that depend on specific employment laws of a particular country. If you have employees in countries like these, bear this in mind when managing your payroll.
Benefits and taxes
Depending on the country, you’ll be required to cover certain employee expenses and benefits. As each country operates under different employment law, research what your obligations are as an employer. Where taxes are concerned, it’s necessary to know what percentage of your employees’ income to withhold in taxes by the regulatory body of that country and when and how to submit them.
It’s also worth checking if the country where you company is legally registered has any tax treaties with other countries. For example, Australia has a tax treaty with many countries including Germany. So for companies based in Australia with international employees in Germany, treaties like these can prevent them from paying double taxes and help with your payroll management.
Consider labor laws and compliance
Each county has established bodies and tax authorities that are responsible for issues such as work ethics and tax deductions. When you’re paying your overseas workers, it’s good to get familiar with who these bodies, their functions and how they can advise you on requirements such as compliance and avoiding permanent establishment risk.
Permanent establishment risk refers to the risk of a local tax authority in a foreign country determining that your business is operating in that country ‘permanently’ rather than just temporarily. If said authority deems that your company is operating continuously in that country, it can then decide that your business is liable for all corporate taxes.
3 Ways to process payroll payments
Next, you’ll need to choose the best payroll model for your business. The most popular models include:
Keep employees on home payroll
If you’re sending a current employee overseas temporarily, you might be able to simply keep them on your home country’s payroll system. It all depends on your home country, the country your employee will be based and if there’s an existing tax treaty between the two.
Using a local payroll company in the designated country
For local tax, compliance and payroll requirements, a locally owned and managed payroll provider could be the best option. A local payroll provider is also more likely to offer your company a more personalised payroll experience to your company rather than a cookie cutter solution.
Outsourcing your global payroll process
You could outsource your international payroll to a company that’s specializes in such tasks. A local payroll company can be great for small businesses taking their first steps into a new country. But for global companies operating in multiple locations, managing payroll can get complicated. Therefore, consolidating all of them under one global payroll provider makes your payroll cycles easier to manage and stay compliant.
These companies are called Professional Employer Organizations and they operate through a web of legal entities around the world, which means they’re able to perform duties like tax declarations, hiring, onboarding and managing payroll on your behalf.
In-house global payroll versus outsourcing global payroll
Should you handle global payroll in-house or outsource it to specialist provider? It depends on many factors. The table below compares both options and highlights why each one might be right for your company.
|In-house global payroll||Outsourcing global payroll|
|Best for start-ups and smaller businesses with only a few international employees||Better for multinational companies with global employees and contractors|
|In-house global payroll can be challenging and time-consuming||Payroll automation saves you time and makes your payroll more accurate by adhering to local labor laws|
|More control over your payroll process||Enables a hands-off approach to payroll|
|Using manual payroll process increases the risk of data breaches||Global payroll providers tend to have more advanced security features|
|Risk of expensive penalties for non-compliance due to human error||Guaranteed compliance. In the rare event of non-compliance, the provider assumes the financial penalties|
|More costly due to needing licences, staff training and the maintenance of your payroll software.||More cost-effective as limited licences and training are needed|
What are the benefits of using a global payroll partner to pay international employees?
Working with a global payroll partner to pay international employees has several advantages, including:
Reduce your payroll costs
Partnering with a global payroll company can save you a significant amount of money in employment costs. You don’t have to hire in-house staff to handle endless paperwork, salary and tax calculations, benefits administration, legal advice, and payment processing. With your EOR handling all your payroll, your HR team can focus on other tasks.
Ensure global payroll compliance
Local labor laws can be difficult to get to grips with, and it only gets harder as you onboard employees in more countries. With a good EOR, however, you can onboard employees in multiple countries with minimal complication. Your global payroll partner will ensure that you meet all legal requirements and keep you updated on changes in local laws.
Stronger data security
The probability of payroll fraud occurring increases when payroll is handled in-house, as more people have access to the data. Outsourcing the process to a global payroll partner improves security by limiting the number of eyeballs and hands with access to you payroll data, keeping it out of harm’s way.
Higher employee satisfaction
When you work with a dedicated payroll partner, you minimize the chance of payroll errors. Not only do they ensure salaries are calculated correctly, but they also make sure all payments are on time. With reliable payroll, your international employees receive a great experience working with your company.
Local salary benchmark and compensation structure
A global payroll partner will be able to effectively conduct salary benchmarking on your company’s behalf. That means giving a complete breakdown of the compensation packages including salary and benefits available within specific sectors, countries and named companies.
If you need your own entity in the future, in the event of company expansion, you’ll want to consider transitioning from an EOR to payroll outsourcing. Hiring with an EOR allows your company to pay international employees quickly, easily, and compliantly. But if you need to create your own entity in the future, your EOR can help you make this transition.
The Papaya Global Advantage
As your business takes off, at home and overseas, juggling international payroll cycles and processes can get costly, time consuming and complex. By merging your global payroll with Papaya Global, you can easily manage your team in multiple locations with ease while staying legally compliant.
With Papaya Global’s payroll automation, you’re guaranteed clear, accurate and time-saving payroll cycles. Even better, improve your international employee management with tailored payroll data insights and Want to discover more? Contact us today for a consultation.
What is the difference between a local and a foreign employee?
From a company perspective, local and foreign employees differ in terms of taxation and benefits. That counts even if their job descriptions are the same. A local employee will work and be protected by local employment laws and regulations, while your foreign employee will operate under their home country’s employment laws.
Can a foreign employee be on a US payroll?
Generally, US companies are able to hire and pay foreign workers as full-time employees or independent contractors, with the option of working remotely in their home country or relocating to the US after obtaining the necessary labor certification and visa.
How can I reduce the costs of global employee payments?
Paying employees more affordably can be done by first accounting for tax treaties between your country, and the country your employee is located in. if there is such a treaty it will keep you from paying taxes on other markets. Once a country assigns you the status of a permanent establishment, you might be subjected to double taxation, so it’s imperial to understand the local criteria. You should also look into using a payroll platform that helps you avoid considerable payment currency exchange fees, such as Papaya.
What are the benefits of using a global payroll partner to pay international employees?
By using a global payroll partner, you can reduce your payroll costs significantly. You won’t need to hire in-house staff, since your EOR will be able to handle all your payroll process needs. This includes making sure your liabilities and benefits are in compliance with the local laws. A good local payroll provider will be able to offer a more secure managing tool, for all your sensitive data. And at the end, your employees will appreciate having an employee portal that enables them to see their payslips and manage their PTO with ease.