How to Pay Employees Globally: Effective Strategies
Learn about the complexities of international employee payments, the compliance and best practices
Rivka Abramson| Jan 16, 2024
- When paying international employees, consider options like local entities, EORs, or independent contractors, while understanding payroll tax and compliance requirements.
- Each country has unique compliance regulations, making it essential to have expertise or work with an EOR for smoother operations.
- Choose between home payroll, local payroll companies, or global payroll outsourcing based on your business's size and global presence.
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 for international employee payment, 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.
Employee payments is the financial compensation provided to employees for their work or services rendered to an organization. This compensation can include wages, salaries, bonuses, and benefits, and is typically agreed upon during the hiring process or outlined in an employment contract.
How to pay an employee
Once you’ve found your new superstar illustrator in Estonia or your amazing translator in China, it’s time to get to work. Steps to paying your employees will differ depending on whether you’re handling payroll in-house or outsourcing it. Below is a summary of the biggest steps you’ll face handling payroll – both in terms of in-house and outsourcing.
When handling Payroll In-House:
- Researching compliance and legislation
Research the legal requirements concerning the country you want to hire in – including taxes, classification and other factors.
Collect all necessary documents from international employees, including tax forms, banking details, and any other relevant paperwork.
- Strategize your currency conversion methods
Figure out the best way to convert your local currency into the relevant foreign currencies – both in terms of cost and minimal error. Your currency conversion strategy should also take into account fluctuating exchange rates.
- Calculate gross pay
Calculate the gross pay for all your international workforce. Take into account hours worked, salary, benefits, and local regulations.
- Make the relevant payroll tax deductions
Your country, as well as the countries in which you’re hiring your employees in, will have their own laws regarding income tax, social security contributions, and other deductions. All of these points need to be considered when you make the deductions.
- Choose the best payment methods
There’s no one size fits when it comes to paying your international workforce– especially when it comes to managing payroll in house. Take the time to figure out which employee payment method will be the most cost effective and secure depending on the countries in which your workers are based.
- Reporting and compliance
Make sure you’re filing all the right information, in the right format, to the right authorities. This involves ensuring that the language and timing of the reporting is accurate.
Additionally, you’ll need a method to help you stay informed regarding all regulatory changes in the countries you are hiring in (these types of changes occur frequently).
When outsourcing to a third-party provider
- Choose the best payroll service provider
This stage involves in depth research. Make sure to take into account reputation, ROI, and data security.
- Draw and sign the relevant service and contract agreement
Outline the relevant services and responsibilities this provider will be taking on.
- Share relevant data and documentation
The service provider of your choice will need access your employee data. This can involve data onboarding – which, with certain providers, can end up being time-consuming.
- Define the payroll process
Define a clear-payroll processing with your provider, taking into account data submission, and payment schedule – among other things.
- Review and audit
Regular reviews and auditing should be ongoing to ensure continued accuracy and compliance with local laws.
- In-house global payroll versus global payroll outsourcing
Should you handle global payroll in-house or outsource it to a 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 vs Outsourcing global payroll
|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
Common employee payment methods
Let’s explore some of the most common examples of each:
Traditional employee payment methods
• Direct Deposit: in this case, employees’ salaries are electronically transferred directly into their bank accounts. This form of payment is easier to automate.
• Paper Checks: Less common nowadays but still considered a traditional method, where the employee receives a physical paycheck they need to cash in themselves.
• Cash Payments: because of security and tax reasons, cash payments have become less trusted forms of compensation. Still, cash remains popular in places connectivity may be limited or many of the workers lack bank accounts.
Alternative employee payment methods
• Payroll Cards: in cases where employees don’t have bank accounts, employers can load salaries onto a payroll card, which functions like a debit card.
• Mobile Payment Applications: Mobile payment platforms like PayPal have also become popular for quick transfers – though because these payment methods aren’t optimized for payroll, compliance issues or payment errors remain risks.
• Payroll Payments Platform: Certain payment platforms are specialized for payroll payments delivery, often making them optimal solutions.
In global payroll payments, there’s no one size fits all – these forms of payments may all come into play depending on the scenario. What may matter most, though, is the payroll model, which can help determine when and how to use each payment method. We dive into these models below.
Understanding international employee payment models
How do companies pay employees globally involves a sea of complexities, especially involving region-specific regulations and tax requirements. There is also the matter payment timing, hidden fees, and security concerns.
But it doesn’t stop there: businesses need to evaluate their own needs, including how many workers they plan on hiring form a specific country, what tax treaties exist between their own region and the one they wish to hire in, and of course, what role the worker will have within the business.
There are different ways to facilitate international worker payments. Three common options include
- Setting up a legal entity in the foreign country
- Partnering with an EOR
- Hiring your workers as international contractors
We dive into each of these options with more details below.
Setting up a legal entity in the foreign country
One way to pay your staff overseas is by establishing local entities in the countries where they live and work. There are three main types of local entities you can create: a representative office, a branch office, or a foreign subsidiary.
For companies making more serious expansion plans in a specific country, opening a local entity may be the most cost-effective option in the long run. With that said, it’s important to note that the process of opening an entity in a foreign country can be both bulky and time-consuming. Because of this, it may not be worth it for businesses just dipping their toes in a new market, with no definite expansion plans.
Partnering with an EOR
An employer of record (EOR) is a company that handles responsibilities such as hiring, onboarding and payroll management on another company’s behalf. Also known as global employment organizations (GEOs) and professional employment organizations (PEO), EORS perform these tasks while ensuring that your company stays legally compliant with local laws and regulations. These services often handle matters like paying your employee’s basic salary, covering health insurance, and handling tax deductions.
Paying workers as independent contractors
You may be able to pay an employee located overseas, as a foreign contractors instead of traditional employees. Just make sure you’re correctly classifying these workers to 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’re hiring. For example, in Germany, you might be legally required to turn your foreign contractors into full-time employees after 18 months. In this scenario, you’d need to open an entity or work with an EOR.
The risk of misclassification is no joke. Companies can be fined heavily for incorrectly paying foreign contractors as employees or vice versa. Some organizations engage in underhand tactics like this to save money by denying their international talent certain paid allowances and benefits. So, for example, 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 payments is usually calculated by the hour or per project and generally handle 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 Global 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 for 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 in which 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.
- Payment intervals
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 are 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 your 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, for example, treaties like these can prevent them from paying double taxes and help with your payroll management.
- 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 calculating your oversea employee payments, it’s good to get familiar with who these bodies are, their functions are, and how they can advise you on requirements such as compliance and avoiding permanent establishment risk — i.e., 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. In this case, your business is liable for all corporate taxes.
What are the costs of paying employees abroad?
There are a lot of additional costs that come with paying employees abroad. Here are three of the major ones you’ll want to consider:
- Currency exchange costs: these can be due to the fees of involving currency exchange, or volatile exchange rates
- Administrative assistance and legal expenses: you’ll likely need some human support in terms of administration and legal help – and this will of course require payment.
What are the benefits of using a global payroll partner for employee payments?
Working with a global payroll partner to deliver international employee payments has several advantages, including:
- Reducing your payroll costs
Partnering with a global payroll company can save you a significant amount of money in global 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 wage compensation, your HR team can focus on other tasks.
- Ensuring global payroll compliance
Local labor laws can be difficult to get to grips with, and it only gets harder as you pay 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 your 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.
Choosing an employee payments provider: what to know
When choosing a third-party provider to handle your payroll payments, make sure you know details about the payment processor involved, as well. Here are some of the factors you’ll want to consider:
Global compliance expertise
Payroll payments involve their own league of complexity. More often than not, your average Joe payment processor won’t have the necessary level of expertise to navigate these challenges. For that reason, it’s crucial to evaluate the payment processor’s level of understanding regarding global payroll – especially when it comes to compliance, since countries’ regulations regarding workforce payments are likely to vary.
Your payment service provider should be compatible with the payroll software you use. One way to ensure this is the case is to choose a software that provides an end-to-end payroll solution – including the last-mile payments. This will help you streamline the entire process while keeping all employee and payment data centralized.
Security and liability
Payroll payments are a risky business – especially when it comes to hacking and data breaches. Make sure that the payroll payments service provider you choose employs robust security measures to keep data safe.
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 leveraging our unified payroll and payments solutions, you can easily manage your team’s payroll payments 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 international employee payments management with tailored payroll data insights and boots-on-the-ground legal expertise.
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.