Global Payroll: Challenges & Solutions
Global Payroll Explained
Payroll is the process that includes calculating each employee’s earnings, withholding the correct income and social taxes, managing bonuses, commissions, expenses, and benefits, and delivering the correct payment to the employee, with a payslip. It also involves keeping records on behalf of employees, making payments to all the necessary stakeholders (such as tax authorities) and keeping track of work hours and paid time off.
Global payroll is the same process, repeated for each country, but with additional levels of complexity. Tax and labor laws vary widely from country to country. Keeping track of numerous data streams – different spreadsheets and expense invoices in different languages and different units of measure – can be overwhelming.
Global payroll is the process of consolidating all payroll data streams from across the globe into one place, standardizing the data, and calculating and delivering payments across the globe in local currency in full legal compliance
The definition of a multi-country payroll is the same regardless of whether a company has an entity in the country where it is hiring, working through an employer of record (EoR) also known as an international PEO or hiring independent contractors. What distinguishes a global payroll from a local payroll is the ability to carry out the necessary payroll steps for different countries simultaneously, making it not only manageable to hire and pay a workforce abroad, but also simple.
5 Main Challenges of Global Payroll
A local payroll can be complex, particularly at an enterprise with thousands of employees, even if all of them are in a single location and fall under the same tax and legal codes. But a global payroll can be at least three times more complicated, and when there are dozens of countries involved, it can be simply overwhelming – unless there is a technological solution.
1.Labor laws and tax codes:
Labour laws and taxes are not only different in each country, but also from person to person. Every employee’s tax rate is based on numerous factors, including salary structure, age, and family status. Laws are also highly unstable. Legislative changes happen without warning. Languages and currencies are different from country to country, and so are standards for bonus payments. Many countries require employers to pay a 13th salary as a bonus.
2. Data points:
The number of data points that need to be collected and processed with an international payroll can be staggering. Every department in each location must provide time and attendance reports, expense reports, and bonus and commission data. Earnings can change each month, and therefore the tax rate could be different. Benefit packages also need to be calculated. In additional there will be variable costs such as expenses and bonuses that also must be calculated in the gross to net – commission payments to sales executives, 13th month salaries, end of year bonuses etc.
3. Reporting & Visibility:
Payroll data for an entire global workforce – payrolled workers, EOR talent, and contractors – tends to be siloed over numerous systems, spreadsheets, and locations. If the company has employees in 10 countries, it may have as many as 10 local payroll partners to ensure compliance in each of those countries. All of that data is then disparate from one another, stored in its own format, language, and currency.
If a finance manager wants to see the big picture of total global workforce spending – or even to compare costs of two or more locations – they have to retrieve payroll data from their individual sources, standardize the format, and convert the currency – a process that could take weeks to achieve.
After everything is aligned and calculated, there is yet another level of complexity. Payments need to be made to no less than three parties (employees, tax authorities, benefits vendors), and sometimes as many as 10.
5. Data Management & Security:
Data Management and Security: All payroll and payment processing must be handled with utmost care for privacy and security. Payroll data contains extremely sensitive personal information that is protected by global standards such as GDPR in Europe and CCPA in the US, with high penalties for privacy violations. Payroll data is a highly valued target for cyber-criminals, requiring the highest standards of data security and ongoing vigilance to address the threats of tomorrow.
For a global payroll manager aiming to co-ordinate all these ‘local payrolls’ into one ‘global payroll’, it is an extremely complex and taxing job to deliver an accurate gross to net international payroll on time with zero errors.
A true global payroll solution in the modern age should address this complexity. A sophisticated multi-country payroll platform consolidates the data streams, automates the workflows, and standardizes the information to make it simple. When combined with in-country partners and a dedicated project manager to stay on top of law changes, the result is a perfect international payroll in full compliance on time every month.
2 Main Types of Global Payroll Providers
To maintain compliance, stay informed of legislative changes, and work effectively with the local culture, a company delivering an international payroll must have a local presence. In today’s global payroll landscape, there are two primary models.
Wholly Owned Model
One model is the wholly-owned model. This model involves the international payroll solution provider opening an office in those countries to handle the entire operation in-house. In this model the global payroll provider has their own entity in the local country.
Another model is the aggregate model. Companies build partnerships with at least one local company (known as an in-country partner) to carry out the payroll – usually accounting firms or law firms. The in-country partner (ICP) is hand-picked, vetted, and provided with the technological support of a payroll platform.
When it comes to ICPs, one size does not fit all. While the wholly-owned model has an intuitive appeal because it seems more integrated and controlled. In reality, it has proven to offer less flexibility, transparency, and accountability than the aggregate model.
With the aggregate model, payroll suppliers in the local country compete for the ‘business’ of the global payroll solution provider. That makes them more accountable and allows the global payroll company to work with only the best ICPs. The aggregate model also allows maximum flexibility. If an enterprise has a special need, it can be matched with the right ICP.
The most effective global payroll provider is one which combines best in-class local in-country partners (highly respected professional accountancy firms) with a cloud-based payroll platform that collects the data from the partners across all locations and provides a unified view from a single pane/dashboard. Together, the result is a strong combination of flexibility, transparency, and data consolidation.
How to Start with a Global Payroll Provider
The global expansion process begins by determining which employment model is right for the project. The three primary categories of employment are EoR, payroll, and contractors. If a company is looking to enter a market as quickly as possible, an Employer of Record (EoR) allows it to pay its workforce in full compliance without opening an entity. Those workers can be supplemented by contractors for tasks that can be completed independently.
If the company is planning a long-term presence abroad, it can open an entity from the start, a process that can take several months. In the meantime, it can hire through an EoR and then change to regular payroll when the entity is processed – a simple step for global payroll providers that offer a total workforce solution.
2.Decide whether or not to open an entity
Once a strategic decision has been made to build a foreign subsidiary or an overseas branch, it becomes cost-effective to open a legal entity.
The number of workers a company plans to hire abroad will also influence employment decisions. Typically, a workforce of 15-20 people is enough to warrant a shift from EoR to payroll. At that level, companies are established enough to seek broader contracts. Opening an entity shows potential partners that the company is stable in its new location.
3.Choose a global payroll provider
When a company begins to consider moving from a decentralized manual payroll to a unified global payroll system, it’s essential to ensure that the global payroll provider can process all the employment types the company is most likely to use.
Companies have a choice of two types: The aggregator model builds a network of reliable partners across the globe who are expert in local tax and labor law. The wholly owned model involves opening entities in each country.
4.Set salaries for your employees
One of the most challenging aspects of global hiring is setting salaries at the optimal point. If the salary offers are too low, the company is unlikely to win the top talent. If the offers are too high, they are needlessly overpaying, reducing the return on investment.
Today, there are numerous tools available online for estimating salaries according to the real costs of hiring in different countries. A more accurate appraisal of salary benchmarks based on experience and specific role requires input from a global payroll expert but it can make all the difference in landing the best talent at the optimal cost.
5.Automate the process
An automated platform takes all the reports payroll managers receive from different departments in different countries – all in different formats and styles – and standardizes them into a single, usable format. It then combines all of the siloed data streams and consolidates them into a single stream of data. Payroll is processed efficiently and with complete accuracy.
An automated platform is tailored for each country where a company has overseas employees. These workflows guide the payroll team through all the necessary steps in the process and ensure all the necessary forms are in place, the correct taxes are paid, and all legal requirements are met.
Why is it important to be 100% in local compliance?
Payroll compliance is the foundation of an effective global payroll and the basic responsibility a company has to its stakeholders. Governments can assess steep fines for any violations of tax codes or labor laws and non-compliance can leave companies vulnerable to lawsuits. It can harm a company’s reputation, making it significantly harder to build partnerships and attract top talent.
Why not just use contractors?
Working with contractors can be a good option for companies – within a limited framework. They provide access to niche, skilled expertise without the need to pay social security, healthcare and other benefits, or employer taxes. But when projects get longer and more complex, companies require more than temporary help. They need a regular and stable workforce. At this point, companies run the risk of misclassification if they continue to rely solely on contractors, and governments across the globe are cracking down on the practice with heavy fines.
How can you benchmark local salaries?
In the era of remote work, companies are hiring top talent with little regard for location and often struggle to determine what salary to offer. The best way to benchmark local salaries is by consulting with payroll experts with local knowledge in the country where you plan to hire. They will know the range of salaries in each industry and at different levels of experience.
How can US companies pay international employees?
Companies in the US who hire employees abroad need to work through a registered entity to make legal payments. That leaves companies with two options: they can open their own entity in countries where they have employees, or they can work with an Employer of Record (EoR) that will serve as the official employer. With an EoR (also referred to as a global PEO), companies outsource the workforce management to the EoR but continue to direct the employees in day-to-day tasks.
What taxes do you need to pay international employees?
Taxes vary widely from country to country, both in terms of the types of taxes and the rates at which they are paid. In order to stay compliant, consult a guide such as Countrypedia for detailed tax information for over 160 countries.
Our Succes Stories
- Dynamic Yield
With hundreds of workers spread across four continents, CyberArk needed solutions for global workforce management with different pay cycles, different compliance standards, and overall workforce expense monitoring.