Managing global payroll is one of the most complex tasks regarding overseas expansion. Considering all that’s involved—complex calculations, local compliance, language and cultural differences, and reporting requirements—organizations must check a lot of boxes in order to successfully manage their international team members’ remuneration. On top of that, there are many ways to find trouble as you attempt to set up and execute payrolls in multiple countries.
Here is an outline of the 12 most common global payroll traps and how to avoid them:
Maintaining Multiple Providers
Whether an organization chooses to manage payroll in-house locally, use shared services centers, or use outsourced global payroll services, it is advisable to limit the number of providers and third parties where possible.
Miscommunication and delays from increasing the number of parties involved creates a growing risk that becomes greater with each new country added to your global footprint. As a company increases the number of providers for global payroll, the room for errors grows in categories that include payroll inaccuracies, reporting errors, and payment mistakes.
The best option to avoid these risks is to use a consolidated global payroll service–a single source that manages payroll for all of the organization’s international operations. A single provider with a uniform process helps to completely reduce silos and make payroll less complicated, less risky, and less painful.
A single-source payroll provider typically offers a well-organized system to manage the workflow, protect the client’s data, and provide required reporting. Each of these elements reduces a company’s required effort into the total payroll process. Typically, all that’s required of the client/employer’s team is that it input its payroll changes, new hires, and terminations by the designated cut-off date. Once the payroll is calculated, the team reviews and approves the payroll register and sends the necessary funds to the payroll partner. The partner manages the rest of the process and ensures timely, accurate payments.
Not Establishing Proper Corporate Registration
When entering a new market, an organization must determine its legal structure and apply for an authorized legal, taxable presence in the country before making the first hire. Without proper registration, a company will often incur higher taxes and face significant liabilities. These problems can be avoided by creating a proper structure before starting operations.
In addition, an organization needs to secure the proper employee registrations, based on the target country, before onboarding new team members.
An organization should not hire and pay employees without a taxable presence and legal entity, so it’s best to determine and approve those requirements before recruiting and onboarding new talent.
Applying U.S.-centric Approach to Global Payroll
Companies cannot treat global payroll as they do their U.S. payroll. For example, in the United States, organizations can still issue standard checks to pay employees. This is not the case in most countries around the world. For example, in the U.K., it’s customary to pay employees by direct deposit and sometimes even cash. In the United States, there are numerous tax authorities to consider in the payroll process including federal, state, and local tax agencies. The global business landscape contains many different payroll tax systems, which vary from country to country. In many cases, each tax or social contribution has a corresponding policy that’s attached to a benefit or insurance provider. Although this is a statutory obligation, the company policy must also be in place if you are to be compliant.
Failing to Conduct Comprehensive Requirements Review
Many organizations assume that their global payroll providers will manage all of their compliance requirements. This is not always true. While a consolidated payroll provider can manage compliance requirements surrounding payroll, there may still be a number of HR-related tasks that must be managed by the organization itself or a partnering benefits provider.
These additional compliance requirements include:
• Meal vouchers in countries like Belgium or France
• Accrual tracking
• Proper employee registrations, such as the Social Integrated Program in Brazil
• Visa and work permit classifications, which vary among countries
Not Keeping Employees’ Data Secure
Businesses have less than six months to prepare for the implementation of the General Data Protection Regulation (GDPR), created by the European Union. As a result, companies must start making changes on how personal data is managed and the risks associated with it. Payroll data contains sensitive personal information, so payroll professionals will need to pay extra attention to compliance. The recent WannaCry cyberattack proved that businesses need to take their cybersecurity seriously—with or without the new regulation—because hackers have grown increasingly sophisticated. They are exploiting every vulnerable point in a company’s IT infrastructure, often leaving personal data exposed.
One of the most effective ways to reduce the risks of exposing personal data is eliminating the transfer of employees’ personal data via unsecured email. Standard email is perhaps the least secure way to send sensitive data; at any point it can be hacked and an organization’s team members could be at risk of identity theft. Instead, rely on a secure system or web-based platform that is specially designed to send and hold data via encryption. Most global payroll providers offer use of such a system, but be sure to vet the system carefully to ensure it is compliant with all current regulations and your own company’s data security standards.
Disconnects in Cross-Cultural Communications
It can be difficult to align an organization’s non-headquarters’ locations with its overall strategic goals. The disconnect usually stems from cultural differences and the lack of clear communication across disparate channels. One way to avoid this trap is by taking the time to fully understand the business culture in each of your operating markets.
For example, if an organization establishes an entity in a Latin American country, it is important to know about the requirement of the 13th-month salary. In most Latin American countries, employees are entitled to a “13th-month” salary, which is payable by the employer in December of each year. This is a cultural norm and should be understood before beginning operations.
Improper Drafting of Employee Contracts
Global payroll is affected by a number of factors including employment type, country of origin, and business entity. One of the critical aspects of managing employment in each country is a clear understanding of employee contracts. Without determining the local requirements for things such as collective bargaining or union expectations in an organization’s new country, you might improperly draft a contract and face significant legal repercussions.
Employment contract requirements vary greatly from country to country, ranging from simple in the United Arab Emirates to very complex in countries like Italy, Mexico, and France. Gain a clear understanding of the requirements needed for contracts in your target country before hiring new team members.
Foreign Currency Exchange Errors
When running international operations, organizations are required to pay overseas team members in their local currency. For example, if a company has an operation in Canada, it must pay its employees in Canadian dollars, not U.S. dollars. The fluctuation in currency exchange rates can present many problems.
A global payroll provider with a track record of success in multiple foreign markets can provide preferred rates and manage the exchange properly. Treasury management is a valuable service that takes the burden off of an organization. When a third party handles all currency exchange matters as a service, the company will then receive a payroll invoice in its local currency, which makes paying on time and keeping records easy.
It’s best to work with an established payroll partner that has the volume-negotiating power to lock in a favorable exchange rate prior to payday, eliminate any post-transaction foreign exchange reconciliation, simplify the general ledger reporting, and reduce the burden on corporate finance systems.
Finally, companies need to know if they can move money from one country to another to pay their overseas employees. This is an acceptable option in most countries, but it’s illegal or virtually impossible to execute legally in others. Russia, Brazil, and China are examples of the latter. Organizations must perform due diligence to understand what the money movement restrictions are before paying team members overseas.
Delays in Global Payroll Money Transfers
Without knowledgeable assistance on money transfers, overseas paydays can get missed. The time it takes to wire funds varies from bank to bank and country to country. Sometimes, payroll disbursement can get delayed by up to a week depending on the route the funds take. By relying on a single, experienced global partner to manage payments, organizations can ensure proper, timely payments that keep team members happy.
Failing to Establish a Consolidated Calendar
Many companies struggle with setting up pay calendars for their global operations. They fail to understand whether there should be a different payroll calendar for each country, if they should synchronize by region, and what the most efficient method is for their team.
While there is usually no hard and fast rule, many organizations choose to pay on common paydays, which are the 15th, 25th, and last day of the month. For semimonthly cycles, the most common configuration is to pay on the 15th and the last day of the month. The 25th is generally the most common internationally as it allows the payroll to close in time to have all the data available to complete the general ledger (GL) posting by the end of the month. Keep in mind, some countries do dictate which days on which you must pay employees, so again, doing your homework is important.
No Hard Record of Global Payroll Tax Receipts
Record keeping is an important part of the global payroll process. Even if an organization relies on a global payroll provider to help with international employee management, it should always collect receipts for taxes paid for each global employee. Having a copy on file can help an organization quickly resolve issues that could arise during an audit.
While they are amazing business tools, it’s best to avoid the use of spreadsheets when it comes to global payroll calculation, tracking, and reporting. Spreadsheets are not secure, have no automatic versioning control, and are too easily altered—all of which creates unnecessary risks. Global payroll is too important a process to be dependent on such an unstable medium.
Avoid these global payroll traps and you’ll be well on your way to successfully paying employees wherever in the world they may work.
Read our interview with Will Crehan, who has worked at Celergo for seven years and has gained a range of insights into the global payroll environment through work in Operations, Relationship Management, and Solution Consulting.
Celergo is a technology-enabled provider of global payroll management solutions to multi-national employers. Its mission is to simplify payroll for its customers by making 150 countries look and feel like just one, while guaranteeing compliance with all local and international requirements.