Global Payroll Challenges & How to Overcome Them
Need help onboarding international talent?
Many will argue that working remotely is the future of work. It’s something that turned out to be quite a positive consequence of the pandemic that started in 2020.
Over the past twelve months, there have been numerous studies that proved working from home led to an increase in productivity, even up to 13%. People are not wrong to believe that working from home, one form of remote work, will definitely stick for the years to come.
However, remote work doesn’t come without its challenges. Many multinational companies are happy to look for talented individuals all over the world, but technicalities sometimes seem to be an obstacle that employers need to overcome. Most of them have to do with making payments to independent contractors and employees from different countries.
So, what’s the best global payroll solution? In this article, we will tackle the most common global payroll challenges and offer a few ideas on how to make payroll processes easier and outsourcing less complicated.
Main payroll challenges for global businesses
Let’s define global first. Every company, whether it’s local or multinational, has its payroll system: the way it manages every payment that needs to be made towards employees and independent contractors (or freelancers).
To comply with the law, a company needs to make sure every wage, tax payment, invoice, and data entry is in place. Businesses that don’t have subsidiaries all over the world have a less complex task to tackle here, but a global business, logically, has to deal with more complex procedures since not all countries have the same labor law, taxing systems, and so on.
That means more demanding payroll processes, more data, more everything. Luckily, it’s still possible to overcome all these challenges and enjoy the perks of hiring from the global talent pool.
Local compliance: Learning about local labor law
Paying your employees doesn’t mean just handing them their paycheck. The way you make payments to them needs to be compliant with the law, and if you hire foreign contractors or employees, there’s something else to take into account. That’s local compliance, and it may be the biggest challenge for every business since it requires the employer to get to know the legal systems and labor laws of different countries.
Hiring foreigners inevitably means you’ll need to learn some procedures and regulations that are specific to each country. Do you know what the minimum wage in your target country is? That’s only one of the questions you need to answer. Non-compliance leads to legal consequences that may cost your business a lot. That used to be one of the main reasons why companies hesitate to start operating globally - they’re not sure about taxes, reporting requirements, and local laws.
On the other hand, following local policies doesn’t mean that you should neglect the domestic ones either, so to avoid financial penalties, lawsuits, and even shutdowns and jail time, you have to ensure all your documentation is accurate and submitted timely.
Two efficient solutions: in-house payroll vs outsourcing
There’s too much information to take in when you’re a global company with many employees from all over the world. But, there’s actually a simple solution for keeping track of necessary payroll data.
Thanks to technological advances, there are now payroll software solutions that allow you to handle employee data more efficiently and reduce the chances of making a mistake. What does that mean? Certain parts of the payroll process can be automated, which means you avoid time-consuming tasks and make it simple to deal with different tax forms, rules, and deadlines you have to meet.
To make the software work, it’s also recommended to have a reliable team of payroll professionals who can keep track of any changes that may happen in tax laws in different countries. These changes will sometimes mean you need to adjust your payroll system and ensure your payroll team is up-to-date with anything that may be going on in the home countries of your workers.
Another adequate solution is outsourcing. Hiring a company that provides payroll services and trusting them with your whole payroll process may relieve a lot of stress and give you back valuable time so you can focus on other critical aspects of your business.
Looking for flexible global payment methods?
Offering your team multiple payment options attracts a bigger talent pool. See how we solve global payroll for international teams.
Employee misclassification: Is your worker an employee or a contractor?
Employee misclassification is a serious issue. The consequences can be really damaging if the IRS discovers an employer failed to pay someone as an employee when they should have. It’s not unheard of that some businesses try to do that because they’re not responsible for paying Medicare and other types of taxes and contributions for independent contractors, which means they save money by classifying someone as a contractor.
However, if a worker becomes aware of it, the business may face a lawsuit and pretty high financial penalties.
If you’re in doubt and you don’t want to make an honest mistake when determining if you’re hiring someone as a contractor or an employee, you can check out the 20 Factor test to help you make a clear difference. Most of these factors come down to the amount of work performed by the employee/contractor you actually have control over. If it’s more than just the outcome and you also determine the worker’s schedule, for example, we’re probably talking about an employee.
Leveraging automation: Have you optimized your local payroll operations?
We already mentioned how technology could help us save time and achieve better results in business, though it may be time-consuming to integrate programs into your daily processes. Sometimes, the complexity of it is due to the inexistent standardization of your data and a lack of a single system that will collect it.
When you standardize your data (in what format you collect it, via which platforms you do it, and so on), you will notice how automated processes can easily replace the tasks done manually. By implementing automation in your systems, you will become more efficient and reduce both the time and money you’d usually spend on daily tasks that consume too much of your energy.
The first step towards well-implemented global payroll automation is to look at your local payroll. Where can you make cuts? Are your processes completely optimized or is your staff wasting time on tasks where presence is not necessary?
According to some data, the automatic onboarding of a new employee can save you up to seven hours. If you successfully identify points where you can make these cuts and introduce automated processes, you’ll see how cost-effective and fast your global payroll operations can become.
Integrating your global payroll process and the system used by your Human Resources department can result in multiple long-term benefits. Automating specific payroll processes gives your employees time to focus on core business aspects that can’t be completed without their attention. By standardizing your data, you also make it easier to pull them whenever it’s necessary to prove your compliance or evaluate your HCM (Human Capital Management System).
It’s worth mentioning that in 2020, according to a survey, almost half of payroll respondents and just as many HR respondents said that their departments don’t share payroll services - or any services at all, for that matter. However, businesses that strive to attract the most talented individuals from countries around the world should find a way to integrate these departments to enable the best employee experience within their organization.
Accurate and real-time reporting: crucial payroll function
Automation doesn’t only save time but also contributes to more accurate and efficient reporting. When feeling exhausted, people are prone to making mistakes, and if you remove time-consuming, manual tasks from their plate, they become more focused and productive. That’s what automation software is for, and it undoubtedly makes real-time reporting more straightforward.
How so? Choosing a suitable global payroll provider can provide you with clear reporting, with little to no manual intervention. When your global payroll management is standardized and consolidated between countries and subsidiaries, you have quicker access to all necessary data whenever you need it because the systems are integrated and available to everyone within the organization, regardless of their location.
Using payroll technology can remove any inefficiencies that have been stopping you from improving your employee retention and accurate payroll reporting.
Data protection: Following the GDPR guidelines
In 2018, new European regulations related to personal data collecting, processing, etc. brought stricter rules (and higher penalties) for businesses worldwide. Those who had been using third-party services to manage their clients’ or customers’ data had to go through policy changes and adjustments to comply with the new standards.
That’s why it’s extremely important to have a suitable DPA in place. This document, the Data Processing Agreement, is actually a contract that legally binds the third-party data processor to handle the data in a way that’s compliant with the GDPR. In case they fail to do so, the document protects the data controller - the company that provided the data to the processor.
What you should bear in mind is that countries that belong to the EU are required by the law to sign a DPA with companies they work with, in a way that involves sharing the clients’ personal data.
In terms of payroll, when you start hiring abroad and expanding, that includes giving your new employees access to your payroll data. That could mean investing in automation software that will ensure the whole process moves along accurately. These programs also minimize the potential of human error because there’s less data managed manually. This way, you’ll be sure that confidential data will only be displayed to and managed by those who are necessary for the process.
Hiring in-house specialists who can supervise the human capital management can go more smoothly if supported by HCM software as well.
KPIs: Are you measuring the right metrics?
It may be difficult to determine what key performance indicators your should measure when evaluating your global payroll processes.
Wherever your workers are located, you should be able to determine whether they’re being paid timely and accurately. These two metrics, along with being compliant with the local tax and labor regulations, are the three key indicators of how successful your payroll system is.
Some businesses also take customer satisfaction into account - in this case, your customers are your employees and contractors. Are they happy with the way their payments are made?
Also, you may realize at some point that your current system isn’t cost-effective. That’s a red flag telling you it may be time to consider other options.
Cultural differences: The last, but not the least important factor
Overcoming the language barrier may not be the easiest task that you can tackle in a few clicks. When working with foreigners, you must not neglect the challenges of different cultures, communication styles, etc.
However, looked at from a different perspective, this challenge may be one of the simplest to overcome. As an employer, you’ll want every new employee to feel welcome to your organization, so it’s important to set some expectations before the collaboration starts. Learning about your employees’ (or contractors’) backgrounds and cultures before you hire them may help establish open communication and ground rules that will help you solve any issues as efficiently as possible.
If you have an international payroll, it also means you’ll be working with different currencies, time zones, languages, and more. The success of your global payroll system may depend on how well you can adjust your day-to-day processes to your global workforce.
That’s why it’s critical to count on local expertise to ensure that your global operations are going as smoothly as possible. Another important element is a suitable payroll platform that’s safe when it comes to data privacy, payroll processing, and the possibility of self-service that helps your employees keep track of their earnings at all times.
You can easily overcome all of these hurdles by setting up systems and procedures that everyone on the team will know about. Also, it’s vital to consider these culture-related factors before you open the subsidiary or your new employee is waiting for their first payment.
Find a payroll solution that fits your business
As you can see, there are quite a few challenges for companies planning to expand and step into the world of global business.
Luckily, there are also multiple solutions for each challenge, which means any type of company - national, international, multinational, big, or small - can find an answer that meets their requirements and needs. One thing they all have in common is the need to keep up with the latest trends and technological advances and leveraging them as much as possible.
Read more about how Deel can solve your payroll challenges or book a demo to see how we can help you and your team grow.
Do you want to calculate how much hiring an employee abroad will actually cost you? Use our employment calculator to get an estimate about your overall costs for employees in different countries.