What Is Global Payroll? Top Challenges and Solutions
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The pandemic temporarily closed many national borders but somewhat ironically, it accelerated hiring across borders. The past few years have seen tremendous growth in remote work and global hiring. For instance, hiring out of Latin America grew 286% throughout the second half of 2021. Other regions saw similar trends, too.
But global workforces bring new challenges, such as global payroll. Global payroll takes more time, work, and legal expertise than local payroll. It must comply with and account for foreign labor and employment laws, taxes, currencies, banks, languages, time zones, and working hours.
This article walks you through the ins and outs of global payroll: its definition, its challenges, global payroll models, and more. You’ll walk away more informed and confident about how to pay your new, international team.
What is global payroll?
Global payroll is a centralized process of calculating employee wages, withholding taxes, administering benefits and bonuses, and delivering payments to your employees in different countries in compliance with their local laws. Global payroll also tracks employees’ working hours and paid time off, keeps payroll records, delivers payslips to your employees overseas, protects their data, and organizes international payroll data.
Some people consider paying international contractors a part of global payroll, especially if a company and contractor have an ongoing partnership. Technically, independent contractors are not on employee payroll: companies only cover payroll taxes and employee benefits for employees, not contractors. However, paying foreign contractors introduces complexities, and many global payroll providers can help you pay contractors abroad.
Global payroll vs. local payroll
The difference between domestic and global payroll is that in global payroll, you have to account for various labor laws, provide local benefits, calculate wage conversions, and send payments to a host of unique countries.
For example, say you hired people from the Netherlands, Colombia, and Nigeria. These countries have different:
- Minimum wage laws
- Available payment methods
- Currencies and exchange rates
- Tax regulations, rates, and deadlines
- Requirements regarding employee classification
- Mandatory employee benefits
Understanding all of the above for one international hire is a big task. Doing so for an entire team spread across countries is even more challenging. Non-compliance penalties are steep, so it’s not surprising that many companies prefer outsourcing global payroll to save the time, money, and effort of handling it in-house.
3 major challenges of global payroll
Accurate payroll means more than handing out payslips to your foreign employees. Let’s zoom into the three most significant challenges of global payroll: local compliance, data management and security, and international money transfers.
1. Local compliance
When hiring and paying international employees, you have to comply with a new set of labor laws each time you hire an employee from a different country. Some specific areas of compliance include:
When you hire someone living in a foreign country, you have to adhere to the employee’s country’s labor laws, not the company’s.
Labor laws determine the employee’s minimum wage, maximum weekly working hours, and mandatory employee benefits (such as paid time off, maternity leave, health insurance, and social security). All these aspects of employment vary by country, and even by employee: minimum wages might differ depending on the employee’s level of education or the job they perform.
A US company, for example, needs to provide 30 days of PTO to anyone they hire in Brazil and 52 weeks of maternity to anyone they hire in Serbia, even though US laws don’t require doing so.
Understanding taxes in your home country is a recipe for a headache. When you hire internationally, you must learn about its federal and regional income taxes, payroll tax, tax deadlines, tax withholding regulations, and so much more.
As you probably already know, employment taxes have many ifs, ands, and buts–for example, a work-from-home stipend counts as taxable income in some countries but not others. Even in the US, the stipend only counts as taxable income if an employer provides funds to purchase equipment, but not if employees reimburse the expenses.
Even if you use payroll software to calculate your total employer costs automatically, you need to learn a lot before you can rely on automation.
One country may consider a worker an employee, while another would consider them an independent contractor. The rules are often similar, but a tiny detail can sometimes make a huge difference.
To properly classify your foreign employees, you also need to familiarize yourself with local regulations regarding employee categorization. You may face severe misclassification consequences if you fail to classify properly, including financial penalties, lawsuits, and sometimes even jail time.
Let’s compare two countries to show where confusion might stem from. Germany defines independent contractors as workers who determine their work schedule, can take entrepreneurial risks, and don’t receive directives. They’re also responsible for their own taxes and health insurance. In the US, this could describe a senior full-time employee at an early-stage startup. The US’s classification requirements are much more detailed.
A fine line separates employees and contractors, and the line shifts from country to country. But crossing it may bring a lot of trouble to an employer in the case of a government audit.
2. Data management and security
Payroll involves sensitive employee data, like social security numbers and bank account information. Remote companies store and pass around data online, which exposes that sensitive data to more risk of data leakage, unauthorized access, phishing scams, and ransomware attacks.
Before going global, establish proper procedures to protect your data, respond to data breaches, encrypt your data, scan systems, secure passwords, and educate your international employees to ensure cybersecurity on their devices.
Once you go global, you’ll have to comply with international data regulations. For example, if you handle payroll data for EU employees, you’ll have to meet GDPR standards. If you outsource global payroll to another company–an EOR or a local payroll service provider–signing a Data Processing Agreement (DPA) with them protects you from liability should noncompliance issues arise.
Check out our payroll security tips for further reading.
3. International money transfers
Whatever method you use, international money transfers involve fees that can add up. You may also need to maneuver situations where an employee can only accept a specific payment method.
You need to pay attention to:
- The payment methods available in each employee’s country of residence: SWIFT, Payoneer and similar money transfer services, debit cards, cryptocurrency, and so on
- Currency exchange rates: employees must be able to receive payments in fiat (or the local legal) currency
- Other types of bank fees, such as transfer fees and intermediary bank fees
- The time necessary for global payroll to process, money to be transferred, and your employee to receive their payment
Also, international money transfers sometimes require additional documentation from the employer so that the employee can prove the transaction is legitimate, like invoices or transaction statements.
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3 ways to handle global payroll services
You have three options to pay your international workers: hiring non-employee workers, partnering with a global payroll provider like an employer of record (EOR), or partnering with local payroll providers wherever you hire.
Hire non-employee workers
Hiring independent contractors, freelancers, or sole proprietors is more affordable and less demanding than hiring full-time employees in terms of payroll. You won’t need to manage recurring payments, payroll taxes, or local employee benefits. Instead, you pay invoices one at a time.
Employers don’t need to provide training or tools to the contractors either, so independent contractors are a good solution for urgent projects and temporary needs.
If you choose to hire foreign independent contractors, study the worker classification rules wherever they live to avoid the fines we mentioned in previous sections.
Check out our guide on paying foreign independent contractors for more information.
Use an employer of record (EOR)
An employer of record (EOR), sometimes called an international PEO, is a third-party company that takes care of global hiring, payroll management, and compliance. EORs set up local entities worldwide and act as the legal employer and global payroll manager of the people you hire. The EOR is responsible for generating contracts, providing payments, filing taxes, and helping with workforce management, compliant wherever you hire.
Managing your payroll through an EOR means a hands-off global payroll process, consistent real-time reporting, a single payroll data source, and a trusted partner to work with. Plus, outsourcing global payroll and HR gives you more time to focus on more core business needs.
EORs break down further into two categories: the aggregate model and the wholly-owned model.
The aggregate model refers to a system in which EORs work with independent in-country partners (ICPs) like local payroll companies and benefits providers.
The EOR doesn’t open a local legal entity in a new country, but serves as an intermediary between the client and ICPs. The ICPs are experts carefully chosen to ensure compliance and keep up with potential changes in local tax regulations and employment laws.
The aggregate model offers a lot of flexibility in choosing suitable ICPs. Aggregate EORs typically work with multiple ICPs, so every client can choose the ICP that suits their budget and preferences and switch when unhappy.
In the wholly-owned model, the EOR opens local entities and acts as full-service payroll partners: they often hire in-house payroll accountants, so you have local payroll professionals (armed with powerful payroll software) supporting your company.
In addition to payroll, EOR also administers international benefits, handles international taxes, and provides other global human resources services, allowing you to attract multinational top talent without hiring an in-house payroll team to handle international HR.
Deel operates as a wholly-owned EOR in over 60 countries and has partner-provided employment options worldwide.
Open a foreign subsidiary and outsource to a local payroll provider
Opening a foreign subsidiary is the most time-intensive option: you essentially have to open a business in a foreign country. Once you open that business, you can hire. From there, you can handle payroll operations in-house or call up a local payroll provider and use their services to act as your local payroll manager in that country, just like you would domestically.
Opening a local entity is a significant undertaking–most companies don’t have the time, resources, and expertise to do it once, let alone for every employee in a new country. That’s the beauty of an EOR: because they already have local entities worldwide, they can legally hire and run payroll for employees across the globe instantly.
Learn more about your options to hire international employees.
FAQs about global payroll
Find additional information about multi-country payroll in our frequently asked questions section.
How do US companies pay international employees?
US companies can only hire and pay foreign employees through a foreign subsidiary. If a US company doesn’t have a foreign entity, it can partner with an EOR to hire and pay international employees.
However, a US company can pay international independent contractors directly, no matter where they live.
What taxes do you pay for foreign employees?
Payroll taxes for international employees depend on the employee’s home country. A US company hiring an employee from Germany or Argentina needs to comply with tax regulations in these countries, not in the US.
If you hire independent contractors, they’re responsible for their own taxes.
How much do you pay international employees?
Some companies prefer location-independent salaries, while others base the salary on living costs in the employee’s country of residence and offer similar pay as local companies.
Simplify global payroll with Deel
Global payroll shouldn’t stop you from building a world-class international team. Our EOR and global payroll platform make international hiring and the global payroll experience hassle-free for companies and workers alike.
Deel lets you hire full-time employees in more than 150 countries and ensures compliance with local laws and tax systems while keeping international onboarding easy. We also offer ready-made contracts vetted by legal experts, EOR services, independent contractor management, and a lot more!
Request a demo and let us show you everything you can get with a single service.
This post is for informational purposes and should not be considered legal advice. Talk to a legal professional such as an employment lawyer for more info.