As businesses continue to expand globally, whether seeking to profit from new international markets, improve efficiencies or attract the world’s top talent, one thing is for sure: an international payroll is becoming increasingly common.
Technology has closed the gaps between marketplaces, office spaces and remote workers the world over. The resulting increase in freelancers, contractors and satellite teams has created a new problem for HR departments who need to ensure the timely and legal payment of overseas employees, often spanning several international locations.
In most cases, it’s not as simple as a quick transfer to an overseas bank account. There are many factors to consider including the requirements and preferences of your foreign employees, customs and laws in the host country, exchange rates and fees. We’ve gathered our top tips to ensure you’re paying your international employees legally, profitably and punctually.
The first step when setting up payroll across multiple countries is to gain an understanding of salary expectations in that new country. International businesses stand to lose money if they overpay staff for roles that do not demand such high salaries. Equally, if salaries are set too low, companies will fail to attract the best talent in your chosen foreign country. This should be an ongoing task.
87 percent of companies keep an eye on salaries compared to performance in the company and within the host country, making adjustments as necessary.
Companies should then consider the types of payment method available to them in the host country and learn which methods employees value most. It’s no longer common for employees to receive a cash payment in most countries due to security and traceability concerns. More common in the US, although increasingly disappearing in the rest of the world, the check has historically been a common payment method. The most common payment method today is fund transfer. Available both on a national and international scale, companies send a bank file to their bank dictating what funds are to be sent to whom. The bank then actions this come payday.
In some less-developed nations such as Afghanistan and Nigeria, mobile money is the most common payment method. Requiring only a phone and a SIM card, the funds can then be used by the employee to pay for goods and services or to convert to cash. As far back as 2011, South African bank FNB set up the technology for their clients to pay their employees using mobile devices. This was as a direct response to a country in which, at the time, 12.4 million adults had never banked formally.
Understanding and selecting the appropriate payment method for your new market will be essential to your business success.
Nothing damages staff productivity like late payments or incomplete salaries. Ensuring your employees get paid as laid out in their employment contract, regardless of their location, is vitally important in establishing a dedicated workforce in new countries.
On a local level, bank transfers fall under two categories. Automated Clearing House (ACH) is the system which transfers money overnight in the USA. It’s inexpensive and used to pay 82% of the US workforce. ACH’s British equivalent is Bankers Automated Clearing Services or BACs. Another three-day process that is relatively inexpensive, 90% of workers in the UK are paid in this way.
In terms of international payment options outside of your home country, there are several that range in time and cost from same-day transfers for just a few cents to up to eight working days in the case where governments need to clear funds. Within the Single Euro Payment Area, a group of 32 countries can make same or next day Euro transfers for just a few cents. IBAN and SWIFT usually take 2 to 3 days.
Invariably, you will need to obtain some crucial information from your employee to ensure smooth payment. These include bank name, bank address, beneficiary name, beneficiary address, SWIFT/BIC code, IBAN or account number (these long codes identify which bank or bank account you want the money to go to) and possibly bank to bank details. Updating your payroll system to facilitate storage of this information will be vital, as any missed or inaccurate information will lead to delays and dissatisfaction.
Every country in the world has its own laws and regulations surrounding money transfers, wages and tax. Navigating these regulations can be challenging for the uninitiated.
Designed to protect against fraud, trafficking, money laundering, and terrorist, global money movement laws must be understood and adhered to in order to avoid fines or even jail terms. For example, transactions which exceed a certain amount must be reported in the US, whereas the UK rates each transaction for suspiciousness. And with ever-changing embargoes, it can be unclear where you are permitted to send money. Currently on the USA’s list are Cuba, North Korea, Ukraine, Iran, Sudan, and Syria.
In the United States, the Office of Foreign Assets Control or OFAC has the job of enforcing a list of blocked people and accounts. Companies found to be conducting transactions with these accounts face penalties of anything from $1,000 to $250,000 per transaction, so it pays to check your vendors on the list before you start doing business.
Next, you need to understand and comply with local tax laws. Have your employees been declared and are their social securities up to date?
In the Middle East, countries have a Wage Protection System that protects workers and keep local governments informed of employee wages. In a recent incident, a member of staff from a US company on secondment in the UAE did not have his wages routed via the WPS, leading to him being detained and having his passport confiscated until the company routed $500k through the WPS to free him.
Companies must also remain up to date on local employment laws and payroll laws. This will ensure employees are working the legal number of hours for a legal wage. It is the responsibility of the Human Resources team to understand income tax and any social security, or Medicare (in the case of US citizens) that they are required to contribute to according to local laws.
Failure to pay country tax in nations where you are conducting business or evading local tax laws, even if this is by accident, could have a serious effect on your business’s credibility at best, and at worst land employees in prison.
Fees for global money transfer can be anything from a few cents to up to $60. If your employment of staff in new markets is not just a short-term measure, it’s important that you figure out the most cost-effective way to send salaries overseas month in month out. If sending large sums regularly, fees can be negotiated with your bank to ensure they don’t hit your bottom line too hard.
Another potential pitfall for your bottom line is currency conversion. Decide which currency it is best to pay your local staff in, taking into account their needs and the current state of the local currency compared to your home currency. Paying in your home currency protects you from potential fluctuations but could be your employees lose out. Adopting the host currency will support your workers, but may mean the business suffers. Choosing a third, neutral currency such as the Euro or the US Dollar offers a steadier option that benefits both parties. Many companies also opt for split pay, between the host and home currency, again balancing any economic turbulence.
Once a currency has been settled upon, there are many ways to strategically improve margin when paying overseas employees. Using the FX spot rate, which fluctuates throughout the day could lead to you spending way over budget on personnel because the expenditure is difficult to calculate and plan for.
Instead, consider using FX Forwards, where you lock in the cost of currency in advance, ready to use come payday. Converting funds at an advantageous time is advisable to ensure maximum financial efficiency. As always, more frequent, large-scale transactions will make this a more inexpensive process, use your size and power to negotiate a better rate.
How can a payroll provider help?
If you have embarked on operations in a foreign company but still don’t know your country payroll from your local payroll, consider enlisting the help of an in-country payroll provider to guide you. Handling everything from employee information to local tax laws, your service provider will keep your operations legal and functioning well for employees and your bottom line. They will see the process through from start to finish, ensuring timely, accurate and legal payments with all the administration dealt with by experienced professionals. Whether you’re hiring long-term branch managers, organizing secondments or bringing on independent contractors, a local in-country payroll provider will have the experience to handle all the formalities. Handling currency exchange and fees, payroll providers offer an impressive return on investment as their expertise allows you to cut costs in the payroll process.
As companies grow and scale internationally challenges such as using a multitude of global vendors, lack of standard processes, not having a single system of record, lack of visibility and consolidated reporting will begin to arise.
In order to standardize global payroll, employers need to have control and visibility over the entire international payroll. Global Payroll Software provides control and visibility through consolidated reporting such as a multi-country employee cost. Offers flexibility for scalability while facilitating a clear line of communication between the employer and the in-country payroll providers giving the employer ownership of the entire global payroll system. Global Payroll software will integrate with the HCM and provide security in terms of governance and data protection.
Global Payroll software delivers a truly Global Payroll System which can serve operational and strategic needs and offer increased value by the Global Payroll Team to deliver the future growth business plan.
To find out more about Payslip’s Global Payroll Software, contact us and we will arrange a free trial!