Are you thinking of taking your business overseas or looking for talent outside your native country? Whether international expansions are small or large, they open up new possibilities for growth and discovery. At the same time, going global adds complexity to a company’s operations. Onboarding international staff and paying them correctly and on time represent some of that complexity.
With global payroll, there are often many things businesses can overlook. Compliance with local labor and tax laws is just the beginning. However, it’s one of the most critical aspects of paying international team members and can involve several strategic decisions. Before going global, consider four of the most important things you should know about international payroll.
1. Hiring Employees Requires Local Business Entities
Adding direct hires to your international team can be more advantageous than working with contractors. Your business maintains tighter control over the work people produce, and you establish more of a working relationship. You may also find that having employees better suits your business model or its operations.
That said, you must own legal entities wherever you want to hire staff members. Say you plan to expand your operations to New Zealand. Before bringing employees on board, your business needs to establish a local legal entity, which could take a while. This lag time isn’t practical for some companies because they only need a few employees to join their ranks. In addition, these businesses might not have plans for extensive expansions or local branch offices.
For companies in these situations, working with an employer of record service may be the answer. An EOR employs international workers on another business’s behalf. Companies can hire internationally without going through the process of establishing separate entities, because EORs already have entities of their own. EORs also provide global payroll services to ensure international remote workers receive accurate payments and competitive benefits for their work.
2. Professional Employer Organizations May Not Be EORs
Some providers that help companies with international payroll are known as professional employer organizations. A PEO typically handles payroll and benefits for businesses that hire employees in more than one country. However, the responsibilities of a PEO usually end there. Companies that partner with PEOs must have local legal entities in the countries where staff members live and work.
Working with a PEO doesn’t ensure that your company complies with another country’s labor laws, either. With a PEO, your business remains the legal employer on paper and must handle compliance with local regulations. These may include 13th-month salary payments and contributions to national benefit programs. While working with a PEO involves a co-employment relationship, it means dedicating more resources from a business perspective.
Using the services of a PEO may be a viable option if you already own legal entities in other countries. Like an EOR, a PEO will help your international employees get their paychecks and benefits accurately and on time. But unlike an EOR, a PEO cannot employ workers on your behalf or make sure you check all the compliance boxes. You’ll need a legal or HR team to handle and stay on top of these issues.
3. Data Security Laws Can Vary
Most companies and HR departments know that running payroll means collecting personal and potentially sensitive employee information. Some details, such as legal names and home addresses, may not be as private. However, bank account numbers for direct deposits and tax ID or Social Security numbers are more sensitive. This information can lead to fraud and identity theft if it falls into the wrong hands.
While businesses might be familiar and compliant with U.S. data security and privacy laws, these can vary in other countries. Laws like the European Union’s General Data Protection Regulation can impact how companies use and store employee data. For instance, you may need to prove that the information you collect relates to an employee’s contract.
Your business may also need to promptly report any data breaches that expose staff members’ personal details. Data security laws like GDPR may require companies to hire or designate a data protection officer. This person manages internal audits of payroll systems, procedures, and practices. A data protection officer is also responsible for recommending changes that impact payroll methods and employee data collection.
4. Currency Exchange Rates May Cause Expenses to Fluctuate
Typically, you’ll need to pay your international employees in their local currencies. Other expenses and contributions, such as taxes and benefits, must also be in the local country’s currency. As the value of the U.S. dollar and other nations’ currencies go up and down, exchange rates influence spending power.
While it would be nice if exchange rates stayed the same, the reality is they often don’t. For any business with global operations and employees, this means weekly or monthly expenses can fluctuate. Depending on your payroll schedule, your labor costs could become more vulnerable to shifting exchange rates.
For example, a biweekly versus monthly schedule may expose a business to more risk from volatile exchange rates. Planning for these risks with contingency funds and equitable pay adjustments is often necessary. For instance, the U.S. dollar is currently stronger than the Canadian dollar. Canadian-based companies paying U.S. contractors or employees may have to account for higher payroll expenses to pay fair market rates.
Global Payroll Tips
Going international opens up more opportunities for businesses. But hiring and paying employees around the globe can add some twists and turns to a company’s expansion plans. Different labor laws, various payroll solutions, and fluctuating exchange rates may impact global operations and strategies. However, working with an EOR can simplify global payroll, keep businesses compliant, and make international expansions more achievable.