Sourcing global talent allows companies to find the right employee for their specific needs. However, managing talent worldwide is challenging—especially regarding payroll.
Companies must navigate obstacles such as paying talent in different currencies to protect sensitive employee data and adhering to evolving compliance requirements.
To maximize rewards and minimize risks when hiring internationally, companies must stay ahead of payroll challenges. This guide explores common global payroll challenges companies face when paying international teams and suggests solutions for overcoming them, including the use of Employer of Record (EOR) services.
8 Global payroll challenges
Global payroll refers to managing payroll for employees located around the world while complying with local tax and employment laws. This complex task, also known as “multi-country payroll,” requires a deep understanding of various international regulations and practices.
Global payroll management presents numerous challenges for businesses operating across borders.
1. Complying with employment and tax laws
Every country enforces unique requirements for compliantly paying international employees. A few examples of differences between countries include:
- Statutory minimums for paid vacation
- Requirements for overtime pay
- Contributions toward social security and healthcare
- Employee vs. contractor classification
- Tax regulations
- Unemployment benefits
- Process for employee severance
Payroll administration teams must understand the payroll requirements in each foreign market where they pay employees or risk non-compliance.
Running payroll in various countries also requires staying current with changes made to tax regulations, contribution rates, minimum wage increases, and other payroll-related regulations.
Solution: Consider global payroll outsourcing options
If payroll teams lack the resources to routinely track regulation changes and ensure distributed employees receive accurate payments, they can consider various global payroll outsourcing options:
- Use an employer of record (EOR). An EOR allows businesses to quickly and compliantly hire and pay international employees without establishing their own entities. This solution provides a centralized global payroll platform as part of its services.
- Establish entities and use in-country payroll vendors. For companies with established entities, outsourcing to local payroll providers can ensure compliance with country-specific regulations.
- Utilize a contractor management solution. This option avoids entity establishment but is only suitable for businesses hiring non-employee talent.
Each approach has its benefits, and the choice depends on a company’s specific needs, resources, and growth strategy.
Learn more about the benefits of international payroll outsourcing.
2. Ensuring accurate payroll every time
Retaining talent requires a smooth back-end employee experience, which includes timely and accurate payments. HR, finance, and legal teams must be aligned regarding employee time off, bonuses, promotions, and terminations to avoid payment inaccuracies.
Inaccurate payroll poses a legal and financial risk to the company and negatively impacts employee morale and the company’s reputation.
Additionally, manual payroll processes are time-consuming and prone to errors, especially when dealing with multiple countries and currencies. This inefficiency can lead to increased costs and compliance risks.
Lastly, Integrating payroll systems and processes when companies merge or acquire international entities can be a significant challenge.
Solution: Standardize country payroll systems and leverage automation
Companies need a streamlined and standardized payment platform that their global teams can easily navigate. This platform should consolidate all payroll streams and be customizable to account for different payment types, payment schedules, and local benefits and taxes. Such standardization is crucial during mergers and acquisitions, where integrating diverse payroll systems can be a significant challenge.
Companies that cannot invest in adopting, customizing, and maintaining a standardized global payroll system can partner with a global payroll service provider that offers a centralized solution for managing payroll worldwide.
Automating global payroll processes can significantly reduce errors and improve efficiency. Automated systems can:
- Calculate taxes and deductions accurately across different jurisdictions
- Ensure compliance with local labor laws and regulations
- Generate reports for better visibility and decision-making
- Streamline data entry and reduce manual errors
- Facilitate smoother integration of payroll systems during mergers and acquisitions
Organizations that do not have the resources to invest in adopting, customizing, and maintaining a standardized global payroll system with automation capabilities can partner with an EOR service. An EOR typically offers a centralized, automated solution for managing payroll worldwide, ensuring accuracy and compliance while reducing the administrative burden on the company’s team.
This can be particularly beneficial during mergers and acquisitions, as the EOR can help navigate the complexities of integrating different payroll systems and ensuring compliance across multiple jurisdictions.
3. Overcoming cultural and logistical barriers
In addition to keeping up with unique payroll contributions, payment types, and pay schedules for employees in different countries, companies must also overcome cultural barriers that may result in inaccurate and delayed payroll.
Challenges that further complicate global payroll include:
- Currency exchange rates
- Maintaining foreign bank accounts
- Language barriers
- Working across different time zones
- Local holidays and customs affecting pay schedules
- Differing expectations around pay transparency and communication
International payments often include high conversion rates and fees, and some foreign employees may only accept payments to government-approved bank accounts.
Companies must prepare appropriate payroll documents in the local language and provide real-time payroll support to employees spanning multiple time zones. These partners also provide local, real-time support to talent across all time zones, further enhancing the efficiency and accuracy of global payroll operations.
Solution: Leverage technology and cultural intelligence
To address these challenges, organizations can leverage a combination of advanced technology and cultural intelligence. Utilizing sophisticated payroll software with multi-currency capabilities and built-in exchange rate updates can significantly streamline international transactions. Cloud-based systems allow real-time access and updates across different time zones, facilitating seamless communication and processing. Additionally, implementing multilingual payroll platforms or investing in translation services can effectively overcome language barriers.
Developing cultural intelligence within the payroll team is equally crucial. Organizations can enhance their ability to navigate diverse cultural contexts by providing training and resources on international business practices. This cultural awareness, combined with technological solutions, creates a more efficient and culturally sensitive global payroll process, ultimately improving employee satisfaction and ensuring compliance across various international settings.
For organizations seeking comprehensive support, an EOR or reliable global payroll partner works with in-country professionals to overcome cultural barriers around the world and ensure global payroll processing remains compliant with country requirements. They also provide local, real-time support to your talent—no matter the time zone.
4. Classifying workers correctly
Proper worker classification is crucial for businesses operating globally to maintain compliance and avoid significant legal and financial risks. Misclassifying employees as independent contractors, or vice versa, can lead to severe consequences, including hefty fines, back pay obligations, and reputational damage.
To ensure correct classification, companies should consider several key factors:
- Degree of control over the worker’s schedule, methods, and tools
- Financial relationship, including opportunity for profit or loss
- Nature of the relationship, such as permanency and integral nature of work
- Local regulations specific to each country where workers are engaged
Further, with the rise of the gig economy, managing payroll for a diverse workforce that includes full-time employees, contractors, and gig workers across different countries presents unique challenges.
Solution: Implement robust classification processes and leverage global employment solutions
Organizations can implement a multifaceted approach to mitigate risks associated with misclassification. One essential approach is conducting regular compliance audits to review worker classifications. This process should include a thorough examination of existing contracts, work arrangements, and local labor laws.
Also, developing and implementing clear policies and guidelines for engaging independent contractors can help ensure consistency across the organization. These policies should be regularly updated to reflect changes in local and international labor regulations.
For companies seeking full-time employees in countries where they don’t have a legal entity, an EOR can handle the complexities of international employment, ensuring proper classification and compliance with local labor laws. This approach allows businesses to expand globally while minimizing the risks associated with worker misclassification.
5. Protecting employees’ personal data
Employees worldwide rank security as their most important priority associated with pay. Still, employee satisfaction should be just one of several reasons companies ensure all employee payroll data stays private and secure.
Data protection laws vary globally and come with severe penalties for violations. Consider the Global Data Protection Regulation (GDPR), which standardizes data privacy laws across the European Union. Serious GDPR violations can result in a fine of up to €20 million or 4% of a company’s annual revenue from the preceding year—whichever is higher.
Companies that manage international payroll increase the risk of data breaches. Payroll teams must be aware of data collection and privacy requirements that vary by country. In addition to the EU’s GDPR, countries such as Australia, Brazil, Japan, India, and New Zealand have their own data privacy protection laws.
Solution: Implement robust data protection measures
To address these challenges, organizations should:
- Ensure data privacy is a key component of their payment and time-tracking systems
- Establish practices to stay current on evolving data protection legislation in every country of operation
- Implement strong access controls, encrypt sensitive information, and regularly update security protocols
- Conduct regular audits and risk assessments to identify and address potential vulnerabilities promptly
For companies lacking the resources to build internal legal and finance teams to assist with employee data protection, an EOR provides a secure, centralized payroll solution that complies with mandatory data encryption, storage, reporting, deletion, and other data security requirements worldwide.
6. Maintaining transparency and visibility
When processing payroll for talent in multiple countries, data can quickly become siloed in various locations and formats—especially if a company uses several in-country payroll vendors with different platforms and standards. This fragmentation not only makes it difficult for teams to efficiently oversee and report on payroll data across countries but also hinders real-time decision-making and strategic workforce planning.
Lack of consolidation and standardization can lead to:
- Delayed access to critical payroll information
- Inconsistent reporting across different regions
- Increased risk of compliance issues due to outdated or inaccurate data
- Difficulty in performing timely payroll audits and analyses
Solution: Implement a centralized, real-time payroll solution
Companies with remote employees in multiple countries should consider using a centralized payroll solution that not only coordinates all payroll streams into one platform but also provides real-time data access and reporting capabilities.
A modern, centralized payroll solution offers several advantages:
- It standardizes payroll information into a single format for easy management and reporting across all countries while providing up-to-the-minute access to payroll data. This real-time visibility enables quick decision-making and proactive problem-solving.
- By serving as a single source of payment, it reduces redundancies, human error, and other risks associated with using disparate payroll vendors in each country.
- Real-time data updates help ensure that payroll processes always comply with the latest regulatory requirements in each jurisdiction. This enhances compliance and provides valuable insights into labor costs for strategic workforce planning.
7. Measuring results for continuous improvement
Tracking key performance indicators (KPIs) is crucial for organizations to assess and enhance their global payroll processes. By monitoring specific metrics, companies can gain valuable insights into the efficiency, accuracy, and compliance of their payroll systems. This data-driven approach allows businesses to identify areas for improvement, optimize resource allocation, and make informed decisions about their payroll operations.
Some essential payroll KPIs to consider include:
- Cost of payroll as a percentage of total revenue or per employee
- Time required to process payroll
- Payroll accuracy rate and error reduction
- Speed of compliance implementation
- Time to resolve payroll queries
- Number of payroll inquiries from employees
Regularly analyzing these metrics enables organizations to benchmark their performance against industry standards and track progress over time. This continuous monitoring helps identify trends, pinpoint inefficiencies, and highlight opportunities for process optimization.
Solution: Implement a data-driven approach to payroll management
- To leverage the power of payroll analytics for continuous improvement, organizations should establish a comprehensive dashboard that tracks relevant KPIs across different countries, job roles, and employee types. This centralized system provides a holistic view of payroll performance and facilitates data-driven decision-making.
- Regularly review and analyze payroll metrics to identify trends, anomalies, and areas for improvement. This ongoing assessment helps in developing targeted strategies to enhance payroll processes and overall efficiency.
- Utilize advanced analytics tools and technologies to gain deeper insights into payroll data. These tools can help identify patterns, predict future trends, and provide actionable recommendations for process optimization. Set SMART (Specific, Measurable, Achievable, Relevant, Time-bound) goals for each KPI and regularly measure progress towards these objectives. This approach ensures that improvement efforts are focused and measurable.
By adopting a data-driven approach to payroll management, organizations can continuously refine their processes, reduce costs, minimize errors, and ultimately enhance employee satisfaction.
8. Choosing the right global payroll method
Despite its many benefits, centralized global payroll may not be the right solution for every business. Finding a suitable global payroll model requires careful consideration based on a company’s circumstances and goals. Below are four global payroll methods to consider:
- In-house global payroll. This method processes payroll internally with in-house teams in each country. It gives businesses complete control over how a global workforce is paid. However, it’s not scalable, and teams must handle payroll and compliance challenges independently.
- Decentralized global payroll. This strategy outsources payroll to local payroll providers in each country. This can be an affordable option for businesses hiring talent in one or two markets, but it negatively impacts standardization and visibility at scale.
- Centralized global payroll. Companies can outsource payroll to one global payroll provider. This method consolidates in-country payroll processes to one partner to reduce risk and increase efficiency. However, companies should thoroughly vet providers for reliability and compliance.
- Employer of record (EOR) services. This option allows companies to hire and pay employees internationally without establishing their own legal entities. An EOR handles payroll, benefits, and compliance, making it an attractive option for businesses looking to expand globally quickly and efficiently.
Solution: Consider business needs and goals
There is no one-size-fits-all global payroll solution, so companies must be discerning when choosing a payroll method that best suits their international expansion goals.
Key considerations include:
- Long-term presence plans in specific countries
- The need for quick hiring and payment of employees in multiple markets
- Available internal resources for managing payroll compliance
- Alignment of current payroll methods with future growth goals
- The level of control desired over payroll processes
- Budget constraints and cost-effectiveness of different options
- The complexity of local labor laws and regulations in target countries
By carefully evaluating these factors, businesses can determine whether an in-house approach, decentralized model, centralized solution, or EOR service best fits their needs. It’s also important to remember that as a company grows and evolves, its payroll needs may change, necessitating a reassessment of the chosen method.
Learn more in our complete guide to global payroll.
Overcome every global payroll challenge with Velocity Global
Managing payroll for international employees is critical to any global expansion strategy. By partnering with a global payroll provider like Velocity Global, companies effectively address every challenge of managing payroll for talent worldwide.
As part of our Employer of Record (EOR) solution, we help companies compliantly hire and pay teams in 185+ countries. Our integrated Global Work Platform provides accurate, on-time payments to teams while consolidating payroll streams into one centralized platform and offering international employees local, ongoing support whenever they need it.
By partnering with Velocity Global, businesses can quickly enter new markets and hire globally without setting up an entity. We handle everything from onboarding and payroll to benefits administration and compliance so teams can focus on daily tasks and big-picture goals.
Whether a business is expanding into new markets, managing a distributed workforce, or navigating complex international regulations, Velocity Global’s EOR services provide the expertise and technology teams need to overcome global payroll challenges efficiently and compliantly. Learn more.
Topic:
Payroll
