Compliance is critical to managing global payroll for international employees—especially because payroll regulations vary worldwide. Employers who violate these regulations risk penalties that may negatively impact their bottom line and business reputation in an increasingly scrutinized global business environment.
Fortunately, maintaining global payroll compliance doesn’t have to be complicated with the right solution. This guide explores the common risks associated with global payroll compliance and effective mitigation strategies.
What is global payroll?
Global payroll refers to the management of all payroll operations for employees in multiple countries. Companies with employees overseas must abide by each jurisdiction’s employment and payroll regulations regarding, but not limited to:
- Wage calculation and pay
- Pre-tax deductions and withholdings
- Post-tax deductions and withholdings
- Fiscal years and financial cut-off dates
- Payroll cycles and pay periods
- Employer contributions
- Bonuses
- Statutory benefits
- Employee work hours
- Worker classification
- Paid time off
- Overtime pay
- Severance
- Payslip provision
What is payroll compliance?
Payroll compliance means following all government laws that dictate how employees receive pay. Employers who violate these payroll regulations may face fines and other legal consequences, including potential business restrictions and reputational damage.
The complexity of payroll compliance compounds with every new market a company enters since payroll requirements vary by country. Employers must also keep up with evolving regulations in each location, such as minimum wage increases, payroll tax rate adjustments, and changes to statutory benefits. Additional considerations include:
- Digital payment regulations and data protection requirements
- Cross-border payment reporting obligations
- Local currency regulations and exchange control rules
- Electronic payslip requirements
- Mandatory Social Security contributions
Global payroll compliance extends beyond traditional payment processing to encompass data privacy laws, digital security standards, and environmental, social, and governance (ESG) reporting requirements in various jurisdictions.
5 global payroll compliance risks to avoid
Companies interested in hiring and paying international employees should understand the compliance challenges of administering payroll in multiple countries. Here are five common compliance risks associated with running a global payroll.
1. Global payroll processing errors
Administering global payroll requires managing numerous data points in multiple countries. Beyond processing payments and taxes, payroll teams must also handle time and expense reports, calculate bonus data benefits packages, and keep up with earnings and tax changes.
To process payroll for employees in multiple countries, companies may choose to invest in in-house payroll teams in each country or outsource payroll to in-country partners. These options may cause payroll data to become siloed over disparate systems and formats, negatively impacting transparency, reporting efficiencies, and data security across jurisdictions.
2. Employment law variance by country
Because payroll compliance varies by country, companies must understand and abide by local payroll and employment laws in each target market. These laws typically cover requirements for minimum wage, paid leave, tax contributions, statutory benefits, and remote work regulations.
Some examples of employment laws in different countries include:
- The European Union Working Time Directive (WTD). This legislation protects employee health and safety. It limits working hours and overtime and establishes break and paid leave standards. The WTD is enforced differently in each member nation and has evolved to address remote work scenarios.
- The Labor Law of the People’s Republic of China. This legislation regulates the number of hours employees in China work and provides guidelines on employment contracts, wages, labor disputes, working conditions, welfare, and overtime, with recent updates addressing digital payment requirements.
Mandatory 13th-month pay in the Philippines. Filipino employees are entitled to an annual 13th-month pay, which amounts to one-twelfth of the employee’s base annual income. Other countries that require employers to provide 13th-month pay include Indonesia, Greece, Mexico, Brazil, and Spain.
Read also: Our Complete Guide to Payroll Tax + How to Calculate
3. Employee and contractor misclassification
Worker classification determines whether or not an employer withholds taxes from a working individual’s pay. For example, employers withhold necessary taxes from full-time employees’ base pay but not from payments to contractors; contractors pay self-employment tax.
Worker classification depends on factors like the worker’s financial relationship with the company and the degree of control over their work. Additionally, classification laws vary between countries, and the distinction isn’t always easy to determine, especially with the rise of hybrid and remote work arrangements.
If employers misclassify their employees as contractors, they are liable for unpaid taxes, employee back pay or retro pay, and other legal fines. Even if employers unintentionally misclassify their workers, they still face similar consequences.
4. Permanent establishment risk
When a business has a stable presence in a country outside its home country and is creating revenue, it triggers permanent establishment. If a company creates a permanent establishment in another country, it is subject to local corporate taxes and could end up paying taxes twice on the same income unless protected by tax treaties.
5. Data privacy and security
Data privacy and security laws protect sensitive employee data gathered for payroll. Payroll teams must comply with data security laws to ensure secure and compliant data management in every country in which they have employees. If a company does not follow proper payroll data security protocols, they risk exposure to cyber-hacking and severe financial penalties.
For example, the General Data Protection Regulation (GDPR) standardizes data privacy laws across the European Union (EU). The GDPR laws apply to any organization that processes personal data for EU citizens, even if it’s not located in the EU. The GDPR issues harsh fines and penalties against organizations that violate its privacy and security standards, with fines of up to €20 million or 4% of global annual revenue.
Reduce compliance risks by outsourcing global payroll
The easiest and most cost-effective way to avoid the risks of global payroll compliance is to outsource payroll operations to a global payroll partner like an employer of record (EOR).
Partnering with an EOR provides companies with an all-in-one solution for hiring and paying international talent while bypassing the need for local entities in each target market.
An EOR serves as the legal employer of global talent and handles hiring, onboarding, payroll, benefits administration, and compliance for the international workforce while companies maintain control of all day-to-day responsibilities.
The benefits of partnering with an EOR for global payroll administration include:
- Accurate, on-time payments to global talent
- Centralized, standardized platform for payroll data and reporting
- Compliance with local payroll and employment regulations
- Secure data privacy and protection
- Time and cost savings
- Increased productivity
- Local HR and finance support in each market
- Scalable infrastructure for growth
Learn more: What Is an Employer of Record (EOR)?
Compliantly hire and pay talent in 185+ countries with Velocity Global
Working with an experienced and trustworthy partner is vital to ensuring global payroll compliance. Overcome borders and simplify global payroll administration by partnering with Velocity Global.
Our Global Employer of Record (EOR) solution helps businesses confidently and compliantly hire and pay their workforce in 185+ countries without the burden of entity establishment or navigating complex labor and payroll laws.
Contact Velocity Global today to learn how we can help quickly hire and pay global talent while maintaining full compliance.
Disclaimer: The intent of this document is solely to provide general and preliminary information for private use. Do not rely on it as an alternative to legal, financial, taxation, or accountancy advice from an appropriately qualified professional. © 2023 Velocity Global, LLC. All rights reserved.
