Paying International Employees: A Complete Guide
It’s a privilege of the 21st Century to be able to tap into international talent so easily.
However, if paying workers in the U.S. isn't fiddly enough, try adding the complication of paying international employees into the mix.
New territories mean new labor laws and customs to navigate and adhere to. Then there's international banking and currency fluctuations.
Use this guide to help you understand the challenges of paying international employees and what your options are.
Challenges Of Paying International Employees
Paying international employees is complex due to differing legal, tax, and regulatory requirements across various jurisdictions:
Compliance with local laws
As mentioned above, each country has its own tax and labor laws to keep track of and there are international labor laws too. Staying compliant with these requires ongoing monitoring and adaptation to these changes to avoid legal penalties.
International payments and fees
Handling payroll in multiple currencies can be challenging due to exchange rate fluctuations and banking requirements and fees.
Further, as Wendy Makinson, HR Manager at Joloda Hydroroll, highlights “Some employees around the world still prefer or have to receive their payments in cash and, although this is usually possible when using a global payroll provider, it can incur additional costs."
Time zone differences
Coordinating payroll operations across multiple time zones can complicate communication and workflow, leading to delays and inefficiencies.
Data integration and accuracy
Integrating data from various internal systems and ensuring its accuracy is crucial as errors can lead to incorrect payments and compliance issues.
Security and privacy concerns
Safeguarding employee data across different regions, each with specific privacy laws (like GDPR in Europe), requires robust security and compliance protocols.
How Can A U.S. Company Pay International Workers?
Your options for paying international employees depend on how much responsibility you want to take regarding their overall employment. Your options are:
In-house
Some organizations, particularly larger ones, choose to manage global payroll internally using separate business entities in each jurisdiction.
Of course, this means 1) setting up business entities in multiple jurisdictions and 2) hiring personnel to process the payroll.
The advantages of this are that you completely own the payroll process and experience.
While payroll software can help, the complexity of this process and the resources required lead many organizations to choose alternative methods.
Advantages: Greater control and customization.
Disadvantages: Complexity and resource requirements.
Outsource using a global payroll service
Maybe you don’t mind setting up a business entity and legally employing workers in another country, but you still don’t want to handle payroll.
Enter global payroll services! These organizations have payroll professionals in countries across the globe who’ll handle payroll processing for you and ensure it’s accurate and compliant.
Advantages: Reduced complexity and resources.
Disadvantages: Reduced control, still need to set up a foreign entity.
Outsource using an employer of record
Rather than try and run global payroll in-house, many organizations outsource the process using an employer of record arrangement.
An employer of record (EOR) acts as the legal employer in the jurisdiction where you want to hire workers and handles all the administrative functions such as payroll.
They’ll have a legal entity in the jurisdiction of choice and specialists to handle all the admin for you and keep you compliant.
Some of these services can help you get set up and hire in less than a month.
Advantages: Simple, quick, and less resource intensive.
Disadvantages: Reduced control and service dependency.
Use contractors
Another option is to hire contractors who are, in theory, simpler to employ.
The only thing to be mindful of here is that, if local authorities legally classify your contractor as an employee, your company is liable for unpaid taxes, back pay, and benefits. You could also get additional fines.
Advantages: Simple and easy.
Disadvantages: Still have to factor in local laws and regulations and those of your home country.
Paying International Employees: 5-Step Decision-Making Process
Choosing between going it alone or using an Employer of Record (EOR) or global payroll service depends on several factors related to your business needs, resources, and strategic goals.
Here’s a step-by-step approach to help you make a decision:
1. Assess your business needs and goals
- Geographical presence: Consider the countries where you currently have employees and where you plan to expand. The legal and administrative challenges vary by country and some are much more complex and protracted than others.
- Employee count: Determine how many employees you have internationally and the projected growth in these numbers.
- Core business focus: Evaluate whether managing payroll internally would distract from your core business activities.
2. Evaluate your current resources
- Expertise: Do you have, or can you reasonably acquire, the necessary expertise in international labor laws, tax regulations, and payroll processing?
- Technology: Assess whether you have the technology to manage payroll efficiently across different countries, including compliance updates and integration with other systems.
- Budget: Consider the financial implications including the cost of setting up and maintaining an in-house process versus outsourcing fees.
3. Assess pros and cons
- Control and customization: In-house processing gives you more control and potentially more customization options, which is valuable if you have complex payroll needs.
- Scalability: Outsourcing to an EOR or payroll service can scale more easily with your business growth, especially in new markets.
- Risk management: Outsourcing can reduce the risk of non-compliance and the burden of legal penalties.
4. Long-term strategic fit
- Cost: While HR outsourcing services might seem more expensive upfront, they could be more cost-effective in the long run by avoiding fines and reducing the need for specialized staff.
- Business strategy: Align your choice with your overall business strategy. If rapid international expansion is the goal, outsourcing or using contractors might provide the agility you need.
5. Request proposals and conduct due diligence
Request detailed proposals from several EOR and global payroll service providers. Things to look out for besides cost and reputation:
- Local expertise
- Transparent pricing
- Accurate employer burden calculations
- Customer support levels
- Long-term scalability
- Partner-dependent vs owned entity providers (the latter is recommended).
- Check references and reviews.
6. Make a decision
Make a decision based on your business’s capacity to manage payroll internally without compromising compliance and operational efficiency, and how well each option supports your long-term business objectives.
Paying International Employees Best Practices
If you decide to go it alone and handle the process in-house, here are some best practices to help guide you:
1. Standardize where possible
Aim to standardize processes across different countries to reduce complexity and increase efficiency. However, allow flexibility for local customization where necessary to meet specific legal and cultural requirements.
2. Stay updated on local laws
Continuously check your knowledge of local employment laws, tax regulations, and reporting requirements in each country. This may involve regular training for your payroll team or consultations with local experts.
“As a business that makes payments to over 35 countries, it means we have to make sure we are on top of local rules when it comes to data, tax, labor laws, and security. Although rules don’t change very often, we don’t want to be doing anything incorrectly or illegally so set aside regular time to check regulations and that we are compliant,” says Makinson.
3. Leverage technology
Use advanced payroll software that can handle multiple currencies, languages, and regulatory environments. Ensure the technology is scalable and can integrate with other HR and accounting systems.
4. Ensure data security and privacy
Implement robust data protection measures to secure sensitive employee information. This includes following international data protection laws such as GDPR in Europe and similar regulations in other regions.
5. Regular audits and reconciliations
Regardless of whether payroll is international or not, it’s good practice to conduct regular payroll audits to ensure accuracy and compliance.
6. Effective communication
Maintain clear and open communication channels with your employees regarding payroll matters. This covers providing detailed pay slips explaining any deductions clearly and being responsive to payroll queries.
7. Centralized reporting
Develop a centralized reporting system that provides visibility into payroll operations across all countries to aid in strategic decision-making and ensure consistency in reporting standards.
8. Plan for contingencies
Establish contingency plans for payroll processing to handle unexpected situations such as technological failures, data breaches, or sudden changes in legislation.
9. Seek employee feedback
Odds are, you're probably attempting to gather feedback from employees about a variety of things, be it new tools they're using in their work, the latest company-wide meeting, or annual employee surveys, so asking about the new payroll software might seem a bit excessive.
However, you'll want to create a low-lift, open forum mechanism for feedback on this type of initiative for employees who do engage with the software to leave comments if they wish.
Costs Of Paying International Employees
To help you consider the costs associated with paying international employees, we've broken them down in a table with estimates around what each one could set you back in USD.
| Category | Cost Type | Details | Estimated Cost |
| Software | Software and infrastructure | Initial costs for multi-country payroll software and necessary IT infrastructure. | $50,000 - $200,000 |
| Software | Integration costs | Costs for integrating payroll system with HR and accounting software | $10,000 - $50,000 |
| Operational | Salaries for payroll staff | Wages for payroll specialists familiar with international regulations. | $60,000 - $120,000 per year |
| Operational | Training costs | Costs for regular training to stay updated on technologies and legislative changes. | $5,000 - $20,000 per year |
| Compliance and Regulatory | Legal and Consulting fees | Fees for legal experts or consultants to ensure compliance and navigate bureaucratic processes. | $20,000 - $100,000 per year |
| Compliance and Regulatory | Audit fees | Costs for conducting regular audits for accuracy and compliance. | $10,000 - $30,000 per year |
| Outsourcing | Service provider fees | Fees for global payroll providers, varying by employee count, countries, and service complexity. | $15 - $50 per employee per month |
| Currency Exchange & Transaction | Currency conversion | Costs for converting currencies for international payroll disbursements. | 0.5% - 2% of transaction amount |
| Currency Exchange & Transaction | Bank fees | Bank transaction fees for international transfers and payments. | $10 - $50 per transaction |
| Error Rectification and Penalties | Error correction | Costs to correct payroll errors, including back payments and interest. | $5,000 - $20,000 per incident |
| Error Rectification and Penalties | Penalties for non-compliance | Fines and penalties for non-compliance with payroll-related laws. | $10,000 - $50,000 per incident |
| Miscellaneous Costs | Project management | Project management costs for implementing new systems or changing providers. | $10,000 - $40,000 per project |
Don’t Let Payroll Get In The Way Of International Talent
Now you know what your options are and what to expect, don’t let something as trivial as payroll get in the way of leveraging international talent.
Key takeaways:
- Paying international employees is complex due to differing legal, tax, and regulatory requirements across various jurisdictions. Key challenges include compliance with local laws and managing international payments and fees.
- U.S. companies have several options for paying international employees, each with its pros and cons:
- In-house management: Provides greater control and customization but is complex and resource-intensive.
- Outsourcing to global payroll services: Reduces complexity and resources needed but offers less control.
- Using an Employer of Record (EOR): Simplifies the process and is less resource-intensive but reduces control and increases dependency on the service.
- Hiring contractors: Simpler and easier but still requires compliance with local laws and regulations.
- Deciding on the best option is dependent on depends on several factors related to your business needs, resources, and strategic goals.
Country-Specific EOR Services
Are you interested in hiring talent within a specific country? If so, take a look at my lists of the best EOR services for the following countries:
- Australia's best EOR services
- Brazil's best EOR services
- Canada's best EOR services
- China's best EOR services
- Colombia's best EOR services
- France's best EOR services
- Germany's best EOR services
- India's best EOR services
- Italy's best EOR services
- Japan's best EOR services
- Netherland's best EOR services
- Portugal's best EOR services
- Singapore's best EOR services
- Spain's best EOR services
- Turkey's best EOR services
- UAE's best EOR services
- United Kingdom's best EOR services
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