12 Global Payroll Traps to Avoid

10 Global Payroll Traps to Avoid

Managing global payroll is one of the most complex tasks involved with overseas expansion. Considering all that’s involved – complex calculations, local compliance, language and cultural differences, and reporting requirements – organizations must check a lot of boxes in order to successfully manage their international team members’ remuneration. On top of that, there are many ways to find trouble as you attempt to set up and execute payrolls in multiple countries.

In this post, we’ve outlined the most common global payroll traps and how to avoid them:

1) Working with Too Many Global Payroll Providers

Whether an organization chooses to manage payroll in-house locally, use shared services centers, or outsourced global payroll services, it is advisable to limit the number of providers and third parties as much as possible. Miscommunication and delays from increasing the number of parties involved is a risk that becomes greater with each new country you add to your global footprint. As a company increases the number of providers for global payroll, the room for errors grows exponentially.

Common problems that result from working with too many global payroll providers are payroll inaccuracies, reporting errors, and payment mistakes. Even if things go well and mistakes are minimal, an employer with ten different providers in ten different countries may find themselves trying to maintain ten different payroll processes.

The best option to avoid these risks is to use a consolidated global payroll service – a single source that manages payroll for all of the organization’s international operations. A single provider with a uniform process helps to completely reduce silos and make payroll less complicated, less risky, and less painful.

A single-source payroll provider typically offers a well-organized system to organize the workflow, protect the client’s data and provide required reporting. Each of these elements reduces a company’s required effort into the total payroll process. Typically, all that’s required of the client/employer’s team is that they input their payroll changes, new hires, and terminations by the designated cut-off date. Once the payroll is calculated, the team simply reviews and approves the payroll register and sends the necessary funds to the payroll partner. The partner manages the rest of the process and ensures timely, accurate payments.

2) Hiring Team Members Before Registering a Legal Entity

When entering a new market, an organization must determine their legal structure and apply for an authorized legal, taxable presence in the country before making the first hire. Without proper registration, a company will often incur higher taxes and face significant liabilities. These speed bumps could have easily been avoided if they created the proper structure before starting operations.

In addition, an organization needs to secure the proper employee registrations, based on your target country, before onboarding new team members.

An organization absolutely should not hire and pay employees without a taxable presence and legal entity, so it’s best to get those requirements determined and approved before recruiting and onboarding new talent.

3) Taking on a US-centric Approach to Global Payroll

Companies that treat global payroll in a similar manner to their US payroll will face serious liabilities. For example, in the US, organizations can issue standard checks to pay employees. This is not the case in most countries around the world. Such as in the UK, it’s customary to pay employees by direct deposit and sometimes even cash.

Also, in the US, there are numerous tax authorities to consider in the payroll process including federal, state, and FICA. The global business landscape contains many different payroll tax systems, which vary greatly from country to country. In many cases, each tax or social contribution has a corresponding policy that’s attached to a benefit or insurance provider. Although this is a statutory obligation, the company policy must also be in place if you are to be compliant.

4) Failing to Conduct a Comprehensive Requirements Review

Many organizations make the assumption that their global payroll providers will manage all of their compliance requirements. This is not always the case. While a consolidated payroll provider can manage compliance requirements surrounding payroll, there may still be a number of HR-related tasks that must be managed by the organization itself or a partnering benefits provider.

These additional compliance requirements include:

• Meal vouchers in countries like Belgium or France
• Accrual Tracking
• Proper employee registrations, such as the Social Integrated Program in Brazil
• Visa and work permit classifications, which vary among countries

5) Emailing Employees’ Personal Data & Other Risks to Personal Data

Businesses have less than one year to prepare for the implementation of GDPR, or General Data Protection Regulation, created by the European Union. As a result, companies must start making the necessary changes to how they handle personal data and manage the risks associated with it. There is no more sensitive personal data than payroll data, so payroll professionals will need to pay extra attention to compliance. The recent WannaCry cyberattack proved that businesses need to take their cyber security seriously – with or without the new regs – because hackers are getting increasingly sophisticated. They are exploiting every vulnerable point in a company’s IT infrastructure, often leaving personal data exposed.

One of the most effective ways to reduce the risks to exposing personal data is completely eliminating the transfer of employees’ personal data via unsecured email. Standard email is perhaps the least secure way to send sensitive data; at any point, it can be easily hacked and an organization’s team members could be at risk of identity theft. Instead, rely on a secure system or web-based platform that is specially designed to send and hold data via encryption. Most global payroll providers offer use of such a system, but be sure to vet the system carefully before you buy to ensure it is compliant with all current regs and your own company’s data security standards.

6) Disconnects in Cross-Cultural Communications

It can be difficult to align an organization’s non-HQ locations with the overall strategic goals. The disconnect usually stems from cultural differences and the lack of clear communication across disparate channels. One way to avoid this trap is by taking the time to fully understand the business culture in each of your operating markets.

For example, if an organization opens an entity in a Latin American country, it is important to know about the requirement of the 13th-month salary. In most Latin American countries, employees are entitled to a “13th-month” salary, which is payable by the employer in December of each year. This is a cultural norm and should be understood by the organization before beginning operations.

7) Improper Drafting of Employee Contracts

Global payroll is affected by a number of factors including employment type, country of origin, and business entity. One of the critical aspects of managing employment in each country is a clear understanding of employee contracts. Without determining the local requirements for things such as Collective Bargaining or Union expectations in an organization’s new country, you might improperly draft a contract and face significant legal repercussions.

Employment contract requirements vary greatly from country to country, ranging from simple in the UAE to very complex in countries like Italy, Mexico, and France. Gain a clear understanding of the requirements needed for contracts in your target country before hiring new team members.

8) Foreign Currency Exchange Errors

When running international operations, organizations are required to pay overseas team members in their local currency. For example, if a company has an operation in Canada, they must pay their employees in Canadian dollars, not US dollars. The fluctuation in currency exchange rates can present many problems.

A global payroll provider with a track record of success in multiple foreign markets can provide preferred rates and manage the exchange properly. Treasury management is a valuable service that takes the burden off of an organization. When a third party handles all currency exchange matters as a service, the company will then receive a payroll invoice in their local currency, which makes paying on time and record keeping easy.

It’s best to work with an established payroll partner that has the volume-negotiating power to lock in a favorable exchange rate prior to payday, to eliminate any post-transaction foreign exchange reconciliation, simplify the general ledger reporting, and reduce the burden on corporate finance systems.

Finally, companies need to know if they can move money from one country to another to pay their overseas employees. This is an acceptable option in most countries, but it’s illegal or virtually impossible to execute legally in others. Russia, Brazil, and China are examples of the latter. Organizations must perform due diligence to understand what the money movement restrictions are before paying team members overseas.

9) Delays in Global Payroll Money Transfers

Without a consolidated global payroll provider helping with money transfers, overseas paydays can easily get missed. Many companies are unaware that the time it takes to wire funds can vary greatly from bank to bank and country to country. Sometimes, payroll disbursement can get delayed by up to a week depending on the route the funds take. By relying on a single, experienced global partner to manage payments, organizations can ensure proper, timely payments that keep team members happy.

10) Failing to Establish a Consolidated Calendar

Many companies struggle with setting up pay calendars for their global operations. They fail to understand if there should be a different payroll calendar for each country if they should synchronize by region, and what the most efficient method is for their team.

While there is usually no hard and fast rule, many organizations choose to pay on common paydays, which are the 15th, 25th, and last day of the month. For semi-monthly cycles, the most common configuration is to pay on the 15th and the last day of the month. The 25th is generally the most common internationally as it allows the payroll to close in time to have all the data available to complete the general ledger (GL) posting by the end of the month. Keep in mind, some countries do dictate which days you must pay employees, so again, doing your homework is important.

11) No Hard Record of Global Payroll Tax Receipts

Record keeping is an important part of the global payroll process. Even if an organization relies on a global payroll provider to help with international employee management, they should always collect receipts for taxes paid for each global employee. Having a copy on file can help an organization quickly resolve issues that could arise during an audit.

12) Using Spreadsheets

While they are amazing business tools, it’s best to avoid the use of spreadsheets when it comes to global payroll calculation, tracking and reporting. This day and age, it is simply unnecessary given all of the available resources and services in the marketplace. Spreadsheets are not secure, have no automatic versioning control, and are too easily altered – all of which creates unnecessary risks. Global payroll is much too important a process to be dependent on such an unstable medium.

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Organizations that rely on a consolidated global payroll provider like Celergo avoid the traps and reduce the complexities, confusion, and risks associated with global payroll processing. We make our clients’ lives easier by managing all aspects of global payroll for them, leveraging over a decade of relevant experience and expertise. Contact us today to learn how we can help you!

TOPIC: Blog

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