International Payroll & Managing International Expansion

Expanding Globally? What does that mean for managing international payrollIs your company growing globally? Do you need to set up international payroll? Will your payrolls be managed locally, regionally or centrally? Are you prepared to handle all of the legal requirements for managing international payroll in all locations?

The complexities of managing international payroll are largely determined by the number of employees working in each location, the company structure, resources, technology, systems, and security. Add on the multitude of local variations including legal/regulatory complications, cultural and religious differences and it becomes clear that global payroll is not a one size fits all business need, and the legal requirements are complex. The five key legal considerations are:

• Payroll management structure

• International payroll options

• Requirements for legal entities and legal registrations

• Professional employer organizations (PEO)

• New hire paperwork

Structure for Managing International Payroll

Structure for Managing International PayrollHow will you structure your payroll management? There are three options for managing global payroll, local, regional and centralization. There are numerous solutions available for each of these options which are dependent upon factors like the number of employees working in each country, the available systems and structure in place, available internal resources and expertise, employee turnover, and local employment complexities. The payroll systems available range from complex systems like SAP and Oracle for larger markets including the United States, Canada, UK and France and more specialized systems like DATEV for countries like Germany, and then for smaller locations like Nigeria, a more manual approach, Excel spreadsheets. The unique requirements for each location determine the systems and solutions that are appropriate for managing global payroll. 

International Payroll Options

What are the options for managing international payroll?Did you know that companies have numerous options for managing their international payroll locally? The options are to outsource to a local payroll provider, to a regional or global payroll provider or a global Business Process Outsourcer (BPO). Which option companies choose depends upon the number of employees, headquarters location, internal resources, experience outsourcing services, and local/regional complexities. The size of the employee population will determine outsourcing options.

Smaller organizations typically will not have the resources or the expertise to deal with local payroll complexities. Smaller organizations typically will outsource to a local, regional or global provider and will manage regionally or globally and capitalize on the expertise of the provider to manage global payroll.

Larger organizations tend to have more resources and a larger internal structure. Many of these companies will have a technical solution in place like an enterprise resource planning system (ERP), human capital management system (HCM). They might even have local payroll systems which are used to manage their employee population across the globe and may use a global payroll services provider fully-integrated into their system. Many of these systems will manage global payroll for larger locations such as Canada, UK, and Germany.  However, they typically do not include the more exotic or remote locations.

Whether you are a smaller or larger organization, it is important and helpful to have someone within your organization with enough payroll expertise to manage your outsourced provider to ensure the work that they are doing is timely, accurate and compliant.

Requirements for Legal Entities and Legal Registrations

Is a legal entity required to process international payroll?Will a legal entity be required for managing international payroll in the new location? Legal entities are not required to run payroll in all countries. The question that needs answering is whether or not the work the employees are doing requires a permanent establishment. If the answer is yes, you may need to set up a branch, subsidiary or representative office in the new location.  If not, you’ll need to determine if a legal entity is required in the locations you need to manage payroll and ensure that you have all the proper registrations and benefits set up to ensure compliance.

If a legal entity is required, all the paperwork must be completed before paying employees. Setting up a legal entity can be an arduous task depending upon the country, such as countries within the former Soviet Union and numerous Latin American countries. Companies will need to determine if bank accounts need setting up locally and employees cannot be hired before completing required registrations or the organization may face penalties.

Another factor that organizations need to be aware of is that each country will have their requirements for corporate registrations. Factors will include tax/payroll IDs, insurance registrations, workers’ compensation, and other statutory requirements. Social registrations for benefits such as pensions may be required since they may be part of the social scheme of the country also may be tied to the individual versus being tied to the company.

Professional Employer Organizations

Is there a workaround available if you do not have a legal entity in a country? One consideration for companies that do not have a legal entity in a location but need to set up an employee in that location, is co-employment, umbrella services or workforce outsourcing. This solution is the use of a Professional Employer Organization (PEO).  In this scenario, the PEO hires the employee as a member of their staff and then charges the organization a percentage (between 10 to 30 percent) of the hiring organization’s cost for payroll, benefits and other services. While PEOs are common in some countries, there may be restrictions in others, and many PEOs may have quotas or restrictions on the amounts and types of employees they can hire.

New Hire Paperwork

Did you know that many countries treat new hires differently than they do in the United States? Countries can require submission of tax IDs, passports, health declarations, dependent forms, Labor Books, and even employment contracts. And to manage payroll payments, these documents are required. Organizations need to make sure the solution they implement for paying employees in certain countries are compliant before they make any payments.

There is no “Right” way for Managing International Payroll

It is clear that managing international payroll is a complex business with diverse requirements necessitating adherence. Whether you are managing one payroll in Russia or 10 payrolls around the globe, your organization will need to pay careful attention to the complexities of paying employees in international locations. As noted above, there are numerous options to help you meet your specific requirements.  You can outsource your program to another company offering global payroll solutions, set up your entity for your staff or maybe even use a PEO.  There is no right or wrong solution, what is needed is the time and resources to ascertain the solution that meets your specific needs.

**This article is for informational purposes only. It is not intended to constitute legal advice.

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