Payroll costs: how can global businesses reduce payroll expenses?

Payroll is one of the largest expenses for just about every business. Without people, your business can’t function. But managing payroll isn’t as simple as sitting down and writing a few checks.

As your business grows, so do your payroll costs. Meanwhile, you’re under pressure to cut overall expenses and maximize performance.

If that sounds like a lot, don’t worry. There is good news. You have several options for cutting payroll expenses without reducing profits. 

We’ll go over the basics to help you get started.

This post will summarize the different factors that influence payroll costs, and discuss some different strategies to help keep them under control. 

You’ll learn how hiring contractors, restructuring schedules, automating payroll, allowing remote work, and improving employee retention can help lower your payroll costs (without hurting your bottom line).

How do you calculate payroll costs?

Payroll costs come down to more than just salaries. They include all charges related to employee compensation.

The Bureau of Labor Statistics reports that the average payroll cost for civilian workers in the U.S. was $42.48 per hourworked as of December 2022. For private industries, it was slightly more.

What’s included in payroll costs?

• Wages for hourly workers and salaries for salaried employees

• Overtime pay, which is paid out after 40 hours, is at least one-and-a-half times the worker’s normal hourly rate

• Employee benefits, including health insurance, paid time off (PTO), and retirement options.

• Employer payroll taxes and withholdings for things like social security, Medicare, federal and state unemployment taxes, and other government programs. 

• Businesses also incur costs related to managing and processing payroll.

• There are other factors to consider when it comes to global payroll. Each country has its own regulations and tax structures to be aware of.

What affects payroll costs?

Several factors influence payroll costs. They include the following:

• The total wages and salaries paid to employees and contractors.

• The type of worker you are paying. Independent contractors may charge a higher rate than salaried employees.But since you don't have to pay for payroll taxes or benefits for contractors, they can be the more cost effective option sometimes.

• How often you pay your employees. If you have a payroll provider that charges per cycle, you will pay more if you are bi-monthly.

• How often you make changes to your payroll. A payroll provider may charge more If employees are frequently added, changed, or removed.

• The number of employees located in other countries with varying regulations and taxes.

• Whether you outsource payroll or perform it in-house: Outsourcing is far more common, and less expensive than doing it yourself too.

Now that we’ve covered the basics, let’s get into some of the differences between independent contractors and your own employees.

Key differences between employees and contractors

These differences are important in terms of classification. Read on to find out why.

The risks of misclassification in payroll expenses

Misclassification can result in serious consequences, especially as more countries crack down on misclassification in the growing gig economy.

• Fines. Expect fines for every instance of misclassification. These fines can be severe. If the misclassification is found to be intentional on your part, you may be subject to even higher fines.

• Back taxes and penalties. Misclassifying an employee as a contractor means you avoided paying statutory payroll taxes for that employee. In most countries, you will owe back taxes. These, on their own, can be substantial.  You may also be liable for penalties and late fees as a result of non-payment. Costs get even steeper when you multiply by the number of infractions and the number of years the worker was misclassified.

• Back pay and benefits. You may also be required to compensate the employee for any pay discrepancy that occurred or benefits denied as a result of the misclassification.  Misclassification opens you up to legal risks from the government and from employees. This gets expensive quickly and can lead to an erosion of public trust. The government may even bar your company from operating in the area if the misclassification infractions are deemed severe.

• Brand damage. Your brand will take a hit if you gain a reputation for trying to deny fair pay and benefits to your workers. This can harm your ability to recruit new talent and can affect your bottom line if customers don’t trust you.

While the penalties for misclassification can be severe, there are some steps you can take to reduce your risks.

Minimizing misclassification risk

Here is how to make sure you are properly classifying your workers and avoiding those costly penalties.

• Know the local laws and statutes

Start by developing your understanding of the classification rules in the countries where your contractors live. 

These can vary greatly from country to country and may change without warning. 

If your legal team does not have dedicated resources to keep up with global contractor regulations, you may need outside help from an international contractor management company.

• Hire contractors for appropriate work

Make sure the work being done by contractors falls within acceptable boundaries. 

Work that is commonly outsourced to contractors includes customer service, data storage, marketing, engineering, and design. 

Work that is central to company profit or functioning should be performed by employees. This often focuses on strategy or product development, including sales and closing contracts, major decision-making, and management roles.

If you’re ready to start working with contractors, there are a few things you need to know.

How to hire, manage and pay international contractors

There are over one billion contractors in the world. Since you can hire international contractors with ease, that gives you more than a billion options to hire for your business. 

While that may feel overwhelming, the additional firepower contractors can offer your business is worth the investment and planning. 

Consider a few of these tips as you get started.

Payment methods and foreign exchange rates

As with employees, there are many ways to pay international contractors, including through Remote, check, direct deposit, PayPal or Venmo, and more. 

Be clear about how you will pay workers before they do work for you.

With global payroll, you also need to consider things like currencies and exchange rates. 

Keep in mind that some countries mandate that workers be paid in local currency through a local bank, although contractors are not always subject to these laws.

Payment structures for international contractors

Unlike employees, you will not set a regular salary for your contractors. Independent contractors invoice you for their work, setting their own rates as they do. 

This system automatically provides a layer of protection against classification risks.

There are a few different payment structures for contractor agreements.

• Time-based. Pay contractors for the time spent on a task or project, usually by the hour or day.

• Project-based. Pay contractors for individual projects.

• Retainer. Pay a lump sum, usually at the beginning of a month or quarter, for a specific amount of work to be performed. Contractors then invoice for work done above that amount.

• Upfront. Pay contractors for work in advance. It’s common for contractors to require a percentage of payment upfront.

• On delivery. Pay contractors after the work has been completed.

Working with independent contractors can be an effective way to reduce your payroll costs. Before you start hiring, there are some important factors to consider.

Factors to consider when hiring international contractors

Employees and contractors are defined differently, and every country has its own definitions for each category of workers.

Although you may be familiar with the laws in your country, you may be less sure of the rules internationally. With the rise of remote workers and international contractors, this is an area of law that is changing quickly.

In general, employees are employed directly by companies to fulfill specific roles. 

Contractors are hired to perform specific functions. These are typically roles the company does not have the ability to perform internally. With contractors, companies are the client, not the employer.

Employers have much more control over employees than contractors. 

Here are a few other common factors in determining if you have an employment relationship.

1. The employer controls when, where, and how work is completed.

2. The employer is responsible for training the worker.

3. The worker receives a regular salary.

4. The worker performs key business services.

5. The relationship continues over a long period of time.

This list is by no means exhaustive, so be sure to carefully research the rules in your target area. 

Protect your intellectual property

Intellectual property (IP) laws vary from country to country, so working with international contractors means working with unfamiliar laws. 

If you are not careful, you could end up drawn into a costly and complex legal battle over ownership of your company’s invention rights in another country.

Risk of permanent establishment

A permanent establishment is a tax designation given to businesses that are deemed sufficiently established to pay corporate taxes in another country. 

Even if you do not have full-time employees in the country, your contractors may trigger permanent establishment. This depends on the type of work they do and how much authority they exercise on your behalf. 

Now let’s look at the best strategies you can employ to reduce your costs.

Ways to lower your payroll costs

There are a number of ways companies can reduce payroll costs.

Explore your options with international contractors

Outsourcing certain activities to third-party local and international contractors can save businesses money on payroll. However, working with contractors is not just a money-saving practice. Bringing in outside help allows businesses to access specialist experts for short term projects, explore hiring in new regions, and take advantage of new opportunities. Here’s what payroll looks like when a business outsources to contractors:

• Payroll taxes. Although rules vary from country to country, companies do not generally have to pay payroll taxes for contractors. This can lead to significant savings, although contractors do tend to charge higher hourly rates to compensate for the difference.

• PTO and benefits. Contract workers are, in the eyes of most countries, self-employed individuals who sell their services to businesses. That means they are responsible for managing their own time off and handling things like health insurance and retirement savings on their own. While businesses can sometimes offer benefits to contractors, doing so carelessly can lead to issues of misclassification.

• Wages. You can hire a contractor for a week or for several months at whatever rate the contractor sets. In many cases, a contractor’s rate may be lower than what you would pay a full-time employee after accounting for expenses such as benefits and training.

• Severance packages and bonuses. Contractors typically do not qualify for severance packages or bonuses. If the relationship with a contractor is not working out, you can quickly cut ties and find someone more aligned with your business goals.

Other advantages of hiring international contractors

There are several key benefits to working with international contractors.

• Speed. It’s much faster to hire and onboard contractors than employees. First, there is less paperwork required. Contractors already know how to do what they do, so you save time and money on training.

• Wider talent pool. You can hire people anywhere on Earth. This gives you access not only to local talent but to people in other cultures with different perspectives, expertise, and skill sets. 

• Regional expertise. With international contractors, you have access to local knowledge. This is especially important if you are expanding into new markets.

• Flexibility. Commitment to contractors is finite, so you can scale up or down as your business needs. This gives your company greater flexibility to address trends and seize short windows of opportunity.

• Diversity. A variety of skills and perspectives can give your company an edge. Diversity can increase innovation and offer high value, especially in a global marketplace.

Now that you know the potential benefits of outsourcing to international contractors, let’s go over some of the other ways your business can save on payroll.

Structure schedules to reduce or eliminate overtime

It is more expensive for businesses when employees work more than their scheduled hours. 

Overtime rates are often very high, and different countries have different thresholds for when overtime hours begin. 

Long unpredictable hours can decrease employee productivity and morale. Employees who feel they have a workload they can’t consistently manage are more likely to experience burnout.

Some countries have laws requiring businesses to give workers additional time off after overtime shifts, creating more unpredictability.

To avoid these costly consequences, design work schedules and scope to reduce or eliminate overtime. It may be difficult, but you will usually find that it’s better to hire a few extra workers or extend project deadlines than to have employees regularly work long hours.

Here are a few tactics you can use to reduce how much overtime your team works:

• Offer flexible working hours. This gives employees the ability to work when they are most productive.

• Properly plan and scope projects so workers can meet deadlines without overtime.

• Adopt asynchronous work practices. Get started with async to improve productivity while maximizing flexibility.

• Use contractors to easily and quickly scale up or down without adding costly overtime. Keep in mind many countries still enforce work-hour limits for contractor relationships.

Automate payroll processing

The more manual your payroll process is, the more expensive it is in the long run and the greater the chances for human error. 

Ernst & Young report that the costs of these errors can quickly add up. To fix payroll errors that occurred last year, companies spent an average of $291 per error.

Automating payroll processing can reduce expenses while eliminating errors and improving the experience for your team, both at home and internationally.

How does automating payroll processing work?

Global payroll management is complex to handle on your own. 

Fortunately, Remote makes it easy for businesses of all sizes to pay and manage their global teams. Whether you have just one person or a team of thousands spread across the globe, Remote can help you automate your payroll.

Here’s how it works:

• Decide whether to pay workers as employees or contractors. Contractors are simpler to onboard, but employees have several advantages in the long run. Which option you choose is up to you.

• Determine whether you have entities in the countries where your workers live. If you do not have a local legal entity in every country where you want to hire, you will need to work with an employer of record.

• Create a competitive compensation package. When you hire in other countries, you need to be aware of what local employees expect in your industry.

• Protect your IP. Not all global payroll solutions provide the IP protections you need. With Remote IP Guard, you can rest easy knowing your IP is protected all around the world.

What are payroll processing programs?

A payroll processing program can automate and expedite the global payroll process on your behalf. 

Payroll processing programs may include global payroll providers, employers of record, payroll administrators, and other types of HR partners. 

Before working with any outsourced payroll solution, understand exactly what is and is not covered in your partnership agreement.

How does automated payroll processing save you money?

• Reduces payroll costs: With an automated system, you don’t have to pay workers to perform repetitive tasks. Automated payroll software lightens the load for your team, allowing them to do more and worry less.

• Increases speed: Computers are much faster than people at making calculations and performing repetitive tasks.

• Reduces errors: While people are great at many things, we tend to make mistakes when details and numbers are involved. Automating repetitive tasks eliminates errors that humans may overlook.

• Centralizes and secures information: An automated system puts everything in the same place, reducing the need to train workers on multiple systems.

Integrate your payroll systems

Integrating payroll with other important systems related to applicant tracking, hiring, onboarding, offboarding, and other HR processes can save your business even more.

• Reduce training time and downtime

• Accelerate processing of HR tasks

• Eliminate compliance issues

• Reduce human error

Remote is partnering with a number of industry-leading HR solutions, including Greenhouse and BambooHR, to make it easy for businesses to combine the power of multiple HR tools to save businesses time and money as they expand their global teams. 

For more information on the Remote API, which allows HR and payroll companies to connect Remote’s global employment solutions directly to other platforms, visit our Remote API headquarters.

Adopt remote-first work practices

Most companies have experimented with at least some level of remote work. 

To create a truly welcoming environment, you must adopt remote-first work practices. 

Going remote-first does not mean you have to shut down your office, but it does mean you have to think deliberately about the experience of your remote workers. 

Not every job at every company can be done remotely.

When it’s feasible, remote work offers significant savings for employers and positive, quality-of-life improvements for employees.

Advantages of remote work

Remote work can save businesses money on payroll in several ways.

• Increasing worker satisfaction. Research shows that people who work remotely are happier, and this happiness comes with better performance at work and lower turnover.

• Increasing productivity. Everyone has times of the day or week when they are more or less productive. Remote work lets employees work when and where they are at their best.

• Reducing unexcused absences. Workers who can get work done on their own time in their own spaces can schedule work around other parts of their lives. They don’t have to take leave for every small interruption.

• Reducing office overhead. If you have fewer workers in the office, you don’t need as much physical space. Want an even better option? Try going fully remote and eliminating the office entirely.

Another important strategy for reducing payroll costs is to focus on employee retention.

Improve employee retention

It is cheaper to retain a current employee than to hire and train someone new. 

On average, replacing an employee costs 33% of their annual salary. 

For more expensive employees, like engineers or senior leaders, those numbers can add up quickly.

Consider all the factors that contribute to employee turnover expenses.

• Time and money spent recruiting, interviewing, and verifying references

• Signing bonuses and other paid benefits

• Training and onboarding periods

• Ramp-up periods for employees to become fully independent in their roles

• Lower morale and increased overtime pay as others pick up the slack from departed colleagues

• Loss of institutional knowledge

• Disruption for clients

Employee retention strategies

The following strategies can help you improve employee retention and save money on payroll costs.

• Pay employees appropriately, accurately, and on time. Nobody wants to worry about where their check is coming from.  Working with a partner like Remote allows you to pay your workers on time easily and reliably, no matter where they are in the world.

• Provide attractive benefits. Design benefits packages that are appropriate for the market in which you’re hiring.  If you’re hiring internationally, you may need to seek guidance from a partner with expertise in those markets.  Benefits vary widely from country to country, and staying compliant with your local benefits packages can be tricky. 

• Adopt remote-first practices. Better remote work practices help workers feel like part of the team. Create that sense of belonging starting on day one, so your remote employees are more likely to stay.

Start consolidating your payroll process with Remote

There are many ways to reduce payroll costs, including outsourcing, consolidating payroll, and focusing on employee retention. 

Remote’s global HR platform is purpose-built to simplify and streamline payroll for a globally distributed team:

• Unify global contractor payments, employer of record services, and payroll management for your team members through your owned entities in one single platform.

• Eliminate the admin and complexity involved in managing payroll manually. Generate, review, and approve payroll for all your legal entities in minutes each month. You can also rely on Remote to hire and pay international employees from the same platform.

• Provide peace of mind with local compliance. The deep localized expertise of Remote’s internal team is built into the platform to make sure your company is always informed on local laws and adheres to all applicable regulations.

• With Remote’s Fair Price Guarantee, your bill is never a surprise. No hidden fees, no percentages, and nothing hidden in the fine print. 

Sign up now to unlock global growth and manage payroll for your team regardless of their home address.

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