What is global payroll?

Running payroll is a complex process, even for companies operating 100% locally. If you’re thinking of hiring international talent, it’s easy to feel overwhelmed at first. 

There are a variety of factors to consider, including global payroll compliance, currency exchange rates, how to factor in the cost of living, and offering local benefits packages, all of which can make global payroll management a tall task.

That’s the bad news. The good news is that global payroll doesn’t have to be a chore — if you know how to manage it.

Whether you’re planning a big global expansion or simply looking for a better way to manage payroll for your existing international staff, this guide is for you.

The ultimate guide to managing global payroll operations

This article offers an introductory-level overview of global payroll. For a deeper dive, we also recommend downloading our Global Payroll Management Guide. 

Remote’s Global Payroll Management Guide provides actionable advice on how to manage payroll for your global team while keeping your business compliant with international labor laws.

What is the definition of global payroll?

Global payroll is an umbrella term for practices related to onboarding and managing payroll for international employees and contractors. Depending on the employees’ or contractors’ host country, global payroll can include a number of actions, including:

• Tax payment withholding and settling

• Calculating wages

• Distributing pay slips

• Following labor laws, etc.

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Learn how to manage global payroll for your team and keep your company compliant with international labor laws.

Is there a difference between “global payroll” and “global payroll operations”? 

You may have heard “global payroll” and “global payroll operations” used interchangeably and wondered if they point to the same process. Well, while “payroll” and “payroll operations” are terms that often overlap, they do have distinct meanings.

Payroll

Payroll refers to the process of compensating employees for the work they’ve done during a specific period. 

Payroll includes not just wages but also bonuses, benefits, and deductions. It also involves ensuring compliance with tax laws, reporting to the government, and keeping accurate records.

Payroll is an essential function for any business, and it’s important to handle it accurately to avoid any legal issues or employee dissatisfaction.

Payroll operations

Payroll operations go a step further to encompass the full range of activities required to manage and administer payroll. 

Payroll operations involve setting up and managing systems to accurately track employee time, calculating wages and other compensation, making payments, dealing with taxes, and keeping up-to-date with changes in tax laws and labor regulations. 

They also include managing relationships with third-party service providers, like payroll processing companies or benefits providers.

So, the primary difference between the two terms is their scope. While payroll is concerned with the act of compensating employees, payroll operations involve all of the systems, processes, and activities that support this function. 

In other words, payroll is a part of the larger concept of payroll operations. 

In practical terms, someone in charge of payroll operations would be responsible for managing the payroll process, but their responsibilities would also extend to other related areas.

That said, let’s take a closer look at how the different components of global payroll operations work together to support international teams.

How does global payroll work? 

For anyone new to global payroll, it’s important to understand the options on the table. There are three main methods of establishing a payroll process in a foreign country.

Employer of record

An employer of record (EOR) is a service through which a designated third-party company manages your entire payroll process in a foreign country. 

EORs make it possible to employ international staff without the need to set up a legal entity in each country. 

From a legal perspective, they are the employer of your international staff. In addition to ongoing payroll management, an EOR can help manage the hiring process and formalities. So their services extend well beyond just payroll into the domain of global payroll operations.

Professional employer organization (PEO)

An alternative to using an EOR for your global payroll management is to partner with a professional employer organization. 

The difference between a PEO and an EOR is that working with a PEO means entering into a co-employment relationship with your employee and that PEO. Both of you employ the person simultaneously, while the PEO manages HR functions on your behalf.

So, a PEO, just like the above-mentioned EOR, acts as your HR department. However, there’s a critical difference between the two: if you opt to use a PEO, you must own a legal entity in the country or region in which you are hiring. 

That’s the case whether you work with a domestic PEO or a global one. A global PEO is still a PEO — just one that can provide companies with PEO services in multiple countries. 

While a global PEO may be able to act like an EOR and take on certain legal responsibilities in the countries where your employees live, you can only work with a PEO (global or otherwise) if you have your own local legal entity. 

So, in summary: any partnership with a PEO requires you to own a local legal entity and enter into a co-employment relationship. An EOR, on the other hand, can hire employees on your behalf in other countries without a co-employment relationship and without requiring you to open a local legal entity.

In-house payroll operations and workforce management

A third way to handle your global payroll operations is to manage them internally. However, this option presupposes that you have the time and resources to handle international HR compliance in-house. 

Before deciding on this approach, make sure that you can:

• Launch legal entities in all of the countries where you employ workers

• Centralize and monitor the payroll process

• Have sufficient local legal representation

• Have relationships with local benefits administrators

• Understand the cultural nuances of payroll, benefits, and taxes in each country

To successfully run in-house global payroll operations, it’s essential to use software such as a human resources information system (HRIS) or human resources management system (HRMS) that can automate at least part of the process and analyze employee payroll data.

The two types of global payroll providers

To expand on the differences between PEO, EOR, and in-house payroll management, global payroll providers can be broadly divided into two types:

Partner-dependent providers

With a partner-dependent provider, your payroll is managed by third-party entities located in the country where you hire. 

Avoid partner-dependent providers whenever possible. Not only do they have limited control over your employees’ experience and payroll, but they also provide limited IP protection and tend to have lots of hidden costs.

Owned-entity providers

Owned-entity providers only operate in countries where they fully own and operate their own legal entities. That means they have full visibility into the payroll, benefits administration, taxes, and contracts of your employees at all times. 

If you have a question or need assistance, an owned-entity provider can help right away, while a partner-dependent provider has to pass the message along to an unknown third party.

For more information on the differences between owned-entity and partner-dependent global employment partners, read our guide on owned-entity global employment.

What are the challenges of global payroll operations? 

Let’s take a look now at the main challenges associated with global payroll. There are several to consider as you prepare to get set up internationally.

Setting compensation for your remote workers

Should you pay everyone the same amount or account for the cost of living? 

The cost of living can vary drastically from one location to another. Taking living costs into account, you can make sure that your employees have the same purchasing power regardless of their location. Adjusting salaries in this way promotes a sense of fairness across your organization. 

This, in turn, can help attract and retain talent, as employees will feel their compensation is fair and competitive relative to their local economy.

On the flip side, uniform salaries can result in disparities among employees. For example, employees in high-cost areas may struggle with expenses, while those in low-cost areas may have a surplus income.

What should you do if employees in one country receive a government benefit that employees in another country do not? 

Like the cost of living, social security programs, healthcare benefits, pension plans, and other government provisions vary widely from one country to the next. 

Companies can consider “equalizing” these benefits to ensure fairness. For instance, if one country’s government provides a robust healthcare system and another doesn’t, a company might offer private health insurance for employees in the latter country.

The goal is to make sure that regardless of location, all employees receive similar benefits through either government programs or company-provided ones.

Regular review of local regulations and benefits is necessary to maintain fairness and legality in these practices.

For a detailed commentary on these types of issues, check out Remote’s guide to global compensation.

Employee classification

Do you know when to classify your workers as employees or contractors?

In a nutshell, employers control how and when employees perform their work. They’re usually eligible for company benefits and have taxes withheld from their pay.

Independent contractors, on the other hand, control how they accomplish their work, don’t typically receive benefits from their clients, and manage their own tax payments as self-employed individuals.

If you get the classification in the country where you are hiring wrong, you can be subject to fines, penalties, and even business bans. Be diligent and review employment relationships regularly to maintain compliance.

IP and invention rights

As remote workers can do their jobs in various locations, you have to abide by different intellectual property (IP) laws wherever you do business. 

Companies with globally distributed remote workers must respect the varying IP laws of each locality. This means making sure that workers adhere to local IP laws when creating, sharing, or using IP. 

Navigating these laws can be complex since they differ in each country. Yet, failing to understand them can not only result in the loss of IP rights but can also lead to legal battles and reputation damage.

Tax management

Hiring remote workers also means you need to know where to pay income taxes and who’s responsible for settling each payment. Employers are usually required to withhold taxes for employees, while contractors tend to be fully responsible for their own taxes. 

See where remote workers pay taxes to learn more.

Permanent establishment risk

Permanent establishment is a tax status that refers to companies with an ongoing presence in a country. Whether permanent establishment applies to your company depends on the local government’s understanding of your operations within that country. 

Working with an EOR or PEO does not have an effect on your permanent establishment risk either way, but a good partner can help you understand and manage your risk exposure. See our guide to permanent establishment risk for more information.

The challenges of global payroll can be steep, but the right partner, such as an EOR, can help you quickly and easily build an international team with minimal risk.

What are the benefits of global payroll providers?

Now that we’ve reviewed the challenges you may face when hiring globally, here are a few reasons you may want to consider working with a global payroll provider.

Compliance with laws in multiple countries

Hiring talent from a number of countries doesn’t automatically mean you’ll have more paperwork to take care of. As an EOR provider, Remote makes it easy to abide by each country’s legal requirements, such as tax, benefits, and social contributions.

Access to in-house payroll knowledge 

Worried about fines for noncompliance? Not clear how to handle withholding for foreign social programs? Your global payroll provider should understand the payroll customs in every country where you hire.

Save time and money 

Global payroll is a faster and less expensive alternative to setting up your own entities in multiple countries. Opening an international entity can cost tens of thousands of dollars and take months to complete. By working with a global payroll provider, you can hire international candidates immediately instead of months down the line.

On-time payment 

Reliable payroll is absolutely critical to keeping your team happy. If you keep payroll operations in-house when you expand into new countries, you could inadvertently cause delays in payment, leading to frustration and mistrust within your team. A global payroll partner helps you guarantee on-time payments to your whole team every time.

Increased productivity 

How much time does your human resources team spend going through spreadsheets, double-checking figures, and making calls with benefits providers? When your global payroll solution handles the details, your team is free to focus on the most important thing: your people.

What are the responsibilities of global payroll providers? 

It’s important to understand the various responsibilities of a global payroll provider, as this will help you decide whether you’re better off using in-house resources or partnering with a company like Remote for global payroll. Here’s a breakdown of the main areas:

Legal compliance in each country

For each employee, you need to provide the following:

• The right type of employment contract

• Legal registration of your entity in the local market, if applicable

• Timely payment of taxes and other local obligations (both yours and the employee’s)

• Statutory benefits (for instance, 13th salary or holiday bonus), as well as optional benefits that are sought after by top talent

• Ever-changing regulations and rule amendments.

Before you hire staff in a new market, make sure to stay compliant throughout the entire payroll process. Understanding these responsibilities is the first step toward successful international hiring.

Cultural and regional differences

There are several cultural factors to consider when hiring internationally. 

Your global payroll provider should be able to help you with the following:

• Public holidays. When you hire in multiple places, you are expected to provide a variety of public holidays to team members. Your global payroll provider can help you track these days for your distributed team.

• Paid time off. Different countries have different laws regarding when employees receive PTO and for how many days. It’s not always a flat number, either — many countries have different rules about paid leave for illness, family care, bereavement, maternity, paternity, and other situations.

• Time zone differences. Ready to run payroll, but the banks in your employee’s country closed six hours ago? Your global payroll provider can keep you ahead of any potential mishaps.

• Salary and currency considerations. First, you must set salaries that are competitive in the market and legal under local government rules. Salaries of employees in the US, for example, are subject to minimum wage laws much higher than the federal minimum in certain states. In addition, the salaries you set for your employees must remain consistent in the currency in which they are set — converting currencies can quickly become difficult without a little help.

Data compliance, GDPR, and security

When you hire international workers, you become responsible for their data. Your global payroll solution provides a way for you to safeguard that data by placing it in the hands of local experts who understand where data can and cannot be hosted or transferred.

Every company with European citizen data is subject to the General Data Protection Regulation (GDPR), a European Union law implemented in 2018 that protects individuals’ privacy and personal data.

The GDPR establishes guidelines for the collection and processing of personal information, gives individuals control over their data, and imposes strict penalties for noncompliance by organizations. So if you hire European workers, understanding how to work within the boundaries of the GDPR is critical.

Different countries all have different laws relating to data protection, and they all have processes to enforce steep penalties for companies out of compliance. If you don’t have full-time data protection teams with local knowledge within your company, you could benefit from working with a global payroll provider with team members on the ground in every country where you hire.

How do you ensure payroll compliance with local labor laws?

One of the key considerations when hiring global staff is deciding on the right type of contract. How are your remote workers classified? 

Depending on the country where your prospective hire lives, a worker may be seen either as someone who is a self-employed contractor or a full-time employee hired directly by the company. 

In some places, like the U.K., there are additional worker classes between these two traditional definitions. As a general rule, employees have more legal coverage and benefits than contractors.

That being said, when you decide to bring a new member on board, you always need to understand which legal requirements are your responsibility. 

Look into the following local labor elements:

• Benefits (e.g., vacation bonuses, 13th- or 14th-month salaries, etc.)

• Overtime hour limits and rates

• Minimum wage

• Employee termination conditions (i.e., any protection periods or compensation)

• Sick leave (for employees and for families)

• Insurance coverage (health insurance, pension, social security, and others)

• Parental leave

• Workplace condition premiums

Once you’ve established which party covers these and any other obligations, you’ll know how reporting and payroll can be handled. Taxes and contributions will usually be dealt with individually by each contractor. For full-time employees, the hiring party typically covers at least a portion of insurance premiums and other payroll-related benefits.

To avoid any compliance or misclassification issues, be sure to give our dedicated employee versus independent contractor misclassification resource a read.

When should you outsource global payroll operations?

There are situations where outsourcing global payroll is the right choice:

When you want to expand internationally

Is your current payroll model fit for international expansion? Do you have the right processes in place? Do you have sufficient staff to manage the workload and expertise necessary to operate in another region? If not, outsourcing global payroll may be the wisest choice.

When you want to reduce complexity 

Local payroll is complex, but global payroll can be substantially more difficult without help. You need to consider different labor laws, tax codes, benefits, and currency exchanges. Handling it alone is hard; working with a trusted partner is easy.

When you want to ensure compliance 

Depending on the location of your employees, you will be subject to various employment laws. Changes in legislation can happen without warning, and the consequences can be swift and unpleasant. By outsourcing global payroll, you can guarantee compliance no matter where you go.

When you want to save time 

If you decide to manage global payroll in-house, your employees will have to go through training and spend a lot of time setting up new processes. That likely means new software, new hires, and long training periods. Outsourcing lets you skip the wait and provide your employees with a superior experience from the outset.

How should you track your global payroll costs?

Tracking and reporting your costs are crucial to ensuring that you have a scalable approach to global payroll. 

Once again, you have two options — an internal tool or file where you track and apply changes manually or reporting software from a global payroll solution.

Using software to track your costs for global payroll is a much more scalable and cost-efficient way to manage your spending. Spreadsheets may be free, but the sheer volume of data involved — not to mention the hidden costs associated with inevitable human error — make manual tools a poor option.

A good global payroll spending management system should provide the following:

• Overall payroll costs in a monthly or yearly view

• Per-employee analytics

• Multi-country comparisons and reporting

• Summaries of taxes, social contributions, and other per-country expenses

A global payroll provider is equipped to help you with all these reports.

5 tips when choosing your international payroll provider

If you decide to outsource global payroll, selecting a vendor is only a small part of the overall process. Here are a few tips to help you get started.

1. Vet potential partners based on local expertise

It’s vital to select a company that is capable of handling different types of employment contracts in different countries. Any long-term partner should be able to handle all your needs using locally owned entities in every country where you operate as well as support international contractors.

Your chosen partner should offer easy-to-use payroll software and have local expertise for things like social contributions, benefits administration, and taxes.

2. Prioritize the employee experience

The experience of your employees is everything. A bad experience with a payroll partner could easily cause your employees to lose trust in your company’s ability to pay on time or provide necessary benefits. 

Be sure any payroll partner can reliably pay your team in the correct currency through the proper channels. For example, employees in Mexico can only be paid through government-approved banks.

3. Understand the difference between an employee and a contractor

Are your workers properly classified as employees or contractors? If not, your business could face hefty penalties and fines in a variety of countries. Making the news because your company incorrectly classified workers could also damage your ability to recruit. 

Work with your global payroll provider to ensure you classify your team members correctly. If need be, your global payroll partner can help you convert contractors to employees.

4. Pay the right salary for the person, role, and location

Appropriate compensation is the foundation of your ability to recruit global talent. Fortunately, your global payroll partner should be able to help you understand what an appropriate salary and benefits package should look like in your prospective hire’s country. If you need help designing a global compensation strategy, a good partner can help with that, too.

5. Consider whether you need your own entity

Do you plan to hire dozens of employees in one country? If so, you should probably consider opening your own local entity. For a smaller or medium-sized team, working with an EOR service may be the more financially responsible option.

Even if you do plan to hire a large team, though, consider working with an EOR to start and then transferring the employees to your own entity once you are ready to do so. That way, you can get started with local hiring right away instead of waiting a year or longer.

Remote’s global payroll services

As your team grows into more countries, it’s important to choose the best global payroll option for your business. 

Whether you want to hire one employee or 1,000, Remote is here to help. We combine global contractor payments, EOR services, benefits administration, and payroll management into one easy-to-use platform available in more than 170 countries. 

With Remote, you can:

• Consolidate payroll processing

• Reduce administrative tasks and manual payroll management for your in-house team

• Stay compliant in 60+ countries with Remote’s local legal experts

• Reduce your payroll management costs

• Centralize payroll administration with access to data and reporting tools

Managing global payroll doesn’t have to be hard. Contact Remote today to learn more about how we can help you grow your global team. If you’re ready, you can sign up now to begin onboarding international contractors and employees right away.

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