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Global Payroll 17 min

What is global payroll?

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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 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.  

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.

Let’s take a closer look at how the different components of global payroll work together to support international teams.

The ultimate guide to managing global payroll

This resource 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.

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. 

Employer of Record (EOR)

An employer of record is a service through which a designated 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 for your international staff. Apart from ongoing payroll management, an employer of record can also help manage the hiring process and formalities.

Professional Employer Organization (PEO)

PEO, just like the above-mentioned EOR, acts as your HR. However, if you opt to use a PEO, you have to own your legal entity in the country or region. Working with a PEO means entering into a co-employment relationship with your employee and another provider. Both of you employ the person simultaneously, while your PEO manages HR functions on your behalf.

In-house payroll operations and workforce management

Global payroll can also be managed internally, provided that you have the time and resources to handle compliance in house. Before deciding on this approach, you need to 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 run in-house payroll successfully, it’s essential to use software that will automate at least part of the process and analyze employee payroll data. 

What are the challenges for global payroll?

Let’s now take a look at the main challenges associated with global payroll.

  1. Setting compensation for your remote workers. Should you pay everyone the same amount or account for cost of living? What should you do if employees in one country receive a government benefit that employees in another country do not? To answer these questions, check out Remote’s guide to global compensation.
  2. Employee classification. Do you know when to classify your workers as employees or contractors? If you get it wrong, you can be subject to fines, penalties, and even business bans. Be diligent and review employment relationships regularly to maintain compliance.
  3. IP and invention rights. As remote workers can do their job in various locations, you have to abide by different intellectual property laws wherever you do business. Failing to understand local laws can not only result in the loss of IP rights but can also lead to legal battles and reputation damage. 
  4. 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.
  5. 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 governments understanding of your operations within that country. Working with an EOR or PEO does not have an affect 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 can help you build an international team with minimal risk quickly and easily.

What are the benefits of global payroll?

Here are a few reasons you may want to consider working with a global payroll provider:

  1. 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. Remote makes it easy to abide by each country’s legal requirements, such as tax, benefits, and social contributions.
  2. 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.
  3. Save time and money. Global payroll is a faster and less expensive alternative to setting up your own entities in multiple countries. Opening an 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.
  4. 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.
  5. 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?

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

For each employee, you need to provide:

  • 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, you must be 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:

  • 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 the local government’s rules. Salaries 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 data of European citizens is subject to GDPR, but your responsibilities become even broader when you hire Europeans to your team. Different countries around the world all have different laws relating to data protection, and they all have processes to enforce steep penalties for companies out of compliance. If you do not 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.

What are the different types of global payroll providers?

Earlier in this resource, we mentioned the differences between PEO, EOR, and in-house payroll management. To expand on that knowledge, global payroll providers can be widely 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 ever 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 is a global PEO?

So if a PEO involves a co-employment relationship, and an EOR hires employees on your behalf but does not involve a co-employment relationship, is a global PEO any different? And is the term any different from global payroll?

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, as an entity is a prerequisite for entering into the co-employment relationship.

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 can hire employees on your behalf in other countries without a co-employment relationship and without requiring you to open a local legal entity.

What is global payroll?

Global payroll is a general term that refers to paying employees internationally. It can come under different names such as payroll outsourcing, managed payroll, or payroll services, and may include working with a PEO or an EOR. Global payroll may even include making payments to independent contractors in other countries.

However, there is a more specific definition of global payroll as well: working with a company to run your payroll in a country where you own your own local legal entity. Some companies offer global payroll services in addition to PEO or EOR services. If you are not sure about which type of global payroll service you need, Remote can help you understand your situation and recommend the best approach.

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 the 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. Tax 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?

There are situations where outsourcing global payroll is the right choice. Let’s discuss them now: 

  • 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 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?

To make sure that you have a scalable approach regarding global payroll, it’s important to track and report your costs. 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:

  • 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

Five 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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 employer of record 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, employer of record services, benefits administration, and payroll management into one easy-to-use platform available in more than 60 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.