Nicole Sahin, CEO and Founder at Globalization Partners
Regardless of whether organisations are seeking to locate talent abroad to fill a skills gap or are looking to expand their business into new geographic regions, they will be confronted with the challenge of onboarding overseas employees and figuring out how to pay them. To avoid the risk of encountering any potential international payroll issues, organisations will need to be certain they are following the rules when it comes to classification, tax withholding and a raft of other details.
Aside from complying with the requirements of national authorities, organisations will also need to be sensitive to local payment customs and cultural differences that will need to be reflected in how international employees are paid. For example, a 13-month payroll is commonplace in many South American, European, and Asian countries.
Similarly, in the EU the working week is capped at 48 hours, while in China labour law caps the working week at 44 hours. Meanwhile, in the US non-exempt employees receive overtime pay once they have worked more than 40 hours in a week. Therefore, the international payroll system will also need to incorporate a method to accurately record and report time.
Let’s look at some of the key areas that organisations will need to consider when hiring and paying international employees.
International payroll – the compliance basics
When paying international employees, businesses must ensure they are withholding and paying the appropriate types of tax, and the right amount of taxes, by the right deadline.
Alongside any applicable regional or state income tax, many authorities collect some form of social security tax from both employees and employers. Similarly, in numerous countries, employers are expected to contribute to payroll taxes – such as unemployment tax and worker compensation – for every employee.
In addition to tax compliance, international payroll will also need to follow all national rules that relate to benefits and wages. This may include contributing to an employee’s pension plan and adhering to any minimum wage rules that apply.
Tax and wage compliance aside, in many respects international payroll is similar to domestic payroll. Decisions will need to be made on the frequency with which employees are paid (monthly, bi-weekly, and on which days of the month), and whether monies will be distributed to remote employees via direct deposit or paper cheques.
Navigating other legal concerns
There is an array of legal differences that need to be kept track of when paying a remote international team. Here in the UK, employers need to pay Statutory Sick Pay if an employee is sick and off work for at least four days for a period of up to 28 weeks. In the US, however, while employers can offer paid time off for sickness they are not legally obliged to pay employees; the Family and Medical Leave Act (FMLA) in the US protects people who need to take up to 12 weeks leave due to sickness or other health concerns, but this leave can be unpaid.
Documentation is another challenging area to manage when hiring and paying international employees. Employees may need to provide proof of citizenship or their right to work in the country (such as a passport) when they are hired. In many countries, an employee is required to present a national insurance number before they can be hired.
The practicalities of payment
Employees must be paid in accord with the laws of the country in which they live and work, but there are exceptions. For example, if an organisation asks an employee to temporarily move abroad in the line of work, it may be possible to continue to pay them from their home country payroll.
However, companies usually find there are a limited number of options when it comes to establishing a separate payroll for each country in which it operates. Setting up a subsidiary to manage all business and handle payroll makes sense if there are plans to permanently expand internationally. But this becomes a time consuming and costly proposition when companies need to hire just a handful of people in multiple countries.
Finally, international employers are also faced with juggling fluctuating currency exchange rates to ensure people get paid the correct amount in their local currency – without incurring excessive cost to the organisation itself.
Should international employees be independent contractors?
At first glance, classifying international workers as independent contractors rather than employees might seem like the ideal way to streamline payments and reduce the complexity of the payroll process.
The advantages of this approach are appealing; organisations that work with independent contractors are not responsible for withholding taxes, paying social security or unemployment taxes. Plus, contractors are not subject to the same hour restrictions as employees, and an organisation does not have to be registered in the country the contractor lives in to pay that person for the work they do.
However, most countries have strict definitions and rules that need to be met before an individual can be considered an independent contractor rather than an employee. Companies that try to classify international employees as independent contractors run the risk that if local authorities determine they have misclassified any employee as a contractor, they will face considerable legal and financial repercussions.
Cutting through complexity – and staying compliant
To eliminate the multiple complexities associated with onboarding and paying overseas teams, companies that need to manage flexible working on a global scale are increasingly electing to outsource the management of their international payroll to a global employer of record.
A global employer of record gives companies the ability to quickly place workers in countries where they do not have a business subsidiary or branch office. This is because the company’s employees are placed on the existing payroll of the employer of record, with the company benefiting from its global legal infrastructure.
This eliminates any need to set up a subsidiary to onboard employees, ensures that country-specific payroll requirements are met, and that employees get paid on time and in the currency of their home country.
It is a cost-effective approach to handling the compliance burden that companies typically encounter when onboarding and paying international teams, making it easy to acquire the agility they need to capture talent and market opportunities – without compromising their operations or their international reputation as an employer of choice.
Bio: Nicole Sahin, CEO and Founder at Globalization Partners
Nicole Sahin’s mission is to eliminate barriers to doing business internationally and building global teams. As founder and CEO of Globalization Partners, she is recognised for having created their innovative Global Expansion Platform™, which empowers companies to hire anyone, anywhere within a few business days – expanding their global footprint without the need to set up in country branch offices or subsidiaries.
