Talent shortages are continuing in a variety of industries, including tech and finance. This is causing some companies to realize that limiting the search radius to only their local area is hampering their ability to find qualified potential hires. Now, with the rise of remote work, businesses are increasingly looking to different countries when seeking new employees.
Global hiring helps ease the difficulty of finding talent. However, it also means that businesses need to figure out how to operate on a global scale, and that includes paying employees in different locations, each with their own local laws and regulations. Global payroll management refers to the management of international payroll operations, which typically include locations where an employer does not have a physical presence. However, paying staff in other countries is not as simple as it may seem.
Common Risks of Global Payroll
One of the primary challenges with global payroll compliance is the need for companies to abide by the employment compliance requirements and payroll regulations in every country in which they choose to operate. There’s no way around this, not even for organizations that expand to just one additional country.
This can be problematic for businesses that don’t possess the knowledge and experience to compliantly employ talent in new regions. Without that expertise, companies could inadvertently violate labor laws, incur financial penalties, trigger an audit, and potentially weaken their reputation among the very employees they are trying to attract and retain.
What does this mean for businesses that want to undertake a global expansion? And how can they employ top talent from anywhere in the world without running into trouble? We’ll take a closer look at five of the most common risks associated with global payroll systems, and how you can protect your company against potential violations.
1. Payroll & Benefits Compliance
Every country has its own employment laws that employers need to follow, even if they don’t have a physical presence in the country. These could include:
- Payroll taxes: Money deducted from an employee’s gross earnings, typically to fund government operations.
- Contributions to social security, unemployment, and other programs: Separate from taxes, these contributions fund programs that assist people, often when they aren’t working or cannot work.
- Employee benefits: In addition to social programs, employers may also offer private health, dental, and vision insurance, among other benefits.
- Minimum wage and working hours: Laws that stipulate the minimum wage that all employees must be paid, the maximum hours they are allowed to work, and any limits on overtime.
- Overtime pay: Rules regarding minimum pay for any hours worked after the maximum number of hours has been reached.
- Paid time off (PTO): How much paid holiday time an employee is entitled to.
- Extra month(s) of salary (13th and 14th-month pay): Additional compensation that is mandatory, or at least customary, in several countries, and is typically equal to one month’s base salary.
- Public holidays: Each country has a unique public holiday schedule that needs to be adhered to, and while they are sometimes lumped in with PTO, they are technically separate and frequently apply equally to all employees.
- Parental leave: Almost every country has laws legislating how much time employees are allowed to take off for the birth (and in some cases, adoption of a child). This includes both paid and unpaid time.
As you can see, this list is fairly extensive. Even the most seasoned business leader may find it difficult to keep up with every country’s laws, labor regulations, tax regulations, and employment standards.
In Colombia, for example, pregnant employees receive 18 weeks of fully paid maternity leave that employers must pay. The Colombian government will refund the money at a later date, but if companies aren’t aware of the upfront expense, they may be unprepared, fail to maintain compliance with local employment regulations, and incur a fine.
Overtime pay governing both the timeframe and the rate of compensation can vary significantly throughout the world, even in countries in which the 40-hour work week is standard. For example, Italy mandates an additional 15%-50% of pay for overtime, in Greece it’s 120%-125% of the regular salary rate, and for Portugal overtime pay is 125%-150% of the regular salary rate.
If businesses attempt to manage these complex processes manually, they could experience errors and inconsistencies, fall out of compliance, and incur fines, penalties, and/or legal consequences, especially if they are outsourcing with multiple local payroll providers.
2. Data Security and Accuracy
Data security has become one of the world’s most pressing issues. A 2023 report by IBM revealed that the average cost of a data breach reached $4.45 million in 2023, a $100,000 increase over the previous year.
The risk of data breaches and privacy violations is already high, and it increases for employers that manage sensitive employee data across borders. This means the simple act of paying employees could create vulnerabilities for hackers to exploit.
This is a multi-pronged problem for businesses, which must ensure they are adhering to the various laws designed to protect citizens’ personal data. The General Data Protection Regulation (GDPR) was created by the European Union to be the "the toughest privacy and security law in the world," and applies to all 27 countries in the European Union. Other data privacy laws include (but are not limited to) the California Consumer Privacy Act (CCPA), the Japan Act on the Protection of Personal Information (APPI), and the New Zealand Privacy Act. Australia, India, and Brazil have introduced their own data privacy regulations as well.
These laws exist to ensure that businesses are careful when it comes to protecting peoples’ data. Any mistake in the way payroll data is handled could result in identity theft and/or fraud — and that could damage the firm’s reputation, not to mention the potential harm it could cause to any impacted employees.
Any company that fails to secure employee data will be unable to avoid violations and costly penalties.
3. Currency Exchange Rates
Currency exchange rates are in a constant state of fluctuation, and can sometimes shift several times a day. It’s time-consuming to calculate exchange rates for multiple currencies, especially if the process is manual. This can create complications for any company employing talent outside of their home base due to the risk of payroll calculation inaccuracies.
In addition, currency fluctuations can impact financial forecasting. If payroll teams are not able to accurately forecast costs due to changing or inaccurate exchange rates, it could result in teams that are under or over-resourced. It could also result in cost overages.
If any discrepancies arise, or if an organization fails to accurately convert one or more currencies, it would then be extremely difficult to accurately complete any payroll calculations. This could result in payments that are above or below an employee’s intended compensation, creating costly challenges — including potential financial losses for the company.
4. Payroll Errors and Fraud
Payroll errors and fraud are much more common than businesses may realize. According to the Internal Revenue Service (IRS), approximately 33% of American employers make payroll errors every year.
Now consider the challenge of calculating multi-country payroll, and with potentially multiple vendors. If employers underpay their employees, complaints and legal disputes are likely to follow. Overpayment may not result in the same reaction, but it costs employers time and money and may upset employees who are asked to return the additional payment.
Payroll fraud is also quite prevalent. Research from the Association of Certified Fraud Examiners (ACFE) found that payroll fraud schemes account for 15% of all occupational fraud schemes in the United States and Canada, which can cost an average of $2,800 per month.
Without proper controls and oversight to accurately monitor a global payroll provider, businesses may not be able to successfully detect and prevent fraudulent activities. This is especially true for any organization using a decentralized payroll platform system in which different entities or subsidiaries handle payroll processes independently.
Malicious actors may see this as an opportunity for collusion, falsification of records, or unauthorized changes to payroll data. They may add ghost employees (fictitious employees that are added to payroll to illegally collect the additional income), make unauthorized changes to salary rates, or add overtime hours that were never actually worked.
In addition to payroll errors and fraud, businesses should also be aware of differences in payroll internationally. This includes 13th-month and 14-month pay. Mexico, Philippines, and Panama are among the countries that require employers to pay a 13th-month salary bonus. Other countries, including France, Germany, and Japan, customarily pay the 13th-month salary bonus — even though employers are not legally required to do so in those nations.
5. Employee Misclassification
According to the U.S. Department of Labor (DOL), some of the indicators of an independent contractor include being able to work with multiple clients, deciding which projects to take on, and determining how and when to perform the work. On the contrary, an employee may be prohibited from working for more than one company, may be required to work specific days and hours, and must complete whatever projects the employer assigns.
Misclassification can trip up businesses that do not fully understand a country’s local regulations regarding the differences between an employee and an independent contractor. If a company inadvertently classifies someone as a contractor that legally should be an employee, they may be found liable for unpaid taxes, employee back pay, and other legal fines.
For example, if an employer in Germany is found to have improperly classified an employee as a contractor, they can be liable for up to four years’ worth of social security contributions for that employee, plus interest. If the government authorities find that the misclassification was deliberate, that number increases to up to 30 years of back payments, plus potential criminal charges. Even if a German contractor is compliantly hired, they are only allowed to work for a company for 18 months before the company must either convert them to employee status, or hit pause for a three-month waiting period, at which point they can renew the contract for another 18 months.
Mitigate Global Payroll Risk with an EOR
Employers may feel overwhelmed by the varying laws, labor regulations, and employment standards that they must adhere to every time they hire new talent outside of their home country. But they can avoid these challenges, fulfill employee expectations, and maintain compliance by partnering with an Employer of Record (EOR) to for their global payroll solution.
An EOR is an organization that assists companies expand internationally by hiring and paying employees on their behalf. This eliminates the need for businesses to set up legal entities in other countries in order to employ a global workforce.
EORs take over the administrative tasks associated with hiring and managing employees, including payroll, onboarding documentation, compliance documentation, benefits administration, tax withholding, and more.
An EOR like RemoFirst can hire and pay full-time employees and contractors on a company’s behalf in 180+ countries, handling payroll services and administrative duties, including onboarding, so that businesses can avoid compliance issues and focus on what they do best.
With RemoFirst, employees’ hours, paid time off, holidays, bonuses, and commissions are automatically calculated. Invoices are aggregated into one payment that covers all international employees simultaneously — on time and in each employees’ local currency.
In a world of talent shortages, there is a need to gain every competitive edge possible, including the ability to find and hire talent across borders. Book a demo today and discover how RemoFirst helps companies employ the very best talent from anywhere in the world.
