While hiring internationally gives your business access to a global talent pool, maintaining compliance with tax and labor laws can be tricky. Every country has its own regulations, sometimes with local variations (like at the state level).
Ensuring payroll compliance is essential for your company. Otherwise, you risk fines and other penalties. For example, the U.K. government recently found that more than 500 companies failed to pay employees in compliance with minimum wage laws. Even though it was determined that not all of the underpayments were intentional, the government still took action against the employers.
The good news — you can hire internationally and maintain compliance by following payroll management best practices.
Key takeaways:
- Global payroll processing is complex due to country-specific laws.
- Failure to comply with laws can result in fines, penalties, and reputational damage.
- A global payroll provider can maintain compliance and keep your payroll process running smoothly.
1. Follow Local Labor Laws & Compliance Requirements
Local employment laws cover a broad range of payroll-related requirements, including:
- Minimum wage and overtime pay
- Tax withholdings and employer contributions
- Retirement programs, such as Social Security and pensions
- 13th and 14th month pay
On top of running payroll for global employees, employers also must follow laws governing employee classification, termination and severance pay, paid parental leave, and mandatory paid time off. Each country, state, or other municipality may also have its own specific payroll reporting requirements.
It's no wonder that compliance is cited as the biggest challenge for global payroll in a 2024 survey conducted by PayrollOrg.
Companies must familiarize themselves with country-specific regulations to avoid penalties and ensure employees receive the appropriate pay and benefits.
Additionally, you'll need to track and revise policies to comply with any updates, such as a new tax law or revisions to mandatory paid leave benefits.
2. Comply with Tax and Withholding Laws
Governments typically require that you withhold taxes from an employee's paycheck and remit the funds on specific dates. Employers need to accurately calculate, withhold, and remit:
- Income tax based on local tax brackets
- Contributions to government retirement and pension programs
- Additional payroll taxes for healthcare and other benefits
Many governments mandate that employers contribute to unemployment taxes or national retirement programs — such as Social Security — on top of employee deductions, ensuring compliance with local labor laws and social benefit requirements.
Tax filing deadlines are another aspect of international payroll you'll need to pay close attention to since they may vary by country. You may also be required to prepare annual tax documentation for employees, such as providing a W-2 to U.S. employees.
In some countries, you must comply with additional mandatory withholdings — including garnishments, child support payments, and union dues — ensuring all deductions follow local regulations.
3. Develop Policies and Procedures for Consistency
One way to reduce the likelihood of legal or compliance errors is by establishing clear policies and procedures for everyday tasks, such as running payroll, remitting taxes, and reporting.
You'll also need to regularly review your payroll policies and make updates based on regulatory changes and company growth. Some payroll tasks to document include:
Pay Schedule
Define your pay cycle. Is it weekly? Bi-weekly? Many countries require employers to follow a specific pay cycle, with monthly payments being the most common standard. This means you may end up with multiple pay cycles to ensure compliance with each country's payroll laws.
You'll also need to track each country’s bank holidays to ensure any impacted employees are paid on time.
Employee Benefits and Deductions
In addition to taxes, you may need to make deductions for employee benefit programs, such as health insurance, a pension, or stipends to reimburse employees for expenses.
Since any deductions impact an employee's net pay, you'll need a process to ensure accurate calculations — especially if the amount can vary from one pay period to the next.
Currency and Exchange Rate Management
Establish rules about paying employees in their local currency to ensure compliance with labor laws. Your policy should also cover how to handle salary fluctuations due to currency exchange rate changes, whether by setting fixed exchange rates for a period, adjusting salaries periodically, or offering a buffer to protect against volatility.
Additionally, choose payment methods that minimize transfer fees and delays, ensuring employees receive their wages on time and in full.
Payroll Processing and Approval Workflows
You can reduce errors by establishing clear, well-defined payroll approval and processing workflows, including verification steps for hours worked, bonuses, and other compensation details if necessary.
You should outline who approves payroll for each employee (A manager? Someone in HR? Both?) and the approval timeline.
You'll also want to detail the step-by-step process for running payroll, including who must sign off before finalizing employee payments and what records need to be maintained for each payroll.
Implementing automated workflows is one way to streamline approvals and reduce manual errors. Technology and software integrations can also help with deduction and benefits calculations, ensuring accuracy with each payroll run.
4. Use a Centralized Payroll System for Global Operations
One option for paying a global staff is by working with a local payroll provider in each country. After all, a local provider might seem best equipped to stay on top of location-specific laws and taxes.
However, multiple payroll providers can be challenging to manage. You might not have consistency between providers, and the oversight needed can place strain on your internal payroll operations team.
Another option would be utilizing one centralized global payroll service. With a centralized system, you'll have:
- A single source of payroll data
- Improved accuracy and reduced payroll errors
- Real-time tracking of payments and compliance
- Company-wide payroll reports for financial and tax audits
When deciding on a global payroll solution, consider choosing a cloud-based platform that integrates with your HR, tax, and accounting systems. That way, you'll maintain efficiency and visibility throughout payroll processing.
5. Ensure Accurate and On-time Payments
You might face penalties or legal action if your payroll is late or inaccurate. If you have repeated issues, it can also lead to increased turnover from frustrated employees.
Even minor payroll mistakes can create significant disruptions in a global workforce where employees rely on timely and accurate payments. Ensuring compliance with local labor laws, tax regulations, and currency exchange requirements is essential to avoiding costly errors.
Here are some best practices to minimize disruptions:
- Automate payroll schedules based on country-specific pay cycles to ensure consistency and compliance.
- Use a multi-currency payroll solution to pay employees in their local currency
- Conduct regular payroll audits to catch and correct errors before they become bigger problems.
A reliable payroll process isn't just about compliance — it's essential for maintaining employee trust and protecting your company's reputation.
6. Maintain Data Security & Compliance with GDPR
Payroll processing inherently involves handling sensitive employee data. Your payroll system houses employee tax identification numbers, addresses, bank account information, salary information, and more.
Data security and compliance should be a top priority, especially when managing payroll for employees with strict data protection laws. For example, European Union (EU) companies must comply with Europe's data privacy and security law — the General Data Protection Regulation (GDPR). Some countries, like Germany, have even stricter rules.
To make sure you're meeting legal requirements, you should:
- Use encrypted payroll software to protect employee data
- Restrict access to only authorized payroll and HR personnel
- Ensure all employees with access are trained in data protection best processes
To ensure full compliance, you must adhere to the strictest global data protection laws. Failing to do so can result in legal penalties, data breaches, and loss of employee trust.
7. Ask for Payroll Feedback From Global Employees
Paying your employees accurately and on time is essential, but you should also consider the employee experience. Is payroll a smooth process, or do they encounter friction at any point?
If you want to understand what the employee experience is like, it’s simple. Ask them. You can collect feedback during an employee's 1:1 meeting with their manager or bring up payroll during team- or company-wide meetings.
You could also survey employees and ask if they're being paid accurately and on time, and if they've encountered any issues. Consider making it anonymous so employees feel more comfortable sharing their experiences.
Of course, feedback is only worthwhile if you act on it. Investigate any reported issues, ensure they're resolved, and implement a plan to prevent similar problems.
Work with an Employer of Record for Global Payroll
Even if you implement all of these best practices, managing international payroll in-house is complex, time-consuming, and risky, and your HR team may not have the necessary expertise.
Partnering with an Employer of Record (EOR) simplifies your global payroll processes. An EOR will:
- Act as the legal employer of your international employees
- Ensure compliance with country-specific labor laws
- Handle tax compliance and legal requirements
- Process payroll in multiple currencies
- Manage employee benefits and contracts
Whether you already operate in multiple countries or are considering building an international team, an EOR will reduce risk and maintain labor law and payroll compliance.
RemoFirst helps companies hire and pay employees in 180+ countries (and contractors in 150+ countries). We'll ensure your employees are paid on time and in their local currency.
We take care of all HR and administrative tasks and assume any compliance risks on your behalf. RemoFirst can also manage employee benefits (like health insurance) and provide assistance in applying for visas and work permits.
Book a demo to learn more about partnering with RemoFirst for your global payroll management needs.
