The rise of remote work has revolutionized the way businesses operate, enabling greater flexibility and access to talent from around the globe. Today, around 12.7% of full-time employees work from home while slightly over a quarter of employees (28.2%) have adapted to a hybrid work model, which combines both in-office and home working, suggesting that remote work is rapidly normalizing.
Unfortunately, a remote workforce can disrupt payroll management. Depending on where the employee is working remotely from, this can impact all aspects of payroll – from tax and legal regulations, pension contributions to benefits and compensation practices.
Here are some key payroll challenges that organizations need to be aware of when handling payroll for its remote workforce as well as ways to navigate these potential pitfalls.
Employment contracts & legal obligations
The first concern that organizations need to be mindful of is employees’ employment contracts. The employee contract needs to account for the legal place of employment and the nature of employment. Standard employment contracts may not be applicable to all employees as labor laws and regulations may differ depending on where the employee resides and works. For remote employees who travel frequently on business requirements, HR may also need to be mindful of the terms and conditions under their employment contracts as well. Depending on the nature of employment, HR also needs to be mindful of the type of work passes that employees may require prior to commencing work with the organization.
To mitigate the varying employment terms and conditions, organizations need to be flexible when drafting employment contracts. This may include creating a standardized template to be used across all countries, with customizable fields depending on the country where the remote employee is working in.
At the same time, organizations need to outline clear expectations and policies around how working hours and overtime are monitored while adhering to local employment requirements. Organizations will need to be creative in coming up with various working arrangements to motivate their talent pool in delivering maximum value without inadvertently discouraging a certain employee segment.
Compensation & benefits packages
A geographically-dispersed workforce also means that compensation and benefits practices may differ from country to country. For example, market pay levels for a payroll specialist may be higher in Singapore versus Malaysia due to currency fluctuations. Provision of fixed cash allowances may also differ across countries. For example, it is common practice for organizations in the Philippines to provide rice allowances to their employees. Similarly, organizations in India often provide a higher proportion of fixed allowances versus base salaries to reduce tax obligations. Employee benefits entitlement and practices also vary across countries. Likewise, compensation and benefits calculations, such as overtime, leave entitlements, pay calculations for work done on a public holiday also differ depending on where the employee works..
Organizations will need to consistently review market compensation and benefits pay practices in order to design competitive packages that attract talents while aligning with market practices. Engaging an external benefits broker can also enable organizations to effectively manage benefits offerings for its remote employees while complying with local statutory benefits requirements.
Taxation challenges
Tax regulations across geographies are extremely complex and rules may differ even across regions within the same country. As organizations transition to a globally-remote workforce, this also increases the challenges in addressing tax liabilities. Organizations are typically subject to taxes based on where their employees perform their work, while employees are often subject to taxes based on their place of residence. This may inadvertently create tax obligations in two or more places as well as tax withholding based on where the employee resides.
Given that the interpretation and application of tax regulations requires expert and local country knowledge, organizations may consider engaging external tax consultants or 3rd-party global payroll vendors to manage tax obligations for their global workforce. This ensures that organizations are able to fulfill corporate and employees’ tax obligations in a timely manner without having to worry about the impact on payroll function.
Mandatory statutory contributions
Aside from the varying tax regulations across countries, statutory contributions such as pension or social security contributions also differ depending on where the employees stay versus where they perform their work. Organizations need to be mindful of the various mandatory statutory contributions for locations where their employees are based, and it is the organization’s responsibility to ensure that payments to these statutory contributions are being made, or risk incurring hefty fines and penalties.
Tackling these mandatory statutory contributions can be less burdensome with the help of an external payroll vendor. There are experienced 3rd-party payroll specialists in the market that manage global payroll on behalf of organizations, and are familiar with the local statutory contributions. These payroll specialists can help to manage the global payroll function and ensure that timely payments and contributions are being made to the necessary local government and regulatory bodies.
Future of payroll outsourcing for remote workforce
The advancement of technology, changing employee expectations and increasing pressure on organizations to adopt a hybrid work model is creating opportunities for people to work with more flexibility and agility than before. However, achieving this is not as straightforward as one might think. Organizations need to carefully consider the impact of any workforce transition to one that is hybrid or even completely remote before determining whether it is optimal for its workforce. A key consideration that organizations also need to be mindful of is the payroll complexities associated with managing a remote workforce; ever-changing labor laws and compliance regulations may add to the list of challenges in managing a diverse and globally-dispersed talent group.
To navigate these payroll complexities, many organizations today fully-outsource or co-source their payroll functions to a 3rd-party payroll vendor. By leveraging on the local and global expertise of these payroll specialists, key payroll functions such as payroll calculations, salary disbursement, tax withholding, benefits administration and statutory contributions can be managed by the outsourced payroll company in a timely manner. This frees up valuable time and resources for the organization to focus on strategic talent initiatives that engages and motivates their remote workforce.