Running payroll is a complex process even for organizations operating 100% locally. If you are thinking or in the process of hiring international talent, there are a myriad of factors to consider, including payroll compliance, exchange rates, tax withholding, cost of living, and benefits – all of which can make global payroll management a complex tax.
While that is the difficult part, the good news is that there are ways to effectively manage payroll for a global workforce. A global payroll management software is one. The rest is dependent on your internal workflows and processes.
What is global payroll?
Global payroll is an umbrella term for practices related to onboarding and managing payroll for international employees and contractors, as defined by Remote. It involves consolidating all payroll data streams of employees across various geographies into a single platform, standardizing the data, and calculating and disbursing salary payments to all employees globally in their local currency, while ensuring full compliance with local employment laws.
When it comes to managing a global workforce where employees may be based in dozens of countries, there are bound to be challenges. Here are some options that organizations can consider in effectively managing global payroll for their international workforce.
Setting up local entities
Establishing local entities in countries where the organization has presence can help to facilitate the global payroll management process. There are three options in setting up a local entity: a representative office, a branch office, or a foreign subsidiary. While each comes with its own advantages and challenges during the set up, global payroll providers can support in managing payroll on a localized level. At the same time, it may also offer certain tax benefits depending on the nature of the local entity. This helps to reduce the overall payroll cost in hiring international employees.
Employing a Professional Employer Organization (PEO) service
A professional employer organization, or PEO, is a type of full-service human resource outsourcing. It may also be known to other organizations as co-employment. Under the PEOÂ arrangement, the PEO performs various employee administration tasks, such as payroll, benefits administration, tax filing, and HR support, on behalf of the organization. Some PEOs may also support organizations with strategic functions including compliance management and recruitment, though the services offered may differ between PEOs. These additional features may benefit the organization as managing salaries and other HR matters for these international employees will be taken care of by the PEOs. Simply put, PEOs are extremely useful in managing the global workforce as they essentially take over the administrative aspects of payroll management for the organization. This allows the organization and employees to focus on other strategic initiatives or promoting sales of its products and services.
Collaborating with an Employer of Record (EOR)
Leveraging an Employer of Record (EOR) is a quick and efficient way to hire and compensate international employees. This service uses a designated company to manage the organization’s entire payroll process in the foreign country. Utilizing this model allows the organization to employ international employees without going through the hassle of setting up a legal entity. In addition to payroll, EOR also manages benefits and taxes on behalf of the organization.
Hiring external contractors
Engaging external contractors is a quick and easy solution for organizations who need foreign labour – but to a limited extent. On one hand, they offer organizations access to niche, skilled expertise without the need to compensate for healthcare, taxes, or other benefits. However, when the project expands in scope or if the organization intends to operate in a foreign country for an extended period of time, it may be best to set up a permanent and stable workforce. Organizations who employ international contractors also need to ensure proper classification of employees to prevent incurring hefty fines.
Employing global talents allows organizations to tap into a broader and diverse pool of skills and experience. That said, organizations also need to be mindful of the local employment laws that come with hiring and setting up an international workforce. Managing payroll for global talent need not be a complicated task. By carefully weighing the advantages and challenges associated with each option, this can help organizations to determine the best option in compensating their global workforce while also ensuring compliance with local employment and labour laws.