Global Payroll and Payments – Closing the Circle

Alex Margolin November 24, 2019

The Payroll department, nestled between Finance and Human Resources, performs one of the most essential tasks for any business – it ensures that everyone at the company is paid correctly and on time, every time. That may sound simple, but in a global economy, it’s one of the most complex operations a company performs on a regular basis.

The payroll department has the awesome responsibility of overseeing the largest expense at any company, and yet, it operates almost entirely behind the scenes, unnoticed, except, of course, when it makes a mistake.

Its invisibility tends to obscure the immense complexity of the work it performs. And with global expansion easier than ever, with or without a legal entity, and more people opting out of regular, salaried employment in favor of the “gig economy,” that complexity is only increasing.

Modern times require more than a regular payroll. They require a global payroll. The additional complexity of a global payroll is more than simply additional line items added to the same payslip as a local employee. In reality, it requires a whole new system of calculation that takes into account all of the unique elements of each country.

At the same time, help is on the way. Automated platforms that are easy to integrate allow payroll workers to manage enormous amounts of information from many different sources through a single system. The most revolutionary version of this system brings both processes – payroll and payments – into a single, unified platform that seamlessly covers every step of the process.

What is a Global Payroll?

A global payroll is essentially the management of payroll in multiple locations across the world simultaneously and through a single system. It covers multiple currencies, multiple languages, and multiple tax codes to ensure legal compliance in each location.

Imagine trying to manage payroll for a global company. The hypothetical company has a team of salaried employees in the country where it was founded. In time, the company sees business opportunities in other countries. Since it does not have a legal entity in those countries, the company sets up EoR (employer of record) arrangements to ensure legal compliance, and hires locally in those three new countries. In addition, each location outsources some functions to independent contractors to keep costs down.

In all, there are 50 people in four countries who need to be paid at the end of each month. Each person must receive payment in the local currency, and all of the employment contracts must be paid in four different currencies. Each country has its own tax codes, social security requirements, salary standard, and benefits benchmarks.

The payroll department has to calculate what each employee is owed. But that’s just the beginning.

A modern global payroll has many more functions. Payroll workers also calculate costs to the employers, which include employment taxes, a share of social security costs, and assorted monthly benefits – many of which vary from one employee to the next. At the same time, the payroll department has to ensure the data privacy of all the people at the company, stay on top of tax code changes in each country of operation, and collect business insights so that management knows where all the money is going.

And that’s just half of the operation. The second half is payments – ensuring that the payments are made and everyone on the team receives the correct amount at the expected time, month after month.

In many companies, those functions are split between different departments, or carried out through different third-party service providers. It is most cost efficient, however, for both halves of the process – payroll and payments – to be processed in a continuum. That ensures the greatest level of oversite to catch any errors and brings costs down to a minimum.

Meeting the Challenge of Global Payroll

A global workforce is best managed through a combination of automated payroll software and support from experts on local tax codes, benchmarks, and salary standards. The software produces accurate payroll calculations and the experts ensure compliance, even as tax laws change. They also provide support to companies so that the system is always running efficiently.

A global payroll can be divided into four distinct stages. Each stage must be completed before moving on to the next stage.

  1. Salary Updates

The process begins with the payroll manager collecting all of the elements that go the payroll calculation for every employee, worker, or contractor. That typically begins with attendance and time sheets and paid time off, benefit plans such as meal allowance or gym membership, and necessary data on all newly on-boarded team members.

Every country has its own unique requirements on minimum wages, length of workweek, rate of overtime pay, and a host of other considerations. Then there are tax rates and related questions such as how to classify social security. In some countries, it is classified as a tax and includes protection for a worker in case of extended absence due to illness. In others it is a mandatory benefit. In both cases, a portion is deducted from an employee’s pay, and a portion paid by the employer. The exact rate is different across the world.

Any adjustments to the monthly payroll are made in this stage. That could mean calculating bonuses an employee might earn, commissions on sales that will vary from month to month, and personal expenses that need to be compensated.

  1. Processing

After all of the data is collected, the processing begins. All of the time sheets need to be collated into a single, consistent format. That includes sorting through countless spreadsheets in different languages, different reporting styles, different sources of data, and different stakeholders within the company and outside of it. The calculations are all carried out on the local level so that

During this stage, all of the calculations are made and the final totals are established. That includes how much will be paid to the employee or contractor, and how much will be withheld in taxes and social security payments. It is also the stage when employer taxes are tabulated and employer contributions to pensions are determined.

  1. Audit and Approval

When the calculations are competed, the process requires an additional level of oversight to ensure that all of the payroll costs are in line with the company’s expectations. Any gap between the payroll budget and the actual payroll can be spotted during this stage and any errors, no matter how marginal, can be eliminated.

Payroll errors are known to deteriorate trust between a workforce and the company. Workers depend on receiving their paychecks on time and in the correct amount, and any deviation from that could cause problems for the worker, including potential tax liabilities if the tax authorities suspect that the worker is earning more than he or she actually is. Therefore, the stage of audit and approval is crucial to ensuring a perfect payroll.

  1. Payment

There is a great deal more to payments than delivering the funds to the people who earn them. Even after the calculating how much each worker should be paid, how much tax goes to the various tax authorities, all the benefit plans relevant to the current payroll cycle, there are bookkeeping tasks to carry out. A fully itemized payslip must be created and all of the amounts entered in to the general ledger.

After the process is completed, the final step is to analyze the costs to ensure that they are in line with overall budget planning. This is when Business Intelligence and analytics become a crucial advantage. Having the entire global payroll available for easy access, and having the tools to compare payroll spending by time periods, by cost centers, or by individuals allows payroll managers to assess the efficiency of their payroll spending.

Essentials of Cross-Border Payments

When all of the calculations are complete, the bookkeeping tasks carried out, and an individual payslip generated for every team member, it’s time for the payments to be delivered to every location. Just as payroll must be 100% accurate and on time, every time for everyone, the stakes are even higher with payments, where real money changes hands.

In the past, companies would write out physical checks that would be delivered to person every pay cycle, normally every two weeks or every month. The check recipient would have to go to the bank and deposit the check in person.

Today, virtually all companies have replaced physical checks with direct deposits to people’s bank accounts or wire transfers to their banks. Direct deposits, which bypass processing by the bank, are cheaper because there are no bank fees, and quicker because the money goes directly to the recipient, without bank processing delays, which sometimes last as long as several days.

A similar parallel is happening in the B2C space where a range of innovative money transfer companies enable individuals to make cross-border transfers without incurring the heavy transfer fees and poor exchange rates of banks

For a global payroll, where payments are delivered across borders, the challenge, as always, is compliance. The payment system must be capable of calculating payroll accurately across the globe and delivering payments to multiple countries in full legal compliance.

That’s where a fully automated payment transfer service becomes essential. Without a unified system, payroll managers are forced to carry out multi-channel payroll – one for each country. This is virtually impossible to maintain. Moreover, without a unified platform, payroll costs remain separate so managers never see the full picture of their payroll outlay.

An automated system can ensure that all of the mandatory payments are made, including to tax authorities, social security, and the host of benefits providers. It can also be set to deliver all of the payments at the same time so that a company’s entire workforce is paid simultaneously.

Taken together, a global payroll and payment system provides full control of the entire pay cycle, unified reporting, and ability to monitor and forecast costs with advanced business intelligence generated by the payroll data.

Future of Payments Will Be Faster and Smarter

Technology moves fast, and in the area of payment automation, that means speeding up the time it takes for people to receive compensation for their work. An emerging trend is for instant or same-day payments, rather than a full payroll cycle. In the future, people will be able to access their pay at the end of each workday, or have the money available in an account whenever they want. Some companies are already experimenting with the idea. The system will require solutions for compliance and tax withholding, but with smart automation, it’s only a matter of time.

It also means finding solutions for the vast number of people in the world who do not have bank accounts. The “unbanked” currently have difficulties receiving their payment because they are excluded from direct deposit or bank wires. But they will all be able to make use of e-wallets that will be able to serve the same function as bank accounts and can be implemented as part of the  payment plan. Some companies are already experimenting with opening accounts for their employees right from the start, and making the accounts accessible through dedicated credit cards.

The world of payments is also bracing for a major disruption in the form of crypto-currencies based on the blockchain model. As Bitcoin and other deregulated coins gain traction among consumers in all sectors of society, more people will want to receive payment in crypto coins instead of traditional currency. That will create new challenges for payroll and payments, especially in the area of legal compliance and government regulation. Governments across the globe are currently debating ways to regulate crypto-currencies and ensure that all taxes are paid – something that is difficult to do at present when the currencies bypass all oversight and move from wallet to wallet with no regard for banks or borders.

Meanwhile, payroll and payments will benefit from more robots and Artificial Intelligence (AI). Robotic Process Automation (RPA) is already taking over many tasks from payroll departments, especially those that are mundane and repetitive, speeding up the process and eliminating human error. AI is also helping process complex systems with greater speed and accuracy.

It is important to note, however, that the future will be more automated and more human. People will still be needed to oversee the process, check for mistakes, and assist companies on a host of issues that go beyond automation.

Papaya’s Payroll and Payments Solution

Hiring abroad or managing a global workforce can be a daunting task. Our mission is for you to regain control by offering complete transparency through direct access to our local partners, a consolidated overview of your global payrolls, EORs, and contractors; and fixed pricing without hidden fees. The Papaya platform integrates with your HRIS and ERP and ensures full legal compliance. Workers are paid in their local currency and receive payslips in their native language through our secure worker portal.

See how Papaya’s global payroll solution manages on all aspects of payroll, including hiring, on-boarding, managing, and paying a global workforce.