The opening of a new international office is a major milestone for any company. As with every benchmark reached, there are many obstacles to overcome. International expansion, although presenting a whole host of new opportunities, also brings a new set of challenges for organisations of every size. Expanding internationally means tackling a minefield of cultural and legal obligations, not the least of which is being locally compliant with employment laws and regulations.
The general perception of the payroll function is simple; a payroll provider pays people the right salary at the right time. However, the reality is that payroll plays an important part across all functions of a business, especially to an organisation that is expanding globally. Payroll is involved in all your hiring and firing of employees, their annual leave, bonus and general employee benefits, as well as providing data for boardrooms to decide on resource allocations.
Payroll links directly to an organization’s tax accounting, which means it is governed by a plethora of local, state and national laws. It isn’t just tax laws that payroll providers must adhere to. A company has to abide by each country’s statutory employment law, and each country you wish to operate in has different processes and laws compounding the complexity.
In Ernst & Young’s “2015 Global Mobility Effectiveness Survey”, 74.5% of over 200 global organisations surveyed stated that better insights are required in global compliance. Why? In addition to the differing laws in each country affecting the process of employing, as well as on-boarding and paying of employees, there are different municipalities and states within each country that may have their own laws too. In Texas, employees do not pay state income tax, however, in California, they do. In some parts of Europe, there is a ‘church tax’ dependent upon an employee’s religion, whilst in the US, even asking an employee’s religious affiliation could expose the employer to a very costly discrimination lawsuit. Then, there are the healthcare benefits. In the US, companies are now required by law to offer a certain level of healthcare coverage, whilst in other countries, the government provides the healthcare coverage to employees.
In every country you operate in, taxes are paid on different dates, involving diverse and resource-draining paperwork. Make a mistake with these filings and your business faces a potentially crippling penalty. Due to payroll errors alone, the IRS issued a staggering $4.5 billion in penalties to US businesses in 2013.
Meanwhile, all these complexities are compounded by the fact that businesses are now operating in an expanding regulatory environment, where governments all around the world are energetically pursuing additional tax revenue and developing their tax tracking abilities. Making sure organizations pay the taxes that are due on time, is worth a lot to governments. The IRS collected almost $345.6 billion in income taxes, before refunds, from businesses in the 2016 fiscal year. Governments want your tax money and are better equipped than ever before to ensure taxes are paid and compliance is met. They are also prepared, and willing, to punish your business heavily for any reporting mistakes made.
Simply Googling “German Payroll Law” is not an option for an organization wishing to expand into Germany. There is a huge amount of complexities involved. Your business must be fully compliant in all your payroll obligations. One option is to use the services of an international payroll service provider that offers a compliant global payroll solution.
Your business could choose to hire staff at your local office to manage its global payroll needs, but they must be fully conversant with international laws. Additionally, your payroll staff must be available to work in different time zones and in different languages. This option is extremely inefficient and prone to errors.
Another option to ensure your business is compliant with global payroll is to hire dedicated staff in each of the countries you operate in. Although this may solve inefficiency and errors, the cost of hiring dedicated payroll staff must be justified by the number of employees. Take into consideration that the cost of a payroll employee may not be justified if you are opening an international office with only a handful of workers. Alternatively, a business may look to contract a payroll company in each country. In small cases, this may be sufficient, but the more international borders you cross, the more payroll service providers you have to take on and manage. All changes that are made to the salary or benefits of employees must be communicated to all the different payroll service providers you are using, making it error prone and inefficient.
By far the best solution for any business expanding internationally is to find an established a single global payroll provider. Employer of Record (EOR) services already have a network in place, as well as the expertise to navigate the regulations, laws and human resource processes across multiple borders.
Instead of implementing numerous service-level agreements, using one international service provider allows your company to have just one all-encompassing agreement. The EOR service will provide multinational HR solutions, including hiring of employees, outsourcing, HR administration, and payroll needs. Moreover, EOR services can provide solutions to any potential staff immigration or relocation visa needs.
An effective global payroll service provider can help you avoid expansion pitfalls by developing a fully compliant and more efficient payroll system for both your domestic and international needs. Doing so allows your organization to focus on the bigger picture of achieving your business goals.