Managing International Pay Practices

As you’re likely aware, the competitiveness of your overseas operations requires sound international human resource practices, with international payroll forming an interesting – if often idiosyncratic – part of that effort.

In the article below, we take a break from our usual newsletter updates to explore a few quirks beyond the “normal” challenges posed by delivering payroll in different currencies, languages and cultures, to take a look at some local market practices that, unless understood at the outset, can add unexpectedly to overall compensation costs. 

Among the local labor, tax and social security laws that regulate pay and other HR procedures overseas are requirements that extend further than the day-to-day insurance contributions, statutory withholdings, disbursements and filing requirements. Often, the overseas employer must also pay heed to items such as mandatory salary increases, imposed profit sharing, payments for holidays and bonuses, and allowances for meals and transportation.  An understanding of such practices – not to mention an awareness of employee expectations regarding them - is critical, as these aspects can have a profound impact on employment contract terms and compensation as well as on payroll operations.

Pay for Performance?
In many international locations, pay is calculated on various employee classification systems that bear little resemblance to US practices.  Though pay-for-performance is slowly becoming better accepted across the globe, it is not ingrained practice, and many elements which impact compensation (including raises, severance payments, notice periods, pension benefits, etc.) are still frequently dictated by statute, negotiated by trade union/works council, or determined by collective bargaining agreements. 

While many of these requirements primarily impact those paid at or near the minimum wage and those whose employment terms are determined - at least in part - by collective bargaining agreements (CBAs), it’s important not to dismiss them as irrelevant to your employees even if they are at more senior salary levels. Be aware of the prevailing attitude toward compensation determination in the countries where you operate, even if your employees do not fall into those categories.

Salary Increase – A few global examples
As you might expect, there’s no “one size fits all” approach. Statutory (mandatory) annual pay raises are common in Europe, and some countries in Latin America.

In Finland, France, Germany and Sweden, for example, salary increases are typically dictated by the prevailing collective agreement. In Turkey, Denmark, Malaysia and Brazil, they are required, but only for companies with unionized workforces. In Greece and Colombia, they are mandated only for minimum wage employees, and in Argentina, where the government requires inflation pay raises for low wage earners, pay increases pegged to inflation rates are often offered as part of employee retention programs for others as well. 

By contrast, the UK and India do not mandate salary increases. In most Asia Pacific countries, annual adjustments on pay are based on inflation index adjustments for those above minimum wage, with mandatory increases applicable only in countries which have a minimum wage requirement, including China, Hong Kong and Australia. Bear in mind that employers may also be required to conduct annual salary reviews with employee representatives, even if no changes result.

Expected Benefits
In addition to obligatory salary increases, an overseas employer is also often expected to provide additional forms of compensation unrelated to job performance, including transportation allowances (Brazil, Chile, Colombia, France, Belgium, much of Asia), daily allowances and/or meal vouchers (Venezuela, France, Belgium, Italy, Spain), obligatory vacation bonuses (Brazil, Mexico, Belgium), free medical exams (Japan, Brazil, France), company cars (the Netherlands, Belgium, Germany) and working from home premiums - either directly or built into base salary - (France). These non-discretionary bonuses and allowances are often included in the definition of compensation upon which termination payments are calculated. 

The employer must also consider the reporting obligations related to these forms of compensation, as they must often be reported on payroll in a certain format, adding to payroll complexity and setting the stage for some expensive employer payouts should an employee be terminated. Employers should also factor in other mandatory reporting requirements that must be reported through payroll and presented on payslips in some countries (e.g. sickness and PTO absences in France and Belgium). 

Is it Salary?
Of particular note in a payroll context is the distinction many countries make between salary (fixed monthly compensation and/or variable compensation like commissions) and remuneration, which includes all the benefits an employee receives, such as housing allowances and other in-kind benefits.  In addition to severance indemnity, remuneration is used to determine social security contributions, withholding taxes and other deposits. 

For example, Brazil requires a payroll calculation for “DSR” or daily rest, which is based on the number of holidays and Sundays in a given month. This factor is applied to commissions paid, effectively granting the employee additional compensation for the presumed lack of rest.  Similarly, in Canada, many provinces require that the 4%-6% vacation pay requirement also applies to commissions earned.  

Pay Frequency
US employers are often surprised to learn that they are obliged or expected to provide more than 12 months of salary payments.   In many locations, annual base pay is spread over more than 12 months, reducing monthly salary payments and allowing employees to collect the remainder in periodic additional payments, often made in May and / or December.

It’s important to recognize that while these additional payments are often called bonuses, they are not “bonuses” in the US understanding of the term, but rather a mandatory part of salary, usually related to “vacation” pay.  Know going in that different pay frequencies will not only impact salary budgeting and administration practices, they may have a direct bearing on the terms of an employment contract.  It’s critical to understand this when drafting employment agreements, to ensure that the dispensation of annual salary in a given country is spread out over the appropriate number of months, thereby avoiding unpleasant surprises when employees come knocking for their 13th, 14th (or in some countries 13.92th, 15th or 16th!) month payments. When employees terminate, they are often entitled to these end-of year payments on a pro-rated basis.  (Employers should also bear in mind if the payment of bonuses is provided for in a collective bargaining agreement or employment contract in a way that an employee can expect a guaranteed bonus, such bonuses may constitute ordinary wages in some countries.)

Pay Frequency – a few examples
In the EMEA region (Europe/Middle East/Africa), additional salary payments are common practice in Spain, Italy, Germany, France, Belgium, Sweden, Norway, Austria and Portugal, mandatory in Greece, and sporadically used in Russia and Turkey.

In Asia-Pacific, while you won’t typically encounter mandatory salary increases, you will find that 13th (and 14th) month payments or Christmas/vacation allowances are expected. To varying degrees, they are also common practice in Hong Kong, China, Singapore, Taiwan, Malaysia, Vietnam and Thailand (but not in Australia, Japan, or Korea).  The Philippines mandates a 13th month pay, and in Indonesia, all employers are obliged to pay a “THR” bonus (at least 1 month's salary + other fixed allowances) to their employees prior to the major religious holiday. 

Confused yet?  It gets better.  In some locations, employees are not legally entitled to a bonus unless it is specifically provided for in the employment contract.  However, if an employer does wish to provide one, statutes (in Hong Kong, for example) regulate the amount and timing of that payment.

Let’s try Latin America, where employees in most countries are entitled to a mandatory 13th month payment from their employer, and each country has its own take on 13th month salary. In Chile, 13th month pay is split between September and December, while in Brazil, Colombia and Uruguay, it’s paid out in June and December. Peruvian employees receive theirs in July and December.  In Argentina, where 13th month pay is split between June and December, employees receive the equivalent of 50% of the highest monthly compensation during the 1st and 2nd half of the year, respectively.  Brazil also mandates a vacation bonus equal to 1/3 of monthly salary and Mexico, it’s 1/4.  Mexico also has obligatory profit sharing and a Christmas bonus equal to at least 15 days of salary. 

The upshot of all of this is that international payroll, like most aspects of international HR administration and management, is a complex business.  A healthy respect for that complexity is a good first step.  Leaving your expectations regarding US-style employment agreements, 401K plans and time tracking at home is another.  The best and most successful programs are those which take into consideration the expectations of pay, benefits and work conditions held by local and expatriate staff as well as the local culture and mandatory regulations.  While all HR-related functions require careful planning, those related to paying and managing international employees merit particularly close attention.