Managing international payroll isn’t just paying overseas employees. In the increasingly competitive global marketplace, it’s about attracting, supporting and retaining the best and brightest employees. Whether you are hiring your first sales person in Germany or your 20th customer support representative in India, your reputation as an employer is vital to your success.
Payroll, of course, is only part of the issue. Employment contracts, benefit plans and compliance requirements also represent critical pieces of the employee experience. Finding, vetting and managing an experienced provider that can provide this comprehensive solution is difficult, and achieving this goal across multiple countries even more so.
Other requirements, including entity funding mechanisms, statutory (compulsory) benefits, and tax withholding and reporting requirements vary widely by country, a reality which can leave the headquartered (HQ) team scrambling to keep up. Companies must also track complicated leave formulas, understand local employment requirements and expectations, file health and welfare documentation and stay ahead of constantly changing legislation.
In many European countries, for example, vacation and sick leave must be tracked as part of the payroll process. In France, failure to do so likely will mean that upon termination, the Courts will rule that no vacation has been taken and full payout to compensate may ensue. In Italy, it is necessary to accrue a mandatory severance payment each month, which can create challenges with accounting. In many countries, additional 13th and 14th month holiday payments/bonuses have to be paid at certain times within the year. In the Netherlands, it is necessary to account for mandatory medical insurance contributions through payroll.
Other forms of compensation, such as the payroll administration and processing requirements relating to share-based compensation, including share options and stock grants, often require coordination between the parent and local entity to ensure that grants and/or exercises are correctly captured for reporting purposes and any taxation in relation to the compensation is correctly withheld within a specific time frame. Often, employees will have their salaries adjusted to take into account these events, which means finance and HR professionals should be clear on the process and impact to reduce employee dispute.
Though many countries are enacting laws that foster and encourage foreign investment and expansion, employment law reform in many countries has not kept pace. This is especially true in the developing world, where legacy laws can actually deter foreign firms both from entering local markets and hiring local and non-local employees. For instance, a foreign entity in China with a registered office (RO) cannot directly hire a Chinese local. Instead, the foreign company is required to use a Chinese staffing agency that hires the employee and then contracts the employee to the foreign entity. An alternative approach is to set up a wholly foreign owned enterprise (WFOE) subsidiary in China, which allows a foreign company to hire Chinese locals directly. The WFOE establishment process, however, requires challenging approvals and regulatory requirements that drive up both costs and delays.
With payroll processes so complex and country-specific, most companies expanding overseas immediately turn to their U.S. payroll provider for advice and assistance. Though some, but certainly not all, of these providers can offer services in certain countries, many aren’t willing to provide such services unless the number of employees is substantial. This can leave companies with smaller employee footprints (50 or less) at a disadvantage.
Without the assistance of an international payroll provider, many companies attempt to manage foreign payrolls on their own. They slog through the evaluation process to hire local providers, try to make sense of the confusing process for entity setup and registration, and try to figure out how to communicate with the foreign partner through language barriers and time zones. This process, especially for companies operating in more than one country, often consumes a disproportionate amount of the HQ team’s time. Even with all the time, energy and money spent, many CFOs and VPs of HR still find themselves thinking, "I don’t know what I don’t know."
The list of complications can certainly make a company think twice about taking the plunge into an international market. Some might even think the myriad of complications, along with the cost and potential risks, may not be worth the potential opportunities. However, despite the obstacles, international expansion is on the rise. According to a 2011 Business Journals study,1 nearly a quarter of American businesses said they are doing business overseas, and roughly 800,000 American companies—with fewer than 500 employees—owe part of their revenue stream to customers based in international locales.
In order to effectively capitalize on these opportunities overseas, companies must identify the right partners to maximize the opportunity and minimize the risk. They should try to find partners who are referred by trusted sources, such as their banking, accounting or legal service providers, a customer overseas, or personal or professional resources who may have expanded internationally before. Once the choices are narrowed down, finance and HR teams should trust but verify—check professional references, search the Internet for feedback and make note of comments, complaints and accolades. Doing due diligence on the provider upfront is critical to the long term success and the overall peace of mind of the executive team.
Regardless of the location a company selects for its international operations, best of breed international payroll providers should be able to do more than simply process the payroll. Rather, they should also be able to advise and assist with the all the mandatory and predictable activities that go along with supporting a local payroll, including:
International payroll is the cornerstone of any successful overseas expansion, and "getting it right" is critical to employee satisfaction and overseas growth. While doing it yourself may prove less expensive in the near term, best-in-class companies are investing in developing partnerships with providers that can deliver comprehensive, scalable international business services and actionable advice across geographies, lifecycles and functions.