International and global payroll: everything you need to know
Apr 20, 2023
Knowledge workers don't need to live near your company headquarters anymore. In remote-friendly industries, home (or satellite) offices can be just about anywhere.
And while a globalized workforce means you can tap into a larger network of stellar talent than ever before, it also means dealing with the complexities of paying employees and independent contractors across different countries—each with their own labor laws, tax regulations, and pension schemes.
That's why employers keen on attracting the best talent abroad need a well-oiled international payroll system: one that pays workers quickly and relieves the burden of HR departments when it comes to managing global workforces.
This international payroll guide will walk you through everything you need to keep in mind when compensating workers across the globe. We'll also explore how many international payroll providers fall short of full-scale workforce management. And then we'll show how an HRIS can solve tricky compliance issues and send employees and independent contractors payments—wherever they live.
What is international payroll?
International payroll is a company's process of sending money owed to foreign employees and independent contractors. With global workforces, this means complying with contrasting employment laws, tax regulations, and benefit schemes in every jurisdiction you hire.
So even if you're headquartered in Toronto, you can't rely on the Canadian Pension Plan when determining retirement contributions you need to make for an employee living in India. And if you hire a British contractor, they may require you to pay them in pounds, not dollars. The more spread out your workforce, the more complex your global payroll processing becomes.
International payroll management: 10 things to keep in mind
There's tremendous variability in the payroll processes, regulations, and customs between regions. Here are the biggest differentiating factors.
Establishing a local entity
Local entities are business structures that allow your company to have operations in a specified jurisdiction. They're often required for hiring international employees, but each country has different policies, timelines, and documentation requirements.
While it can get costly and complex to set up a local entity in every jurisdiction you hire, one workaround is to use an Employer of Record (EOR), which manages international payments for you (more on this later).
Hire, pay, and manage people worldwide with Rippling.
Employee and contractor agreements
Before anyone gets paid, employers and workers have to fill out their paperwork. Contractors need to sign, well, contracts outlining the scope and details of their services (wage, deadlines, workflow), while employees need to sign agreements that lay out their key working conditions (salary, benefits, termination notice requirements).
Keep in mind that countries have different requirements for what belongs in those agreements, pursuant to the labor laws of wherever your hire lives. Non-compete clauses, for instance, aren't legally enforceable in every jurisdiction.
There can also be variability in employee agreements within countries. Australia, for instance, has more than 100 types of employee agreements (known as "awards") across industries, each with their own pay scales and legal requirements.
Each new hire needs to be onboarded into your payroll system. That means collecting the necessary personal and banking information in enough time to pay them as soon as their first deposit is due.
It can take a while to get a new worker "in the system," especially if you're hiring in a new country. International contractors often have to weather three-month waits to get compensated for their work. Familiarize yourself with onboarding timelines in different jurisdictions, and consider employing a workforce solution that sets up payroll for international talent quickly.
Tax laws, rates, and deadlines
Payroll taxes can be tricky enough with domestic employees. With a global workforce, you have to comply with tax regulations in every jurisdiction you hire. That means determining each employee's income tax rate (which varies within and among jurisdictions), providing the right documentation within required timelines, and keeping track of any policy updates, as tax laws change regularly.
Omitting forms and missing deadlines leave you exposed to tax penalties. If you don't have the bandwidth to keep track of ever-mutating international tax laws around the world, you should consider leveraging payroll software that handles global tax compliance for you.
Automatically calculate, withhold, and pay taxes with Rippling.
Countries have different laws and norms when it comes to global payroll processing. These include:
- Payroll schedule: Countries have different payroll frequencies based on agreements and employment laws. While US employees often get paid bi-weekly or semi-monthly, France follows a monthly pay cycle. Make sure you know when and how often you need to run global payroll.
- Workweek and overtime: Local agreements often specify different formal workweeks. In some jurisdictions, employees are entitled to overtime pay after 35 weekly hours. In others, 40 hours is the cutoff. The exact overtime rates vary as well, so you can't apply a blanket policy to your entire international workforce if you want to ensure global compliance.
- Minimum wage: Countries have different federal and regional minimum wage laws that you should always factor in when running international payroll. You should also research distinctions between wages that are legally required and competitive salaries within your industry.
- Payment method: You may need different payment processes for international workers. Figure out the timelines, requirements, and fees associated with paper checks, wire transfers, and direct deposits.
- Extra compensation: Many countries give employees a 13th (and sometimes 14th) month salary at year's end. In some places, this is mandatory. In others, it's custom. Either way, you should know best practices for bonuses in any jurisdiction where you hire.
Countries also have different legal requirements and best practices for benefits packages. You need to know your responsibilities for:
- Retirement contributions
- Paid leave (including vacations, sick days, and parental leave)
- Health insurance
- Worker's compensation
- Severance pay
Other perks—like wellness, work-from-home, and dining stipends—may not be legally required. But they can help you stand out in a competitive job market. If you offer them, they need to be factored into your international payroll services.
Compared to employees, there's less to manage when hiring and paying international contractors, who file their own taxes and control their work conditions. But it's crucial to ensure you're categorizing workers accurately. If your business relationship with a contractor more resembles that of an employee, you run the risk of misclassification, which can incur steep fines, legal fees, and reputational damage.
If you want a hand drawing the distinction between contractor and employee, use Rippling's Worker Classification Analyzer.
International payments usually incur fees. Companies that use the Society for Worldwide Interbank Financial Transactions (SWIFT) network to safely send payments across borders, for instance, will usually have to pay between 2% and 5% in exchange rate costs.
Many countries require that you pay workers in their local currency, so you need to monitor your payroll to keep pace with volatile exchange rates. And you'll save time by using global payroll software that allows you to pay employees and contractors in their local currency in a single pay run.
A global workforce leaves employee data vulnerable to privacy breaches. Some countries require employers to specify, in written contracts, how private information will be collected and used on the job—like the EU's General Data Protection Regulation (GDPR).
While outsourcing your payroll management to a third-party provider can spare you time and compliance risk, sharing your data with them can be dicey. Most global payroll solutions claim to offer global payroll—but in reality, they secretly outsource most of their product and technology to third-party vendors. That leaves you with a higher risk of data breaches from manual uploads.
At minimum, you should establish a Data Processing Agreement (DPA) with a payroll service that mandates sound privacy practices and provides legal protection.
But you should pay special mind to global workforce solutions that prioritize data protection. Look out for systems that:
- Comply with industry-standard privacy regulations in different countries
- Build secure infrastructures with around-the-clock maintenance
- Carefully vet personnel
Your data is secure with Rippling.
Human Resources headcount
Ideally, the same system you use to run international payroll will help you in all facets of employee management: recruiting, onboarding, employees or contractors changing roles, time off approvals, benefits administration… the works.
That's why the best solution is a global HRIS that puts all these disparate tasks under the same roof. All the busy work of sending out forms, running payroll, and managing compliance is automated, giving way to a more nimble HR department.
- Take Literati, an Ed Tech company that used Rippling to reduce its headcount to only two admins for HR and IT operations for 160 employees.
- Morning Consult also switched to Rippling and also slimmed its HR headcount down to two admins that manage 500 employees. Since Rippling can manage the complexity of processing global payments in 90 seconds, Morning Consult reduced its time to run payroll by 84%.
Pros and cons of different international payroll services
We mentioned a few as we went along, but here are the different ways you can process and manage global payroll, along with the perks and snags of each option.
What it is: An app that automatically makes and tracks payments to workers.
- Outsource global payroll while still maintaining control
- Minimize risk of manual error
- Save time
- Need in-house admins with payroll knowledge
- Requires a paid license and often grows more expensive per extra employee
- Many tools outsource their product to third-party vendors
International managed payroll provider
What it is: A third-party service that handles payroll on behalf of an employer—including keeping records and withholding taxes.
- Don't need expert knowledge of international payroll best practices and regulations
- No license required
- Relinquish employee data and run the risk of a breach
- More expensive than payroll software
What it is: Hires foreign workers on a company's behalf while handling payroll, taxes, contracts, timesheets, and benefits.
- No need to set up a local entity
- Faster way to hire globally
- Reduce compliance risk
- Offer competitive benefit packages
- More expensive than payroll software and payroll service providers
- Some services don't work with employees and contractors under the same umbrella
International Money Transfer Company
What it is: Third-party organization that allows you to make global payments.
- Competitive exchange rates
- Available for most currencies
- Don't handle taxes, benefits, and other aspects of payroll management
- Global compliance risks
- No specialized support
Only Rippling has you covered for the full lifecycle of your global workforce
Most global payroll solutions require a degree of sacrifice: convenience at the expense of security. Or expertise at the expense of lengthy payroll processing times.
What's more, most EORs are running international payments through a payroll aggregator, meaning they're outsourcing your data to third parties to manually process payroll.
Since they often work with dozens of vendors at once, these aggregators can jam up payroll processing times and cause long delays. You'll also have a hard time customizing time and attendance sheets, determining bonuses, and keeping all your workers within the same system. Not to mention keeping track of all potential global compliance pitfalls.
Then there's Rippling, the only native global payroll software and HRIS that helps you manage every aspect of your global workforce in the same system. You can pay employees across countries in local currencies in a single pay run, allowing you to process payments in a fraction of the time of a conventional aggregator.
What's more, Rippling is built to support every stage of your company's growth. Whether you're starting small and only hiring international contractors, or are looking to expand your global footprint by managing foreign employees with your own local entities, you can keep the same payroll system—even as your tactics change.
Request a demo today to see how Rippling can simplify global payroll processing.
Rippling and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any related activities or transactions.