Global Payroll for International Employees: Key Challenges

Introduction

We have always been strong advocates of global hiring and its benefits. In case you haven't seen it, we have conducted a comprehensive analysis of how global hiring can significantly reduce costs for US-based startups as well as tap into a diverse pool of talent from around the world. A separate analysis also showed the cost-effectiveness of building remote tech teams across various global locations. With businesses increasingly expanding their operations beyond borders, the need to employ international staff becomes crucial.

While this brings numerous benefits, it also poses unique challenges, particularly when it comes to payroll management. Paying international employees or contractors requires a thorough understanding of international payroll processes, compliance with local laws, and consideration of various factors such as currency exchange, payment methods, and more. In this blog, we'll explore the intricacies of global payroll and provide valuable insights to paying international employees. As India experts, we will also provide insights on how global companies can transfer money to employees in India and best practices for successful payroll management.

Understanding Global Payroll

Global payroll refers to the administration and management of employee compensation and related processes across multiple countries or legal jurisdictions. It includes salary calculation, tax management, administration of benefits, and compliance with local labor laws and regulations. 

According to a survey conducted by EY, approximately 33% of global companies do not have a formalized global payroll policy. The purpose of having a global payroll strategy is to ensure accurate and timely payment of employees across the globe while considering factors such as local currency, tax requirements, social security contributions, and other relevant factors. By developing a standardized payroll policy, businesses can streamline their payroll operations, maintain consistency in payroll practices, and minimize the risk of fines arising from errors or non-compliance.

Factors to Consider in International Payroll

Consider the amount of resources and investment required to handle payroll at your operational location. Now, multiply this requirement by the number of remote locations where your employees are situated. This represents the extent of compliance and payroll management that you must handle. Additionally, companies may have contractors working in specific locations, further intensifying the complexity.

It is highly likely that your current payroll system will prove insufficient. However, before searching for the best global payroll service provider, it is crucial to grasp the appropriate international workers arrangement that suits your requirements.

Questions to Ask during Evaluation of Payroll Vendors

Now that you have clear expectations in mind from your payroll service provider, let us understand the important questions that you must ask every vendor as part of the evaluation process.

Service Offerings and Capabilities

• What comprehensive services do they provide for global payroll management?
• Is their platform compatible with your existing HR and finance systems?
• How do they ensure data security and protect sensitive payroll information?
• Can they provide transparent details about their pricing structure and any additional fees?
• How user-friendly is their payroll platform, and what features does it offer for easy navigation and accessibility?

It is important that you assess providers' service offerings and capabilities for seamless management across countries as well as with your HR and finance systems (you don’t want to upload an Excel file every time!). The service provider should have robust measures for data security. It is also important to get transparency in overall pricing and opt for a user-friendly platform with self-service options and real-time reporting for efficient operations.

Compliance and Global Support

• Will they handle local taxes, laws, and compliance requirements for each country of operation?
• Can they manage international payments and handle multiple currencies efficiently?
• Are they capable of providing payslips for international employees and contingent workers?
• How will they manage time and attendance tracking for your global workforce?
• Is there a dedicated team to serve and support your global payroll account?

A reliable provider (e.g., an EOR partner) should proficiently handle local taxes, laws, and compliance requirements for each country of operation, ensuring adherence to diverse regulatory landscapes. They should be able to provide accurate payslips for international employees and contingent workers, ensuring transparency and compliance. It will also help if the payroll provider has a dedicated team to support your global payroll account, ensuring prompt assistance and a smooth experience. 

Technology and Integration

• How frequently do they update and improve their payroll technology to meet evolving needs?
• Besides payroll, what other services do they offer to complement your global HR needs?
• What training and transparency do they provide to help your team effectively use their platform?
• How will your employees be supported in using the payroll platform and resolving issues?
• What other platforms can they seamlessly integrate with for a more streamlined process?

Evaluating the technology and integration capabilities of a global payroll outsourcing provider is crucial for a modern and efficient payroll solution. Inquire about their frequency of updates and improvements to ensure they keep pace with evolving industry needs and regulatory changes. Beyond payroll services, assess the additional offerings they provide to complement your global HR requirements, such as HRIS integration, benefits administration, or workforce analytics. Lastly, inquire about the range of platforms they can seamlessly integrate with, as this ensures a streamlined process with your existing systems, optimizing overall payroll efficiency and data management.

Collaboration and Business Scalability

• How closely will they work with your financial team to ensure accurate financial reporting?
• What happens when you scale your business or expand into new international markets?

Understand if the provider will work closely with your financial team to ensure accurate financial reporting and seamless integration with existing financial systems. As your business scales or expands into new international markets, the partner should be flexible enough to accommodate changing payroll needs and easily support your operations in new markets. This ensures that you won't have to seek a new payroll partner for each geography, streamlining your global payroll management.

Customer Support and Accessibility

• How approachable and responsive are they when you need assistance or have questions?
• Do they offer round-the-clock customer support or have well-defined support hours?
• What channels of communication do they provide for reaching out to their support team?

Look for a provider known for being approachable and responsive, ensuring they promptly address your queries and offer assistance whenever needed. Check if they offer round-the-clock customer support or have well-defined support hours that align with your business's operating hours and time zones. Some payroll providers provide premium customer support, but at an additional cost. Additionally, inquire about the various channels of communication they provide for reaching out to their support team, such as email, phone, or live chat. 

Additional information that you must ask for

• Can they provide references or case studies showcasing their experience and satisfaction with existing clients?
• Do they have termination agreements in place to handle the end of the partnership smoothly?

Seek references or case studies showcasing the provider's experience and the satisfaction of their existing clients, validating their ability to deliver quality services and support long-term business growth. Finally, inquire about their termination agreements, including notice period, to ensure a smooth transition of payroll responsibilities. It is always better to go with a provider with zero or no-financial risks.

Choosing the Correct Type of Employee-Employer Arrangement

When hiring overseas talent, you can either hire contractors or recruit full time employees, either by setting up a new entity or employing an EOR (Employer of Record). While we have explained the different hiring models in more detail separately, there is a fine line between employee and contractor classifications. Usually, it is dependent on multiple factors, including level of autonomy in work, entitlement to benefits, time of engagement, and liabilities arising from work-related issues. For example, contractors who have worked for more than 240 days in India have a high chance of getting misclassified as employees of the company.

Complying with local laws and regulations is paramount when paying international workers. Each country has its own employment laws, tax obligations, and social security contributions to process payroll, which employers must navigate to ensure compliance and avoid legal issues. Understanding these factors and seeking guidance from local experts, such as legal and tax advisors, is crucial to meeting all requirements.

Currency Exchange Rates and Payment Methods

Currency exchange plays a significant role when you pay employees overseas. Fluctuating exchange rates can impact employee payments, affecting their net income. Businesses need to consider the most suitable currency conversion methods, taking into account exchange rates, transaction fees, and timing, to ensure accurate and timely payments. There are broadly three types of payment methods to consider:

• International Bank Transfers: Paying global employees or contractors through traditional banking channels is typically the costliest method. Large banks and institutions often impose a 3-5% charge on the exchange rate for every transfer. The exchange rate itself is non-competitive, varies across banks, and is determined by the transfer amount. Moreover, the breakdown of charges is often unclear, and companies risk damaging their reputation by underpaying their workers.
• Money Orders (Western Union, MoneyGram): A widely favored approach for international money transfers in the past, this method has declined in popularity due to its lengthy processing time and the uncertainty surrounding exchange rates during the transfer. Additionally, it may necessitate the physical deposit of funds by the employer, which could be a viable alternative in countries lacking digital payment options.
• Digital Payments: When it comes to international money transfers, digital payment platforms such as PayPal and Wise have become highly popular choices. They offer advantages like lower fees, favorable conversion rates, and swift delivery of funds within a few hours. Platforms like Wise even provide physical account details in various countries, allowing you to bypass international wire fees. Nevertheless, it's important to note that these services may not be accessible in all countries.

Legal and Compliance Infrastructure

There are a lot of legal and compliance issues that companies need to account for when paying overseas employees. Some of these are:

• Double Taxation: Your international employee will be responsible for paying local taxes, and if your company is based in the US, you will also have to fulfill tax filing obligations. This can significantly increase the overall cost of employing an international worker. To mitigate this, it is advisable for companies to hire individuals from countries that have established tax treaties with the US (or the country of your registration). Such treaties prevent double taxation on items like welfare, Social Security, and health insurance, ensuring that you are not burdened with paying these expenses twice.
• Declaration against Illegal Activities: In order to prevent illegal activities like money laundering, many countries have established regulations to monitor foreign currency remittances. For instance, India enforces this through a mechanism called the Foreign Inward Remittance Certificate (FIRC). Essentially, this certificate serves as proof that your employees have received foreign currency in exchange for the services they have provided. Therefore, if authorities raise concerns about your employees' transactions, possessing a FIRC certificate can serve as their safeguard against potential legal complications. A salaried individual or a freelancer getting compensation in foreign currency are the most common examples where someone might require it.

Obtaining a FIRC can be a cumbersome process, but it is a mandatory requirement for every online transaction between an employer and an employee.

Paying International Employees: A Use Case for India

India has emerged as a popular destination for international businesses to hire talented professionals due to its skilled workforce and cost advantages. Employing international staff in India, however, necessitates understanding the country's unique employment laws, tax regulations, and social security obligations.

Currency Exchange and Payment Methods for Paying Employees in India

When paying international employees in India, businesses must consider multiple modes of transfer and their impact on employee payments. Opting for reliable and cost-effective currency conversion methods, such as partnering with banks or digital payment partners, ensures good conversion rates and timely payments. Selecting the most suitable payment method is crucial for efficient payroll management in India. 

The table below provides a detailed breakdown of the final amount received after transferring USD 10,000 from the USA to India through two different channels.

Digital Payments such as Wise offer better conversion rates, a complete breakdown of the costs, and are the fastest way to transfer money. Thus, Wise is increasingly becoming a preferred payment solution for international payroll.

Legal and Compliance Considerations for Paying Employees in India

Employers with a physical entity in India

In India, employers with a physical entity in India must adhere to the Payment of Wages Act, which outlines rules related to salary payment frequency, deductions, and more. Additionally, the Income Tax Act governs income tax deductions and filing requirements. Employers may also need to contribute to social security schemes like the Employee Provident Fund (EPF) and the Employees' State Insurance (ESI), depending on certain criteria.

Employers without a physical entity in India

If the employer doesn’t have a physical presence, it is the responsibility of the employee receiving money to ensure that they are filing their taxes on time and declaring their income compliantly. Fortunately, India has signed a Double Taxation Avoidance Agreement (DTAA) with 93 countries, so there is very little chance of double taxation. According to tax experts, workers should:

• Follow the advance tax payment schedule and pay off the tax due for the year
• Give details of foreign taxes in “Form 67” and submit it before filing returns. One may get full or partial credit for foreign taxes. 

Employers also need to ensure that their remote employees are getting statutory benefits such as:

• EPF contributions
• Paid vacations/ time-off
• Leave of absence for 10 National Holidays
• Provisions for sick leave
• Provisions for maternity and paternity leaves 

Not providing the necessary benefits results in considerable trust loss for the brand and also results in misclassification of workers, leading to hefty fines. 

FIRC as a part of making international money transfers to India

Through FIRC, India has established regulations to prevent money laundering, as was previously discussed. FIRC also functions as evidence of the purchase or sale of shares to a foreign entity. Importantly, FIRC is also used by contractors for year-end export accounting compliance. Since GST exemption applies to the export of such services, FIRC serves as an important proof of the export of services and the remittances received in lieu of them. However, for employees receiving international remittances, obtaining a FIRC can be a protracted and cumbersome process. Let’s look at the same thing in a nutshell:

Step 1: Request for FIRC Certificate or Advice

To request a FIRC certificate, the employer has to draft a letter to the bank where they are receiving foreign currency. This letter should contain the following:

1. Beneficiary name
2. Company details to identify the overseas party
3. Payment info, i.e. amount realised in foreign currency, equivalent INR
4. Unique Transaction Number (UTR)
5. Purpose code to identify the nature of the cross-border transaction. This would help in identifying the source and destination of funds. It is extremely important to mention the purpose of remittances honestly. This is because banks usually ask for proof of the purpose listed by people

Step 2: Indian Bank generates the IRM

Once the bank is satisfied with all the documents, it generates an Inward Remittance Message (IRM) on the government export portal called EDPMS. Thereafter, this IRM number becomes the FIRC number.

Step 3: FIRC is Issued

After the payment, the beneficiary bank will issue the FIRC electronically or physically.

Getting an e-FIRS: A Hassle-Free Way to get FIRC

If you are transferring money through digital payment partners such as Wise or Cashfree, the details of the FIRC will be automatically generated and sent to your email. Particularly in India, if you are a Cashfree merchant, the beneficiary's email ID is shared with the bank at the time of transfer. The bank partnered with Cashfree will issue the e-FIRS directly to your beneficiary’s email address. In most cases, it will be sent on the same day the payout is processed. However, it is important to note that these digital payment partners are just financial intermediaries providing the information; compliance is still the responsibility of the worker and the company.

As per the Cashfree website, the issued e-FIRS is in the following format.

Best Practices for International Payroll in India

There are broadly three types of entities to whom employers can pay money on behalf of their international employees. These are:

Paying a Contractor

If the employee is engaged as a contractor, it allows for ease in the movement of money. However, the operational hassles are many, as employees need to generate invoices every month. Indian employees feel more comfortable with full time employment which is shown through proof of payslips and safety of employee benefits. Employees who earn more than 50 LPA every year will have a very high tax compliance. The biggest issue is, however, worker misclassification, which can cost the employer a lot of money in fines.

Paying a Company

Employees can choose to form their own company, and setting up an LLP is recommended as compliance requirements are simpler than those of a private limited company. The employer will be paying the LLP on behalf of the employee. However, this will require the employee to do:

• Tax planning
• Quarterly advance  tax filing
• Tax audit
• Take GST for exports 
• Monthly GST filings

This will entail an additional Rs. 7,000 per month (~$86) with a one-time setup fee of Rs. 15000 (~$183). Although this is a viable option, Indian employees prefer full-time employment as compared to owning a company. We find this to be a subject of interest for employees who are earning more than Rs. 40 LPA while being employed with global companies, as they try to offset the above cost through incremental savings on taxes.

Engaging an EOR

The most convenient and straightforward method for global companies to pay international employees is by partnering with an Employer of Record (EOR). EOR partners take responsibility for the employee's payroll, while the global company retains control over their day-to-day operations. This arrangement ensures full compliance with local laws, while the employee benefits from being associated with a renowned global brand. EORs handle various aspects, including contract management, compliant payroll processing, and fulfilling legal obligations.

For businesses focused on a specific country or region, it is advisable to engage a local EOR partner with expertise in that particular area. However, for companies aiming to hire employees across multiple countries/regions, partnering with a global provider like Wisemonk is more practical.

Working with a global payroll provider enables you to comply with local and international laws without having to establish a legal entity in any of the countries where you are hiring.

At Wisemonk, we handle all aspects of your payroll, including:

• Managing contracts of all employees
• Payment of salary and reimbursement (where applicable)
• Managing payslips for employees
• Filing of local taxes and social contributions (E.g., PF)
• Providing F&F in case of employee off-boarding
• Providing expert advice on payroll law updates
• Multiple modes of payment (allowing employers to choose their preferred payment mode)

If you’re hiring workers in multiple countries, consider using Wisemonk’s global payroll system, which enables you to pay all of your overseas workers (employees and independent contractors) in one place.

Conclusion

Managing payroll for international employees presents unique challenges, but with proper understanding, preparation, and adherence to best practices, businesses can navigate these complexities successfully. By considering legal and compliance factors, currency exchange dynamics, payment methods, and leveraging strong partnerships, companies can ensure efficient and compliant international payroll management. As businesses continue to expand globally, investing time and resources in mastering international payroll processes is a strategic imperative.