How to design payroll & benefits for international employees
Attracting and retaining the best employees is crucial to the success of any business – and very little will disrupt that process more than badly-implemented payroll and benefits. This is especially tricky for companies working across multiple geographies, where the payroll and benefits process has to reflect the range of cultural and geographical differences present across their workforce.
Any mistakes in this area will not only produce a financial penalty (via a miscalculated payroll) but also a human cost, with the potential to increase employee dissatisfaction and churn. This challenge has been intensified by the recent trend towards remote working, which has made companies more likely to operate a globally dispersed workforce.
In this increasingly globalized market, companies need to adapt their payroll approaches accordingly. The best solution is to utilize an Employer of Record (EOR), that can supply experts with the requisite local knowledge to help navigate the minutiae of international payrolls.
Strategies to keep in mind
To avoid some common international payroll pitfalls, global employers should keep these principles in mind:
1. Operate with gross pay rather than net
When negotiating salary with employees, it’s wiser to base the discussions on a gross pay figure, rather than net. The latter can be misleading for both parties, because in many countries the figure for an employee’s tax liability, and any refund, is calculated by the government based on that employee’s family situation and can be impacted by location, family situation, income, and claimed exemptions. This will depend on information the employer typically won’t have, such as total family income, and so the business won’t actually have the ability to convert the gross figure into net.
Using a gross figure for initial negotiations removes this problem entirely, allowing the employer to operate with the reassurance of having a fixed payroll figure for the year, rather than one which fluctuates unpredictably due to factors beyond their awareness and control.
2. Negotiate an annual package
To avoid falling into the pitfall of 13th month payroll requirements, it’s safer to base pay negotiations on an annual package, rather than monthly. Many countries have a statutory requirement for a 13th (and sometimes also a 14th) payroll month, but payroll executives won’t necessarily be aware of this if they aren’t familiar with these specifics. These additional payroll months are intended as a form of compensation, but legally don’t necessarily count as a bonus, or holiday pay.
The amount is typically (but not always) equivalent to one month’s base salary, the precise amount varies from country to country, as does the legal or informal status of the convention. In China, 13th month pay is not obligated by law, and is customarily paid at the Lunar New Year, whereas in Belgium it’s legally mandatory, so long as the employee has been working for at least six months, and is paid at the end of the calendar year.
This could provide an unwelcome surprise for any employer who didn’t take it into account when setting monthly payroll figures for employees. Not only will they find that their actual payroll expenditure for the year exceeds the budgeted sum, but also that failure to follow the statutory obligation risks a legal penalty.
3. Be aware of local laws and benefits
In 2022 43% of payroll professionals named compliance as the biggest global challenge. Companies need to do their research, or consult experts, like Atlas, to ensure that they’ve included all statutory and customary benefits in the negotiation process.
Businesses that don’t will struggle to optimize their budget planning and run the risk of non-compliance penalties. Not providing customary benefits also risks major dissatisfaction amongst employees, who will feel that they’ve been denied a basic right.
Local expertise is important here, since aspects like statutory work-from-home benefits will vary from country to country, and some systems are more comprehensive than others. In the UK, employers have an obligation to account for equipment issued to home-working employees, and may potentially need to cover other expenses such as energy costs. Similarly, Spanish law states that employers are required to cover all the expenses associated with the computer hardware, tools, or furniture needed to perform work duties for employees spending at least 30% of their time working from home.
Employers also need to be aware of established local customs that aren’t actually legally required. For example, in Mexico meal vouchers are a common elective benefit that’s technically non-statutory. Although it may seem relatively trivial, and there’s no legal penalty for not providing it, denying benefits like these could harm morale, and thereby employee retention. Health insurance is another commonly-occurring non-statutory benefit and is typically valued highly by workers who will see its absence as a significant detriment.
For employers unfamiliar with local practices, local laws and cultural differences can be a challenge to navigate, making the specific expertise provided by an EOR highly beneficial.
4. HXM is important
Companies looking to expand globally need a way to pay their talent that is straightforward to interpret and operate, reducing the possibility of misunderstanding for all parties. Partnering with experts in Human Experience Management (HXM) is vital to this process, especially if employers and employees are communicating across a language barrier which increases the scope for miscommunication.
Payroll miscommunications can be particularly stressful for employees, especially amidst the ongoing cost-of-living crisis. Receiving a lower remuneration than expected could have a significant impact on an employee’s financial situation, making them more likely to seek a better-paid position elsewhere.
Surveys indicate that employee recruitment and retention is a major challenge for businesses. This year 36% of HR professionals cited it as the biggest challenge to successful performance, with significant numbers also pointing to recruitment (30%). If a business wants to attract and retain the best talent, it will need to make effective use of HXM to keep its workforce content and committed to working for the business.
Local Expertise is vital
The recommendations above represent only a few of the many potential challenges for international payrolls. Mistakes in this department run the risk of eroding both employee morale and business profitability, making it vital for businesses to utilize local expertise and EOR partners, such as Atlas, to avoid these hazards. Proper support and guidance enables companies to optimize their payrolls and benefits, whilst assisting in avoiding potential sources of employee dissatisfaction.
Ultimately, a well-designed payroll is crucial in enabling businesses to employ and retain the best people, wherever they may be based globally.