How To Pay International Employees

How to Pay International Employees: Navigating the Challenges and Finding Solutions

Building a team that spans across geographical borders provides access to a diverse set of global skills, but it comes with its own set of complications—particularly in figuring out how to pay international employees.

Transferring funds to employees located overseas is no simple task. A physical check or direct deposit may not be feasible. You might face limitations with the payment platforms at your disposal, unable to transfer funds to your employees’ countries. Moreover, navigating the maze of varying tax and classification laws across different regions poses another significant challenge.

By recognizing these hurdles, you can proactively seek solutions that facilitate smooth cross-border transactions.

This handbook provides a detailed overview of the various obstacles and possible solutions for compensating employees situated in different corners of the world. Let’s dive in.

How to Pay International Employees: The Challenges

Here are some typical issues faced when figuring out how to pay international employees:

Compliance Matters

Undoubtedly, the most frequent problem faced when compensating international employees is compliance. Paying overseas employees is not the same as compensating local staff.

You are obligated to provide compensation in accordance with their country’s payroll and labor conditions, not yours. As labor laws vary widely from one nation to another, this can get complex. However, it should not restrict your access to a global pool of talent.

Key compliance concerns include:

• Ensuring fair compensation and statutory benefits for employees

• Complying with labor laws concerning notice periods, fair dismissal, and severance compensation

• Contributing to social welfare as an employer

• Avoiding penalties for incorrect classification when employing contractors

• Conforming to international data privacy regulations

Failure to adhere to these rules could result in substantial financial penalties for your company.

Tax Complications

Another complex aspect of managing global payroll is dealing with tax laws. The employer must deduct the appropriate taxes from an overseas employee’s pay, while also making timely payments to the relevant tax authorities.

Your organization is also required to maintain precise records of taxes paid, as the tax authority in a foreign country can audit your company at any moment. This necessitates the retention of all tax documents and receipts for several years to avoid severe penalties if an audit uncovers discrepancies in tax payments.

Currency Fluctuations

Compensating your international team in their local currency may be advantageous for them but could pose challenges for you. Exchange rates are a concern, especially as they can vary depending on the payment platform used (either by you or your employees).

For instance, when you pay international employees through your bank, the exchange rate is determined by the bank, often to their advantage. This could mean your company ends up paying more for the same amount.

Also, if the value of a foreign currency increases against the dollar, your company might end up paying your international employees significantly more than originally planned.

Cultural Nuances

Cultural differences in payroll practices can impact how you compensate your overseas employees. For instance, it is common in several South American, European, and Asian nations for employees to receive a 13th-month salary.

Your multinational team might join your company expecting this additional payment at the year’s end. If your company is unaware of this practice, you risk disappointing your staff.

Refer to our Global Hiring Guides for a better understanding of compensation laws across 50+ countries.

Variances in Overtime Limits

When figuring out how to pay international employees, timekeeping can pose an unexpected challenge for your company.

Non-exempt employees in the United States can claim overtime pay if they work beyond 40 hours per week. However, there’s no cap on weekly working hours for individuals over the age of 16. This is not the case in other nations. For instance, in many EU countries, the working week is capped at 48 hours. In Israel, the legal weekly work limit is 42 hours, with a shorter workday on Friday. Such specific terms might not be discussed during recruitment but are crucial for a frictionless relationship between your company and its workforce.

To stay within these limits, an international payroll system should have a method to record and report time accurately.

Methods to Pay International Employees

There’s no universal solution to paying international employees. The best method depends on several factors, including the employee’s location and the nature and duration of their work.

In certain cases, depending on local laws, you may need to set up a branch in the host country. If you don’t have a branch/office or any other registered entity in that country that permits you to run payroll legally, you may need to compensate your employees remotely from your home office.

Here’s a closer look at these options.

1. Pay via the Company Payroll

If the duration of employment is not very long, compensating your employee through your home country’s payroll should be acceptable. Many foreign countries allow this mode of payment, but it’s useful to be aware of any special laws or regulations. If you employ a local, you will most likely need to set up payroll in their home country, primarily for tax and social security purposes.

If you have multiple overseas employees, your company will need separate payrolls for each country of operation. For such a setup, you have a few potential scenarios. You could establish a subsidiary in the country to manage all local business and payroll. This might be a viable option, especially if your company plans permanent international expansion.

However, if you’re hiring a few people in another country or hiring across multiple countries, setting up a subsidiary or branch in these countries might require more time and effort than you’re willing to invest. In such cases, outsourcing your payroll might be a more cost-efficient alternative.

2. Compensate Employees as Contractors

While not suitable for every type of employee, this option can be useful in certain scenarios or for short-term projects where the company doesn’t need to manage the employee’s schedule or workflow.

However, your company should approach this model carefully and thoroughly. Understanding the differences and outlining them in individual contracts is essential to avoid misclassification that could lead to legal trouble. Government authorities may view this as a deliberate attempt to evade costs associated with hiring employees instead of contractors.

3. Pay via a Local Partner’s Payroll

If you have an existing partnership with a third-party payroll provider or a Professional Employer Organization (PEO), you can work with them to locally compensate your remote employees.

For payroll administration and compliance, the partner acts as the “employer.” Your company can then transfer the salary through them, while they handle any mandatory contributions.

4. Outsource Payroll to a Payroll Provider, EOR, or PEO

In most cases, outsourcing your global payroll is a smart move. However, the options available can be confusing due to the multiple acronyms involved.

Here’s a quick summary: a payroll provider typically handles only administrative tasks. An Employer of Record (EOR) or Professional Employer Organization (PEO) ensures compliance with all statutory requirements related to labor laws and employment (including paying international employees). Alternatively, you can explore another option – a hybrid EOR like Oyster.

Like an EOR, Oyster helps with cross-border employment on your company’s behalf, but it comes with added advantages of being fully automated, self-serve, and no startup costs. In addition to offering compliant, local contracts, Oyster also manages payroll and benefits for your team worldwide. This allows your company to genuinely care for your team members, no matter where they’re based.

5. Things to Consider When Paying International Employees

Several factors need to be considered when figuring out how to transfer payroll overseas to remote employees. Here are a few:

Relationship

Your duties and obligations as an employer will differ based on your relationship with the employee. Are they remote full-time employees or independent contractors? The benefits and entitlements for either differ, and the labor laws accordingly vary.

Pay Cycle

As for domestic employees, you must establish a pay cycle to govern the frequency of payments to your international employees. Although some companies opt for a monthly payment cycle, the most frequent cycles are semi-monthly (twice a month) and biweekly (every two weeks).

If you need to comply with a foreign country’s labor laws, make sure to check if there are any guidelines on the frequency of compensating each employee. You don’t want to fall into the trap of paying each employee monthly when their local labor laws mandate at least biweekly payments.

Currency

Currency fluctuations can significantly affect a remote or international employee’s pay and taxes. You might need to adjust their salary based on their home currency.

In certain situations, a currency exchange agreement can help you navigate currency fluctuations (either from your end or the employee’s end).

Tax and Social Security

As your remote employee resides in a foreign country, they will likely have to pay taxes, but your company will also have to hold back taxes at home.

Check for any tax treaties between your country and the employee’s country to avoid double taxation. You may be able to use specific tax credits to offset additional taxes and prevent double taxation.

Hassle-free Global Payroll

The concept of distributed workforces is relatively new, and many businesses are still working their way around it. Allowing professionals to handle the minutiae can put your company ahead, making it much easier to tap into international talent.

Concerning Oyster

Oyster is a global employment platform that empowers HR visionaries to find, employ, compensate, manage, and care for a thriving global team. It enables growing companies to offer their valued international team members a top-notch experience, without the typical headaches and costs.”