As a business looking to expand internationally, there are a number of ways that you could pay your employees in other countries, and each comes with its potential benefits.
The international payroll market has continued to mature in recent years, as providers seek to service the ever-changing ‘international customer’: new suppliers have entered the market, and old suppliers have been working to improve their solutions.
Globalisation is undoubtedly here to stay, and even with the recent impact of Covid-19, customers who are looking to expand expect it to be done quickly, efficiently, and within budget.
With each international jurisdiction having its own laws, and all businesses having their own unique requirements, how do you start to understand the best way to set up your international payroll?
How can you pay your team on time and in compliance with local legislation?
Read on to understand some of the key things about international payroll.
Be prepared, and if in doubt ask an expert
We work in a global marketplace where commonality is expected, so businesses expanding abroad need to begin trading immediately. All too often this means the dismissal of country legalisation, because speed of entry to the market is considered to be the most important activity.
This means compliance and service are regarded as secondary requirements, and this generates risk in a new expansion before it has even begun. This is a high-risk strategy, considering the changes in GDPR and increased policing of data.
There are stories of poor market entry with suppliers offering services within days, sidestepping the compliance requirements, when corporate registration can usually take months. This results in failed, high-cost expansion stories being shared around the executive table.
There are lots of lessons to learn about making supplier decisions, but the major one is agreeing on a clear strategy with detailed service requirements of the country you plan to enter. Ensure your pricing delivers the service that you require and if you don’t know what to ask for, find someone who will support your international conversation as it can be costly to pay for everything when you have assumed they were already included in your service.
Now, let’s review the market overall and look at how we can make the international conversation easy and what service models are available to you when you have chosen to outsource.
What international payroll service options are available?
As with domestic payroll, you will find there are many solutions and services available for delivering international payroll. The buyer may choose to:
- Manage a selection of suppliers within their chosen expansion countries.
- Work with an international provider who would manage the supply chain on their behalf.
- Work with a supplier that offers direct services for multiple countries.
- Choose a piece of software that allows international payroll to be managed by internal staff.
The landscape of service options is undoubtedly varied, and this can be confusing for a company expanding internationally for the first time. For a buyer in this situation, it is important to “keep it simple”, which usually translates to finding a trusted advisor who can hold your hand as you learn what you need to do. First-time entry strategies should not be seen as longer-term strategies. Knowledge generates confidence, and ultimately, the ability to select services that suit your business rather than just your level of understanding.
Lets take a deeper dive into the options available:
Software as Service (SaaS)
Limited software options are available as localisation support is not universal. No single HRIS system is available today with total localisation/country coverage. The cost of software can also be prohibitive for buyers with smaller volumes to service. Software tends to be more cost-effective for buyers with higher volumes as payslip prices are lower and productivity can be driven by the client, rather than the service provider.
Most SaaS international payroll software is rented rather than purchased. Instead of buying software via a license with periodic upgrades, SaaS is a subscription-based service, so all upgrades are provided as part of the subscription. Like any rental, there is a rental/lease period and the supplier will usually have an annual increase in fees.
When using a SaaS solution you will be responsible for recruiting and retaining the skilled international payroll professionals you require. You will need to create a shared service centre with the knowledge required to deliver international payroll services. You will also need to fund and maintain any interface requirements to third parties, keep your personnel trained in multiple country payroll legalisation and ensure your team has the linguistic skills to answer queries from your international employees. Without large volumes, this is a costly model.
Bureau payroll services
Few international payroll businesses offer bureau services. A bureau software solution is more commonly offered as a domestic payroll service within a country, so you will need to manage your service provider as well as your people.
The supplier’s role in delivering this is to provide access to a payroll solution. They are responsible for maintenance of the payroll legalisation, ensuring the software provided is compliant and offering a payroll helpdesk that supports legislation and software application know-how. They can also extend their application service offering by including time and attendance, as well as interfaces and HR integration. This is not a common choice for international payroll solutions as most bureau services use old technology and so have not extended their localisation to more than just one country.
Your role is to supply an administrator to use the software, but you will need to manage each in-country service provider if you select a bureau model or, in some countries, a SaaS with a helpdesk. It is also preferable to speak the local language for query management.
Outsourcing international payroll services can be confusing. The market offers variations of scopes, commonly called, part managed, fully managed or shared managed. These are named to meet client expectations and support a detailed scope of services. Payroll providers try to limit their service exposure in an ever-changing and expanding world by ensuring clients are fully aware of their obligations and the services they are paying for. Unfortunately, these detailed conversations sometimes do not happen, which results in some aspects of the payroll service being missed. This means change control is often applied after the supplier has been selected and contracted. Tedious as it can be, going through the contractual scope of services can save a lot of money and it is strongly recommended that you make time to review your payroll requirements if you are considering outsourced services for your international payroll.
Your supplier’s role in outsourcing is to deliver a service that is based on your scope of requirements – they supply the people, application and knowledge, enabling you to focus on your business. It’s a great concept and the one that works best in international payroll because it is quick, easy and, most importantly, reliable and safe. You cannot outsource your risk of compliance, but you can select a supplier that has a proven track record of delivery in the jurisdiction you wish to expand into.
Your role is to make sure you know what your supplier is accountable to deliver to you. Any changes in your company’s policies that have an impact on employee benefits or are related to your responsibility as an employer need to be communicated by you. You cannot outsource your employer obligations, even if you outsource your payroll service, and you are still legally responsible.
The cost of payroll around the world is varied
The cost to deliver payroll in each jurisdiction can vary, and it does not correlate to the economic wealth or service maturity in the country or region. Some countries can experience a high volume of legislative changes in a tax year and some operate complex legalisation, generating high costs of delivery. No single country is the same, but countries in a region can be similar.
Employers looking to outsource must first determine their international business case by reviewing all aspects of why they want to outsource. When determining the cost elements consider the costs of the people who support, advise, and administer, as well as the IT costs and related third-party costs. Only when you account for all of these touchpoints will you have the true cost of payroll.
With such variation in pricing and complexity between countries, it is rare that suppliers offer a single transactional cost for an employee in any country worldwide. Some companies that have wider service networks or process larger volume payrolls in shared service centres vary their pricing per geographical region, but no provider today offers one single fee. As outsourcing becomes more common across the world larger service providers, such as ADP, may venture into the single pricing marketing approach but this is a high-risk strategy with the current variation of labour cost across regions. It is, however, one very much desired by world employers.
There is a continued drive to use AI (as the brain of delivery) and robotics (the resource body that delivers the payroll processing) but this only works in large volumes or shared application services, as seen in SaaS and Bureau service solutions. Workflow will doubtless drive greater efficiency and help to lower costs when a company is delivering in higher-cost regions, as fewer people are required in the delivery model and, as we all know, people are the largest costs in any region to deliver.
By redirecting some service delivery tasks to lower-cost regions and by being creative, service providers can achieve excellent profit margins. When labour arbitrage is no longer the main tool that service providers can use to offer competitive pricing, the wealth of talent in some less mature geographies allows them to drive efficiencies and overall customer satisfaction by utilising highly educated employees in process reengineering.
The hidden costs of delivery
During the data collection process, especially when this is related to cost analysis, identification of the true costs of Payroll delivery are sometimes hard to consolidate and understand. Costs may sit in another department or an external supplier. Some costs may not be repeatable per payment period and some costs may be wrapped into other service costs, such as banking or third-party payment services.
When consolidating your costs of delivery, consider wider costs than IT, application, people, and support costs. Think about:
- How seasonal volume changes impact your cost to process your current payroll.
- Reprocessing and additional process runs/payments.
- Printing costs associated with payroll, e.g. it is still mandatory to provide a paper payslip in some countries. Distribution of the payslips should also be considered.
- Off cycle/emergency payments.
- Overpayments and non-recovery, inclusive of bad debt effort.
- Account reconciliation for third parties (pension, taxation, benefits)
- Bad Debt write-off.
- Employee query management and contact effort and costs.
All of the above are costs to deliver payroll. Sometimes, however, companies forget to include them in the cost of delivery. The decision to outsource is often made to drive organisational change. Inherited services and service providers have become stale and have a lack of energy and innovation. New C Level managers often consider outsourcing to reduce cost where they can and deliver improved quality and change in the business model.
Application and service landscape
The application landscape and how applications in-country are chosen is not dissimilar for both a multinational payroll outsourcer and a multinational client. Small populations have a larger cost per payslip, but as employee populations grow the cost-effectiveness of the service increases, resource productivity becomes greater and the choice of applications becomes wider and more varied.
Many organisations have a “transactional level” to determine what system will provide an adequate return on investments. The larger HR application providers need an employee volume level higher than 500 employees to make a profit as transition fees to the larger HR platforms can be costly. Some service providers can lose money unless contract lengths are 36 months or greater. The need to vanilla solutions and reduce historical data transfers is of utmost importance if the outsourcer is to drive some profit from larger-scale onboarding activity, particularly if the contract length is short.
Overall, larger HR providers like a blend of employees with a mature country landscape where larger volumes are employed and they have developed localisation in their product. ADP’s multinational product Global View (SAP) and their purchase of expert multi-country provider, Celeron, has matured their offering further, and it now offers a flexible country volume solution for larger employees. Ceridian’s Dayforce is a combination of payroll localisation for some mature countries, combining their multinational payroll offering with a vendor network that is contracted through a direct supplier of international services or an administrator of a supply change network. This is a weaker solution to ADP but they do harness the power of an extremely good HR system and their roadmap is showing great promise in competing with ADP’s offering.
Smaller international suppliers combine their own direct delivery models with in-country providers known as ICP’s, and link their offering to larger HRIS providers who certify them as recognised partners. The certification membership program offers integration tooling and marketing support, something that Oracle and Workday have done very successfully over the last 5 years, but there is still a gap in the offering with country localisation being held outside the HR application.
Therefore, the multinational market from the buyer’s perspective is dependent on the volume of employees, the strategic expansion of the business, the budget available, and most importantly, the needs required of the employees being serviced. Analysts still state that the international payroll market remains immature, but it is part of a multi-billion outsourcing marketing and the market is growing, even with the impact of Covid-19.
Which supplier is right for you will greatly depend on your company size and strategy. For instance, established businesses, whether they are big, medium or small, focus on ensuring people get paid, correctly and on time. That does not change when you expand internationally but the amount of support and guidance you require to get your people paid does. A larger business will potentially employ their own country experts in-house, but a smaller one is reliant on a supplier providing advice and support. Ensure your supplier can deliver your international payroll service compliantly and will support your overall payroll obligations within the country, whatever its size.
Know your supplier
We have all heard of “know your client (KYC)”. In the global workplace “knowing your supplier” is equally important. When it comes to compliance knowing who you are dealing with is critical. There are a lot of providers offering different services within the international payroll space so it is important to understand their service model before you contract with them.
These service models fall into mainly four categories:
- Local Companies that offer local services, in the local language in their local market.
- Regional Companies that offer local services that extend to near border local markets.
- Companies with a large integrated network of suppliers may directly deliver to some countries, but offer one contact that reaches into a global delivery network.
- Companies have multiples of wholly own companies and are less reliant on external suppliers.
Supply chain management (aggregation) is something every international payroll supplier undertakes as there is no one single payroll platform. Even suppliers who state they have the largest wholly-owned payroll platform work as an aggregator because their countries work independently, and contracting is often more complicated due to their intercompany trading rules.
The easiest, single contract supplier is the aggregator (option 3). An aggregator provides a single contract to the client and back-to-back agreements with their in-country suppliers. For your business, this means a single point of contact who works with in-country suppliers on your behalf through their established supply chain.
Some experts believe wholly-owned international payroll suppliers are the most dependable while other experts state local independent suppliers are the most effective. The reality is they all do an excellent job and the decision to select a wholly-owned supplier or use either a local supplier or an aggregator is totally dependent on the needs of your business. Part of your selection criteria will be to agree on a strategy that identifies those countries that need the most support because you are just entering them. In a world where compliance in some countries is bureaucratic and easily misinterpreted, it is important to select a provider that will navigate and support you by protecting your brand in early entry into a new market. Other providers will work within a clear framework of services and use change control to cost additional services required. This is all very professional but in a new country you know little about, you could be agreeing to a scope of services that you are unaware of, and what’s more, you do not know if they can deliver all the services you require. Therefore, it is impossible to know what the additional cost of delivery will be at the contracting stage.
When selecting an international payroll supplier, knowing your supplier, agreeing your scope of services and agreeing your scope extension period is all paramount to your future success.
We have said much in this paper about employee volumes and knowing your overall strategy and overall growth before selecting an international payroll partner. We know that companies, whether they be new start-ups or established businesses expanding their global footprint, are looking for a partner to support their expansion journey who have detailed country knowledge they can share, rather than a standard scope of services.
The need to expand internationally compliantly is as important as the need to ensure that all employees are paid correctly. Therefore, the need to be diligent in the selection of your supplier during a time of professional vulnerability should drive you to select an international payroll supplier with the global knowledge required to guide you to success.
About the authors
Deborah Williams has in-depth knowledge of the payroll industry having created, developed and expanded international payroll businesses and used to be COO at UnaTerra.
Scott Johns is Head of Relationships at UnaTerra. In his role he manages UnaTerra’s global network experts. He has worked in the International Expansion service sector all of his career and has delivered services for many significant clients for some of the main service providers in the industry. Scott is a big rugby fan and loves nothing more than having a few drinks with friends while watching his home country Wales play.