Best Way To Pay International Employees

What is the Best Way To Pay International Employees? Doing business in this age and time is getting easier and better with the possibilities of the internet and a reliable global payroll partner.

You can build your business even if you can't find the talent in your local country; If you can't find the right talent in your country, then simply hire them overseas.

So many decades ago, hiring talents from other countries would have been seen as a last resort, nowadays hiring managers don't think twice about sourcing employees from abroad. But when it's time to pay international employees, it's best to proceed with caution.

That's because there are several ways to pay international employees and different employment, tax, and compliance requirements to consider. This is why this article was written, to help you understand the best way To Pay International Employees.

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Why Hire International Employees?

Before we discuss the Best Way To Pay International Employees, let us first take a look at the reason why most businesses, agencies, and companies hire international employees.

Just like I made mentioned at the beginning of this article, sometimes the specific talent you need for your business or project may not be easily found in your local country, so what do you do? Will you abandon the project? should you close your business because you can't the right talent in your country? the answer is ‘No'.

What you need to do is to go online and hire a foreign talent that can do the job and then use a reliable global payroll partner like Papaya Global to facilitate the management and payment of your employees.

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4 steps for paying your global workforce

Once you've found your new talent, it's time for your HR team to get to work.

That's to say, your HR team needs to get everything set up with Papaya Global or any similar tool, right before your new international employees get started.

Also, your company will need to complete some tasks of its own, including:

1. Deciding on how to hire your employee 

That means deciding between hiring your new international employees by either: 

• Registering an in-country partner or local entity where the employee lives and works, then hiring them directly. 
• Using employer of record (EOR) to hire the employees on your company's behalf.
• Classifying them as independent contractors instead of traditional employees. 

2. Giving your employees the correct classification 

What type of workers are you hiring? Are your workers, employees, or independent contractors? For example, in countries like the United Kingdom, there is a legal distinction between workers such as independent contractors and sole proprietors.

Knowing the difference is essential for staying legally compliant and will help you cover your employee's benefits correctly. 

3. Selecting what kind of services you need

Next, you'll need to determine what kind of HR tools you'll need to manage your new international team members. What kind of international payroll software or expertise will you use? Do you need to hire new HR experts to manage your increased headcount or will an EOR be a better option?

4. Determine your expansion budget 

Your expansion budget may determine which way to hire and eventually pay your international employees. For example, opening an entity can be a pricey option but, if your workforce is large enough, it will make financial sense in the long run. 

Financially, using an EOR is usually a middle-of-the-road option. That's because it's not as expensive as opening an entity and it's as cost-efficient as paying your international employees as contractors. Despite this, using an EOR is often the best option for hiring full-time employees quickly and compliantly. 

As previously mentioned, paying international employees as contractors is the cheapest option but also the riskiest. Incorrectly classifying employees as contractors, whether intentional or not, could land your company in serious trouble due to misclassification legislation.

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Different ways to pay international employees

Let's look at how you can pay international employees. To start with, by setting up your own local legal entity.

#1. Establishing a local entity

One way to pay your staff overseas is by establishing a local entity where your employees live and work.

There are three main types of local entities which you can create:

• A representative office, 
• A branch office, or
• A foreign subsidiary.

Representative Office: A representative office is quick and simple to set up but has its limitations. For example, setting up a representative office doesn't let you employ individuals in revenue-generating roles like sales and management.

Branch Office: A branch office is more flexible than a representative office, but set-up costs can be expensive. Additionally, it can take much longer to establish. 

Foreign Office: A foreign subsidiary can be cost-effective to set up but can be time-consuming to manage. Even better, a foreign subsidiary gives your company access to additional benefits such as local tax rebates. 

#2. Engaging the services of a PEO 

A PEO simply means ‘Professional Employer Organization', and it is a company that handles responsibilities such as hiring, onboarding, and payroll management on another company's behalf. Also known as Global Employment Organisations (GEOs) and Employment of Record (EORs), PEOs will perform these tasks while ensuring that your company stays legally compliant with local laws and regulations.

Your company can outsource your payroll responsibilities to your chosen PEO and they'll take care of everything from paying your employee's basic salary and covering health insurance to handling tax deductions. 

#3. Paying your international employees as contractors 

You may be able to pay some of your international employees as contractors instead of traditional employees. However, you must correctly classify your employees in order to stay compliant and avoid any fines or legal penalties. 

Employment law will differ from one country to the next so it's always best practice to research every new territory where you have international employees. For example, in Germany, you might be legally required to turn your contractors into full-time employees after 18 months. In this scenario, you'd need to open an entity or work with an EOR.

Another reason to do your research is the risk of misclassification. Companies can be fined heavily for incorrectly paying overseas contractors as employees or vice versa.

Some organizations engage in underhand tactics like this to save money by denying their employees certain paid allowances and benefits. So, if a German company intentionally side-steps the 18-month rule, it could have to pay four years' worth of social security arrears with 12% interest.

Contractors are usually paid by the hour or per project and they usually handle paying their own taxes and insurance. Contractors are also not entitled to any employment benefits such as sick leave and paid time off.

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What to consider when paying international employees 

Once you've chosen between establishing a local entity, using a PEO, or paying your employees as international contractors, there are other factors to consider such as:

#1. What currency to use when you're paying international employees 

It may be best to pay your workers in their local currency where possible. That way, it's easier for them to access and they won't be at the mercy of poor exchange rates.

On your part, you'll want to prevent under or overpaying your staff by monitoring currency fluctuations and exchange rates. This will help you make accurate calculations of salaries and bonuses.

#2. Working hours and time zones

It's important to know if there are any limits to daily, weekly, or monthly working hours in the countries your employees work. That way, you can work out and follow any overtime benefits you'll need to provide while complying with local labor laws. You'll even need to research working days.

While countries like Spain operate a Monday to Friday work week, others like Israel have a Sunday through Thursday culture. Understanding time zones too will help you know when best to contact your employees and when not to. 

#3. Payment intervals

Some countries require that their employees get paid for an extra month or two, thus bringing payment installments to 13 or 14 instead of 12 months. The 13th and 14th-month pay is the payment of an additional month or two's salary during the financial year.

It's a common practice around the world in countries like Greece and Portugal, but there are some variations that depend on the specific employment laws of a particular country. If you have employees in countries like these, bear this in mind when managing your payroll. 

#4. Benefits and taxes

Depending on the country, you'll be required to cover certain employee expenses and benefits. As each country operates under different employment laws, research what your obligations are as an employer.

Where taxes are concerned, it's necessary to know what percentage of your employees' income to withhold in taxes by the regulatory body of that country and when and how to submit them. 

It's also worth checking if the country where your company is legally registered has any tax treaties with other countries. For example, Australia has a tax treaty with many countries including Germany.

So for companies based in Australia with international employees in Germany, treaties like these can prevent them from paying double taxes and help with your payroll management.

#5. Consider labor laws and compliance

Each county has established bodies and tax authorities that are responsible for issues such as work ethics and tax deductions.

When you're paying your overseas workers, it's good to get familiar with these bodies, their functions, and how they can advise you on requirements such as compliance and avoiding permanent establishment risk. 

Permanent establishment risk refers to the risk of the local tax authority in a foreign country determining that your business is operating in that country ‘permanently' rather than just temporarily.

If said authority deems that your company is operating continuously in that country, it can then decide that your business is liable for all corporate taxes. 

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3 Ways to process payroll payments

Next, you'll need to choose the best payroll model for your business.

The most popular models include:

1. Keep employees on home payroll

If you're sending a current employee overseas temporarily, you might be able to simply keep them on your home country's payroll system. It all depends on your home country, the country your employee will be based in, and if there's an existing tax treaty between the two. 

2. Using a local payroll company in the designated country

For local tax, compliance and payroll requirements, a locally owned and managed payroll provider could be the best option. A local payroll provider is also more likely to offer your company a more personalized payroll experience to your company rather than a cookie cutter solution.

3. Outsourcing your global payroll process 

You could outsource your international payroll to a company that specializes in such tasks. A local payroll company can be great for small businesses taking their first steps into a new country.

But for global companies operating in multiple locations, managing payroll can get complicated. Therefore, consolidating all of them under one global payroll provider makes your payroll cycles easier to manage and stay compliant.

These companies are called Professional Employer Organizations and they operate through a web of legal entities around the world, which means they're able to perform duties like tax declarations, hiring, onboarding, and managing payroll on your behalf.

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In-house global payroll versus outsourcing global payroll

Should you handle global payroll in-house or outsource it to a specialist provider? It depends on many factors.

The table below compares both options and highlights why each one might be right for your company.

In-house global payroll	Outsourcing global payroll
Best for start-ups and smaller businesses with only a few international employees	Better for multinational companies with global employees and contractors
In-house global payroll can be challenging and time-consuming	Payroll automation saves you time and makes your payroll more accurate by adhering to local labor laws
More control over your payroll process	Enables a hands-off approach to payroll
Using a manual payroll process increases the risk of data breaches	Global payroll providers tend to have more advanced security features
Risk of expensive penalties for non-compliance due to human error	Guaranteed compliance. In the rare event of non-compliance, the provider assumes the financial penalties
More costly due to needing licenses, staff training, and the maintenance of your payroll software.	More cost-effective as limited licenses and training are needed

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Benefits of using a global payroll partner to pay international employees

Working with a global payroll partner to pay international employees has several advantages, including:

#1. Reduce your payroll costs

Partnering with a global payroll company can save you a significant amount of money in employment costs. You don't have to hire in-house staff to handle endless paperwork, salary and tax calculations, benefits administration, legal advice, and payment processing.

With your EOR handling all your payroll, your HR team can focus on other tasks. 

#2. Ensure global payroll compliance

Local labor laws can be challenging to get to grips with, and it only gets harder as you onboard employees in more countries. With a good EOR, however, you can onboard employees in multiple countries with minimal complication.

Your global payroll partner will ensure that you meet all legal requirements and keep you updated on changes in local laws. 

#3. Stronger data security 

The probability of payroll fraud occurring increases when payroll is handled in-house, as more people have access to the data.

Outsourcing the process to a global payroll partner improves security by limiting the number of eyeballs and hands with access to your payroll data, keeping it out of harm's way.

#4. Higher employee satisfaction

When you work with a dedicated payroll partner, you minimize the chance of payroll errors. Not only do they ensure salaries are calculated correctly, but they also make sure all payments are on time.

With a reliable global payroll partner, your international employees receive a great experience working with your company.

#5. Local salary benchmark and compensation structure

A global payroll partner will be able to effectively conduct salary benchmarking on your company's behalf. That means giving a complete breakdown of the compensation packages including salary and benefits available within specific sectors, countries, and named companies. 

#6. Expansion-compatible

If you need your own entity in the future, in the event of company expansion, you'll want to consider transitioning from an EOR to payroll outsourcing.

Hiring with an EOR allows your company to pay international employees quickly, easily, and compliantly. But if you need to create your own entity in the future, your EOR can help you make this transition. 

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Why Choose the Best Payroll Partner

The reason is simple; as your business takes off, at home and overseas, juggling international payroll cycles and processes can get costly, time-consuming, and complex.

By merging your global payroll with Papaya Global, you can easily manage your team in multiple locations with ease while staying legally compliant.

With Papaya Global's payroll automation, you're guaranteed clear, accurate, and time-saving payroll cycles. Even better, improve your international employee management with tailored payroll data insights.

Frequently Asked Questions

Final Thoughts

There you have it, the Best Way To Pay International Employees in your business or company. With Papaya Global, you will have all these things set up easily and there will be no need to worry about the complexity of the whole payment process.

It's very important to work with a reliable global payroll partner; this will save you a lot of time, stress, and expenses as a business/company.

Let me know in the comments if you have questions and I'll be happy to answer all of your questions. Thanks for reading!!!

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