Whether an organization has expatriates on assignment or local national or third-country national employees working across the globe, the pay delivery model (where payroll is processed and paid from) is a very complex issue. Just as an employer based in the United States must comply with U.S. payroll tax requirements and wage and hour laws, so, too, must it comply with the same requirements for the other countries its employees are working in. With expertise needed in country-specific tax and labor laws, and the effects of exchange rates on pay, the question expands to not just where pay can be delivered from, but where it should be delivered from.
When paying employees in foreign countries from the home-country payroll, expertise in international tax requirements is essential. Whether done in-house or through a domestic vendor, knowledge of country, state, province, city and municipality requirements is needed to ensure compliance. As in the U.S., these requirements may include issues such as income tax withholding and reporting; unemployment contributions; retirement and social services withholding and filing; and record retention requirements, all of which must be filed in the country the work was performed in. For instance, is your payroll department knowledgeable about inhabitant taxes in Japan, or required contributions to the Canada Pension Plan, or social insurance contributions in Switzerland? Is the department equipped to make these contributions and filings on time to the other country? If not, a localized or globally outsourced payroll may be more appropriate.
Expertise in each country’s wage and hour labor laws will also be needed in determining, for example, what constitutes an hour of compensable work; calculating any overtime due, required Christmas bonuses, frequency of wage payments and any wage deduction restrictions; and determining wage statement requirements (France requires many pages of information!) and record retention requirements. Knowledge of these laws must be up to date to avoid penalties. Data privacy laws must be followed as well, especially when these data are being transmitted across borders.
The exchange rates for each location also need to be considered, as payment from a home-country payroll, once converted, could mean higher or lower pay for employees on an ongoing basis, making compliance with tax and labor laws that much more difficult and leaving employees feeling frustrated.
While there is no one answer for every employer, determination of whether a home-country, host-country or split-country payroll delivery model is used should not be made without extensive research and analysis of whether required expertise exists in house or the payroll function is best localized or globally outsourced.
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