Expanding your team across borders allows you access to a diverse pool of international talent, but that comes with its challenges—especially how to pay international employees.
Paying foreign employees can be tricky. After all, your company can't just send them a check or deposit the funds directly into their bank accounts. You may find that the payment platforms available to you do not send payment to your employees’ country. Plus, there are various tax and classification laws to worry about, and they differ from region to region.
Understanding the issues enables you to be proactive in searching for solutions that allow for seamless cross-border payments.
This guide includes a comprehensive list of challenges and solutions for paying employees who work across international borders. Let's get started.
Challenges of paying international employees
Here are some common challenges of paying international employees:
The most common issue you'll encounter when paying international employees is compliance. That’s because paying international employees is not the same as paying employees in your home country.
You must pay employees according to their country's payroll and employment standards, not yours. Because labor laws differ from country to country, this can quickly become complicated, but it does not have to limit the talent pool available to your company.
Among the primary compliance concerns are:
- Providing adequate compensation and other statutory entitlements to employees
- Observing labor laws regarding notice periods, fair termination, and severance pay
- Making appropriate social contributions as an employer
- Avoiding penalties for misclassification when hiring contractors
- Adhering to international data privacy laws
If you don’t comply with these regulations, your company may face severe financial penalties.
Tax laws are another murky area to consider when you’re handling a global payroll. On the one hand, an employer must withhold the appropriate taxes from a foreign employee's paycheck. On the other hand, the company must pay taxes to the relevant government body by specific stipulated dates.
Your company must also keep accurate records of taxes paid, as the tax authority in a foreign country may conduct an audit of the company at any time. This means that your company must keep all tax documents and receipts for years or risk paying hefty fines if an audit reveals that you weren't withholding or paying the correct tax amounts.
Paying your international team in the currency of their respective countries is beneficial for them but can be difficult for you. There are exchange rates to worry about. Especially considering they may fluctuate depending on your payment platform of choice (or your employees’).
For example, when you pay international employees through your bank, the exchange rate is set at the bank’s discretion. Typically, this is an inflated exchange rate designed to profit the bank from the transaction. Your company could end up spending more to pay the same amount.
Also, if the value of a foreign currency rises in relation to the dollar, your company may end up paying your international employees far more than you originally agreed.
Some cultural differences in payroll may affect how you pay your overseas personnel. For example, paying employees a 13th-month salary is a standard practice in many South American, European, and Asian countries.
Your multinational workforce may begin working for your company with the expectation of being paid more at the end of the year. But, if your company is unfamiliar with the tradition, you risk disappointing your team.
Check out our Global Hiring Guides to get familiar with compensation laws in over 50 countries.
Differences in overtime limits
When it comes to paying international employees, timekeeping can be a more significant challenge than your company expects.
Non-exempt employees in the United States are entitled to overtime pay if they work more than 40 hours per week, but there is no upper limit on the number of hours a person over the age of 16 can work per week. This is not the case in other countries. The working week in many EU countries, for example, is limited to 48 hours. Yet, the working week in Israel is legally restricted to 42 hours per week. And they don’t work a full day on Friday. It’s improbable that these terms would pop up during the hiring process, yet they’re super important to a seamless relationship between your company and its workforce.
To avoid exceeding the limit, an international payroll system must include a method for accurately recording and reporting time.
How to pay international employees
There’s no one-size-fits-all approach to paying international employees. Your best option depends on several factors—including the employee's location and the nature and duration of the work for which you are hiring them.
You may have to establish a branch in the host country in some cases, depending on local laws. If you do not have a branch/office or any other type of registered entity in that country that allows you to run payroll legally, you may need to pay your employees remotely from your home office.
Let's check out what each of these options entails.
1. Pay through the company payroll
Paying your employee through your home country payroll should be fine if it’s not for an extended period. Many foreign countries permit this arrangement, but knowing any special laws or rules won’t hurt. If you hire a local, you will almost certainly need to set up payroll in their home country, primarily to assist with tax and social security.
If you have several foreign employees, your company will need a separate payroll for each country in which it operates. For this sort of setup, you have a few options. You can establish a subsidiary in the country to handle all of the business in that area and payroll. That’s a feasible alternative, especially if your company intends to expand internationally permanently.
However, if you are only hiring a few people in another country or hiring in multiple countries, establishing a subsidiary or branch in those countries may require more time and effort than you would like to invest. In this case, outsourcing your payroll would be more cost-effective.
2. Pay employees as contractors
While this option is not appropriate for every employee you hire, it can be helpful in certain situations or for short-term projects where the company does not need to manage the employee's time or workflow.
But, your company should be cautious about and thorough with adopting this model. It is critical to understand the distinctions and spell them out in individual agreements because a misclassification could land you in hot water with the authorities. Government regulators can interpret this move as intentional because it is easier (and less expensive) to pay contractors rather than employees.
3. Pay through a local partner’s payroll
If you already have a third-party payroll partner or a Professional Employer Organization (PEO), you can collaborate with them to pay your remote employee locally.
For payroll administration and compliance, the partner assumes the role of "employer.” Your company can then remit the salary through them, as well as withhold and manage any mandatory contributions.
4. Outsource payroll to a payroll provider, EOR, or PEO
Outsourcing your global payroll is the smart way to go in most cases. But, there’s a bunch of acronyms for the options available, and it may be hard to know which is which.
Here’s a quick rundown: a payroll provider usually performs only administrative tasks. An Employer of Record (EOR) or Professional Employer Organization (PEO) will make sure that all statutory requirements related to employment law and hiring talent are taken care of (including paying international employees). Or you can explore another option - a hybrid EOR such as Oyster.
Like an EOR, Oyster assists with cross-border employment on behalf of your company but with the added benefit of being fully automated, self-serve, and free to start. Aside from compliant, local contracts, Oyster manages payroll and benefits for your team worldwide, empowering you to truly care for your team members, regardless of their location.
What to consider when paying international employees
There are a few things to consider when determining how to send payroll overseas to remote employees. Here are some of them:
Your duties and responsibilities as an employer will vary depending on how you structure your relationship with the employee. Are they remote employees or independent contractors? Benefits and entitlements differ for either, and so do the labor laws.
You must select a pay period to govern how frequently you pay your international workers, just as you do when paying domestic employees. Although some companies pay employees monthly, the most common are semi-monthly (twice a month) and biweekly (every two weeks).
If you must comply with a foreign country's labor laws, make sure to check to see if there is any guidance on how frequently you should pay each employee. You don't want to be caught paying each employee monthly when their local labor laws require at least biweekly payments.
Currency fluctuations can have a significant impact on a remote or foreign worker's pay and taxes, and you may need to adjust their salary based on their home currency.
In some cases, you can create a currency exchange agreement to help you mitigate currency fluctuations (from your end or the employee's end).
Tax and social security
Because your remote employee lives in a foreign country, they will almost certainly be required to pay tax, but your company will also be required to withhold tax back at home.
Check to see if there are any tax treaties between your country and the employee's country to avoid double taxation. This may allow you to use specific tax credits to offset additional taxes, thereby avoiding double taxation.
Global payroll without hassle
Distributed workforces are a relatively new concept, and many businesses are still figuring it out. You can put your company ahead of the curve by letting pros handle all the fine print so you can easily access top international talent.
Oyster is a global employment platform designed to enable visionary HR leaders to find, hire, pay, manage, develop and take care of a thriving global workforce. It lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.
Oyster enables hiring anywhere in the world with reliable, compliant payroll, and great local benefits and perks.