What you need to know about paying wages to overseas employees
More companies than ever are enjoying the benefits of global business expansion. Paying wages to overseas employees, however, can be complex. Learn how to efficiently pay employees abroad with Mauve.
The world of remote work has brought companies access to a global talent pool and a wide-ranging selection of associated benefits – but many don’t know the ins and outs of paying wages to overseas employees. What payroll changes should they make? Do they need to have an international entity set up?
In a growing trend, 32 per cent of companies now hire on skills rather than proximity to their office. This has opened up opportunities for new and current workers to live overseas. When paying remote workers abroad, companies need to plan and manage their international payroll to comply with local laws, maximise efficiency, and protect their employees.
What are the options for paying employees abroad?
In today’s working world, companies look to overseas talent to increase hiring opportunities, bridge skill gaps, and get ahead of the competition. But global payroll can bring challenges.
The most crucial aspect to get right is compliance. You need to make sure to comply with all local legislation and payroll onboarding processes – many countries have unique laws to navigate. For example, annual salaries in Spain are split into 14 instalments, while Dutch employees receive a 13th-month salary each year.
Failing to meet these requirements can bring severe penalties. So, what are the options for paying overseas employees?
Option 1: Register a local legal entity
The first solution on our list is for a company to register a local legal entity. Simply put, they open an arm of their business in the foreign country where workers are based.
This is often the most comprehensive option, but is not without its complexities. It’s usually opted for by large international companies looking to hire many employees in that country – with the resources to handle any administrative obstacles along the way.
A company registering a local legal entity will need to:
- Open bank accounts in the new country.
- Open the entity according to all local rules and regulations.
- Check their existing payroll system is usable for that country and, if not, set up a new one.
- Hire local staff and fully register new and existing worker(s) on the company’s payroll.
This option can give companies a permanent, established presence. For companies just starting to hire in foreign markets, this is likely to be complex. That’s especially true if you only intend on hiring a small number of overseas employees in that country. In that case, you might turn to an expansion expert for local guidance.
Option 2: Use an Employer of Record
To build a global team without the hassle, many companies turn to an Employer of Record (EoR). An EoR is a partner with an established presence across many countries. They comply with local and international labour laws, and understand the unique challenges in each country. When working with an EOR, companies take advantage of their new partner’s local knowledge of employment legislation, payroll, and HR compliance.
The EoR can employ local talent on your behalf – allowing you to employ workers internationally before setting up your own legal entity in that country, if you should choose to go down that route. No local knowledge required, no red tape. Not only is using an EoR usually the most time and cost-effective choice, but it also gives you access to local experts who comply with all applicable regulations.
Option 3: Use independent contractors
The third option is to hire independent contractors instead of full-time employees. This can be the simplest solution, if the circumstances are right, allowing you to agree a fee with a worker and pay them per project. Be careful that you have correctly classified the employee – hiring full-time employees as independent contractors can have serious consequences in many countries.
When working with contractors, you receive flexibility in return for limited control. This is a good option for small companies looking for casual or infrequent overseas workers – there’s no employment relationship, so both sides have minimum protections and maximum flexibility.
Choosing which overseas employee payment method is right for you
Every business has its own unique circumstances and there will be pros and cons for each potential method of paying employees abroad. These should be considered carefully on a case-by-case basis.
- Opening a legal entity is often a great option for large businesses looking to establish a presence in a country while hiring many workers. Different countries bring different challenges, so this may be easier in some places than others. It should be seen as part of a comprehensive global business expansion project rather than a quick way to pay employees abroad. Smaller businesses can also reap the benefits of opening their own entity if they use the services of a global expansion provider.
- Working with an EoR can benefit small-medium businesses looking to hire international employees, especially those lacking the local knowledge or resources required to carry out necessary administrative tasks. However, it can suit businesses of any size depending on the circumstances. Partnering with an Employer of Record is suitable for companies wishing to hire talent in, and access, new markets, looking for quick onboarding, and aiming to keep things simple.
- Using independent contractors is usually best for very casual working relationships. This might be a temporary or freelance position, typically paid by the day or hour. When hiring contractors, you should be careful not to accidentally stray into a relationship that could construe the worker as a full-time employee. Different countries have different definitions of what type of relationship, or what type of work, constitutes an employer-employee relationship, and the penalties for straying across these lines can be severe.
Each of these arrangements places different responsibilities on the business; as such, it is advisable to get professional advice before making a decision.
Other considerations when choosing how to pay remote workers
Withholding tax contributions for overseas employees
Tax laws vary from place to place. In some countries, employees are responsible for declaring and paying their own taxes. In others, the company is required to deduct and manage taxes before they pay employees. Employer contributions can include tax payments as well as contributions to healthcare and welfare insurance and pension schemes.
Navigating exchange rates
Exchange rates fluctuate daily and can end up costing businesses unnecessary capital in fees and exchange rate losses if these fluctuations are not paid close attention to. Establishing a local entity, or working with an Employer of Record, are two ways of ensuring you can pay workers abroad in their local currency, without having to worry about the impact of exchange rates on your, or their, finances.
Relocating local employees overseas
Whether you choose to establish a presence overseas yourself, or via an Employer of Record’s international network of local entities, you may find it beneficial to relocate members of your HQ team to assist with the business’s expansion.
A key factor to take into consideration when deciding how to continue paying a relocated employee is whether or not their salary – including any associated benefits package(s) – should be re-evaluated in light of the cost of living in the destination country. This is a core part of supporting employees throughout the move.
How to pay wages to employees abroad in 5 straightforward steps
The best way to pay overseas workers depends on your requirements. To create the proper structure, you should follow these steps.
Step 1: Decide on your international payroll model
Does a legal entity, EoR, or contractor arrangement work best for you? Once you’ve assessed your model, you’ll have an idea of how to pay overseas employees.
Step 2: Classify your employees correctly
Misclassification of employees can incur heavy penalties, so make sure that any arrangements you make with employees are suitable. It’s especially important to do this with contractors as the legislation of many countries, such as the UK’s IR35 law, distinguish strongly between contractors and employees.
Step 3: Decide on a payment method
There are a number of different ways to physically pay wages to overseas employees, from international bank transfers and PayPal transactions to conducting payroll through a local entity. The method you choose should be a reflection both of your company’s capabilities, local labour and tax law compliance, and what works best for the worker receiving their pay.
Step 4: Look after your employees
The well-being of your overseas employees is always paramount. Make sure they receive payments correctly and on time. Always clearly communicate any changes to their expectations – if they’re unhappy or worse off than they would be on a home-country payroll, they may begin to look elsewhere.
Step 5: Ensure ongoing compliance with local laws
Once your plan is established, you should continue to comply on an ongoing basis with all local tax and labour laws. When paying international employees, keep a constant eye on any developments to local employment laws and adjust your payroll processes accordingly.
What are the benefits of working with overseas employees?
Given the evident complexities of paying wages to overseas employees, you may be asking yourself, is it even worth it? Before we finish our article, let’s take a quick look at some of the major potential benefits associated with expanding your workforce abroad.
- Hiring employees abroad can provide businesses with access to new, previously-untapped markets.
- Overseas employees may have local knowledge and expertise unavailable to your business’ current talent pool.
- Outsourcing labour to other countries may help reduce payroll costs, creating a more cost-effective workforce.
- Companies which open their recruitment process internationally gain access to a global talent pool, potentially offering a higher-than-average quality of candidates.
- Increased diversity in the workforce, if coupled with inclusion and equality, can benefit an enterprise's productivity and creativity.
In review: Simplify the overseas payroll process by partnering with an EoR
When paying wages to overseas employees, you have various options. If the conditions are right, you can open a legal entity in that country, work with an experienced local partner, or use contractors. Companies looking to grow their international team without the hassle should consider working outsourcing their payroll operations to an established Employer of Record. Contact Mauve Group today to learn more about paying employees abroad simply, quickly, compliantly, and cost-effectively.
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