Money is a sensitive matter and managing employee salaries should always be handled with the utmost care, confidence, and punctuality. When expanding your business, international payroll is becoming a fundamental requirement for any company. In today’s business environment, companies that fail to manage global payroll successfully, often face legal, financial, and reputational risks.
International payroll compliance is by far not easy. Global payroll administration means tiresome and ever-changing activities, i.e., applying employment laws, monitoring local country-specific requirements, preparing contracts, maintaining employee records, etc. that can make international payroll management a frustrating experience for companies that do business abroad.
In Leinonen Group we have helped many companies expand abroad and build payroll processes that comply with local requirements. To share our knowledge that organizations usually face in their journeys, we have written down the main aspects to keep in mind when operating payroll internationally with minimal reputational risks.
Based on our experiences over 25 years we can highlight 3 areas that are usually affected by payroll compliance risks and are related to international payroll challenges: ACCOUNTING, LEGAL and HUMAN RESOURCES.
Accounting challenges: how to align payroll-related accounting procedures internationally?
Expanding your business is supposed to support the growth of the company, but very often the expansion results in increased exposure to accounting and payroll compliance risks. Every market has its own unique regulations and rules that will impact payroll-related accounting procedures. Therefore it´s of utmost importance to get the right accounting systems and processes in place to avoid possible future fines, tax errors, or the disclosure of sensitive employee information. These risks will threaten the company’s performance and reputation the most.
For smaller or medium-sized companies it´s not always very practical to manage to account for international payroll in-house because each country may have its own requirements for GAAP (Generally accepted accounting principles), GDPR (General Data Protection Regulation), record keeping, filing, etc. Therefore, outsourcing payroll and accounting functions may help the companies to simplify their operations whilst being able to take advantage of financial and legal specialists, optimize costs and increase efficiency.
Read further from this article on what to keep in mind when choosing international accounting and payroll providers (Why do companies stick with poor accounting and payroll providers?)
Legal challenges: how to avoid non-compliance with local regulations?
International payroll goes hand in hand with tax and legal requirements. Some rules that apply in one country may not apply in others, even if the countries are located geographically close to each other. For example, the Baltic States (Estonia, Latvia, Lithuania) are often considered as one region but if you take a closer look into payroll taxes (e.g social security tax rates, PIT rates, minimum salary levels, etc) the variation by markets can be quite big. Read further about different tax rates from the summary of 2022 Baltic Taxes.
If you dive deeper into legal aspects, you find out soon enough that country-specific laws and regulations are constantly changing and therefore need focus every day. From a risk perspective, non-compliance with local labor regulations inevitably leads to fines and penalties.
How do overcome these risks? One way is to hire its own tax and legal team for each market that in the end could become a quite costly exercise. Another way is to outsource international payroll providers with a tax & legal department to help manage the updates throughout the year. Having a reliable partner or a team of experts will keep you away from payroll tax errors.
In Leinonen Group we have payroll and tax experts available to share their knowledge and experiences in all our 12 markets: Finland, Sweden, Norway, Estonia, Latvia, Lithuania, Belarus, Bulgaria, Poland, Hungary, Russia, and Ukraine.
HR challenges: to whom to delegate the payroll questions?
When it comes to payroll activities there is always a question of who should be executing them in a company and how. Delegating these tasks to your accounting team might not be the best decision in terms of efficiency. On the other hand, delegating the payroll-related tasks to your HR sometimes requires additional training and investment in terms of salary calculation, tax reporting, and usage of payroll software.
Nowadays businesses tend to outsource a big part of their supporting activities. Marketing, IT support, and accounting are some of the most popular outsourced functions. Delegating payroll-related tasks to an external provider allows a company to have a team of outsourced specialists who are dedicated to their business which is usually costly to have in the house. In addition to the costs, it is not always efficient to build an in-house team since there are not enough tasks for a full-time job.
Therefore, based on our experiences we believe that outsourcing international payroll brings numerous advantages to companies. For example, when you use an outsourced payroll service provider, the output, speed, and quality will not be affected by holidays or sickness. When having an in-house payroll department, there is always the possibility that one of your key payrolls staff members will leave, taking with them all their knowledge. If this happens, replacing them could be extremely difficult, resulting in a logistical nightmare when payday comes not to mention the reputational risk. If you are outsourcing, you will not have to spend time training new employees or assisting them in understanding your company’s payroll system.
What are the key benefits of outsourcing payroll activities, you can read further from this article (Here is why outsourcing payroll is a great idea).
In summary, to successfully operate internationally, make sure your payroll systems and processes are in place and convert international investments into bottom line profits. To avoid negative impacts, companies need to understand the international payroll compliance risks and be aware of three main challenge areas: international accounting, payroll, and human resource-related issues.
If you as a business owner or a manager would like to concentrate on running your business without worrying about your international payroll, accounting, or legal obligations, feel free to contact any of Leinonen’s offices for help. Our experts will handle these obligations correctly, efficiently, and legally, keeping your company away from any reputational risks.