International Payroll Outsourcing – A global challenge?

Establishing a robust, secure and accurate international payroll can be a particular challenge for some organisations, especially if there is a high number of countries involved and the organisation is liable to change on a constant basis.

And there are other challenges as the world continues to change too. The recent move in the UK to unburden itself from Europe throws up new questions about how UK based companies will operate, and pay staff, in Europe. Country specific disciplines such as SSAE16 (previously Sarbanes Oxley -SOX) in corporate America have also had a major impact on firms and how they operate, making for a particular need for US listed, or US financed companies to improve financial controls. And as emerging markets start to grow and in country economies evolve, so does the propensity for having ever more complicated levels of payroll tax legislation.

As organisations increasingly look beyond their traditional domestic boundaries the complications of their payroll processing start to increase. In a recent survey by PWC of 193 organisations, 89% expected increases in international mobility. Being able to track individuals on a country by country basis to determine their taxability is already one of the biggest challenges organisations face in order to be fully compliant with tax withholding rules.

International Payroll outsourcing – while appealing in the sense of removing the burden – can be seen as daunting as there is a perceived lack of visibility and control that may cause uncertainty or difficulty in some organisations. But with such a strong return on investment and time saving argument to support it, can international payroll outsourcing really be ignored as an option?

Justin Cottrell, CEO of IRIS FMP, runs through the crucial questions to ask yourself and your potential international payroll partner so that any fears can be allayed.

DO I NEED TO WORRY ABOUT INTERNATIONAL PAYROLL?

Keeping an eye on employees who are currently internationally mobile is a must. Whilst you may not be thinking internationally and are new to the international arena you will need to establish when frequent business travellers are triggering withholding tax thresholds in the countries they are visiting and working within.

DON’T WORRY, I CAN DO IT ALL MYSELF

Working directly across multiple countries with in-country suppliers not only requires the time to fully vet them, but will need an ongoing commitment to manage and chase them down when things don’t go to plan. With multiple time zones this could mean a team covering a full 24-hour period. And you could also find yourself landed with massive costs associated with technical integrations with HR or Finance systems, and Foreign Exchange. If you’re prepared for all that, and stay on top on the legislation and legal compliance, then outsourcing isn’t for your organisation.

HOW WILL I BE LOOKED AFTER IF I OUTSOURCE?

Many global payroll services companies will promise a traditional international payroll model with a central point of contact in the customer’s core location, who is responsible for the operation of all the country’s payroll. What in fact happens is the local payroll provider actually devolves operational control and responsibility to external third party providers within each territory, each with its own processes and even cultural or linguistic obstacles, and each with a contact for the client to manage.

This means that one of the core reasons for pursuing a international payroll policy – the ability to have one place of control and accountability – is immediately undermined and the business is left in exactly the same situation of disparate control that it started with, but now there is a charge for it!

It is therefore essential that before signing the contract, you ascertain exactly how the service delivery and account management is structured, who your primary point(s) of contact would be, who is actually doing the work, and who your escalation points are if necessary.

WILL IT BE COST EFFECTIVE?

The model of international payroll bases its value on the removal of multiple points of contact, eliminating any duplication of processes and a central point of both salary payment and cost. But for these to be realised, outsourcing international payroll cannot be done half-heartedly. For example, if there are 20 global locations – of whatever size – outsourcing them in piecemeal or in regional groups will not allow a full return as there is still a selection of responsible parties, a degree of duplication of effort and no central point at all.

Only by outsourcing the payroll in its international entirety to a single provider can the full ROI potential be achieved. Crucially though, be certain to analyse, with the outsourcing agency, precisely where, how and even when the ROI is seen, and then make the payroll outsourcer accountable for achieving it.

WHAT IF MY BUSINESS CHANGES?

Any organisations moving into an international payroll environment must ensure that the global payroll provider is able to accommodate any substantial changes to the structure of the organisation without difficulty and that the contract is not constructed in a penalising fashion.

For example, some agencies will devise the contract on an inflexible basis so that should an international location be moved or even closed, there will still be fees payable if this is done before the point of contract renewal. Therefore, the crucial question is not ‘Can the international payroll outsourcer meet my current needs?’ but instead, ‘Can they meet any future needs I may have, even if that is actually a reduction in requirements?’

HOW CAN YOU HELP MY BUSINESS GROW GLOBALLY?

It is not just about providing payroll. If a new location is set up in a new country, how much support will be providing in ensuring compliance with any new legislative requirements there may be for payroll operations? Or will the payroll agency only become involved once it has been set up?

Also, new countries may have their own HR requirements beyond just the payroll itself – will the payroll agency help with this too, and what if anything is the cost of any help? Outsourced relationships are built on trust, reliability, core value and added value, and by proactively helping the organisation to expand smoothly into a new territory, and even proactively challenging the client’s requirements where appropriate and necessary, the last on this list can be evidenced all the clearer.

One of the biggest questions to ask is about coverage. For some payroll outsourcers it’s all about the easy money, so they will cover only the easy countries – America, Europe, Australia for example. Start talking about some of the more obscure countries in the world and you’ll find they cannot help. IRIS FMP for example covers 135 of the 196 countries in the world, and continues to expand its coverage.

HOW WILL THE SALARIES ACTUALLY BE PAID?

The global payment process itself can be a trial. Will the agency undertake the salary and tax payments themselves, and be able to accommodate the various currencies? In an ideal world, there should be a single payment method across all the countries, with funds deposited into a single bank account and treasury management conducted centrally for all the territories – a far better solution than several foreign bank accounts paying each employee individually.

Connected to this is the way in which the organisation is billed for this service. From a global P&L perspective, invoices from various territories in their own currencies can be a particular problem, as again multiple bank accounts and payment schemes may have to be established. Instead, being sent a single invoice to the ‘lead’ territory, which can be paid in a single currency, can remove an otherwise dramatic administrative burden.

SOME, PART OR ALL?

There is no doubt that outsourcing all of your international payroll will see the greatest return on investment. But outsourcing your international payroll all at once might not be for you, so look to a provider that is flexible in its approach. Often companies will have a new country requirement and will test the water with an outsourcer, and then look to outsource other countries once trust and success are proven.

You should also establish how many of your people are working in a given country as there will come a point when it may be prudent and cost effective to have their own in house payroll and HR team.

One thing you should consider however is a review of your foreign exchange requirements, as there is often a tendency to just let finance sort out payments. This usually ends up being processed by the company’s bank, with hefty costs and commissions. With better more cost effective providers now in the market, undercutting the banks, you can save massively on foreign exchange costs.