Today we are delighted to feature a guest post from Globalization Partners, whose Employer of Record (EOR) technology leads the way in enabling companies to expand globally.
By all accounts, the longstanding model of centralized work is proving insufficient for long-term resiliency and global growth. In June 2018, Targus Research analyzed the impact of remote work in 16 countries and found that by 2030, remote work would contribute US$10 trillion to their economies, saving more than 3.5 billion hours of commuting and 214 million tons of CO2. Stanford’s Institute for Economic Policy Research (SIEPR) reported in June 2020, the U.S. economy was now a working-from-home economy, with 60% of economic activity being generated from home.
The recent pandemic accelerated the developing normalcy of the remote workforce, and now many companies are choosing never to go back to the office. They can now tap into a borderless, skilled talent pool that adds value to their operations and circumvents local talent shortages. Oxford Economics’ Global Talent 2021 survey found 54 % of global college graduates worldwide will be produced by the world’s top emerging markets: Brazil, China, India, Indonesia, Mexico, Russia, and Turkey.
What does this mean for the payroll function?
Remote work and talent relocation
When anyone can work from anywhere, why stay in a major city? Upwork’s Remote Workers on the Move report published in October 2020 found that in the U.S. alone, 14 million to 23 million Americans are planning to relocate to another city. As workers take advantage of remote-first work environments and relocate, the complexities begin to mount for businesses and payroll professionals.
The first question companies must answer is regarding salary. In a trend specific to the U.S., skilled workers looking to relocate to make the most of cost-effective locations are seeing their salaries diminish. This rings particularly true for Silicon Valley professionals. While these salary cuts might seem an effective way to save money in the middle of the Covid-19 downturn, they may have long-term negative effects in terms of increased turnover.
There are alternatives companies can consider:
- Keep salaries the same to foster employee loyalty and job retention. For example, once employees with a San Francisco salary relocate to a cost-effective location, it is unlikely they will find a local employer willing and able to pay the same amount. However, by maintaining their current salary, these employees will be motivated to build up a team in this new location to the benefit of the company’s expansion.
- Take the Facebook approach and re-benchmark the employees’ compensation to align with the payments in the new location.
Relocation means new regulations
Location-based salary benchmarking is only one of many topics companies are beginning to explore. If they allowed their talent to relocate during the pandemic, decision-makers are now facing another headache: compliance.
Remote workers and their employers are bound by the laws where they live – not where the company is based. Time zone differences are the least of the inconveniences once companies realize they may need to set up a legal entity in the locations where they don’t yet have a footprint and figure out legal and tax issues in new countries.
Staying on top of constant regulatory changes in the local market is a challenge in and of itself. Not all companies have the capacity or breadth to monitor these regulations across several markets to ensure compliance while hiring international, remote talent. For the sake of cost-effectiveness, businesses may be tempted to rely on contractors, but even those figures may present hidden extra costs in the form of taxation or non-compliance fines.
The global payroll challenges of a remote workforce
With a distributed global team, it’s essential to realize that global payroll needs vary drastically from one market to another. Here are 4 areas to consider as you establish a presence in a new country:
Conducting local salary research is critical to offer your talent a compensation package that not only reflects their skills but is equitable to their local living costs and fosters talent retention. But keep in mind that there are additional charges that the legal employer is responsible for that can quickly increase the total cost of employment beyond salary.
While local salaries in other markets might seem cost-efficient, the devil is in the details and small print. In some countries, paying 13th-month salaries is either customary or required by law. The regulatory specifics vary from one location or industry to another, while the minimums, maximums, and requirements are subject to change annually.
Companies may be subject to a double taxation regime, meaning they could pay tax both at home and where the employees are located. To avoid this, you need to find out if there are any tax treaties between your country and the one you are hiring in.
This can negatively impact both the employee’s net pay and the company’s operations. If employees are paid in the currency of the country where the company is located, but their expenses are paid in their home country’s local currency, a currency exchange agreement must factor in exchange rate fluctuations. The same applies to a fixed salary agreement in their local currency.
In the U.S., employees receive overtime pay once they have worked more than 40 hours in a week, but there is no upper limit to how many hours per week a person over the age 16 can work. In contrast, several EU countries cap their working weeks at 48 hours. In China, labor law caps the working week at 44 hours. To avoid going over the limit, an international payroll system that includes faultless records and report times is crucial.
3 critical characteristics to consider when choosing a global payroll provider that will help you scale and stay compliant:
Innovation edge: The same technological advancements that made the gig economy and remote work possible are working to facilitate scalable payroll platforms. A borderless world requires an innovation-fueled, equally borderless platform.
Cloud-based Enterprise Resource Planning (ERP): ERP, when cloud-based, allows payroll platforms to stay continuously up to date with tax code changes. It also enables seamless data sharing and is ideally suited for remote work.
Artificial Intelligence (AI): Payroll management involves generating sizable amounts of data. More often than not, this data is not properly harnessed for workforce insights, reduced errors, or improved interdepartmental coordination. Excellent timekeeping, comprehensive compliance to a dynamic regulatory landscape, faster and bullseye analyses for assertive decision-making, and the design of innovative payroll strategies are but a few of the benefits that AI-infused payroll unlocks.
The main point to note is that remote work is here to stay. Although it provides a large window of opportunity, businesses must prepare and adapt to reap the benefits it offers. Set your company up for success by partnering with global payroll providers that understand the landscape and are building now for the future.