Global Payroll, how does it work?

The monthly payroll cycle in short

In general, the monthly payroll cycle will be coordinated at the head office. The local assistant collects the mutations for the current month and sends them to the headquarter. If mutations are incorrect or incomplete they will be returned to the concerned local assistant. The salary administration at the head office collects and administrates monthly changes such as, new hires, overtime, holiday allowance, terminations. Before the cut-off date the salary administrator submits the mutations in the agreed format. Based on the four-eyes principle, a colleague checks the changes before sending. After control the approved list will be sent to the local salary provider (depending on the contract, via a streamline solution or an encrypt data line). The local provider provides a provisional output and sends it to the headquarter for control. The salary administrator checks if all data are processed accurately. After control the salary administrator accepts or rejects the output. After accepting the corrections, the manager or director approves for the final run. So far a brief description of the monthly payroll process.

Experience in global payroll

From my perspective, understanding global payroll is an important part of your job when you go overseas. Be in touch and make sure you are well informed about changes in the local law- and legislation. Visit government sites e.g. information about tax and social security, pension and other compensation and benefits. Be prepared for prospective changes. Sometimes agreements on a higher management level are not sufficient. As a payroll administrator you have to deal with the local payroll provider. Avoid misunderstandings, discuss on an operational level the templates/flex forms and how to transfer data. Be clear in your information, some local salary providers follow the instructions to the letter. Is it sensible to have blind faith in your overseas payroll provider? It’s impossible to know the entire law and legislation of each country. But in the end, you remain accountable for the entire monthly payroll process. Conflicts in the work place are usually the result of unclear agreements. Clarity is the main pillar of accountability. So Discuss responsibilities and make sure they are written down in the SLA (service level agreement).

The complexity of Global Payroll

The world of global payroll is becoming more and more complex. Also the field of the gross-nett calculations becomes more complex varying from very simple to extremely complex. For example, in France there is no tax withholding in contrast to Germany. Payroll in Germany includes the collection of different taxes (lohnsteuer, Solid. Zuschlag, Kirchensteuer) and mandatory contribution to social securities. Denmark has a progressive tax system. This means the higher the income, the more taxes you have to pay. Everyone in Denmark must have a tax card. This card contains information about the withholding rate. In Singapore, when your non-Singapore employee plans to leave Singapore for e.g. more than three months, it’s your responsibility that he/she pays all taxes. Each country has his own rules about tax withholding, payments and date of delivery. Insufficient knowledge can lead to fines and penalties.

Compensation & benefits

As salary provider you have to deal not only with salary issues but also to with compensation and benefits. Compensation and benefits refers to the compensation/salary and other monetary and non-monetary benefits an employee receives in return for work. This includes a variety of benefits such as, pension, healthcare insurance, disability income protection, sick leave, vacation, maternity leave etc. Whether you like it or not, you have to understand the compensations & benefits of each country you are established in. Don’t get surprised with mid-term salary increases as a result of collective agreements. Get informed about the different types of reservation of leave days. For example, in Denmark, the salary provider provides a monthly overview with the accrued holiday allowance per year. It’s very difficult to check this list because the monthly taken holidays are settled with the monthly reservation. Furthermore, is there a mandatory pension scheme and a healthcare insurance? How to avoid unnecessary surprises such as a merit increase? Create an Excel file with an overview of all regulations. It helps you to control and understand the global compensation and benefits.

Set up General Ledger account

Discuss in advance with finance how to set up the GL files. Create a standard list for all countries. Make it a part of the deal with your prospective payroll provider. This saves a lot of time because you don’t have to enter the GL files manually afterwards. Are the requirements of the Generally Accepted Accounted Principles (GAAP) sufficient or do you have to deal with US-GAAP or IFRS rules? You should know before you start.

Outsourcing

Your final decision will probably depend on your workforce and the countries you are established in. Irrespective of the choice you make of the above mentioned possibilities, you have to train your staff annually or hire specialized educated employees. Because you remain responsible for the entire monthly payroll process.

Use this checklist to decide which level of outsourcing you need:

• Investigate the functionalities and possibilities of each payroll system. This is necessary because you want to match functionality with the existing needs. Practice shows that in many cases companies only use the transfer tool for sending and receiving data (streamline solutions or an encrypted mail line). Because the most of time the company is not aware of the availability of other important functionalities within their payroll system.
• Research the possibility of two different kinds of payments on one contract. In English speaking countries a blue collar worker is a working class person who performs manual labour. Blue collar work may involve skilled or unskilled manufacturing, mining, sanitation, warehousing and much other physical work. Blue collar workers are often paid an hourly wage. In contrast to white collar workers who are paid a monthly wage.
• Be prepared that in the future you will probably have to deal with the 30% rule, shadow payroll and salary splits. How much experience your internal experts have with these complicated legislation?
• Can the payroll system handle multiple languages? The payroll system should at least be able to handle the native language and English.
• Discuss and confirm that all output and reports such as pay lists, G/L files are delivered bilingual.

More international solutions available

The development of new Payroll solutions increases fast. More and more Payroll providers move into the international market. They have developed and expanded their services beyond the traditional gross – to nett processing to fully managed payroll service included time and attendance management and HR functionalities. In the past, integrated HR systems were only accessible for the top-range segment. With cloud solutions as Software-As-A-Service (SAAS) these solutions are also available for small and medium sizes companies.

Selecting the right vendor

When you consider to buy a new international payroll solution or sign a payroll outsourcing contract, please pay attention to the following points:

• Start with a workshop to determine the HR- and Payroll ambition
• Design the desired way of working (HR processes) according to your ambition
• Make an inventory for system requirements and nice to haves.

And remember, blind trust in the expertise of one payroll provider is a risk. I assume you want to stay in control of your own business because in the end, you are accountable.

There’s no such thing as the “best” HR software, but there always a best suitable solution. Vroom is a Vendor-neutral HR consulting firm. Our consultants can help you select the best fit. We take into consideration your organisation, your payroll and or HR goals and limitations, and especially look at the possibilities to improve. Do you need a partner for such a project? We would like to discuss your options. Contact us for more information