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7 min read

Remote Payroll Compliance Guide

Remote Payroll Compliance Guide for 2023

In 2020 we saw many changes to how people live and work. Because of COVID-19 lockdowns and restrictions, many workers found themselves with the opportunity to work remotely. And a lot of them even considered the idea of finding jobs that would allow them to work from abroad, with companies welcoming that change too.

While this posed new challenges it also presented many opportunities for businesses, the main one being the chance at building a powerhouse global team that existed solely based on talent, not location.

Employers and job seekers are no longer limited by geography with both being able to seek out the best people and opportunities, wherever they are in the world.

Staying compliant with payroll laws around the world for remote workers is a big concern for employers. We’ve put together this comprehensive guide to help you understand what you need to know about global payroll, and how an EOR takes all that burden away from you when you employ abroad.

1. Understanding payroll requirements for withholding, compensation, and unemployment taxes

Say your company is from the US. When you run a business, you are responsible for paying all applicable federal and state taxes, including federal and state taxes related to having employees. These vary by state, of course, but often they include workers’ compensation insurance, unemployment insurance taxes, and temporary disability insurance.

And for any other company based in any other country, that’s the general standard when it comes to withholding taxes: you need to pay those taxes to the government, to ensure employment compliance, unemployment protection, social security benefits, and others.

But if you want to grow an international team, and employ talent in different countries, things can get tricky and overwhelming. It’s not enough to put these remote workers under your payroll. Why? Because, usually, no country will allow you to put your remote employees under a different payroll from the one domestic employees have. Every employee in X country needs to be on an equal footing.

In other words, you need to fulfill the same obligations as any employer in a foreign country.

For example, if you hire an employee who lives in Portugal, you will need to comply with their tax laws including individual income tax for employees in Portugal, social security costs, VAT, withholding tax, and corporate taxes. Even if your employee is not, technically, a Portuguese citizen, they are considered one legally if they spend more than 183 calendar days (or more than six months) per year in Portugal, have a spouse with legal residency, or own property that they live in.

In the UK, employers must calculate tax, National Insurance contributions, and other deductions, issue employees with payslips, and make a Full Payment Submission (FPS) report on or before payday each month to HMRC (Her Majesty’s Revenue & Customs), disclosing payments to your employees and what deductions you’ve made.

2. Salary, overtime pay, and pay frequency according to country laws

Deciding what your employees should be paid takes more than coming up with a number. Yes, you should do your research on skill set, cost of living, and other elements prior to hiring, but each country’s laws on working hours and overtime should be considered too.

For example, in France, work weeks are capped at 35 hours and any additional hours worked must be paid at an increased rate. In Portugal, where one of our teammates works, work weeks are capped at 40 hours, and employees need to be paid double the hourly rate if they work during the night and on the weekends (if planned in the contract).

You also need to take into account the frequency with which you pay your employees. In the US, some states require employers to pay their workers at least twice a month. But if you’re employed in the Netherlands, monthly salaries are usually paid once a month, and always before the end of the following month. RemotePad has teammates in Macedonia. When we pay them, we know we have only until the 10th of each month to do so, because that’s what’s required by law.

Although we’ve only provided a few examples, it is clear that these laws can vary greatly by country. Understanding them can be tricky and there are major risks when you don’t set yourself up correctly.

When you work with an EOR, they do that job for you. They make sure each contract is compliant with local laws, at all times, so you can always pay your teammates without a worry in the world.

3. Paying employees and handling currency exchange

One of the most important aspects of remote payroll is ensuring your employees get paid, just like any other employee would. But how do you pay teammates who are overseas? How can they withdraw their payments? In what currency?

Paying international employees can be tricky, especially since bank transfers can be expensive and currency exchanges might cause your teammate’s salary to fluctuate heavily. And it’s not a good thing to leave your team wondering what amount they’ll be getting next.

4. Annual leave, maternity leave, healthcare, and other statutory benefits.

In most countries, there are labor laws you need to comply with to protect employees. Besides dictating the frequency with which you need to pay your employees, the number of hours they can work per day or week, and others, these laws also dictate time away from work (sick or vacation days), paternity/maternity leave, or severance upon termination that your employee is entitled to and that must be paid.

For eg., in some countries, employees’ annual salary is calculated based on a 12-month period. But in Portugal or Greece, you need to pay your employee 14 months’ worth of compensation since vacation and Christmas subsidies (the first one paid right before the employee leaves for holidays, and the second before Christmas holidays) are mandatory.

In other countries, annual salary isn’t distributed between 12 or 14 months, but 13. In Argentina and Colombia, this 13th month is paid in two equal 50% installments in June and December. In Canada, however, there is no law regarding a 13th salary, and calculations take the 12-month standard into account.

When it comes to healthcare, sometimes it’s provided by the state at a very low cost (the case with most countries in Europe), so there’ll be no need by law for you to buy your employees a private healthcare insurance plan if they won’t use it or don’t want to use it. You can replace this benefit with others that you think they’ll appreciate (like a gym or office budget, for eg.). It’s important to remember that what seems like a benefit for one employer in one country might not be that important for another employee in another country.

There are also other health-related elements that need to be taken into account.

Our teammates from Macedonia and Portugal need to undergo company-covered and mandatory health checks (every two years for both cases). In the Portuguese case, you also need to have work accident insurance, something that is meant to protect not just your employees but the company as well whenever there’s an injury or accident in the workplace. For remote teams, you might want to clarify what is or isn’t a work-related injury in the contract, or even include working hours. This is to prevent injuries such as “falling out of bed and hurting my head during a nap after lunch” from being taken as a work-related injury.

As for maternity and paternity leave compensation, laws vary extensively from country to country, too. In India, it is required that you give mothers 12-26 weeks of fully paid leave, and in Singapore, maternity leave is a minimum of 12 weeks (16 weeks for locals, with 50% funded by the government). A sharp contrast to Denmark’s 52-week-long, and fully paid, maternity leave.

5. Privacy and data security

As you add people to your workforce keeping data secure becomes increasingly important. If you have employees around the globe, you will need to ensure that you are keeping sensitive information secure and complying with any laws related to the transfer of data internationally. The importance of physical security must also be considered, with sensitive data often needing to be backed up in physical storage devices that must also be subject to strict security measures. This applies to both your company’s data and employees’ personal data. You don’t want to find out that your payroll or human resources records were breached and used for nefarious purposes.

In the European Union, for example, all companies need to comply with the General Data Protection Regulation (GDPR), implemented on May 25th, 2018. This legal framework sets guidelines for the collection and processing of personal information from individuals who live in the European Union. But every country has its own rules when it comes to data collection and security, so keeping that in check can be a lot to manage.

Pros and Cons of Running Remote Payroll

There are advantages and disadvantages of running a remote payroll. We can help you navigate the waters but, at the end of the day, it’s up to you to see if the pros outweigh the cons.

Pros of remote payroll

  1. Ability to attract the best talent for your business
  2. Ability to find employees with unique skill sets that may not be as readily available in your geographic location
  3. No need to spend hundreds of thousands and waste time setting up a subsidiary
  4. You can continue to pay your employee in their local currency
  5. Cost savings as you can hire employees who live in parts of the world with a lower cost of living
  6. Decreased cost of office space as remote employees can work from home

Cons of remote payroll:

  1. Complexity of legal requirements and paperwork on local compliance
  2. International bank transfer fees can be expensive
  3. Need to keep up with ever-evolving labor laws and payroll regulations
  4. Increased liability if your business is out of compliance
  5. Some countries may not allow it unless it’s through an EOR (eg. China)
  6. The employee may still be required to be on a local employment contract by law

Use an Employer of Record (EOR)

Traditionally, you’d have to spend months, if not years, and at least $80,000 per country making sure everything was compliant. All that before you got to hire someone. There’s no need for it anymore due to EORs.

Using an Employer of Record is the most cost-effective, time-saving, and efficient way to pay your global teammates within each country’s law. Once you sign over your employees to an EOR there will no longer be any need for you to worry about ensuring tax compliance, filing paperwork, processing payroll, dealing with government entities, or keeping track of local laws.

EORs can do that because we have the legal infrastructure already in place for you to start employing and paying global teammates.

This also means you won’t need to register and open a local subsidiary or bank account. They have their own subsidiaries that handle everything on your behalf, without you doing a thing. EORs handle the admin part of employment so that companies can keep on growing their business by having a truly talented team with them.

With an EOR, you can now tap into the world’s talent pool from the comfort of your own desk, without ever being distracted by the red tape.

At RemotePad, Lech draws on his professional experience to write about employment taxes and payroll (both remote, and in-office). Lech holds a Bachelors’ degree from the University of Kent, a Master of Arts (MA) from Kings College London, and professional payroll and tax qualifications. He has 20 years experience advising on all manner of tax and business planning matters.