With many employers spending as much as one-third of their revenue on payroll expenses, reducing payroll costs is a hot-button topic for many multinational employers.
Controlling any area of the business, especially spending, begins with a clear idea of what’s happening—so let’s start there:
What exactly are payroll costs, and what’s typical for a global business?
What’s included in payroll costs?
Determining how to reduce payroll costs starts with a fundamental understanding of where you’re spending your money.
The first thing that comes to mind is typically the labor costs.
The money that you pay out for wages, salaries, overtime, bonuses and benefits make up a big portion of your total payroll costs. On average, global businesses spend 60% or more of their operating costs on payroll.
But that money often falls into a ‘justified business expense’ category. When we’re looking at how to reduce payroll costs, there’s a lot more to consider.
The money that your global company spends on payroll also includes:
Payroll taxes (like income tax and social security tax)
Payroll processing labor
Accounting and payroll software
Outsourced payroll services
Costs to cut checks
Administrative costs to maintain personnel records
Best ways to reduce payroll costs
Reducing your global payroll expenses is most likely top of mind after realizing the high price you pay on operating costs.
But where do you start?
Global businesses should closely examine existing processes and procedures, looking for opportunities to improve efficiency with outsourcing, reduce payroll errors and add automation. These changes will have the most direct impact on lowering global payroll costs.
However, change isn’t limited to the payroll department.
Operations can also focus on implementing changes that will reduce overtime, and HR can focus on taking steps to reduce employee turnover.
Let’s take a closer look at how specific changes can help you slash global payroll spending.
1. Outsource labor
Strategic outsourcing occurs at all levels of the business and can lead to significant savings. Companies can work with contractors to outsource certain job functions in exchange for cost savings.
For example, if you can cut a dozen physical positions in your corporate office using outsourced labor, you can lower the associated taxes and benefits costs. This approach also reduces the amount of office space you’ll need for employees.
Unfortunately, there’s a fine line between cost-effective outsourcing and tax evasion. If you go this route, plan carefully and be prepared to defend your decisions if a foreign taxing authority challenges your business model.
If you’re caught misclassifying employees, you could get hit with extra fines, legal issues, and a mark on your company’s reputation.
Watch out for these outsourcing pitfalls:
Permanent establishment: Hiring contractors in another country may unexpectedly trigger PE tax liability.
Intellectual property rights: If you hire contractors in another country, your IP rights may change.
Fines and penalties: Foreign taxing authorities are sometimes eager to investigate and slap multinational companies with misclassification penalties.
Potential lawsuits: The cost of misclassifying contractors can be high. You’ll pay a lot more than back wages to fix your mistake—and may even see courtroom litigation.
2. Stay compliant
Another big money leak for global payroll expenses is compliance fines. Missing a deadline is easy to do when there are dozens of different deadlines for every country. If you want to tighten the reins on financial bloat, start here.
Getting strict about meeting deadlines for all compliance activities can potentially save your global business millions.
3. Reduce overtime
Another money suck for your payroll expenses is overtime. In many countries, you’re paying 50% to 100% more for overtime hours compared to base wages. There may always be circumstances that warrant the extra expense, but overtime should be the exception rather than the rule.
Not only will your global company keep payroll spending in check with less overtime, but employee morale will improve, and turnover will naturally decline. While many employees appreciate an occasional push that leads to a little extra cash, it’s a situation of diminishing returns if the overtime becomes too common.
4. Automate payroll processing
Automation is another essential component of efficiency. Take a moment to consider how many payroll associates your company currently employs—and how much time each of those employees spends on manual tasks.
Technology enablement in payroll, paired with strategic outsourcing to a third-party payroll provider, can streamline the entire process and free your staff up to cross-train for more efficiency.
5. Reduce employee turnover
Employee turnover is costly across the organization. It’s easy to see the losses in terms of time spent onboarding and training new employees. There’s also a significant performance difference between new employees and those who are more experienced.
But there’s another administrative cost you might be overlooking. Your global business is likely spending a small chunk of change on payroll-related administration due to employee turnover. Don’t forget to examine the time spent:
Collecting and processing new employee information for HR and payroll
Enrolling new employees in benefits
Completing termination requirements while meeting compliance deadlines
Focusing on talent retention can naturally reduce your payroll costs.
Final thoughts on how to reduce payroll costs
If you’re looking to slash costs on your global payroll, don’t overlook the key points above.
Rethinking your payroll practices and supporting initiatives to reduce employee turnover, it can have a positive, long-term impact on lowering your global payroll costs.
But outsourcing can have the most immediate and impressive impact. Outsourcing your global payroll can drive efficiency in your payroll processes, eliminate compliance issues and reduce the cost of payroll administration.
Get in touch today to learn more about reducing your payroll costs with our Payroll 360.