International payroll outsourcing: A guide for multinationals

April 29, 2020

international payroll outsourcing

For global companies, processing international payroll internally is complex, expensive, time-consuming and error-prone, and it can put you at risk of noncompliance. To alleviate the administrative complexity and expense of in-house payroll, many companies have turned to an international payroll outsourcing solution. 

What is international payroll outsourcing?

International payroll outsourcing means that a third-party company takes over payroll processing for your company, including administrative functions, such as tax reporting, calculating voluntary benefits and managing employee inquiries. The third party also becomes responsible for record-keeping and maintaining compliance.

Why consider outsourcing international payroll?

Generally speaking, the payroll process is much more complicated than most people know. In fact, producing payroll correctly every pay period can be a minor miracle. But beyond the average complexity of processing payroll accurately, compliantly and on time, navigating international payroll is fraught with unique challenges.

Working with employees in multiple countries requires ongoing HR support for managing and resolving issues that come up in a typical pay period, let alone when there’s a major technical problem or change in the law. And you’ll need to support multiple time zones (possibly up to a full 24-hour period), languages, regulations and customs wherever global payroll is processed.

How can international payroll outsourcing help your company?

Because of the intricacy and importance of multinational payroll, outsourcing with a global payroll service provider can make a great alternative to in-house payroll. Here’s how:

Spend less and save more 

International payroll outsourcing saves your company money. You won’t need to hire additional staff to calculate payroll taxes or handle statutory tax filings and payroll inquiries, because your provider is your global payroll guide. Your company also won’t need to invest in expensive software and hardware to manage the global payroll process, shifting your payroll strategy from a capital expense to an agile operating expense. 

Additionally, outsourcing keeps you protected from the often excessive fines that come from noncompliance.

Maintain compliance around the world

Compliance is a universal issue. Labor laws, data requirements and tax regulations are complicated, prone to change and vary by country. With an average of 35 data items per employee that must be reported, European and South American countries are typically the most complex to process payroll. 

Companies are required to abide by national law, regional law and local law, and to balance those laws with their business practices and the cultural norms of the host country. It’s an overwhelming task and almost impossible if you don’t have a global payroll guide on hand to navigate the situation and steer clear of the hazards. 

When you work with a global payroll service provider, you rely on local expertise and experience to help your company remain compliant, while you conduct business smoothly and without unnecessary stress and disruption.

Improve data security and visibility

When international payroll is processed in-house, you’re exposed to risk of fraud. In fact, payroll fraud happens in 27% of all businesses and is the No. 1 source of accounting fraud and employee theft.

When end-to-end processes are managed by an external party, any discrepancies between payroll, HR and finance departments are quickly reconciled. An outsourced global payroll solution is especially beneficial if your company is struggling to improve internal controls or standardize processes across many locations.

Global visibility to workforce spend data is another value-add feature that only a centralized global payroll service provider can offer. All local data such as, tax regulations, currencies,  benefits and languages are translated and consolidated into one global view, so you gain unprecedented visibility to payroll insights and are better able to address key business questions and make informed strategic decisions.

Reduce payroll errors and increase employee satisfaction

Employees are generally understanding when an employer has an issue with administration. But they’re rarely patient when it comes to payroll mistakes. People everywhere expect to be paid properly and on time. Nothing hurts employee morale like problems with payroll. When you have a dedicated global expert handling payroll, you minimize issues and can deliver the payroll experience your valuable employees deserve.

Are there any drawbacks to outsourcing payroll? 

Employee payroll is one aspect of operations that works well as an outsourced function. However, it isn’t all sunshine and rainbows. There are some tradeoffs to figuring out how to outsource payroll effectively, and each company should weigh the risks for themselves.  

For example, you may feel inconvenienced by losing some control of employee data and having to learn and integrate new processes.  

But for most companies looking to outsource payroll, any disadvantages are offset by less risk of regulatory compliance issues and stronger operational efficiency. 

What payroll functions can be outsourced? 

How to outsource payroll functions is an individual choice for each company. For some, outsourcing provides support for select aspects of paying employees, and for others, someone else takes care of the whole enchilada. Here are some examples of payroll functions that can be outsourced: 

  • Running payroll and calculating withholdings 
  • Printing checks and making ACH deposits to employee accounts 
  • Filing government forms, like for employee income tax and withholdings
  • Making tax, social security and other statutory payments 
  • Managing employee benefits

How to outsource payroll

There is no singular solution for how to outsource payroll. Your needs might look different in different regions—and that’s okay. You can customize a solution that adapts to your needs and budget now, as well as in the future. Here’s how to get started. 

1. Understand your motivations and requirements 

The first step in outsourcing payroll is nailing down the “where, what and why” that are driving your decision.  

  • Where do you need outsourced payroll services? (Which countries or regions?)  
  • What payroll services do you need in those countries? Will you pick and choose? Or would you like a partner to take over the full operation? 
  • Why are you looking to outsource these services? Drivers for figuring out how to outsource payroll often include improving efficiencies and saving money. Some businesses also need regional expertise to fill knowledge gaps or to handle financial transactions. 

2. Consider your long-term strategy 

As you define your requirements, don’t forget to consider how your payroll needs may evolve as your business grows. Does the business have its eye on further expansion? If so, make sure your payroll partner can support these locales. 

Will you need more comprehensive coverage—such as HR support—in some countries down the line? If so, you should ensure your partner offers a broad range of services. 

3. Choose a budget 

It’s important to understand what investment level you’re able to afford before researching providers and requesting proposals. You might find yourself with some sticker shock—temper it with a healthy dose of reality. Consider the cost of processing payroll in-house (including adding staff with required expertise) compared to the cost of outsourcing some (or all) of this role.  

4. Research providers 

Your search for a provider will turn up a large number of contenders. Some will be large companies, household names in international payroll, who offer deep (even complex) networks of products and services and vast country coverage. Others may offer deep local expertise in particular regions or countries. Expand your research and narrow your list to those providers that not only cover the countries where you do business, now and in the future, but also offer local expertise and a strong operating presence where you need it most. 

It's also worth researching each provider's implementation success rate.

Global payroll implementation is extremely complex and requires comprehensive expertise to deliver on time and on budget. Before you add a provider to your shortlist, make sure you: 

  • Understand their implementation process (in detail) to ensure consistency and thoroughness 
  • Request client referrals to verify implementation success       

You’ll also want to verify if providers have the unique capabilities you want and need, such as: 

  • Shadow payroll  
  • Tax filings  
  • Money movement services  

Dive deep to make sure you fully understand each provider’s range of capabilities. Jump over to this post to get more details on what to consider when outsourcing payroll. 

5. Request proposals 

Once you’ve gathered some solid prospects, it’s time to start taking a closer look at each—this means a request for proposals (RFP). In this step, you solicit a plan and pricing from each provider on the table.  

A successful RFP starts with some internal project planning to determine what resources you have and what you will need from the potential vendor. You should also include an outline of your unique payroll requirements. At this stage in the process, you are not asking for a generalized list of services—you are assessing each provider’s ability to meet your specific needs. 

There isn’t a magic number for how many proposals you should request—but you should narrow the field down to your best options. Consider focusing on your top three choices. 

Creating an RFP can be a tedious process. Keep in mind, though, that the quality of your proposals is dependent on the quality of information you provide in your RFP. 

6. Decide on the details 

Once you’ve evaluated the proposals and selected a vendor that will be able to meet your criteria, it’s time to hammer out the details. Pore over the contract. Make sure the responsibilities for both parties are crystal clear and the pricing jives with what was quoted in the proposal.  

Then it’s time to sign on the dotted line, rally the troops and launch your project to transition to outsourced payroll.  

How much does it cost to outsource payroll? 

The cost to outsource payroll varies by contract. Vendor pricing and scope of services are two of the biggest factors that affect pricing—with most contracts working out to somewhere between $100 and $200 per employee annually. 

Each provider structures pricing a little differently, so let’s take a look at some of the line items you might find. 

Fees by payroll frequency 

The most common fee structure is assessed based on your payroll frequency. If you run payroll every week, the vendor will assess fees every week. Using this model, you might see a weekly fee between $1.50 and $3.00 per employee, plus a single base fee between $25 and $40. These fees would be billed weekly per your frequency contract.  

Per employee per month (PEPM) 

The ‘per employee per month’ model is a simplified version of the payroll frequency model. Instead of charging fees with each payroll, the payroll provider assesses fees once per month based on the average number of employees paid in the given month. Less frequent processing typically results in marginal cost savings for the client (aka your business). 

Fixed-rate 

While many companies prefer to work with fixed-rate fees because they provide the greatest amount of control for budgeting, these arrangements typically come with simplistic service packages and are less common with more comprehensive vendor contracts. 

Find the right partner for international payroll outsourcing

Outsourcing multinational payroll can present great opportunities for companies who realize its strategic importance and prioritize efficiency, local expertise and business intelligence. The key is finding the right international payroll outsourcing partner to help you reach your strategic initiatives.

Learn more about partnering with a global payroll service provider by scheduling a free consultation with one of our global payroll experts today.

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