Payroll outsourcing : The complete guide for global organizations

Payroll is very complex, costly and time-consuming. Therefore, it is hardly surprising that, across all the different HR functions, payroll is the one that companies outsource most often. In the context of international business expansion, the business case for payroll outsourcing becomes even more pronounced as the complexity and compliance risks linked to the payroll process exponentially increase with every country that gets added to your list of hiring destinations. 

While having your multi-country payroll run externally will ultimately lighten the burden on your HR and global expansion teams, it also requires some careful preparation. That is because outsourcing payroll in several different countries and creating a global payroll strategy that works for your organization is a lot more complex than it is for one single country.

In this article, we will tell you everything you need to know about payroll outsourcing on a global scale, including:

• What payroll outsourcing means

• When and why it makes sense to outsource payroll

• Which payroll functions can be outsourced

• What the benefits of payroll outsourcing are

• What possible downsides there are

• What different options exist for outsourcing payroll in the context of global expansion

• How much payroll outsourcing costs

• How to outsource payroll successfully on a global scale

• How Lano can simplify global payroll outsourcing for you

Outsourcing your payroll means that you contract a payroll service provider who will run payroll for you. So rather than processing payroll in-house, you get an external company to take care of it. While some businesses use external payroll services for their domestic workforce, the real value of outsourcing the payroll process comes into play when managing global payroll.

Generally speaking, outsourcing payroll becomes a relevant option for organizations that struggle to process payroll in a fast, efficient and accurate way with their in-house team. For companies that are in the middle of their global expansion project, the need to outsource payroll emerges due to different factors. 

If you think getting payroll right in one country is a challenge, just try to imagine what it’s like having to run the process in different countries all over the world, with each of them having different rules and regulations that govern it. Given the complexity of payroll, it is not hard to imagine that it ties up lots of resources. Resources that your company needs to focus on growth and to achieve your expansion goals. 

What’s more, the risk of committing payroll compliance errors grows with each new market - especially as laws are changing all the time. That’s why international payroll outsourcing is very popular among organizations that are expanding globally. As the 2020 Deloitte Global Payroll Benchmarking Survey showed, almost 73 percent of organizations questioned were outsourcing at least some aspect of payroll.

It’s up to the company to decide which parts of the payroll process get transferred to an external service provider. They typically include:

• Payroll processing and calculation of wages and withholdings

• Calculation of payroll taxes which need to be paid by the employer

• Employee benefit administration

• Filing tax reports to the respective authorities

• Making the necessary payments (tax, social security etc.)

An additional payroll service which can be outsourced is the direct deposit of wages and salaries to your employees. However, this is not always possible in the context of global payroll outsourcing as some countries have specific regulations which prohibit payroll providers to pay employees in the foreign employer’s name (e.g. in the U.S.). In this case, opening a local bank account or paying your employees from your foreign account is necessary. 

Check out our related blog post where we tell you everything you need to know about paying remote employees in foreign countries. 

Another aspect you may want to consider when hiring remote workers in countries where you don’t have to create a local entity is that you will have to get registered with the local authorities as a foreign employer. Having a payroll solution like Lano where this registration process is taken care of is a big plus.

There are various reasons why companies decide to outsource payroll. The main reasons are cost and time savings, reduced compliance risks, less room for errors, better data security and higher data transparency.

Outsourcing payroll means saving time and money

Payroll outsourcing companies usually use a specific payroll software and are therefore able to automate many processes that would need to be done manually when payroll is run in-house. This means that contracting an external service will usually be cheaper, faster and more efficient than setting up, managing and paying an in-house payroll department. Multiply the cost and effort with the number of countries across which your global team is distributed and you will get a picture of how much money you can save with global payroll outsourcing.

Payroll outsourcing allows you to keep focusing on growth

In order to make your organization’s global expansion a success, it is important to keep focused on hitting your growth targets. Not having to deploy a part of your HR team to take care of payroll means you have your entire team available to focus on your core business and drive your expansion project forward.

Outsourcing payroll enhances global payroll compliance

One big advantage of working with international payroll outsourcing companies is that you benefit from their expertise. Payroll providers are experts with regard to local tax rules and regulations and know the specific compliance calendar in every country they cover. In concrete terms: By getting an external party to handle payroll in your foreign hiring destinations, you will have peace of mind because it is much less likely you will miss important deadlines for tax filings or fail to make the right social security contributions for your employees - and receive penalties for it.

Outsourcing reduces error frequency in payroll

Especially when you have only just launched a new market and hired your first local employees, you want to make sure that payroll runs smoothly - and not knock everybody’s morale by inaccurate or slow payroll processing. By outsourcing payroll, you can reduce the number of payroll errors significantly. How? Well, first of all, payroll companies usually have automated large parts of the process, which means that less work is done by humans - and thus less room for mistakes. Second, payroll is their core business and they know exactly what they are doing. At the end of the line, less mistakes in payroll means happier employees.

Payroll outsourcing leads to better data security and increased transparency

Payroll data is very sensitive, hence the need to have high security levels in place when handling it. As payroll providers process immense employee data sets, they generally have strong data protection standards - in most cases even higher than your own. In addition, many international payroll outsourcing companies offer additional reporting which increases the transparency of your payroll data. Getting detailed insights into how much you spend on your workforce in each country is key to making important strategic business decisions.

Depending on your company’s philosophy, it is possible to identify some disadvantages of payroll outsourcing. These might include:

• Data ownership and loss of control: Some companies want to be in full control of all the processes related to their business and entirely own their employee data.

• Accessibility of payroll partners and error rectification: Having payroll partners in different countries all over the globe means dealing with different time zones and language barriers which can slow down communication and procedures to correct any payroll errors.

• No compliance guarantee: Although contracting a payroll service company reduces compliance risks significantly, there is never a 100% guarantee.

Basically, there are two different payroll outsourcing solutions for international organizations and businesses:

• Contracting a payroll outsourcing service: This can either be a local payroll partner (in each hiring destination), a payroll aggregator who subcontracts several in-country providers to offer you multi-country coverage or a global payroll solution.

• Hiring your globally distributed team via Employer of Record companies: Depending on your expansion goals and the number of employees you are planning to hire in each country, it might be smarter to just hire your foreign employees through an Employer of Record who will not only handle payroll for these employees but who will also take care of all the other employment-related issues such as compliance, onboarding, benefit management etc.

Interested in knowing more about how hiring remote talent all over the world works with Lano? Check out our global hiring solution to find out more.

Given that payroll processes, regulations and service fees vary greatly from country to country, there is no clear-cut answer to the question of how much money you will need to spend for multi-country payroll outsourcing. Other factors which influence the cost are headcount, volume and the service features you require. 

When it comes to pricing models, there are also different options. While some payroll providers base the price on payroll frequency, others will charge a fixed fee for a basic service package. Yet others calculate their prices per employee and per month.

There are different measures you can take to contribute to a smooth outsourcing process. Regardless of whether you are already running payroll in multiple countries and want to change from an in-house to an outsourced solution or whether you have only just started to build your global team and intend to outsource payroll right from the beginning, here are a few helpful tips to keep in mind:

• Develop a clear payroll outsourcing strategy: The first step is to have a clear vision of the services you require and the expectations you have. Having a solid base will facilitate outsourcing for both your team and your payroll partner.

• Choose the right payroll partner: There are many payroll companies in the market. Do your due diligence before selecting one. Here you can find out more about how to choose a payroll service provider.

• Have any possible questions answered: In order to avoid any problems, you should make sure that there are no questions left unanswered before you make the switch.

• Run payroll in parallel in the first month: If you want to switch from in-house payroll to a payroll outsourcing service, it might be a good idea to get your new provider to run payroll in parallel to your own one over the course of one pay period.

• Choose a less busy time of the year to outsource payroll: Usually, the end of the year is the busiest period for payroll departments. When switching to a payroll outsourcing model, it’s easier to choose a different moment.

• Prepare your team: Payroll affects your entire workforce. Therefore, notifying your employees and giving them enough time to prepare for the change is vital. Especially those team members who are involved in the payroll process - either for admin purposes or other - should receive clear instructions on how to use the new system.

• Be aware of global payroll challenges: Running payroll in one country is one thing, but global payroll is another level altogether. Consider possible challenges like different time zones and language barriers when outsourcing payroll to foreign service providers.

Although selecting the right payroll provider, managing the outsourcing project and setting everything up requires some effort on your behalf, the real challenge of international payroll outsourcing is to coordinate all your payroll partners which are based in different countries around the world. 

According to the Deloitte Global Payroll Benchmarking survey which we have already mentioned before, those organizations who outsource some part of their international payroll processes were on average relying on six different payroll providers. That’s six different systems to handle, six different incoming data streams and six different data formats which then need to be entered manually into your central HR and finance systems. 

With Lano’s global payroll solution, you can consolidate and visualize payroll data for your entire global team on one single screen. Easily integrate new and existing payroll providers thanks to the Lano API, speed up the payroll set-up process in new hiring destinations and benefit from our network of top local payroll partners in 130 countries.

Get in touch with us today and let us help you simplify your global payroll.