An employer of record (EOR) is an employment organization that allows companies to hire, manage, and pay remote workers in foreign markets. EORs perform practically any and every HR function their clients need to recruit and retain foreign employees or independent contractors. They have local legal entities in the countries in which they operate, and act as direct employers of the workers they hire on behalf of their clients. This means their clients won’t need to bother with incorporating a local subsidiary in the overseas markets in which they operate before they can recruit, manage, and pay workers. EORs can also offer localized payroll in those countries, and usually provide streamlined payroll platforms that support both formal employees and independent contractors or freelancers.
Many foreign companies that outsource positions may already have locally incorporated subsidiaries or otherwise fully functioning HR pipelines. So instead of partnering with a full service EOR, they favor payroll-only solution providers to leverage their compliance fulfillment services and payroll processing platform.
For companies keen on establishing more globally distributed teams in other markets, however, depending on a global payroll provider is often not enough. Relying on an EOR for payroll alone in one market gives companies the flexibility to request additional services in other markets. In this way they can quickly and effortlessly build additional remote teams without needing to establish a local legal entity or worry about compliance concerns.
EORs allow foreign companies to hire in international markets and perform payroll processing for employees or invoicing for independent contractors, quickly, easily, and compliantly.
Skuad is an EOR for over 160 countries and can help clients pay remote workers in over 100 markets.
Payroll processing is standardized and follows a straightforward pipeline regardless of where it is performed. The stages are pre-payroll activities, payroll calculation, and post-payroll reporting. Each stage is further broken down into processes that focus on specific aspects required in payroll, such as due diligence, accuracy, and compliance. While payroll processing does not change country by country, the statutory requirements mandated by local labor laws do. One of the primary reasons why global payroll is challenging is because different international markets will require various mandatory factors, and only a payroll provider with genuine in-country expertise in different markets will be able to ensure compliance throughout.
Employer of record payroll is fully compliant with local labor laws while also completely equipped to handle the full payroll processing pipeline.
Stage 1: Pre-payroll
The pre-payroll stage is the phase of due diligence, where everything is prepared for the next steps of the pipeline. It is when the organization standardizes policies and double checks that payroll is ready to follow statutory guidelines on aspects such as attendance requirements, leaves, taxation, benefits, and more. Much of pre-payroll is spent on data gathering and double checking.
Input gathering and validation requires careful consideration as it involves information such as attendance data, sick leaves, reimbursement documents, and even performance-based adjustments to base rates. The larger the operation, the more potential pitfalls there are in pre-payroll. Additionally, integrated tools and processes like digital timesheets and biometrics need to be integrated into pre-payroll.
While straightforward, pre-payroll activities should be strict and accurate, formatted to ideal standards, and compliant to local labor laws.
Stage 2: Payroll Calculation
The second stage of payroll processing is dedicated to the actual computation of wages. In this stage, thorough consideration should be given to meeting mandated minimums, taxation legislation, and other deductions and adjustments required by local labor laws. Automation from a payroll processing platform can help improve calculation accuracy and reduce manual error in this stage. It can also help hasten and improve the processing of supporting documentation like receipts, sick leave slips, performance evaluations.
Stage 3: Post-payroll
The final stage of payroll is mostly concerned with the actual payout. Post-payroll is when companies send an advice to their payment processor to proceed with the salary disbursement. Integrations and direct deposit capabilities from payroll platforms can help make this stage much more efficient.
Additionally, post-payroll also involves accounting and reporting, i.e. compliance.
Accounting is internal — the company needs to keep track of the significant expense that is worker salaries. Reporting is external and mostly for compliance. All mandatory deductions taken out of wages and remitted to appropriate government bodies, for instance, need to be properly reported and filed. The primary example would be taxes.
Need more in-depth help with payroll processing? Skuad can help set up international payments for remote workers.
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One of the trickiest aspects of payroll processing is compliance to local legislation. It’s also why expert EOR payroll providers are necessary. Few companies of any size can muster the in-house resources to be experts on local labor laws in every country in which they need to pay employees or independent contractors.
Payroll processing, as mentioned earlier, includes statutory components dictated by local labor law, and those differ from market to market. An obvious example would be taxation and how it’s calculated, or leaves and other benefits. Even something as common as overtime regulations and payment can become complicated when spread across international remote teams with different guidelines for each.
Additionally, reporting and accounting compliance is critical for paying remote workers. Local labor laws govern accounting standards and guidelines, and depending on how much responsibility you bear for the taxation and applicable social security deductions of your workers, you’ll need to do a bit of reporting to various government bodies.
There are simply too many things to keep track of regarding payroll. For instance:
- There are markets where companies need to pay 13th and even 14th month salaries.
- There are countries where there are no income taxes, per se.
- Different regions in the world can have vastly different guidelines for leaves, particularly parental leave such as maternity and paternity leave.
- Other regions follow complex guidelines on sick leave and sick pay.
- Each market dictates how to report to governing departments regarding accounting.
Running afoul of these mandatory requirements opens companies up to a lot of financial risk. For instance, typically, missing benefits and pay will need to be calculated and provided in full to the worker, which can snowball into a significant expense. Additionally, there are often penalties and fines associated with noncompliance, and in some cases, legal fees that might arise from a dispute being escalated to adjudication.
This is a huge reason why EOR payroll is a must for companies building globally distributed teams. The compliance angle alone is hugely important.
Payroll outsourcing isn’t new. Around 73% of organizations, in fact, outsource part of their payroll to providers, according to Deloitte’s Global Payroll Benchmarking Survey. In the report, sourcing technology and payroll expertise is a “critical” point in global payroll strategy. Additionally, the survey found five crucial areas for improving payroll:
Employer of record payroll providers address all these crucial areas for improvement, and help foreign companies implement better global payroll strategies for their internationally distributed teams. EOR payroll provides the following key benefits:
- Local labor law compliance. A key sticking point that is unavoidable when hiring and paying remote workers is compliance to local labor laws. Payroll processing in particular is beholden to statutory guidelines from local governance due to tax legislation and other financial aspects of labor practice. Exhaustive and comprehensive in-country expertise when it comes to labor laws is more cost-effective when outsourced.
- Manage noncompliance risk. In the same way EOR payroll ensures local labor law compliance, it naturally also manages any risks associated with noncompliance. An EOR payroll provider is the all-important first line of defense against inadvertent noncompliance that can result in hefty fines and fees. Additionally, streamlined, efficient payroll also improves working relationships with remote employees, reducing turnover in the long run.
- Efficient development of internal processes. EOR payroll can help clients develop internal processes due to their in-country expertise. Anything related to HR and payroll is a matter that an EOR payroll provider can help clients better understand, develop, and implement. This includes the creation of policies and processes that factor in employment norms and labor laws in international markets.
- Improved payroll processing. EOR payroll’s expertise is in handling HR functionalities and payroll, so their services and even their platform will be streamlined for these purposes. Essentially, an EOR lets clients borrow their software platforms, automation capabilities, and digital infrastructure for their own benefit.
- Reduce overhead costs for payroll. Employer of record payroll drastically reduces the overhead costs of developing in-house global payroll strategy in the long run. Starting small, these costs don’t seem to amount to much, but can easily snowball without the streamlining and centralizing offered by providers like EOR payroll.
Employees and Independent Contractor Payment Concerns
Finally, employer of record payroll also centralizes and streamlines one of the most common issues for companies hiring international workers: concerns for paying employees and independent contractors or freelancers. Formal employees rely on payroll processing, but freelancers go through invoicing, and a lot of independent contractors the world over may be relying on their own manual processes for payment.
Companies hiring globally distributed teams often use a mixture of employees and “as-needed” freelancers who perform functions not suited for full-time workers or are involved in otherwise temporary projects. It might not seem complicated, but the logistics and compliance concerns related to this hybrid approach snowballs with scale.
So for employees, the primary concerns are inaccuracies and delays in payroll. These are likewise noncompliance risks as many markets impose deadlines for wage disbursement and penalties for missing pay. For freelancers, the primary concern is timely pay and a better way to manage invoices. From the businesses’ side, the issue is handling multiple invoices from a rolodex of independent contractors based in multiple markets.
For both employers and their employees or freelancers, consolidation, compliance, and cost-efficiency are always factors to consider for payroll processing or invoicing. Employer of record payroll can not only manage payroll processing, but also offer single invoice processing that allows companies to pay one time for all their distributed freelancers. Better yet, EOR payroll can do both in one platform.
Want to learn more about EOR functionalities for remote employees and freelancers? Book a demo with Skuad today.