The rise of the global gig economy and its transformative impact on the workforce cannot be denied. Location-based services such as rideshares and food delivery are ubiquitous, and online gig assignments account for up to 12.5% of the global labor force according to The World Bank Group’s report, Working Without Borders. The surge allows companies to increase their talent pools, find specialized skills, and expand into new markets.
While the trend opens up opportunities for companies and workers across geographies, sectors, and socioeconomic conditions, the report also points to the challenges, specifically, “cross‐border coordination mechanisms that may be necessary between countries to determine the applicable tax, labor, and social security regulations.” In this context, navigating payroll compliance becomes a significant consideration.
The Complexities and Risks of Global Payroll Compliance
Payroll compliance can be complicated, even within a company’s country of origin. For companies expanding into new global markets, the pressure is even greater on payroll teams dealing with different regulations, tax laws, and employment customs that vary greatly from country to country.
When contractors and freelancers from different geographies are added to the mix, the scenario becomes even more complex. Just knowing the applicable worker classification and employment status rules in each employee location, including remote workers, can be overwhelming.
Even something as seemingly straightforward as tax and reporting deadlines becomes more complicated in the global arena. For example, in Brazil, income tax is due within the first five days of the following month, while social security tax is due on the 20th of the following month. This is not only different from U.S. requirements, but even neighboring countries. If this example is multiplied by each local, state, regional, and national regulation, the scope of the challenge becomes crystal clear.
For companies looking to grow and succeed in new markets, non-compliance is not an option. This puts payroll teams under intense pressure to avoid the damaging consequences of a mistake. Failure to pay employees on time, correctly file taxes, and keep accurate payroll records can result in audits and fines from government agencies. In addition to financial and legal penalties, offenders may accrue reputational damage that impacts customer and employee relationships.
Even small errors can quickly add up. Ernst & Young analysis showed that on average companies have just an 80.15% payroll accuracy rate, with each error costing on average $291 to fix. Often these were not egregious mistakes, but simple ones related to time, attendance, and expense entries.
Technology Can Help Minimize Costly Payroll Mistakes
In this complex, high-stakes environment, it’s not surprising that organizations turn to technology to support their payroll teams. In fact, the global payroll software market is expected to witness significant growth due to the increasing demand for automated payroll systems, labor cost management, and time tracking processes.
Implementing a payroll technology solution requires a long-term commitment that includes ongoing financial investments; constant attention to maintaining updates; aligning with other operational processes; and proactively and reactively addressing changing global legislation. This holds especially true as governments continue to grapple with policies related to gig employment.
At the same time, it’s important to give equal weight to having employees on board with strong local knowledge and situational experience in the respective countries. Laws are complex and intertwining, so leveraging both technology and human expertise is critical. But hiring disconnected local experts can be cost prohibitive and exacerbate existing organizational silos.
Best Practices for a Successful Digital Transformation
Because this level of attention and representation places additional burdens on multiple departments, including HR, payroll, finance, and IT, companies are increasingly turning to payroll partners who offer the right technology coupled with experienced in-country payroll experts. An enormous benefit is that these partnerships can help build a unified, cloud-based solution that crosses geographic boundaries and accounts for a variety of work arrangements.
Developing a standardized global process requires the seamless integration of information from all departments, which can be a struggle for busy organizations also trying to grow their business. But it’s essential for maintaining compliance and ensuring accurate financial reporting. To help ease the transition, here are a few best practices to consider:
- Automating any system relies on starting with good, clean data. To ensure payroll data is accurate from the start, it’s important for companies to develop a strong partnership between HR and payroll. Unfortunately, many HR teams overestimate the quality and accuracy of the data in their HCM platform and assume that payroll doesn’t need a seat at the table during the digital transition.
This short-sighted assumption can negatively impact payroll automation in the long run. Including the payroll team from the beginning of the process allows them to discuss what they see as opportunities to improve data across all employee groups, especially the more dynamic contractor and freelancer population, and to raise red flags that may expose the company to risk.
- The relationship between HR and payroll needs to be nurtured so that it’s an ongoing partnership. Traditionally, payroll departments coordinate and integrate data at a local level, resulting in disparities between countries, gaps in data flows, and too many individual processes that become difficult to track and maintain. Local teams also often resort to institutional knowledge or passing information manually, such as through e-mails, creating room for misinterpretation and human error.
Using a partner that has in-country expertise, understands the local rules and regulations, and can also integrate the HR and payroll data delivers a stronger framework. This will ensure the data is clean and consistent throughout the organization. It can also help draw out and replace vulnerable manual processes that sit with individuals rather than reside within the wider organization.
- Whenever there are manual processes for inputting payroll data, there are greater chances of errors and compliance issues. However, many global payroll providers aren’t truly operating under one umbrella, but instead contracting with payroll processing companies in different countries and compiling information into a single customer-facing dashboard. Because the data is spread across the different countries of operation, it has to be manually manipulated into a cohesive and user-friendly format. This not only exposes companies to greater risk, but it limits visibility because users can only see the data the provider has aggregated on the dashboard.
A truly unified, transparent, global process improves accuracy and compliance while also streamlining risk assessment. And a single payroll monitoring system allows HR, payroll, and finance teams to react to compliance risks in real-time, as opposed to after the fact.
- No matter how much attention to detail is used when inputting data, there’s bound to be errors. Quickly flagging missing or inaccurate payroll data is crucial to compliance, but manual processes are cumbersome, time-consuming, and imprecise. Automated data validation provides companies with a safety net that ensures compliance and enables them to pay employees accurately, on time, and with the right deductions.
Ultimately, this saves the payroll team an enormous amount of time when payday comes around and they don’t have to panic that there may be an issue with employee paychecks. For employees, it gives them assurance that they work for an organization that cares about their wellbeing and isn’t going to leave them in the lurch.
Growing a company and expanding into new markets should be an exciting time for everyone – from senior leadership and department heads to full-time employees and those looking for a new opportunity. When the transformation opens up talent pools that include freelance and contractor workers from around the world, the result is an even greater potential for success. To fully realize and capitalize on all of the possibilities, organizations need to free their HR, payroll, and finance teams from the onerous focus on compliance, fines, and penalties, so they can concentrate on excelling at the jobs they were hired to do.
Matthew Hiller is EVP at CloudPay, an organization modernizing the pay experience for business and people. He guides the product team and platform roadmap, focused on converting opportunities and ideas into evolution of the CloudPay platform. Matthew is building on 17 years of CloudPay experience, in multiple regions, to get to the heart of problems in the global payroll ecosystem and find impactful solutions that push the industry forward.
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