The prospect of hiring cheaper labor overseas can be an attractive one to companies, but it’s not the only reason why firms may globalize their employees. But for all of its potential, international staffing can cause headaches come payroll time. According to Victor Lobo, VP of sales and marketing at Blue Marble Global Payroll, companies really aren’t approaching it the right way, and that could mean the costs of cross-border payroll may not make the benefits of a global workforce worth it.
Typically, Lobo explained to PYMNTS, companies are asked to open local bank accounts in the markets in which their employees work. But Blue Marble wanted to look for a more streamlined alternative for customers, he added, due to an array of challenges businesses face.
Take wire transfers, for example. These kinds of payments, Lobo said, can be a headache.
“They have to initiate a wire or money transfer from a bank account to each local account, and that’s a lot of manual transacting going on,” he said. “That also comes with potential errors, as well as additional fees.”
The U.S. is a particularly troublesome market for companies with a global workforce, he added. Whereas, in the EU, the majority of cross-border payroll is conducted via direct deposit, Lobo described the U.S.’s approach with wire transfers and other less-streamlined rails as “archaic.”
“Their way of getting paid is sophisticated,” he said of international EU employees. “And here, the U.S. is still doing it in an archaic way.”
Overall, many organizations that have to pay their employees in places other than where the company itself is located aren’t going about it in the most efficient way, according to Lobo. The research on this topic suggests he’s right.
Last year, research from international payments firm Equiniti International Payments and Payroll World found that more than half of businesses surveyed said they’ve had to deal with a payroll payment either having failed or getting returned every single month, for instance.
Lobo explained that, in his experience, the companies Blue Marble works with simply aren’t sure how to approach international payroll.
“We’ve found that they’re not sure how to structure their payroll or how to pay an employee, in what currency, things like that,” he said. “We find they’re not paying or moving money in the proper currency or not even doing payroll properly.”
Some of those errors can be costly to the organization as a whole. Specific tax and other legal requirements for payroll vary across jurisdictions, meaning international payroll can lead an enterprise to noncompliance.
It’s a common issue, as Equiniti’s survey found that nearly 60 percent of businesses named meeting the local payment requirements of their international employees as their most common problem.
A separate study conducted by Ernst & Young in 2013 found that the most common error cited within the payroll department is incorrect tax withholding, with analysts pointing to common feedback among those surveyed that legal and regulatory requirements across jurisdictions are a top concern, too.
Of course, the issue of exposure to foreign exchange volatility is a massive challenge. Lobo said he’s experienced cases where some businesses aren’t even sure how much they’re really paying their employees across borders and currencies until after the transaction is settled.
“I think it’s because they don’t really know what they’re getting into,” he stated. “They don’t understand the [FX] fluctuation. It’s never been top of mind until after they see that transaction happening.”
With the pain of cross-border payroll evident, why is it that a corporation would want to hire overseas in the first place? Lobo explained that there are an array of reasons, and they don’t all simply come down to cheaper labor (though that is a common motivation).
Even businesses with a few employees are hiring a few more overseas as the result of obtaining specialized talent, for example. Market consolidation and M&A are also major drivers behind the trend, Lobo explained, with companies seeing a spike in their staff numbers across multiple areas after a merger.
In other cases, it’s a matter of exploring ways to expand. “Many of our clients tell us they’re either testing out a new product or a new market, sales opportunity,” the executive said.
Today, an international vision when expanding a company is almost a requirement for success. Yet, in the data collected by Ernst & Young in 2013, few companies actually map out a plan to bring their payroll processes along with their corporation’s international expansion. The company found that just 11 percent of the businesses surveyed that said they expect to enter into new markets within the next year are planning to adopt a global payroll model; 41 percent said they aren’t planning to alter their payroll process whatsoever.
Part of the problem may be a lack of awareness. Lobo told PYMNTS that many companies aren’t even aware that a global payroll service even exists. Blue Marble has just announced a partnership with international payments firm World First to address some of the challenges, as well as to heighten the visibility of the company, Lobo said.
The market is there for these service providers, he said; it’s just a matter of making them realize there’s a solution. And according to Lobo, a platform-based way of moving money is the most efficient way to tackle the hassles of international payroll.