Payroll compliance

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What is payroll compliance?

What are the key payroll compliance considerations?

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How to tackle global payroll complexity?

There is perhaps no more fundamental function in business than paying employees accurately and on time. Meeting contractual obligations to the people who give their time to the company is the most basic level of payroll compliance.

But there is a lot more to payroll compliance than that. Payroll is one of the most highly regulated functions in business today, often with layers of tax and employment law at the national, regional, local and, increasingly, multinational, level.

To ensure payroll compliance, employers must abide by a wide range of regulations relating to taxation and social insurance, delivery of statutory reporting, data protection, and employment conditions (including employee validation, minimum wage levels, benefits, allowances, leave entitlements, working hours and overtime rules). They need to maintain and file complete and accurate records – and pay the correct taxes – on time for every employee, in line with the latest regulations.

The growing trend to employ local talent means multinational companies now, more than ever, need a thorough understanding of local taxation and other employment laws.

Keeping on top of payroll-related rules and regulations in a single jurisdiction is complex enough. However, for companies handling global payroll, there is an intricate web of widely varying payroll-related regimes to keep up to speed on, and stay compliant with.

This is what makes payroll compliance one of the key drivers of complexity in doing business around the world. To make matters even more challenging, some of the most complex markets in which to do business are also the most punitive in terms of fines and penalties for non-compliance.

Payroll compliance is therefore one of the biggest areas of financial and reputational risk for multinational organisations: the consequences of making a mistake, even inadvertently, can be severe, putting companies at risk of investigation by the authorities.

Source: Global Business Complexity Index 2022 by TMF Group

Potential consequences of non-compliance in China

In China, as prescribed by the Security Law of the PRC, Articles 86, if an employer fails to pay an employee's monthly social insurance contributions on time and in full, the employer is required to make any underpaid or overdue amount within a stipulated period. Late payment interest will be imposed from the due date at 0.05% per day on underpaid/overdue payment; where the payment is not made within the stipulated period, the local authorities will impose penalty at a range from 100%-300% on the underpaid/overdue amount.

Potential consequences of non-compliance in Colombia

In Colombia, the Ministry of Labour has powers to monitor, verify and control compliance with employment standards. One of the toughest measures it can impose for non-compliance is the suspension of activities for up to 120 days, or even the closure of a company.

Potential consequences of non-compliance in the UK

In the UK, penalties for failing to pay the National Minimum Wage are extremely punitive, at 200% of any arrears owed to the worker (up to a maximum penalty of £20,000 per worker). An employer's brand and reputation can also suffer, as the UK tax authority 'names and shames' employers that are penalised.

The global payroll compliance landscape can be a difficult one to navigate and interpret. Overseas businesses can be subject to greater scrutiny on the part of local governments, regulators and tax authorities.

In more complex regulatory environments, there may be frequent changes to legislation, onerous payroll reporting requirements, detailed paper-based record keeping and complex salary calculations.

These are the key areas where compliance is a must:

Local labour laws

Local labour laws

These vary widely, and no two jurisdictions are the same. This highlights the need for local expertise: people on the ground who can assess each situation in the context of the local regulatory environment while meeting corporate needs.

Hiring and firing employees

Hiring and firing employees

With labour laws often titled strongly in favour of the individual, organisations need to adhere to strict processes for hiring new employees, as well as for terminations, whether voluntary or involuntary.

Source: Global Business Complexity Index 2022 by TMF Group

Social security systems

Social security systems

Social security registration and reporting requirements can be onerous, particularly where regulatory authorities are trying to address the issue of illegal workers. In Mexico, for example, employees are registered at the Social Security Institute and employers with workforces of 300 or more must file an audited report demonstrating they have paid the mandatory monthly premiums applicable to every employee (both employer and employee contribute).

Leave entitlements

Leave entitlements

Managing multi-country payroll can be made more complex by specific employee leave entitlements, which must be adhered to in order to remain compliant. These entitlements vary widely:

  • Norwegian employees are not entitled to holiday pay during the first year of their employment, but they are still entitled to leave. However, if they worked with another employer prior to their current job, they will receive holiday pay from the previous employer.
  • Companies with staff in the United Arab Emirates must provide them with at least 30 days of annual leave after more than one year of service. UAE labour law allows Muslim employees in the private sector unpaid leave amounting to 30 days, which can be taken once during their period of employment. This is to be used to perform the Hajj (the annual Islamic pilgrimage to Mecca).
Income tax systems

Income tax systems

There are as many, if not more, varieties of tax regime as there are countries in the world, often with variances across states and regions within nations. This lack of uniformity complicates the process of managing global payroll: there is no one size fits all when it comes to tax compliance.

Reporting requirements

Reporting requirements

Every jurisdiction has its own specific requirements for which information must be reported, and when. In some countries, employers must keep up-to-date figures and report information to external authorities each month. In other countries, government reporting is much less of burden and is only required annually. For example:

  • In the United Kingdom, all employers must notify Her Majesty's Revenue & Customs (HMRC) of their 'Pay As You Earn' (PAYE) liability at the same time as, or before, they make payments to employees. Reports must be submitted to the government each time the business completes a pay run - failure to comply results in fines.
  • In some countries, the tax authorities are proactive. For example, the Finnish tax authority sends individuals a pre-filled tax return in the spring of each year. Once checked, if there is nothing to correct, it can simply be filed for personal records.
Foreign personnel

Foreign personnel

Employment and tax rules are typically complex and different for expatriate workers dependent upon location and personal circumstances. There may or may not be reciprocal tax agreements in place between the host country and the expatriate worker's home country; there may or may not be a need to set up a business entity to employ expatriates. There may be the option for 'employment without establishment' (EwE) in the country. Whatever the options, it's important to set up and report on foreign personnel correctly.

Payroll cycles

Payroll cycles

The wide variation in the frequency of payment runs and the required tasks, such as creating payslips, can make global payroll difficult to calculate. For example, in Europe monthly payroll is the norm. However, there are discrepancies in certain industries - including agriculture and hospitality - where a biweekly payroll is typical, or in certain countries where additional bonus runs are included within the standard payroll processing calendar. The upshot is that there is a specific payroll requirement in every country, further customised by peripheral rules, regulations and of course, language and currency.

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