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There’s a big squeeze going on for employees around the world right now. The headlines are full of mass layoffs in the jobs market and cost of living concerns in the general economy.
For payroll and HR professionals, it’s a tough time too. Many won’t have experienced the recession of 2008, and while this one feels very different, it will force the same type of tough decisions their peers made 15 years ago.
There are ways to make the results of those tough decisions less likely to be layoffs, and that is by knowing your toolkit of options and deploying them effectively within your organisation. Today, we’ll look at:
There is a menu of items for any organization to choose from to make their payroll process more tax-efficient and budget-conscious while still rewarding employees appropriately.
While options can differ substantially depending on the country payroll is delivered, many countries will have the same general themes for you to investigate. We can further break down these benefits into ones that are cost-neutral to the business, and those with cost implications.
1. Deferred compensation options
Deferred compensation doesn’t necessarily mean ‘we promise to pay you later.’ Instead, it can mean that you defer compensation into a pension pot, for example, or stock options that can be claimed later. This can allow employees to tighten their belts now in return for a greater pension return in the future, although typically, this option is used for high-salaried employees.
With deferred compensation options, there is always the existential threat for the employee that the business will go bankrupt, and they lose all their money.
2. Tax credits and incentives
Utilising tax credits and incentives on the business side is highly dependent on your local jurisdiction and, simply put, requires a good deal of knowledge of the tax code. However, if you can get a handle on them, tax credits can be a valuable tool for reducing payroll costs.
In the US, for example, the Work Opportunity Tax Credit (WOTC) is a federal tax credit that reduces the amount of taxes an employer owes for hiring certain target groups, such as veterans, people with disabilities, and people receiving public assistance.
3. Condensed working week and flexible working arrangements
The work-life balance can be more important to some people than wages, so offering fewer working days for less pay as a potential option for employees can reduce your payroll burden significantly.
Of course, in this instance, there is a productivity trade-off, even when considering positive reports about productivity levels after reducing the work week (and note, most of those reports are based on keeping salary at the same level). If it’s implemented for some employees and not others, there is also the potential for workload being piled onto those left behind.
4. Additional holidays
Adjacent to flexible or reduced working hours are additional holidays. This may work particularly well in a business with regular peaks and troughs in activity. The way you pay your workers (either a reduced monthly salary throughout the year or simply gaps in salary if extended leave is granted) will be determined by cash flow requirements and the employees’ needs.
5. Extra social activities
While ‘work social activities’ aren’t usually at the top of an employee’s compensation want-list, providing extra staff nights out and social activities in lieu of higher compensation can work in some industries, particularly for those with a labour force comprising of young people.
Staff entertainment can also be tax deductible in certain circumstances.
6. Vouchers / Food Stamps
Vouchers, such as those used in multiple high-street stores and supermarkets, or food vouchers, can be another way to compensate employees tax-efficiently.
While they generally can’t be used multiple times within a defined time period, employment laws will often allow for one-off gifts and bonuses (or up to a certain limit) to be given in the form of vouchers that can be tax efficient to the business.
While compensation tactics like the following won’t necessarily save money off the business’s bottom line, they can provide invaluable support for employees during tough times.
In some circumstances, there is the potential to utilize economies of scale. By buying the benefit in bulk, the employer can help the employee at a lower cost than the employee could themselves. The trade-off in the employee’s mind is then seen as advantageous when considering an overall compensation package.
1. Providing childcare
Childcare is always a significant cost burden for employees. In general, there are no tax benefits or expense write-offs for businesses paying for childcare, so it’s a straight swap for salary in terms of bottom-line costs.
However, beyond the money spent on childcare, there is plenty of evidence to show that a lack of childcare can result in difficulties attracting and retaining employees, lost days in productivity, and even lead to a lack of diversity in the workforce, so providing childcare can result in fewer costs for the business down the road – even if those costs are hard to put an exact number on.
2. Medical and dental benefits
Providing medical coverage and/or insurance, as well as benefits such as dental care, can give employees real peace of mind and help improve productivity and retention.
There are also innovative ways for employers to provide these benefits while also reducing payroll taxes. As always, this entirely depends on local laws.
In the US, for example, Flexible spending accounts (FSAs) on the employer side and Health savings accounts (HSAs) on the employee side are worth looking into. In essence, they allow money to be put into accounts without paying tax first, and then used for eligible medical and dependent care expenses, such as doctor’s appointments, prescription drugs, and childcare costs.
3. Favorable loans
In some sectors and jurisdictions, it is permissible to give favorable loan terms to employees, allowing them to benefit from a lower interest rate or without a need to put up collateral. These can be given to help an employee during a medical emergency, housing issues, or simply to retain that employee for the long-term.
The reason for the loan is not important, but the structure of that loan and how you report it to the tax authorities are. This whole area can be fraught with complications but, when done correctly, can help employees going through hard times.
4. Pension Contributions
While pension contributions have a cost to the business, they provide an excellent way for employees to get favorable tax terms in the long run. Generally, taxes on pensions are much lower than on wages.
Upping the percentage your business contributes to an employee’s pension pot can make real differences in attracting and retaining employees while giving them long-term financial security.
5. Employee Training
Although a cost to the business, training is a great way to provide benefits for employees. What’s more, training will often benefit the business too in terms of improved employee productivity, innovation, and morale.
Training can also sometimes be used to reduce the tax burden of a business as well.
In the EU, training costs are typically treated as operational costs (and therefore can be used to reduce taxes on profits), so offering additional training to employees instead of wages can reduce the overall tax burden on the business.
6. Relocation assistance
In some cities, rental costs can run to 50% of an employee’s salary or more. In other cities, that can be significantly lower.
As an example, many young people will want to save for their first home but be unable to because of high rental costs. Allowing them to move to another destination to take advantage of better cost-of-living expenses can help them achieve that goal.
Giving workers the chance to relocate to another country can be both a cost and a cost saving to the business, depending on how the deal is structured i.e. salary could be reduced, but their take-home pay is effectively larger due to having less expenses.
7. Free meals and accommodation
Every compensation you give an employee will be judged, tax-wise, by its ‘fair market value’. There are some exceptions to this, such as free meals that are distributed on the business premises.
When it comes to accommodation, and again this is all subject to the jurisdiction, there is the ability to get tax benefits from paying for an employee’s accommodation.
It should be said, though, these are rare and usually depend on if an employee can only perform the job if staying on your property. This leads to examples like nurses, prison guards, etc., which does not apply to most businesses.
8. Travel benefits
The English language is full of words never used, and ‘dromomania’ or ‘the love of travel’, is one you’d rarely hear in normal conversation. The impulse, however, is common throughout the world.
Offering people the chance to travel as part of their job can be seen as a huge benefit and a key reason to stay in a role. While some of us prefer our own beds over a hotel room, traveling can be a key part of the compensation toolkit.
When looking for efficiencies in delivering payroll, how you pay is a crucial aspect to consider, and one often overlooked. The benefits can be significant if you can save even 1 or 2% of your payroll costs and reduce the amount of administration time for processing payroll.
1. Reduce FX costs and bank fees
Many payroll partners, such as TransferMate, use their own global payments infrastructure and technology to allow their clients to make payments around the world more cost-effectively than traditional banking networks.
Simply put, with fewer third parties handling your payroll, the less banking and FX fees you have to pay.
2. Reduced errors and manual work
The technology backing this payments infrastructure also means payroll payments are faster, are less prone to error, and have less need for manual processing.
As you are not using the traditional correspondent banking system, which is a complex web, payments move faster through the network. You also don’t have to upload different files to different systems and manually match the payments, resulting in less error and administration work.
3. Reduce processing time for each payroll instance
Other technologies can also help reduce the time it takes to process payroll each month. For example, Global Accounts by TransferMate allows users to pre-fund payroll in a network of local accounts, meaning the funds arrive quickly in employee bank accounts.
This can save 2-3 days each month in the payroll timeline.
There are many options for payroll and HR professionals and their leadership teams to consider when trying to reduce their payroll burden during tough economic periods. This doesn’t make deciding which to deploy, and then actually making them a reality, any easier.
The human factor should always be put first in any of these decisions. Look after your employees, and they will look after you.
We’re all being squeezed from several directions right now, but we shouldn’t forget there are ways to relieve some of the pressure.
To make your payroll process more efficient, saving you time and money, contact the TransferMate payroll team now.
Payroll is one of those parts of the business that you don’t really want to hear about. It should just happen. Payroll experts, though, know that making it ‘just happen’ takes a lot of work.
From initial set-up to ongoing monitoring, payroll is a such a fundamental part of the smooth running of any organization that assessing where the risks lie is the first step in preventing a breakdown. This is particularly true as our workforce gets more mobile – and global – making the payroll process more complex to manage efficiently. The first step in getting control over this complexity is to know the elements you need to monitor.
While every employer is different, risk in their payroll strategy can be collated into several buckets. Future trends, shifting legislation, people, processes, and systems are the big-ticket items you need to address.
One third of organizations do not have a formalized payroll strategy
EY Global Payroll Survey, 2021
While not the riskiest part of the payroll process per se, the new norm of a globally mobile workforce has the potential to impact on all other areas. With people more likely to work in different jurisdictions throughout the year, it’s incumbent on the organization they work for to keep track of this movement and pay accordingly.
With the pandemic making work from home so accessible for people, a whole new world of opportunities have opened up. Immigrants may choose to go home for several months and see their families and friends, young people saving for a property may move to a place with cheaper rental prices, while high-earners may choose to swap one area for another throughout the year as a lifestyle choice.
Once they reach a threshold of time spent in the foreign country, all those elements that you need to consider for fully foreign-based employees come into play, including:
Also added into the mix is the problem of overpaying tax authorities and either being unable to recover it or spend significant administration time doing so.
With this newly mobile workforce, tracking their movements becomes a compliance issue. Firstly, you need to set-up a system to identify and track internationally mobile employees. While self-reporting is a must, the organization itself must make this self-reporting accessible and known. This means set-up of forms, communicating its existence, and then getting people to comply regularly, which all sounds easier than it is in practice.
Once you’ve collected the data, what do you do with it? What’s the difference between an employee usually based in the UK spending six months in the U.S., Portugal or the Seychelles?
It’s down to the employers to get those initial payroll payments, and their tax implications, correct. If they don’t, they can be liable for governmental fines or committing the cardinal sin in payroll – not paying employees accurately and on-time.
Top solutions: Outsource payroll to a third-party to keep track of your mobile workforce and relevant legislation or track employee movements and hire-in expertise, or train internal staff.
With more tracking comes more data, with more data comes more risk. Data laws differ (sometimes wildly) in different jurisdictions, so employers will need to manage these differences.
To take the U.S. versus the EU, the U.S. has generally weighted protection of data as a commercial asset, while the EU has put individual rights first through its GDPR legislation. While the two regions have similar requirements in lots of respects, in some cases what is normal in the U.S. will get you into hot waters in the EU.
When devising your payroll strategy, how you collect, store, and use data is a crucial element to consider and plan for.
Top solutions: Contract a payroll solution provider with the highest data security standards, including ISO27001, GDPR, and multilevel user access for transfers and approvals.
Payroll is particularly risky when it comes to FX rates because payroll payments have to be made. You can’t simply wait until the currency rate becomes more favorable or change to a different source, like you might be able to do with purchases of foreign goods and services.
Small fluctuations in the currency (on either end) can mean a higher cost to you in terms of meeting payroll obligations, or the employee having less spending power.
This is also not considering the FX rates you pay as the payroll payment crosses borders. With payroll generally being the biggest single cost for most businesses, small percentage cuts over time can add up to big costs.
Top Solutions: Lock-in/guarantee exchange rates, monitor exchange rates as a matter of the payroll process, use low-cost FX payment providers.
A statistic that may surprise, and alarm, business leaders is that payroll fraud happens in 27% of all businesses. More than 11% of those frauds involve payroll loss of $48,000 on average, and on average the schemes went undetected for 36 months.
Payroll fraud happens in 27% of all businesses
Association of Certified Fraud Examiners
Overall, a study by the Association of Certified Fraud found payroll fraud cost an average of 5% of a company’s revenue.
One of the reasons payroll fraud goes undetected for so long is that it’s seen as a stable entity i.e. people do today what was done yesterday and don’t analyze what’s actually going on within the system. As such, even though it’s not a pleasant thing to acknowledge, payroll fraud is a genuine risk to every company and needs to be continually monitored.
Top solutions: Regular audits by management, leverage payment systems that flag unusual behavior, create a culture of anti-fraudulent behavior.
A risk to the bottom-line of the business, as well as reputational risk with employees, is inefficient payroll payment systems. Beyond usual Excel sheets, unnecessary manual processes, and just plain human error, inefficiency can come in the form of additional costs because of the payment rails being used for payroll.
The IRS estimates that 40% of small to medium-size businesses end up paying a payroll penalty each year.
If you are using an expensive provider or the traditional correspondent banking system, you may well be subject to high bank charges and FX rates compared to modern payment solutions. With payroll such a large percentage of the business, these unnecessary surplus payments are hard cash going out the door each and every month – for years.
These processes can also lead to shortfalls in payments, or delays in receiving payments, leading to unnecessary follow-up from your finance department. By leveraging the global payments infrastructure built by FinTech’s over the last decade and more, either through API integrations or white-label solutions, you’ll be able to pay in more currencies, for less, and in a fully regulated and secure environment.
Top solutions: Partner with a third-party payroll specialist using modern payment rails.
The biggest crisis generally come when the thing you think is working perfectly suddenly breaks down. In a business setting, payroll is one of those big risk elements.
Devising a coherent strategy in terms of regular audits on the current system, and looking for improvements, will make a real difference to a business – both in preventing damaging events, but also increasing revenue through the cutting of costs.
Knowing where to look for risk is the first step in devising that payroll strategy. After that, how to ‘make payroll happen’ will become much clearer.
In today’s increasingly digital and hyperconnected world, it has become easier than ever to expand into new markets. Technology has made it possible to connect with colleagues, clients, and customers — no matter where they are located. A key component of successful international expansion is establishing an effective global payroll strategy, but processing global payroll is a challenging endeavor.
Whether your organization has been operating overseas for a while, or you’re just at the stage of exploring international recruitment, there are a myriad of complexities associated with global payroll.
One of the most important factors when it comes to processing payroll for a global workforce is choosing a global payroll model that’s right for your business.
Below, we look at the three key global payroll models to help you determine which is the best fit for your organization.
With this model of global payroll, the company has multiple contracts with individual local providers, usually one for every country in which they need payroll. Before the widespread use of technology, the local vendor model was the original solution for processing payroll across multiple countries. The main drawback of this model of international payroll is that it is extremely limited in terms of process efficiency, data management, and compliance. Today, this model is most common among organizations with a single overseas location or where there is a small headcount.
A company using the aggregator model of global payroll uses a single payroll vendor. In turn, this vendor partners with or acquires local providers in other countries to process all payroll for a company under a single contract. The main benefit of this model is that it allows companies to operate in multiple international locations while minimizing vendor management. Companies can view country-specific or regional payroll information using reporting tools or dashboards maintained by the aggregate provider. However, while the data may be presented by the aggregator in a standardized format, the information is pulled from multiple disparate systems used by the in-country providers – and consolidated into the dashboard for easy viewing. From a compliance perspective, this presents challenges as companies need to be confident that their aggregate provider can ensure compliance for every in-country vendor they partner with, especially in terms of data protection and security.
By using a unified payroll solution an organization processes all payroll in all countries using a single, centralized payroll platform. Compliance and analytics are two of the most important benefits of using a unified global payroll solution. However, not all payroll platforms have the same features and functionality — so it’s important that organizations look at their options carefully to determine the best fit.
Now that you are familiar with the three key models of global payroll, it’s time to choose the right one for you. To help you determine the best fit for your business we put together some questions to further help with the decision-making process. You can access those in Global Payroll: The Essential Guide. Your answers will help you choose the right payroll model for your business needs.
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