International employees are an asset to many companies, but what is the best way to pay them when you live in a different country? Should they be paid in their home currency or your company's currency? What about when there are fluctuations in exchange rates? This blog post will explore these questions and provide insight on how to go about paying international employees.
This blog will cover key issues such as;
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Determining which currency to pay your employees
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Factoring currency risk into your payroll
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Deciding how you will pay employees, for example by international transfer
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Using payroll software to calculate the appropriate wage for your employees
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Consulting an accountant to make sure you comply with international laws
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Making sure your employees are paid on time so they don't get frustrated with you
Which currency should you pay your employees with?
Currency choice is an important issue that needs to be carefully considered and agreed between employer and employee formally in a contract of employment.
This is because if you pay your employees in your company's operating currency (which is not the employees home currency) you effectively pass exchange rate risk on to your employees as currency fluctuations may directly affect how much pay your employees receive at the end of each month.
On the other hand if you decide to pay them in their home currency (i.e. not your company’s operating currency), you run the risk of opening the company up to currency exposure and currency fluctuations and you’ll have to put a plan in place to mitigate these risks.
Factoring currency risk into your company payroll
In most cases it is preferable to pay international employees in their home currency, because explaining the concept of exchange rate risk to employees can be difficult and may result in frustration. You, the employer, are typically the larger party to the negotiation and you may be expected to bear the exchange rate risk as a cost of doing business.
Paying employees in their home currency might mean a little extra work for your company to start with, as you should consider opening an account with an foreign exchange specialist in order to get the best value when converting company operating funds into the employees home currency to pay their salary. You'll also have to consider putting a plan in place to protect the company itself from currency fluctuations, especially if the international element of your employee payroll is sizeable.
It's important to remember that over time currency values change and it requires having a long-term strategy in place for mitigating currency risk. You'll need to regularly monitor the impact exchange rates have on your payroll and, in turn, your company balance sheet. There's no getting away from some level of volatility with international payroll, but you should at least be prepared for when market events start impacting currency values. Prior to setting up your international payroll it would be sensible to establish a relationship with a Foreign Exchange and payments specialist. They can help you convert your company funds into the employee's home currency and make the international pay-out to your employee for you, thus reducing your payroll admin. A specialist can also help you monitor currency fluctuations and stay on top of market events that might impact your currency exposure and therefore how much extra it might cost you to pay your employees from month-to-month.
Using payroll software to calculate the appropriate wage for your employees
You’ll also need to think about how you will manage deductions from your international employees' wages, for example taxes and local national insurance contributions.
At this juncture it might be worth considering implementing an international payroll software which automatically calculates the appropriate wage you’ll need to pay your employees. Not only is this type of software highly accurate and helps prevent mistakes, it can also save you a lot of time by automating your international payroll process as your business grows.
Use an accountant to make sure you comply with international laws
In addition to using an up-to-date international payroll system we recommend consulting an accountant with cross-border or international payroll experience. They can help you get your international payroll processes set up for success.
Your accountant will advise you on the appropriate deductions to make from your employees gross salary (such as taxes and local national insurance etc) to leave you with a nett amount to be paid to them.
Once you know the nett amount you'll need to contact your FX provider to get a quote on how much it will cost you to purchase the net amount in the employee's home currency. Once the deal is agreed and the funds have been received, the FX provider will make the payment to your employee for you.
Make sure your employees are paid on time so they don't get frustrated with you
Last but not least, set up a regular plan for your employee payroll. Whether you do payroll monthly, bi-weekly or weekly, make sure you schedule time into your calendar to run the payroll on your payroll software and to get a quote from your FX provider. Don’t forget to allow time for the transfer of funds from you to your provider and from your provider to your employee. International business payments can take 1 to 2 business days to process, so you should factor these timings into your payroll schedule to ensure your employees are paid on time.
And if you have more than one international employee on your books, why not outsource all of your payroll remittance administration to TransferLab? TransferLab can provide you with a single quote for all of your payroll wages and we can process the international payments to each of your employees on your behalf, saving you time and money.
Get in touch with one of our Sales Directors to discuss outsourcing your international payroll remittance today.
