As if you didn’t have enough to deal with, we’re now throwing a little bit of international payroll risk management your way. You know it. We know it. There are plenty of things that can go wrong in payroll. And once you go global, those risks multiply.
We’re talking about things like errors in employee pay, keeping your data safe and fraud… to name but a few!
In this rapidly-changing and technologically-advancing world, knowing the risks your organisation faces when it comes to international payroll, and having a robust plan to mitigate those risks is crucial if you want to safeguard your payroll and your future.
What are the risks?
Tax: Getting tax right across your different countries is a massive job. Different countries have different requirements. The result of non-compliance? You guessed it. Fines, fines and more fines. Plus government audits, legal costs and irreparable damage to your reputation. See what we mean? Incorrectly calculating tax, or missing the deadlines are huge risks – financially, legally and reputationally.
Insufficient payroll records: Every country your organisation operates in will require you to hold certain records for employees. They will (we bet) all be different. And if your organisation fails to do this? You’re looking at legal action, fines and more penalties.
Fraud: Payroll fraud is when an organisation’s payroll system is used and abused for the financial benefit of another. Sadly, your own employees can often be responsible for such crimes. Keep your guard up against identity theft, fake claims and embezzlement. Obviously, your organisation stands to lose large sums of money to fraud. It isn’t a victimless crime, either and the impact at the employee (and customer) level can be felt too.
Mistakes in employee pay: This is one you definitely won’t want to get wrong. When you’re operating over multiple ‘payroll zones’ it’s easy to get things wrong. But mistakes that result in underpayment or overpayment are costly to you and your people.
Inadequate software security: Expired, outdated software will leave you exposed to viruses or hacks. And we all know what that means. Personal data leaks and the rest of the world now knows the intimate details of your employees’ lives. Invest in the best security you can.
Inbuilt security for payroll software: In fact, it’s important to make sure that your payroll software itself meets the stringent certifications required to make sure it keeps your organisation’s details safe and secure. It’s worth doing your research here. Is security inbuilt? Are they ISO 27001 certified? What are their policies and can you see documentary evidence of it?
Employee access to payroll software: You probably haven’t even thought about who has access to your payroll system, but it’s pretty darn important. Is it just Jill? Or does Jill and her whole team have access? If it’s just Jill, we need to talk. Having only one employee granted access to the software is bad news. Why? With only one person on the job, fraud can go unnoticed, data breaches unchecked and mistakes unseen. Make sure several employees can have centred and controlled access to your payroll software to reduce the risks.
Quite simply keeping up with all these changes is a gargantuan effort for your payroll team. The rapid pace of technological change can leave your team behind. Apparently, each year, payroll teams are having to keep up with more than 30,000 changes in the global payroll sphere. And if your organisation operates in several countries, that’s only going to add to the complex soup of changes.
Overall, if you don’t get it right when it comes to international payroll risk management, then you’re going to fall foul of the law. And you may well have to contend with fines, penalties, legal action and that old chestnut – serious reputational damage.
Compliance risks related to payroll processing
Operating in multiple countries and jurisdictions is no mean feat. And with great company clout, comes great responsibility. International payroll means your teams have to manage and process gigantic amounts of data, like cross-border wage payments (including bonuses), taxes and employee benefits to name but a few.
It gets tricky because such processing requires many, many teams. It gets even trickier, because data becomes isolated thanks to multiple separate systems from multiple separate teams. This can lead to transparency issues, concerns with your data’s security and troubles with efficient international payroll reporting. All of which in turn can lead to unintentional lack of global payroll compliance.
1. Local employment laws
Let’s take local employment laws as an example. Payroll varies the world over and your organisation must know and adhere to the local payroll laws in whichever jurisdictions you operate. Local labour laws demand compliance with statutory employee benefits, tax, paid time off and minimum wage.
2. Tax regulations
Make no bones about it, complying with local tax regulations is complex. Each country you operate in will have its own tax code. Getting this wrong can land you in seriously hot water, and you’ll incur fines, penalties and legal costs. Don’t run the risk.
3. Data security and privacy risks
The data you hold is an absolute goldmine when it comes to looking after your people. But it’s a golden lure for cyber criminals. And for all the technological advancements in software, the hackers and attackers are becoming increasingly sophisticated to keep pace. Take heed from Arup’s case, from March 2021. This 6,000-strong firm based in the UK suffered a catastrophic data breach, exposing their entire organisation’s private information. Symatrix, who was Arup’s payroll provider at the time, had been attacked by ransomware (algorithms that hold your data hostage and you have to pay to get it back). It’s seriously scary stuff.
Then there’s the question of complying with data protection laws. Whether it’s GDPR, HIPAA, or PIPL, lots of countries and states have their own law. Know them and follow them for best practice!
4. Currency and exchange rate risks
It goes without saying that an organisation with a global remit will be subject to frequent fluctuations in currency and exchange rates. At best, you could profit, but at worse, you could lose out. And it’s frustratingly unpredictable – obviously you need to set budgets, but how are you supposed to do that when things change all the time?
Keeping abreast of changing exchange rates is vital because the value of the currency will impact how employees or potential employees will view the value of their employment package. It’s tricky because it goes both ways. 12 months ago it could’ve been a great deal. Today however, with the increasing living costs over the world, the employee might be worse off. You may even be overpaying if you’re not careful. The best thing you can do is stay vigilant and have robust plans in place.
The impact of currency volatility on cross-border payments, budgeting and financial reporting
Managing your money cross-borders should be an efficient affair. And obviously you want to incur as few costs as possible. It’s worth taking stock of how you do things currently and seeing if you can identify any areas of weakness and improve those areas. Your HR team will need to take a pragmatic approach to get to grips with the organisation’s budget, as well as different local currencies. Enlisting the services of a third-party money expert in this area could pay dividends.
Payroll process risks
Global payroll risks aside, there are plenty of risks that exist in the payroll process itself, such as manual errors, lack of internal controls and ineffective data management. Let’s have a look at these one by one.
- Miscalculating pay: Making mistakes is a costly business – it leads to unhappy people, a drop in employee engagement and, ultimately, higher turnover.
- Ineffective data management: If your team is ineffective or unskilled when it comes to handling data, this can considerably slow things down and make it difficult for everyone.
- Lack of internal controls: You need to make sure your internal processes are shipshape and watertight to ensure proper procedure and due diligence.
- Misclassification of employees: Classify everyone under the correct terms – whether they’re full-time permanents, freelancers, or contractors. Misrepresenting them is actually against the law. Many organisations do it because it can be substantially cheaper. However, any costs saved are likely to be recouped by the government through costly penalties and fines.
- Incorrect tax codes: We get it. These are confusing. There’s a whole world of numbers and letters to choose from. But make sure you’re getting it right, or the consequences will be felt.
Fraud and compliance breach risks
Payroll fraud is a costly problem. If your organisation doesn’t have the necessary safeguards in place, it can go on unseen for months and even years before the penny drops. And as the old adage goes, an ounce of prevention is worth a pound of cure. It’s never been truer in the world of payroll. So, what are the different types of fraud? Let’s have a look.
Ghost employees: Thankfully not something out of a Netflix horror. We’re talking about a person (who doesn’t even have to exist!) that is being paid fraudulently through your payroll.
Falsification of records: Falsification of records (also known as unauthorised changes to employee information) covers a whole bunch of naughty! Maybe it’s falsely adding to the number of hours worked, paying more than an employee is owed, faking sales figures in order to avail of bonuses (or commission) and increasing benefits.
Impacts of fraud
The impact of fraud can be devastating on an organisation. It goes without saying that there’s the problem of lost money. It also presents a breach of trust within the employee-employer relationship and can end in criminal charges for the perpetrator(s).
To add insult to injury, if the fraud is publicised, it may well result in a loss of trust by clients and customers, which in turn damages the reputation, leads to fewer new customers and even more money lost. And unsurprisingly, employee morale could tank. An example can include evaporation of trust (especially if senior staff committed the fraud). Overall, it’s not a good look.
We can’t overemphasise the importance of having thorough training programs, solid systems and proper processes in place to prevent fraud within your organisation. A multi-pronged approach is needed to prevent it from happening. Here are a few strategies we recommend:
Vet your people: Starting the verification process early will save you in the long run. Do your due diligence during the recruitment process and check rigorously.
Need-to-know basis: Employees only need to be privy to information that will help them carry out their job roles. Nothing else.
Control systems maintenance: Are your control systems up to date? Are you reviewing them regularly? Make sure your people are following processes properly.
Security security security: Paper payroll is so mid-noughties. But if you do hold any of your payroll details in physical form, keep them firmly secured with the biggest padlock you can find. And definitely use a shredder to get rid of any personal information.
Password management: Are you managing staff passwords properly and securely? Including having a password policy for employees?
No- “one” is responsible: Make sure that payroll tasks are distributed between several staff members. One person should never be in full charge of payroll processes.
Why fully managed international payroll is your best bet
We think you’ll agree there are plenty of challenges in the global payroll world. There’s a lot to guard against and getting it wrong is a pretty costly exercise. Why burden yourself and your team with this responsibility?
Consider investing in outsourcing your international payroll. For starters, it’s an amazing way to quickly improve compliance (and avoid those rather scary consequences) and increase reliability and consistency (especially if you operate in multiple countries, each with separate payrolls).
We live and breathe international payroll and would love to partner with you to help you get it right. Get in touch.