A growing company cannot afford to ignore international business. So, when a small or medium-sized enterprise launches operations overseas, it’s about more than reaching new customers; it’s about localizing procedures and shortening the supply chain in order to save money.
The challenges of an international payroll system, however, can quickly run up the tab for an SME instead of slash it — and lead to legal consequences in the process. That’s according to Radius Chief Technology Officer Peter Troost, who spoke with PYMNTS about how the global payroll solutions firm approaches the foreign exchange, accounting and compliance hurdles in this space.
According to Troost, each jurisdiction has its own stringent employment compensation and tax rules. For instance, there are pension fund regulations in the U.K. different than in the U.S., while in the U.S. there are strict guidelines for dealing with a contractor when they are not considered an employee.
“If you’re not familiar with rules like that, then it’s easy to run afoul of those rules,” Troost explained, “and not realize it for months after the fact, until the government determines that you are out of compliance.”
That’s when the trouble begins for SMEs expanding abroad, which have to now implement fixes and possibly pay penalties to realign payroll with local regulation.
“It’s very difficult for people financially, because it was not an expense they were anticipating,” Troost added.
Small businesses may want to take the time to figure out a third-party payroll provider that can deal with international compliance for them, he suggested.
Indeed, recent research by another HR and payroll firm Paychex found that the majority of SMEs handle payroll themselves. While it adds an extra burden of stress and spent time on a small business owner, analysts pointed to compliance as the greatest problem for SMEs.
“The challenge lies in managing and integrating these functions while staying compliant in today’s highly complex regulatory environment,” said Paychex President and CEO Martin Mucci in a statement last October announcing the findings.
So, it may come as no surprise that for businesses approaching Troost and Radius, many SME owners aren’t even aware of what’s in store when it comes to multinational payroll.
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“Buyers often don’t understand the complexity of having that service [of global payroll],” he said. “They’re trying to select a payroll provider certainly on the basis of price, but they can later determine that it’s much more expensive to go out and find employment lawyers and tax accountants in each of these countries to take care of the compliance landscaped for them on a country-by-country basis.”
The SME Challenge
When you think of a multinational business, you may jump to a major conglomeration with international units. But Troost said that, in fact, the majority of Radius’ clients are SMEs. Not only do they not have the resources to handle payroll compliance themselves, but they’re often companies that only have a handful of employees abroad.
“My neighbor across the street is the CFO of a Massachusetts company, and he told me he has 300 employees in Massachusetts and six in the U.K.,” Troost said. “He said he spends 70 percent of his time dealing with U.K. employment-related issues. For the SMEs dealing with the complexities of hiring and managing people overseas, it really places a large burden on them — more so than the big, multinational conglomerate that has more resources to deal with those issues in house.”
Most of the businesses Radius is seeing as expanding with a global workforce are B2B businesses, Troost said. That may be a manufacturer that needs a location manager in China to deal with local suppliers, a software company that wants to begin selling into Europe and therefore needs on-site sales managers or a firm that wants to set up a processing center in Brazil and wants to hire local staff to take care of Latin American accounting.
No matter the industry or motivation, Troost explained, if an SME wants to go global, it needs to assess how it will compensate employees and do it lawfully.
He explained that a payroll system like Radius’ can provide a way to oversee payroll in all nations on a single platform. The company has just rolled out new upgrades to achieve this and has enhanced capabilities to not only disburse funds to employees in local currencies but to integrate that financial data into the rest of a small business’ accounting, expense reporting and HR operations.
The solution also uploads completed regulatory and tax filings to the Web, categorizing them for future reference — key, Troost said, should a company get audited later on.
They’re the types of situations that a small business owner may not even be able to imagine when launching an overseas effort. But, for the SMEs going global with cost-savings goals, getting all of your regulatory ducks in a row could be the difference between cost efficiency and the blindsiding financial burden of noncompliance.
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