Vistra Insights

Managing international pay practices

The competitiveness of your international operations requires sound human resource practices, with an emphasis on compliant and reliable global payroll.

Many of the challenges of delivering payroll in multiple jurisdictions are well-known, including accounting for different currencies, languages, technologies, time zones and vendors. Sometimes overlooked is the extent to which country-specific compliance obligations and cultural expectations can vary. In this article we provide some examples of these demands that, unless accounted for early in the due diligence process, may bring compliance penalties, unexpected compensation costs and other burdens. 

HR and other professionals who manage payroll know that each country has labour, social security and other laws related to payroll withholdings, disbursements and filings. Many of these professionals may not know that some countries have additional requirements that affect payroll, such as: mandatory salary increases, holiday payments and bonuses; imposed profit sharing; and allowances for meals and transportation.

When planning an international expansion, those responsible for delivering payroll must understand all the payroll-related compliance obligations of the target country. These obligations can profoundly affect employment contract terms and compensation, as well as payroll operations generally. These and country-specific customary (or discretionary) benefits also affect local employees’ expectations, along with a multinational employer’s ability to attract and retain employees in the target country.

Beyond pay for performance

In many countries, pay is calculated using employee classification systems that may bear little resemblance to an organisation’s home-country labour schemes. Pay-for-performance systems are becoming widely accepted across the world, but they are not universal. Many elements that affect compensation — such as pay raises, severance payments, notice periods and pension benefits — are still in many jurisdictions dictated by statute, negotiated by trade unions and works councils, and/or determined by collective bargaining agreements (CBAs).

Many of these payroll-related requirements primarily affect lower-wage workers and those whose employment terms are determined — at least in part — by CBAs. Even so, it’s important not to dismiss these obligations as irrelevant to senior-level local employees. It may be customary in a particular country to provide such benefits, or some of them, to all employees, even if doing so isn’t strictly speaking required. This kind of awareness of local customary benefits and attitudes is increasingly important in today’s global economy, which includes a shrinking talent pool and demanding workers who understand their legal rights.

Salary increase requirements: Some global examples

As we’ve noted, labour laws that affect payroll are country-specific and can vary greatly by jurisdiction. Mandatory annual pay raises are common in Europe and in some South American countries. In Finland, France, Germany and Sweden, for example, salary increases are typically dictated by the prevailing CBA. In Turkey, Denmark, Malaysia and Brazil, they are required, but only for companies with unionized workforces. In Greece and Colombia, they’re mandated only for minimum wage employees. And in Argentina, the government requires inflation-pegged pay raises for low wage earners. That said, local employers often offer the same rates to their other workers as part of employee retention programmes.

By contrast, the UK and India do not mandate salary increases subject to minimum wages. In most Asia Pacific countries, annual adjustments to pay are based on inflation index adjustments for those above minimum wage, with mandatory increases applicable only in countries which have a minimum wage requirement, including China, Hong Kong and Australia. Employers may also be required to conduct annual salary reviews with employee representatives, even if no changes result.

Expected benefits

In addition to mandatory salary increases, employers are typically expected to provide additional forms of compensation unrelated to job performance. These vary by country and can include: transportation allowances (Brazil, Chile, Colombia, France, Belgium and much of Asia); daily meal allowances and/or vouchers (Venezuela, France, Belgium, Italy, Spain); vacation bonuses (Brazil, Mexico, Belgium); free medical exams (Japan, Brazil, France); company cars (the Netherlands, Belgium, Germany); and working-from-home premiums, either directly or built into base salary (France). These bonuses and allowances are often included in the definition of compensation upon which termination payments are calculated. 

Employers must also consider the reporting obligations related to these forms of compensation, as they must often be reported on payroll in a certain format. These obligations add to payroll-management complexity and budget considerations, as they can result in significant employer pay-outs when an employee is terminated. Employers should also understand any local reporting requirements that must be reported through payroll and presented on payslips. These can include sick days and other PTO absences, for example in France and Belgium. 

Is it salary?

Many countries make a distinction between salary — which is fixed monthly compensation and/or variable compensation like commissions — and remuneration. The latter includes all the benefits an employee receives, including any housing allowances and other in-kind benefits. In addition to severance indemnity, remuneration is used to determine social security contributions, withholding taxes and other deposits.

For example, Brazil requires a payroll calculation for “DSR,” or daily rest, which is based on the number of holidays and Sundays in a given month. This factor is applied to commissions paid, effectively granting the employee additional compensation for the presumed lack of rest. Similarly, in Canada, many provinces require that the federal 4 to 8 percent vacation pay requirement also applies to work-related bonuses.

Pay frequency

US employers in particular are often surprised to learn that in some countries they are obliged or expected to provide more than 12 months of salary payments for a given calendar year. In many locations, annual base pay is spread over more than 12 months, reducing monthly salary payments and allowing employees to collect the remainder in periodic additional payments, often made in May and/or December, which needless to say further complicates the payroll process. It’s important to recognize that while these particular additional payments are often called “bonuses,” they are not bonuses in the widely accepted sense of the term, but rather a mandatory part of salary, usually related to vacation pay.

An employer considering expanding into a new country should understand that different pay frequencies will not only affect salary budgeting and administration practices, they may have a direct bearing on the terms of an employment contract. It’s critical to understand this when drafting employment agreements, to ensure that the dispensation of annual salary in a given country is spread out over the appropriate number of months, thereby avoiding unpleasant surprises when employees come knocking for their 13th, 14th (or even 15th or 16th) month payments. When employees terminate, they are often entitled to these end-of-year payments on a prorated basis. (Employers should understand if the payment of bonuses is provided for in a CBA or employment contract in a way that an employee can expect a guaranteed bonus; such bonuses may constitute ordinary wages in some countries.)

Pay frequency: A few examples

Additional salary payments are common practice in Spain, Italy, Germany, France, Belgium, Sweden, Norway, Austria and Portugal. They are mandatory in Greece, and sporadically used in Russia and Turkey.

You won’t typically encounter mandatory salary increases in Asia Pacific countries, but you may find that 13th (and 14th) month payments or Christmas vacation allowances are expected. To varying degrees, they are common practice in Hong Kong, China, Singapore, Taiwan, Malaysia, Vietnam and Thailand (but not in Australia, Japan or Korea). The Philippines mandates a 13th month payment, and in Indonesia, all employers are obliged to pay a “THR” bonus to their employees at least one week prior to major religious holidays. 

In some jurisdictions, employees are not legally entitled to a bonus unless it is specifically provided for in their employment contract. However, if an employer does wish to provide one, statutes (in Hong Kong, for example) regulate the amount and timing of the payment.

Employees in most South American countries are entitled to a mandatory 13th month payment from their employer, and each country has its own take on 13th month salary. In Brazil, it’s paid out in November and December, while in Colombia and Uruguay, it’s paid out in June and December. Peruvian employees receive theirs in July and December. In Argentina, where 13th month pay is split between June and December, employees receive the equivalent of 50 percent of the highest monthly compensation during the first and second half of the year, respectively. Brazil also mandates a vacation bonus equal to one third of monthly salary, and Mexico mandates one fourth. Mexico also has obligatory profit sharing and a Christmas bonus equal to at least 15 days of salary.

Like most aspects of international HR administration and management, then, international payroll is complicated. The most successful multinational organisations understand that each country has unique regulatory obligations and worker expectations related to payroll. They also understand that the risks are high. Failure to follow local payroll rules and respond to expectations can lead to compliance fines and penalties, reputational damage, inaccurate budgets and an inability to attract and retain talent in a fiercely competitive global economy. As with all areas of international expansion and operations, proper due diligence and continued vigilance are essential to successfully managing global payroll.

 

This is an updated version of a previously published article.

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