How to Handle Payroll for Offshore Remote Employees

Patrick Ward Patrick Ward Follow Sep 27, 2020 · 9 mins read
How to Handle Payroll for Offshore Remote Employees

Hiring internationally can bring high-skill talent to your company for around half the cost of onshore labor.

However, international teams can create logistical issues when it comes to hiring and paying your workers, and make it difficult to establish retention mechanisms like health insurance and benefits remotely.

In today’s post, I’ll break down the most common scenarios for companies making offshore hires, and present the solutions used to handle payroll, contracts, and benefits.

The growing importance of having an international hiring strategy

On a personal note, I’ve seen a lot of companies looking at moving offshore workers from contract to full-time post-Covid-19, as the shift to remote-first among tech companies heats up offshore job markets.

Companies like FaceBook are planning to move 50%+ of staff remote within the decade. Smaller firms are following suit. New stats from NelsonHall predict the market for employer of record services (a common method of hiring international workers) will go up more than 28% by 2024. 1

What does it mean? It means that the best offshore talent is about to get a lot more competitive.

Companies that offer stable contracts with high pay and benefits will have first pick of talent, making compliance with employment law more important than ever.

Note: topics discussed in this article are specific to US tech companies hiring remote talent outside the US. These solutions are most applicable to small–mid-size companies setting up smaller remote teams or running distributed teams, not for multinationals setting up branch offices.

Summary of common remote payroll scenarios

Most international payroll scenarios fall into one of these categories:

1. Offshore contractors

When you want to take advantage of lower costs and/or higher skill levels of workers outside the US, hiring contractors is the simplest way to get started.

Contract arrangements are particularly well-suited to short-term or part-time work, or work where you are comfortable being one of many clients rather than a sole employer.

Pros

  • Low cost: contractors are affordable for limited-scope projects.
  • Low paperwork: at small scale, the compliance needs for contractors are low.
  • Flexibility: you can hire and fire at will.

Cons

  • Employee churn: contractors often juggle multiple clients, and are prone to leave with little notice.
  • Legal exposure: some countries have stricter laws about contractors, and you could run into issues if the country views you as a full-time employer rather than client for the contractor.
  • Training drain: time invested in training contractors is often better spent on full-time employees who are easier to trust and will stick around longer.

2. International employees

When you want to retain offshore or remote workers full-time and have 100% of their efforts put into your company, you’ll need to figure out how to set up a formal payroll system and offer benefits like you would to a domestic employee.

Full-time hiring is ideal when you’re looking for permanent team members who can be trusted with institutional knowledge about your business.

Pros

  • Company culture: if your company is remote-first, building a strong culuture of full-time employees is essential.
  • Employee retention: full-time employees stay longer and develop along with your business.
  • Lower long-term costs: full-time employees come with fewer fees than short-term contracts or staffing agency talent.

Cons

  • On-ramp time: it often takes longer to source and hire full-time workers compared with contractors or staffing firms.
  • Local compliance: local legal compliance can be tricky, even with a Global PEO as an intermediary.
  • Flexiblity: most countries outside the US have stricter requirements for hiring/firing employees.

Remote workers on international assignment is also a realistic scenario, but I’ll skip that since in most cases you can keep them on existing payroll, at least temporarily.

Offshore contractor payroll options

Direct contracts

Set up and sign employment contracts with the worker directly, consulting a legal professional in both countries.

Pros: no extra HR costs, no middleman, flexible contract conditions. Cons: legal risk, high cost of legal consultation, manual invoicing, may not be scalable.

Contractor platforms

Services like Upwork can help you find, vet, and manage remote contractors. These are much easier to manage than direct contracts, and can work nicely for small teams. However, it becomes expensive for both employer and contracter quickly due to the high fees.

Offshore employee payroll options

Global PEO and GEO services

Services needed to hire and pay offshore employees depend on the country, but the most important are basic compliance services and employer of record services.

These services are often bundled and offered by specialized firms advertised as “Global PEOs” or “GEO” companies. (Professional Employer Organization, Global Employment Organization, respectively.)

Globalization Partners and Velocity Global are examples of firms providing global payroll services for enterprise and mid-market companies. If you’re looking to operate at a large scale and need hands-on service, these types of firms are your best bet. (Disclaimer: Globalization Partners is a client at Rootstrap, where I’m a Director-level employee.)

Smaller companies can get similar services from niche software-based services like Deel or Panther. You can think of these as “Gusto for international hiring”; an emphasis on user-friendly software and a pricing structure that’s friendlier to mid-size clients looking to hire a smaller number of employees.

Branch offices

The only other option for compliant international hiring is to establish a local presence — if you have the budget and scale for this, I doubt you’re reading this article since you should have a team of experts working on it.

Hybrid option for international hiring: staff augmentation firms

A third option for hiring internationally is to do so via staff augmentation firms, such as Rootstrap (per disclaimer above, I’m affiliated with this company). Other examples include Gorilla Logic or, on the high end, Globant.

Key considerations for remote offers

  1. Currency of payment
  2. Holiday and benefit norms in the employee location
  3. Stock option and healthcare laws in the employee location

Currency is a critical up-front choice, since exchange rate can cause a strong salary in USD to become way too high or way too low quickly if the value of the employee’s home currency changes. This is particularly an issue in the South American offshore labor market currently.

The important point here is to ensure that whether the employee’s pay is established in local currency or equalized to USD value, that it is established up front in the contract.

I personally feel that it’s best for smaller companies to set salaries in the employee’s home currency, since this makes a more clear situation for the employee in terms of budgeting their monthly expenses. You may need to adjust for higher-paid employees or senior talent.

Key compliance areas for international hiring

Regardless of the strategy you take for hiring remote team members, you have three key concerns:

  1. Local employment laws
  2. Social security laws
  3. Tax laws

Obviously all these are beyond the scope of an intro article, but suffice it to say; whatever route you take, ensure that you have a clear answer to each of these areas.

As mentioned above, the key benefit of Global PEO services and staff augmentation firms is that they handle these for you, allowing you to pay one point of contact without wading into international tax law personally.

Pitfalls to be aware of when hiring internationally

The US is an “at will” employment environment, meaning that its normal for companies and employees to both have the right to “walk” at any time for no reason.

For better or worse, this is not the case in most countries, making the US something of an oddity. In other labor markets like the UK or Australia, employers have much stricter requirements around employment. Sure, you can fire all your employees if things go south — but suffice it to say, you’ll pay a financial toll for it.

In some cases, it may be more beneficial to only engage with contractors, or via intermediaries like IT outsourcing firms. You lose something in terms of labor quality doing this, but you gain the ability to walk away at any time without paying a mountain of fines.

On the flip side, the US has fairly relaxed requirements when it comes to Paid Time Off (PTO). With tech companies, it’s common for PTO to be a given, and to be handed out liberally with minimal employee reporting requirements.

This is not the case outside the US, and it’s common for employees and employers to have to categorize and report PTO according to the type (sick leave, vacation, etc).

Obviously this is less of a roadblock to hiring, but it’s worth budgeting the time for paperwork in advance.

Handling stock options and perks for remote international staff

For tech companies and startups, the question of stock options for remote and international teams is particularly crucial.

Vesting rules can be thrown a loop by the local regulation in some countries, meaning that you should not assume that the contracts will be the same for domestic and international core team members.

For example, Argentina has unique laws in regards to severance of employees with unvested shares. If an unvested employee walks, you may not be entirely “off the hook” as you would be with a US unvested employee.

In summary, if you are offering international employees stock options as part of a benefits package, this is a situation where involving an experienced Global PEO is crucial to avoid compliance nightmares.

Patrick Ward
Written by Patrick Ward Follow
Hi, I'm Patrick. I made this site to share my expertise on team augmentation, nearshore development, and remote work.
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