Top 10 Global Payroll Regulations and What they Mean
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By Julie Welch
Global Payroll Compliance, Region by Region
The recovery of the global economy presents both advantages and challenges for organizations seeking to establish or expand their international presence. Operating in different countries can offer increased market presence, a global reputation, and (in some cases) more competitive salary rates. However, navigating the waters of global payroll regulations also comes with the inherent challenge of managing a compliant payroll system across multiple territories with multiple languages, currencies, cultures, and business practices. Indeed, as global payroll specialists Webster Buchanan point out in a recent report (Multi-country Payroll: Analyzing the Business Benefits and Challenges), it can be difficult to look past the individual factors that create national level payroll environments. In reality though, “while every legislative environment is different, 70% or more of the processes performed in a payroll operation are common regardless of where they take place. Payroll data is prepared and submitted, gross-to-net calculations are carried out, payments are made and the associated reports are completed”, says Webster Buchanan researchers. Unfortunately for organizations looking to leverage global functionalities, the remaining 30% of payroll management in a new country or territory depends on collective bargaining agreements, long-standing culture- specific practices, and a body of national, state, and local regulations.
These elements make for a global payroll compliance environment that is infinitely complex and ever-evolving. As such, no single paper or article could comprehensively cover the sheer diversity of global payroll legislation. In fact, any serious attempt to do so would result in an encyclopedia rather than an article and what’s more, would be out of date almost immediately. Instead, the purpose of this special report is to provide a primer in global payroll legislation to the organization that is thinking of expanding; either beyond its home country for the first time or breaking into a new territory. By focusing on just 10 representative regulations or pieces of legislation across the major global regions, we aim to give a taste of what the regulatory landscape entails.
Payroll Compliance Issues in the United States
AnThe reporting and record-keeping requirements mandated by U.S. federal labor law are as rigorous as any region and compliance is a must for any employer. As Sage’s report, Avoiding Costly Fines: A Guide to Compliance Mandates, states, “Accurate payroll is essential for any company. Mistakes in employee pay calculations can lower employee satisfaction [and] errors in government filings and tax payments can result in costly fines”. As such, for both reasons of workforce engagement and penalty avoidance, the following four items are of particular relevance to any employer.
Global Payroll Regulation #1: Fair Labor Standards Act (FLSA)
Covering issues such as minimum wage, overtime pay, equal pay and child labor this fundamental piece of legislation spells out the mandatory requirements of employment, earnings, and employee details that employers must stay in compliance with. For instance, for those employees covered by the FLSA, overtime must be paid for any time worked above 40 hours per workweek. Given that fact, a key issue for payroll accuracy is to be clear at any given time on which employees are covered and which are classified as exempt from this overtime requirement. It should be noted though that it is possible for the interpretation to change over time. For example, judicial decisions in several recent litigation cases look likely to reclassify the status of sales representatives in the pharmaceutical industry—potentially completely changing the management and payment of this employee segment. Penalties up to $50,000 can be assessed (and/or imprisonment up to six months upon a second conviction) in some cases of unpaid minimum wage or unpaid overtime compensation.
Global Payroll Regulation #2: Federal Insurance Contributions Act (FICA)
FICA records, covering Social Security, disability, and Medicare must be kept for at least four years and FICA also provides for mandatory reporting; quarterly to the IRS and annual to the Social Security Administration. Both civil and criminal penalties are possible for failure to meet FICA obligations, including the late filing of employment tax returns, late payment of taxes shown on employment tax return, and federal interest assessed for underpayment of taxes.
Global Payroll Regulation #3: Federal Unemployment Tax Act (FUTA)
Providing a legislative umbrella to individual state unemployment programs, FUTA requires all employers to maintain records of wages, tax rates, and workers’ benefits, make annual reports to the IRS and deposit taxes on a quarterly or annually basis; according to the tax amount. As with the other pieces of legislation listed above, both civil and criminal penalties are possible for failure to meet FUTA obligations.
These fundamental federal laws that lay down U.S. employers’ responsibilities exist in principle worldwide; meaning that most regions and countries will have legislation in some form or fashion that covers deductions, record-keeping, and mandatory reporting to government agencies. Taking that as read, enquiries should be made about such provisions in any new territory. We therefore don’t propose to list the equivalent legislation for each region in this report. Instead, leaving the U.S. as a benchmark for the basics of payroll compliance awareness, the remainder of this special report will focus on the differences that an employer may find in other global regions. However, there is one additional piece of U.S. legislation that remains which is having a broadening global impact (especially in regards to payroll compliance)—Sarbanes Oxley.
Global Payroll Regulation #4: Sarbanes-Oxley Act (or SOX),
Also known as the Public Company Accounting Reform and Investor Protection Act, this legislation establishes financial accounting standards for all U.S.-based public companies in order to restore investor confidence through the added oversight of financial reporting practices and financial professionals. However, non-publicly traded firms are increasingly finding themselves subject to financial scrutiny and in this sense, compliance with SOX standards of internal control have become “best practice” regardless of the type of organization. Additionally, not only must the U.S. company comply with SOX, but the companies it deals with must also comply; meaning contractors, sub-contractors and suppliers whether they are a U.S. company or not. As payroll is a large and regular set of financial transactions for any organization, the provisions of the Act have caused a significant impact on payroll management and the design of payroll software—requiring greater accountability and transparency in processes and reporting.
Payroll Compliance Issues in the European Union
The edition of the ADP Europe at Work Atlas observes, “The European Union is an elaborate mosaic of different peoples and cultures with widely varying – yet rapidly converging – business practices.” This statement summarizes the sheer variety of legislation across the EU’s 27 member countries while also acknowledging that years of EU Directives (which must be adopted into members’ own national legislation) have gone some way to simplifying and codifying European employment practices; the purpose being to protect EU workers across all member countries and encourage a free flow of labor and commerce. The following three pieces of legislation represent some key features of the European payroll landscape.
Global Payroll Regulation #5: Working Time Directive (WTD)
The WTD was driven by a desire to protect employee health and safety and provides blanket rights for EU-based employees to paid breaks, a rest of at least 11 hours in any 24 hours, and a minimum number of holidays each year. It recommends a default right to work no more than 48 hours per week. However, the manner in which different EU countries have adopted the WTD in their own legislation has created a wide variety of practices between members. The UK, for example, implemented an option for individual employees to opt out of the 48-hour limit, whereas France tightened the limit to 35 hours. An organization with a multi-country presence may find itself offering and enforcing differing terms and conditions depending on employees’ locations. It is also worth noting that similar legislation (albeit with differing limits) can be found in countries and regions as far apart as Japan and South Africa.
Global Payroll Regulation #6: Data Protection Directive
A 2011 Society of HR Management (SHRM) report notes that, “When implementing… across national boundaries, issues associated with data privacy and data movement across these boundaries must be kept in mind. Different countries and regions have enacted laws and policies that can significantly affect the design and implementation... Global corporations must strike a balance between global consistency and local flexibility when implementing new technology.” Unlike the U.S. which has no single data protection law (information being protected by a combination of legislation, regulation, and self-regulation rather than a single federal statute) the EU has strict legislation governing protection of personal data. The Directive requires the establishment of a National Data Authority in each member country and the appointment of a Data Controller in each organization, responsible for ensuring the safety of personal data. Given that payroll data contains highly sensitive information for each employee such as Social Security numbers (or their country-specific equivalent) and banking details, non-EU employers with EU-based employees face a compliance requirement that is not only strict but often unfamiliar as well. In order to bridge the gap for U.S. companies, the U.S.-EU Safe Harbor Framework has been established, which guides organizations to a self-certification that their data protection practices meet EU criteria.
Global Payroll Regulation #7: Acquired Rights Directive
Designed to protect employees working for companies with a history of mergers and acquisitions, this directive gives employees the legal right to transfer to a new employer with their existing terms and conditions of employment intact. The directive also protects employees from being let go during a transfer of employment contract –automatically deeming such dismissals unfair is the principal reason for the dismissal is the transfer itself. The impact on payroll management is that potentially, after a number of mergers or acquisitions, payroll processes must track and deal with employees in similar (or identical) roles that nevertheless are in receipt of differing remuneration packages.
Payroll Compliance Issues in the Asia Pacific Region
Numerous organizations have turned their attention to countries throughout the Asia Pacific region to capitalize on opportunities for reduced labor costs. While this cost reduction generalization does not apply to all AP countries (most notably Japan, Australia and New Zealand), the fact remains that regardless of reasons for expansion into this region, organizations must nevertheless be cognizant about compliance. In fact, by way of a warning regarding the regions intense employment diversity, the Towers Watson 2012 report (Everything Is Possible; Nothing Is Easy, What You Need to Know About HR Service Delivery in Asia) states, “Labor costs, technology infrastructure, governance and legislation, decision-making processes, work practices, culture and, of course, language all differ markedly from country to country.” Or, as HRMAsia.com puts it, “Companies not up to speed with local employment laws in Asia are likely to face hurdles.” Interestingly enough though, there does appear to be a general trend (though proceeding at different rates in different countries) towards “westernizing” labor laws; embedding national guidance on issues such as minimum wage, employment contracts, termination and so on. As such, compiling the region’s regulatory environment into a single, cohesive set of guidelines is all but impossible. China, however remains a country that is particularly difficult territory to navigate, especially in regards to the overarching Labor Law.
Global Payroll Regulation #8: Labor Law of the People’s Republic of China
Effective since 1995, this all-encompassing piece of legislation covers employment contracts, working conditions, wages, hours, welfare, training and labor disputes. As an indication of the nature of many of the provisions which an organization new to China would need to become familiar with, the overtime provisions are particularly precise. Requiring employees to work “longer hours” (more than eight per day or 44 per week) demands overtime pay of 150% of normal salary. Likewise, working on a “rest day” attracts 200% and legal holidays, 300%. Although such precision can make payroll calculation simpler, the practices of a foreign-based organization used to its own overtime rates could easily result in non-compliance.
Payroll Compliance Issues in the Latin American Region
Currently the Latin America payroll environment (South and Central America and the Caribbean) is seeing an increase in outsourcing provision and take up and, encouraged by wider social and government service use, a relatively high adoption of prepaid payroll cards. While unique in its own right, the payroll legislation landscape of the Latin American region will be reasonably familiar in light of the above examples from other regions. For example the Labor Code and associated legislation in Brazil (one of the strongest Latin American economies) covers employment definitions, contracts, working hours and minimum wage. However, as with other regions, foreign organizations looking for a local presence in the Latin America markets should enquire about compliance issues that are specific to the country tapped for expansion.
Global Payroll Regulation #9: Employment Contract Law No. 20,744
Under this statute, although there is no requirement for contracts of employment to exist in writing between employer and employee, there is an obligation on the employer to immediately register the employment relationship in a Special Payroll Book, which is subject to periodic control and supervision by the Ministry of Labor. According to Baker & McKenzie’s Overview of Labor and Employment Law in Latin America, failure to comply with this obligation, could result in significant compensation being due to all employees involved.
Payroll Compliance Issues in the Middle East Region
The Middle East region, often economically associated with North Africa (MENA) or even both Europe and Africa as a whole (EMEA) nevertheless contains significant legislative diversity of its own. Including the strong, oil-based economies of countries such as Saudi Arabia and the United Arab Emirates (UAE) the region attracts heavy foreign investment interest, as well as heavy populations of contingent and migrant labor. As with all the global regions, the individual countries mostly legislate on the standard employment and payroll-related issues but compliance pitfalls for the unwary remain.
Global Payroll Regulation #10: The United Arab Emirates’ Wage Protection System
Launched in 2009 by the UAE government, the Wage Protection System (WPS) applies to all employers and seeks to protect the salaries of all workers by requiring that all wages be paid via selected financial institutions that are in turn authorized and regulated by the government. Notably though, this system does not necessarily require or even encourage employees to have bank accounts. In fact, this scheme has furthered the emergence of private networks of ATM machines designed to allow workers access to their salaries. Nevertheless, the WPS gives the Ministry of Labor real-time monitoring of salary payments and allows for easy penalizing of defaulting employers.
The Bottom Line on Global Payroll Regulations
While these top 10 regulations (and others) have clear implications for organizations, on a more general note companies should be cognizant that understanding the compliance landscape goes far beyond simply memorizing current laws. Indeed, truly effective management of global payroll regulations means developing awareness that:
Each country has a unique labor law and payroll landscape which, even if payroll management is outsourced, the client organization must have a full appreciation for.
The precise details of key payroll issues (e.g. minimum wage, overtime pay, maximum hours, etc.) will vary from country to country and must be managed accordingly.
The hallmark of the payroll-savvy organization is not so much about having the in-depth payroll knowledge, but rather knowing the right compliance questions to ask when looking at payroll services.
In summary, for organizations seeking to expand into other geographic regions, or to hire virtual workers overseas, familiarity with legislative similarities and differences in each country of operation is critical to avoidance of penalty for non-compliance. In-country expertise and appropriate payroll software can go a long way to enabling full compliance with reporting and record-keeping mandates and ensuring payroll accuracy according to regional and national variations. As a Paychex report (Mastering Payroll Compliance) observes, “Businesses pay government agencies millions of dollars each year in labor and tax compliance penalties. And, in this economy agencies are more vigilant than ever about enforcing regulations”. A combination of the right payroll software and potentially outsourcing can ease this compliance burden; however, in order to take full advantage of the capabilities afforded by automation and/or service providers, an organization needs to understand the broad legislative requirements.
As global payroll specialists Webster Buchanan point out in a recent report (Multi-country Payroll: Analyzing the Business Benefits and Challenges), it can be difficult to look past the individual factors that create national level payroll environments. In reality though, “while every legislative environment is different, 70% or more of the processes performed in a payroll operation are common regardless of where they take place.