Here’s a troubling statistic: 44% of employees in Europe recently reported receiving late paychecks. Here’s another: in 2022, the average individual payroll error cost U.S. companies USD 291 to fix.
If you’re a business owner or HR executive, the potential for payroll errors probably weighs on your mind. However, you can’t let the complexities of global payroll overwhelm you, because you definitely don’t want your employees’ paychecks to be late.
When employees aren’t paid, it creates multiple issues. First, your employees will be upset and stressed out, since they rely on paychecks arriving on time. When they don’t, it can hit them hard, throwing a wrench into their finances and eroding trust in you as an employer.
Fail to pay on time, and you may also face penalties, such as fines for incorrect tax withholdings or missed payroll taxes deadlines, as well as potential legal action under local labor laws.
Key takeaways:
- Navigating the nuances of employment laws in different countries can lead to payroll errors and missed tax deposits.
- Payroll mistakes can erode employee morale, and correcting those errors can be time-consuming and costly, a luxury your company can ill afford.
- Employers who pay late once are at risk of making additional errors in the future, which can lead to more severe financial and legal penalties.
Why Global Payroll Is So Tricky
Running payroll in a single country means following one set of labor laws; however, even then, payroll setup can be complex, and mistakes are easy to make.
A good example is Queensland Health in Australia. When its payroll system migration went off track in 2010, the resulting errors came with a massive price tag. The faulty move to a new system, which resulted in employees being underpaid or not paid at all, was estimated to cost around AUS 1.2 billion over eight years to fix. Yikes.
However, international payroll requires navigating multiple laws across several jurisdictions. That complicates an already maze-like workflow even further.
Some of the factors that can make international payroll a bit tricky include:
- Pay periods: Individual countries, or the states and provinces within them, can mandate their own pay cycles. Some require monthly or bi-weekly payments, while others offer no guidance at all. Global employers must meet the regulations of each region where they employ staff.
- Payroll systems: Relying on local providers to manage payroll across multiple countries fragments your company's data, increasing the likelihood of errors and, consequently, non-compliance. Additionally, you have multiple vendors to manage, further adding to the complexity.
- Currency fluctuations: When paying employees across borders, fluctuating exchange rates can inadvertently impact the final amount deposited into employee accounts. This can lead to overpayment or underpayment, which can frustrate employees and erode trust in your company's ability to pay them accurately.
- Tax regulations: Each country has distinct rules for filing payroll taxes, making deductions, and reporting earnings. Trying to manage these requirements manually or through separate systems increases the potential for error.
Payroll mistakes can occur for various reasons, such as currency mix-ups or inaccurate withholdings. Some of the most common slip-ups include:
- Miscalculating overtime pay
- Errors in deducting mandatory or voluntary benefits
- Incorrect tax withholdings for international employees
- Missed tax filings
- Employee misclassification
The potential for payroll errors presents a unique risk that many companies find challenging. In fact, a recent survey found that over 50% of companies were penalized for non-compliant payroll.
The Steep Price of Oops: Why Timely Payroll Matters
The fines for late payments are only the start. Missing payroll can quickly create a ripple effect that leads to hidden expenses for your business, such as:
- Wasted time: Make an error, and your HR, finance, and administrative teams will need to pivot to reconcile data, recalculate employee withholdings, amend payroll tax filings, and communicate with local providers and employees.
- Increased administrative costs: If your staff can’t resolve the issue, you may need to contract external providers to perform retroactive fixes and ensure compliance. It’s time-consuming. It’s a burden. And it’s avoidable.
- Audits and fines: Late payments can signal non-compliance and lead to audits and penalties. Authorities can impose escalating fines for continued non-adherence to labor laws, especially if your company has improperly misclassified workers.
- Lawsuits: Labor laws tend to protect employees explicitly. They can — and often do — enable employees to file lawsuits, including for late wages. This results in legal defense fees and potential settlements that dwarf the original amount owed.
Receiving pay for work performed is a basic expectation of the employer-employee relationship. Failing to meet that expectation can impact your bottom line by reducing:
- Morale and productivity: Employees under financial stress from late paychecks are likely to be anxious and distracted. This can quickly translate to lower morale and decreased productivity.
- Employee retention: Late paychecks can quickly drive employees away, resulting in higher hiring and onboarding costs.
Ultimately, repeated failure to pay your employees on time will create a reputation for poor financial practices, making it more difficult to replace the employees you lose.
Understanding Payroll Penalties
There’s no two ways about it, late international payroll payments are a serious compliance risk. Each country has its own labor laws, deadlines, and enforcement practices, which means there’s no universal rulebook for paying employees on time. A payroll process that works smoothly in one country could easily be out of compliance in another.
Another challenge is that enforcement varies widely across the globe. In some countries, authorities issue warnings or provide grace periods before penalties are applied. In others, fines or legal action can happen immediately, with little to no notice.
This inconsistency makes it easy for global companies to be non-compliant without realizing it — until the penalties arrive.
The takeaway: a one-size-fits-all payroll system simply doesn’t work for international teams. Staying compliant means localizing your payroll operations, keeping up with each country’s regulations, and partnering with experts who can help you stay ahead of changes.
Potential Penalties for International Employers
The penalty risks for failing to make payroll are extensive, especially given the fact that payroll laws sometimes vary not only by country but also by state.
It’s a headache to juggle the potential for triple wage liabilities in one place — like the state of Massachusetts in the U.S. — while facing undefined penalties in another, such as Brazil, where payroll must be completed by the fifth business day of each month or else an undefined penalty might be assessed.
However, it’s a weight that international employers with employees based in multiple countries across the globe have to carry.
For example, in the province of British Columbia, Canada, employers may owe interest on unpaid wages and face fines up to CAD 10,000. Likewise, in the United Arab Emirates, employers must pay salaries within 10 days of the due date. Employers who fail to make these payments may face fines and the potential suspension of their work permits.
Misclassifying workers is a risk everywhere, and the penalties can add up fast. In France, for instance, Uber was fined EUR 17 million in 2023 for misclassifying its employees as freelancers.
Factors That Affect Penalty Severity
The financial impact of a late payment is rarely a one-time problem. When payroll errors occur repeatedly, the costs tend to accumulate over time and become even more expensive to rectify. A few key factors can make delayed paychecks even more costly, including:
- Size of the business: For a small business in particular, even a single penalty can be a threat. One study found 40% of small businesses are fined annually for payroll tax mistakes, with the average penalty costing around USD 850.
- Duration of delay: Penalties escalate over time. Authorities can charge interest on unpaid payroll taxes, which can rapidly inflate the amount owed. Furthermore, penalties may be tiered: a payment only a few days late might incur a 2% penalty, which jumps to 10% after 15 days.
- Frequency of offense: Repeated late payments can signal to regulators that a company is knowingly ignoring the rules.
How to Avoid Payroll Penalties
The best way for businesses to prevent late payments and avoid potentially significant financial costs is to take proactive steps to ensure payroll compliance.
Not sure where to start? A good first step is to automate your payroll systems with built-in compliance for the tax laws of each country in which you operate. Payroll software handles calculations for tax withholdings and payroll taxes automatically, helping ensure everything is paid accurately and on time.
It’s also smart to stay current with local labor laws by working with trusted partners in every country where you have employees. That can help reduce the risk of worker misclassification. The challenge is that managing multiple payroll providers across regions can quickly turn into a full-time job.
To simplify the process, consider partnering with an Employer of Record (EOR) to streamline your hiring efforts. An EOR assumes the legal responsibility for ensuring accurate and on-time payments, helping you maintain employee trust and prevent reputational damage.
RemoFirst Ensures On-time Payments, Every Time
When you partner with RemoFirst, we make sure that your global employees are paid accurately, on time, and in their local currency across over 185 countries.
We also take on the administrative burden of managing global payroll compliance issues, freeing your team up from the challenges of learning detailed employment laws in multiple countries.
Our process is centralized and automated: your company receives a single invoice in a single currency, such as USD or EUR. Meanwhile, RemoFirst’s platform automatically handles the complex, country-specific calculations for each employee.
We also ensure that all necessary local taxes, social security contributions, and benefits are correctly withheld and remitted to the relevant authorities.
Ready to learn more about how RemoFirst can power always-on-time payroll? Schedule a demo today.
