How to calculate employment costs when hiring abroad

Sooner or later, every company reaches the point where it needs to start thinking about expanding into new markets to prevent growth stagnation. However, international business expansion comes with numerous challenges and pitfalls. One of these challenges is hiring employees overseas.

Hiring international employees poses various compliance risks for businesses, ranging from employment law violations to permanent establishment risks. Also, expanding businesses need to budget for the expected cost of hiring, which is hard when employees are located in countries where the business doesn’t have any local compliance expertise.

Yet understanding how much it will cost to hire an employee in a new target market is crucial for creating an accurate expansion budget. Underestimating local employment costs can lead to financial bottlenecks and, in the worst case, lead to project failure.

Read on as we dive deep into the hidden employment and operational costs of hiring international employees and share some practical tips for better budgeting when hiring workers overseas.

Employment costs are all the costs that are associated with hiring and employing a worker. They include anything from salary and wages to additional bonus payments to statutory payroll taxes.

There are direct and indirect cost factors businesses need to consider when calculating their employment costs. Direct cost factors are costs that are directly associated with the employee’s remuneration. Indirect cost factors are additional costs that need to be paid as a result of the employment, such as overhead costs or recruitment costs.

As already mentioned, employment costs encompass many more aspects than just the actual cost of remunerating employees for their work. In addition to the direct costs of employment, there are various other cost factors to consider. And the number of cost factors grows even bigger when hiring international employees.

Direct employment costs:

• Base salary,

• Statutory employee benefits (sick leave, paid time off, social security, and more),

• Income and payroll taxes,

• Mandatory bonus payments or separate holiday pay,

• Other employer contributions to statutory funds and social security programs, and

• Voluntary employee benefits.

Indirect employment costs:

• Recruiting costs (e. g. fees for recruiting agencies, referral bonuses, or costs for using an Employer of Record),

• Onboarding costs (e. g. costs for paperwork, employee travel to onboarding events, or employee training), 

• Cost for equipment (e. g. laptop and software tools),

• Overhead expenses (e. g. rent for office space, utilities, or general office supplies), 

• Cost for running local payroll and HR support,

• Legal and compliance expenses in the target market,

• Transaction fees and fees for foreign exchange if the foreign hire gets paid in a different currency, and

• Cost of setting up a legal entity to compliantly employ workers abroad.

Other factors that influence the cost of hiring international employees include employee location, industry, work visas, union participation in the country of hiring, and country-specific additional pay elements. For instance, employees in Colombia are legally entitled to a transportation allowance equal to COP 162,000 which must be paid on top of their regular wages.

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Given the number of different cost factors to consider, calculating the costs of hiring foreign workers can be a very time-consuming task. However, businesses should do their due diligence and really go through the process from start to finish to get a good understanding of how much it will cost them to hire an employee in the chosen target market.

There are several reasons for this. First of all, labor is an important cost center for businesses and the cost of hiring international employees can therefore be a decisive factor when it comes to evaluating the profitability of overseas expansion.

Second, knowing what costs to expect enables businesses to improve their financial planning and budget accordingly. Not knowing how much it will cost to hire local employees upfront is likely to result in financial bottlenecks that could slow down the hiring process. If open positions that are crucial for establishing a local presence cannot be filled due to financial shortages, this could potentially cause the expansion endeavor to fail.

Third, understanding the real cost of hiring employees abroad helps businesses build a solid global compensation strategy for their international teams and ensure compliance with local employment, taxation, and compensation laws.

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Payroll costs and other expenses associated with hiring employees represent an important share in a business’s overall expenses. That’s why cost control plays a crucial role here. Read on as we give you some practical tips for keeping your international employment costs under control.

Carefully choose where you want to hire

Carefully choosing the country in which you want to hire can make a big difference to the incurred employment costs. The cost of hiring overseas employees varies significantly depending on where the employees are located. Countries with low cost of living and low payroll taxes are generally cheaper for hiring foreign talent. Check out this list of top countries for international business expansion.

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Try to avoid setting up local entities

The cost of establishing a local legal entity can be extremely high. If the main reason for incorporation is the need to hire local staff in the new target market, it’s best to check for alternative ways to hire employees abroad. For instance, you could start building your local presence with contractors and then hire them through an Employer of Record (EOR). Hiring employees via an EOR is typically a lot cheaper than creating a local entity.

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Consider cultural expectations

It’s not just compensation laws (e. g. minimum wage requirements), taxation, and statutory benefits requirements that influence the cost of hiring international employees. Instead, businesses also need to factor in cultural expectations surrounding employer-provided benefits and more.

In many countries with low compensation standards and basic social security programs, it’s common practice for employers to go beyond what’s legally required and offer additional compensation (e. g. a 13th salary), allowances, or complementary insurance coverage. Foreign employers who fail to respond to cultural expectations might find it hard to attract local talent.

When it comes to global expansion success, budgeting is everything. Here are a few tips to create an effective budget for hiring overseas employees.

• Be realistic about the expected cost: Realistic budgeting is key to ensuring that enough money is available to hire international employees and fill much needed positions in new target markets. Leaving out cost factors based on the assumption that it might be possible to cut corners here and there is not a good approach.

• Budget for unexpected surprises: Given the complexity of international business expansion, it’s not rare that things go wrong or that unforeseen things happen. At the end of the day, good financial planning also means calculating for unexpected surprises. In most cases, it’s better to put aside a little more money than needed—just to be on the safe side.

• Review and adjust your budget: While you should have a clear idea of how much money you will need to hire international employees, your budget shouldn’t be set in stone. Make a plan to review your budget regularly and adjust it as you go.

• Get external advice if needed: Businesses that don’t have any expertise or knowledge regarding employment laws and compensation requirements in a new country where they hire employees shouldn’t hesitate to get external advice if needed. This could be a local employment and compliance specialist or an in-country payroll provider who can shed some light on local tax and compensation laws.

• Use the right tools: Whether it’s international hiring and recruiting, HR management, or something else, having access to the right tools can make a big difference. An international employment cost calculator can make budgeting a lot easier for businesses that want to hire and grow a global team.

Global hiring is so much easier when you have the right tools at hand, including when it comes to calculating overseas employment costs. Lano’s Employment Cost Calculator lets you calculate employment costs around the globe in a matter of seconds.

Simply enter the details on where you want to hire, what position you want to fill, what the employee’s gross annual salary will be, and which currency you want to pay them in and watch the calculator work its magic.