Tips and effective solutions for global payroll errors
Payroll
Author
Laura Bohrer
Date published
15.08.2024
Payroll errors can have severe negative repercussions on a business’s financial integrity, its reputation as an employer, and its employees. Enhancing payroll accuracy by reducing the frequency and severity of errors should therefore be a top priority for organizations, especially for those with international operations.
In global payroll, businesses not only need to beware of operational errors, but they also need to prevent strategic errors that could jeopardize their entire global payroll operation. What are common global payroll errors? How do they impact multinational organizations? What strategies can help businesses prevent errors in global payroll? Here’s what you need to know.
What are common global payroll errors?
There are two types of errors that can occur in global payroll. On the one hand, there are operational errors that are the direct result of wrongful payroll calculations or inaccurate data entry. These errors include overpayments or underpayments, missing commissions or bonuses, or even missed salary payments.
On the other hand, there are strategic errors in global payroll which may not necessarily produce tangible problems at first, but can lead to large-scale inefficiencies and costly compliance mistakes further down the line. Examples of strategic errors in global payroll include missing deadlines for filing and reporting payroll taxes and mixing up payroll components between different countries.
The repercussions of global payroll errors
Global payroll errors can have severe negative repercussions on a multinational organization. They can affect businesses in several different ways which range from tangible financial losses to talent drain. Here is a summary of the consequences that can result from recurring errors in global payroll.
Reputational damage: Frequent mishaps in global payroll can quickly damage a business’s reputation. Due to the large scale of operations, global payroll errors will hardly go unnoticed.
Financial losses: Errors in international payroll processing can have severe financial consequences for businesses, since they can have rippling effects that spread over multiple geographies.
Compliance issues with local authorities: Depending on the nature of the payroll mistake committed by the organization, local authorities could decide to undertake corrective actions to make an example of the organization. Severely inaccurate payroll reporting and tax filing could lead to operational disruptions if the company gets temporarily banned from operating in the jurisdiction. Especially in the early stages of international business expansion, the effects could be devastating.
Increased employee turnover: As HR Dive reports, two payroll errors are enough to make nearly half of employees leave a company. Employee turnover costs companies real money, with estimates suggesting that U. S. businesses lose a trillion dollars every year due to employee turnover. Moreover, if local payroll processes are not working as they should, this could negatively impact the business’s ability to attract talent in this geography in the long run.
Tips for preventing global payroll errors
Since there are many different types of global payroll errors, there is no one-size-fits-all solution for preventing them. Instead, businesses need to take different preventative measures to account for all eventualities. Here is an overview of some of the most common errors in global payroll along with individual tips on how to stop them from happening.
Payroll miscalculations
Many payroll errors result from miscalculated payments. Payment miscalculations can have different origins. For instance, they can be the consequence of inaccurate data input or they can result from errors in employee benefits deductions.
Mismanaging exchange rate fluctuations can also lead to pay miscalculations. In this case, the calculation itself might be correct, but the final amount that hits the employee’s bank account differs from the sum which has been agreed in the employment contract.
How to prevent payroll miscalculations:
Leveraging payroll automation to replace manual tasks and carry out automated payroll checks
Introducing of a double-check system to verify the accuracy of the payroll data input
Implementing strategies for managing currency exchange in global payroll
Employee misclassification
Employee misclassification, also known as disguised employment, is a common mistake businesses make when expanding into new territories. Working with independent contractors to start building a local presence in a new market is a common strategy, but it often leads to businesses classifying their workers as contractors although they should actually be classified as employees.
How to prevent employee misclassification:
Using country-specific employee classification checklists
Getting support from local employment experts to classify workers correctly
Contracting the services of an Employer of Record (EOR) to hire employees without establishing a local entity
Late or inaccurate tax filing and reporting
Calculating, deducting, and filing payroll taxes is one of the most important tasks in payroll. When running a multi-country payroll, however, it can be hard to keep track of the different country-specific deadlines for remitting payments and submitting payroll tax declarations. Missing deadlines can have severe negative consequences for the business, such as penalties, fines, and reputational damage. The same holds true for inaccurate payroll tax reports.
How to prevent late or inaccurate tax filing and reporting:
Introducing a detailed payroll and compliance calendar that contains all the relevant dates and deadlines for payroll processing, tax filing, and reporting
Outsourcing payroll to in-country partners who manage compliance and handle tax administration
Implementing a double-check system to spot potential mistakes before submitting reports
Incorrect employee information
Employee personal information changes frequently. Whether it’s a new bank account to which salary payments need to be transferred or a changed surname after a wedding, any changes affecting an employee’s personal details need to be updated in the payroll system as soon as possible. If changes are not updated in time for the next payroll run, this results in payroll errors which need to be corrected.
How to prevent incorrect employee information:
Introducing employee self-service functions for payroll where employees can update their information autonomously
Clearly communicating cut-off dates for payroll changes to all parties that handle employee personal information
Delayed salary payments
Delays in salary payouts are another common global payroll error. Cross-border payments take longer to process than local payments when using traditional payment methods. If payroll administrators fail to allow for additional time for the payment to go through or forget about an upcoming bank holiday, payments won’t hit employee bank accounts on time.
How to prevent delayed salary payments:
Developing a payroll schedule that allows for additional time for processing cross-border payments and takes into account country-specific public holidays
Investing in alternative payment methods for global teams, such as digital wallets or Earned Wage Access (EWA)
Payroll errors resulting from mismanaging multiple payroll vendors
Many multinationals work with several in-country payroll providers to process their international payroll. Managing multiple vendors can, however, add an additional layer of complexity in global payroll management. This often results in a lack of operational oversight which, in turn, increases the risk of errors.
How to prevent errors resulting from poor multi-vendor management:
Using a unified global payroll solution to avoid errors resulting from a mismanaged multi-vendor approach
Establishing standardized payroll processes and data formats across all regions to streamline consolidation efforts
Compliance mistakes resulting from improper local payroll set-up
Taking a shortcut when first setting up in a new market is tempting because it avoids the costly and time-consuming process of establishing a local legal entity. However, failure to build a proper local payroll infrastructure is likely to result in severe compliance problems, such as missing employer information on tax reports, and more.
How to prevent compliance mistakes related to the local payroll set-up:
Using an Employer of Record to hire local employees to avoid entity set-up and outsource employment compliance
Completing business registration with the help of local experts
Checking for potential alternatives, such as the Foreign Employer model
Data protection violations
Payroll data is highly sensitive, which means that it must be protected according to the highest security standards. Moreover, businesses need to comply with country-specific data protection requirements. Failure to do so can lead to steep fines and severe penalties. Multinational businesses operating in Europe, for instance, need to be familiar with the implications of GDPR for global payroll.
How to prevent data protection violations in global payroll:
Investing in a global payroll solution that fulfills the necessary data protection requirements and has strong security measures in place to keep data safe
Global payroll errors committed by external providers
While payroll outsourcing significantly reduces the risk of payroll errors and compliance mishaps, it doesn’t guarantee a completely error-free payroll. Taking into account that outsourcing payroll doesn’t mean outsourcing liability and responsibility regarding payroll accuracy and timeliness, businesses need to make sure that they put their global payroll in capable hands when choosing payroll service providers.
Payroll errors committed by external payroll service providers can be hard to rectify and communication can be slow and ineffective due to the different parties involved.
How to prevent global payroll errors committed by external service providers:
Carefully assessing potential payroll vendors before closing a service contract, ideally using a detailed global payroll RFP template
Regularly evaluating the service quality of existing providers by going through a detailed payroll service satisfaction checklist
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Strategies for rectifying errors in global payroll
Despite the best efforts, errors in global payroll cannot always be prevented. The important thing is, however, to be prepared when payroll errors happen. Preparing for mishaps in global payroll includes defining definite strategies for dealing with errors when they occur. Here are a few tips and best practices for rectifying global payroll errors.
Timely and open communication: No company in the world achieves one hundred percent payroll accuracy. Errors in payroll happen. But if they do, they need to be communicated in a timely manner. Businesses should be open about payroll mistakes. A payroll processing error letter should be sent out to affected employees. The letter should explain the mistake, state an official apology, and outline when the error will be rectified.
Clear priority system: Different countries have different rules for how long employers have for rectifying payroll errors. No matter what the legally prescribed time frame is, payroll errors should always be corrected as quickly as possible to limit financial stress for employees. In order to enable their global payroll team to act as quickly as possible, businesses should establish a clear priority system for payroll tasks that outlines which tasks to deprioritize to make time for correcting any errors that might have happened.
Off-cycle payment procedures: Given that many employees live from paycheck to paycheck, payroll errors such as underpayments or missing bonus payments should be corrected as soon as possible. Payments issued outside of the normal payroll cycle are called off-cycle payments. To ensure that these payments go through quickly and without any unnecessary hold-ups, organizations should establish clear procedures for payroll employees to follow.
Payroll error rectification checklist: Even small calculation errors in payroll require several retrospective adjustments concerning subsequent process steps. For instance, inaccurate payroll calculations lead to inaccurate global payroll reporting and tax filing. All the documents and processes need to be corrected from the process step where the error has happened onwards. To make sure nothing is forgotten, businesses should develop a payroll error rectification checklist that details all the steps that need to be completed in the process.
Avoid global payroll errors with Lano
Successful global payroll management requires streamlined operations, automated processes, and standardized data. The higher the level of automation and standardization, the lower the risk of costly payroll errors and compliance mistakes.
Not sure where to start? Lano offers comprehensive global payroll services paired with an advanced global payroll consolidation platform. Enhance your overall global payroll efficiency with streamlined processes and consolidated global payroll reporting, benefit from detailed insights into your global payroll data to inform business decisions, and get access to a global network of vetted payroll partners. Book a demo with one of our payroll experts to learn more.
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