Mitigate Risk: Follow the Compliance Checklist
By Jayson Saba
Regulatory complexity heightens human capital management challenges for global organizations. As the globalization of the workforce grows, there will be ongoing pressure to maintain compliance. A lax approach to compliance oversight can lead to major fines and penalties—while dealing with improper payments, sagging employee morale, and poor employee retention rates.
The compliance challenges involved in operating across borders can be numerous. Yet for most, noncompliance is the result of systems and processes that were not designed to manage the specific payroll requirements inherent in a multi-country scenario.
Managing global compliance is the second most important job for payroll after accurate and timely payment. By including the following categories as part of an auditing process, payroll practitioners can help their organizations reduce risk, avoid compliance headaches, course-correct if necessary and, ultimately, save time and money. Like many things, diligence before the fact pays dividends as opposed to remediating after an issue surfaces. In addition to potential fines, it would take a lot of effort to identify what went wrong and understand whom to hold accountable.
Use the following categories to review, verify, and validate to stay in compliance:
1. Employee data (general)—Take the time to verify employee data and ensure that each employee profile includes all required data elements, such as their address, employee ID, pay grade, benefits elections, certifications, and, of course, employment status. This is especially critical on a global scale as each country has its own set of rules and requirements. Check that the employees who received paychecks were actively employed during the time period the paycheck covers.
2. Employee pay and hours—Check on the accuracy of employee hours worked versus hours paid, pay rates and number of hours worked, overtime payments, payment for time off, deferred compensation payments, or other special payment arrangements. In certain European countries, there are strict regulations on time worked based on what is included in the employment contract. This is also true in the case of collective bargaining agreements signed with employee unions.
3. Remittances—Confirm the accuracy of remittances (i.e., tax, social insurance) made on behalf of the employee and employer to government agencies.
4. Payroll taxes and annual reporting—Confirm the accuracy of employer payroll taxes paid in your organization’s countries of operation (e.g., in the United States: federal income tax, state income tax, local income tax, FICA, additional Medicare, FUTA tax, and self-employment tax, as applicable) and annual reporting (at all federal, state, provincial, and local levels. For example: Forms 940, 941, 943 in the United States. This could be different in other countries. In Canada, employers must report on health/ education levies and Health Services Fund contributions, which could differ by province.
5. Employee annual reporting—Review income forms, summaries, etc., for inconsistencies.
6. General ledger review—Compare and verify all payments made to employees, government agencies, etc., and reconcile with bank accounts. Check the transactions posted in the payroll ledger accounts against the total payroll expenses for the period. Verify the vacation pay, personal time off, and other associated payroll costs against the transactions posted in each of the corresponding general ledger accounts.
7. Employee special reporting—Ensure timely and accurate issuance of, for example, new hire reporting or instances when earnings are interrupted.
8. Employee government forms—Review employee government forms affecting at-source tax withholdings, permits/status in-country, etc.
9. Workers’ compensation premium and reporting—Review workers’ compensation insurance premium payments and ensure that the associated earnings are appropriate. This differs by country and by state or province. A best practice is to inquire about whether registration is necessary within a specific state, province, or other locale where you have employees beyond the federal level.
10. Payroll processes—Review written and unwritten payroll procedures the payroll department uses. For example, choose a different policy each quarter and take a fresh look at what is working or what might need to be tweaked. An important aspect of the process review is to make sure that the appropriate checks and balances are in place for those employees who are in charge of payroll processing. If a payroll process remains unwritten, seriously consider documenting it in writing.
11. Validate your thinking—If you send money or data to an agency, check its employer guide and document deadlines. Understand where the checks and balances are for each jurisdiction of your operations, and establish or confirm receipt of written policies addressing proper payroll processes, defining roles and authorities, and document retention.
12. Confirm expectations—If you outsource certain tasks to a vendor, establish where responsibilities lie. Define roles and the limits of its authority, and determine how information will be shared, at what frequency, and who will retain it. For example, if a company outsources payroll to a third-party partner, there needs to be a clear understanding on who is reporting hours worked. Does that responsibility lie with the employer or the outsourcing provider?
13. Establish an audit schedule for review and follow it—Reviewing data—especially across multiple countries—takes time. Ideally, payroll auditing should happen frequently and regularly. In a perfect world, at the close of a pay period. This would allow time to detect errors and determine whether they are the result of a flawed assumption or calculation error. That said, payroll adjustments and corrections tend to be easier if they are made mid-year versus year-end.
14. Plan for adjustments—It is likely that any payroll audit will uncover errors, so plan how you will handle necessary adjustments.
Having said all this, don’t underestimate the complexities associated with international payroll compliance—specifically country-specific compliance with regard to labor rules, regulations, taxation, and money movement. There is a need for operational sophistication in the payroll department. As definitions of work requirements change from border to border, so do the compliance and tax requirements for those employees. Organizations must constantly monitor local changes and provide a flexible solution that can keep up with the changing regulatory landscape across and within individual countries. Working with a payroll partner that has vetted in-country vendors in the countries where you have workers will give you the local knowledge and expertise to comply with payroll requirements in foreign jurisdictions.
Outsourcing to an international payroll partner that offers real-time reporting and a comprehensive strategy to address global pay processes along with HR and workforce management in one technology solution will make the auditing and compliance puzzle easier to solve. However, no matter how much a company outsources, there is always a role that individual global organizations can and must play in maintaining compliance.
Understanding what processes your organization has in a country and what you and your team might need is a good start, along with a solid understanding of where your workers are and which compliance rules they are subject to. Cooperation beyond a singular function team is key—enabled by internal partnerships among payroll, human resources, legal, and finance and externally between your company and your outsourced partner. Above all, if you can, audit often—not just mid-year. Why? Because payroll—especially global payroll management—is foundational to labor risk and financial risk—not just from the standpoint of payroll compliance, but compliance in general.