- Remote working and offshoring can address talent shortages but surface different issues in different jurisdictions.
- Employers must comply with the human resources, tax and payroll regulations of the jurisdiction where the employee is physically doing the work.
- Some available solutions take care of the entire process of engaging and paying staff while others solve a specific part, such as complying with local pay rates.
The closed borders arising from the global coronavirus pandemic have exacerbated already acute talent shortages in Australia and New Zealand. As the talent shortage worsens, many companies are taking a new approach: hiring staff who live and work overseas, be it in Asia, Europe or the US.
“The basic driver is that demand for resources is absolutely going up, while the availability of local resources is going down,” says Greg Harrison, a Sydney-based business adviser with New Zealand Trade & Enterprise, which helps Kiwi companies expand offshore.
“The resource constraints, particularly around technical people, salespeople and marketing people are considerable. They’re well-known problems in Australia. They’re well-known problems in New Zealand.”
At the same time, Australian and New Zealand companies are seeking to expand offshore, setting up branch offices and sales offices in foreign locations, and engaging local staff.
“We’re seeing a lot of companies, particularly in the tech space, really extending quite rapidly into new markets. These companies are looking at markets across North America and South-East Asia and Europe to really grow their customer bases,” says Kathleen Lawler, senior manager (technology) at Austrade, the Australian government’s agency to promote trade and attract investment.
“We’re seeing a lot of companies, particularly in the tech space, really extending quite rapidly into new markets.”
Hiring and paying staff in offshore locations has its challenges. On top of the issue of finding the right people in a foreign country, there are all sorts of issues in understanding and complying with local human resources, tax and payroll regulations. Consultants at PwC have noticed an upswing in companies employing staff offshore. Border closures have meant that staff hired to work in Australia and New Zealand haven’t been able to enter the countries, and so are commencing their employment overseas.
Additionally, a rising number of organisations across many industries are implementing policy changes that allow their employees freedom to work from any location, potentially indefinitely, PwC partner Alana Haiduk notes in a recent article, What should Payroll consider for employees working remotely due to COVID-19?
Where an employee physically performs their duties affects the employment tax obligations for their employer. “Employers need to determine what is required of them in the countries where they now find they have remote employees, even if they have no other business presence in that country. Failure to comply with employment tax obligations can lead to penalties, interest and reputational risk,” PwC advises.
This presents companies with a dilemma. Getting on top of all the employment and taxation obligations in an unfamiliar jurisdiction is a complex and time-consuming task, particularly if there are language barriers. In many cases, to employ someone in an offshore jurisdiction a company will be required to set up some sort of local entity, which further increases the complexity and expense.
Choosing the right solution
More companies are turning to tech solutions to help them manage these obligations. Some solutions take care of the whole process – all the way from finding and engaging staff to paying them and complying with local regulations. Others solve a more specific part of the problem, such as complying with local pay rates or making the foreign exchange payments.
As useful as these tech solutions may be, Harrison says companies need to do their own research to see if a tech solution is appropriate, or if they would be better off using a global accounting firm or consultancy.
“The organisation involved needs to actually understand why they’re engaging a technology solution rather than the consulting service,” he emphasises.
“The organisation involved needs to actually understand why they’re engaging a technology solution rather than the consulting service.”
“They need to appreciate the underlying issues at play, and then whether it’s to engage a consultant, engage an accounting firm, engage a technology solution just becomes a business decision.”
There are three ways an Australian or New Zealand company can hire someone offshore says Shannon Karaka, head of expansion Australia and New Zealand at Deel.
For starters, they can establish an entity in the country where the staff member will be, or they can engage contractors overseas. While the latter is cheaper and faster than establishing an entity, it also carries misclassification risk.
In most countries, if a contractor works full-time for a single employer for a period of time and doesn’t have the flexibility to work for other companies, then they can end up being classified as a permanent employee and the employer can face stiff penalties.
“Over time, the risk increases because that contractor looks more and more like an employee,” says Karaka, adding that the risk of misclassification in the US, the UK, Germany, the Netherlands and France is particularly high.
The third option is to leverage a third party to do the hiring and paying – a service that companies such as Deel offer.
“What we do is we act as an employer of record, which means if a company wants to hire someone in a different jurisdiction, they don’t have the entity set-up. We hire that individual and we assume responsibility for the compliance,” Karaka says.
Picture: Shannon Karaka, Deel.
“We act as an employer of record, which means if a company wants to hire someone in a different jurisdiction, they don’t have the entity set-up.”
“We also manage payroll, which includes the salary but also the statutory costs and benefits that are required by law in that country.”
Employers using Deel can hire staff as contractors or as permanent employees. When contractors are hired, Deel monitors their working pattern and advises if the employer is at risk of misclassification. In some arrangements, it provides financial protection for the employer if they are fined.
Deel has more than 80 entities in different jurisdictions and acts as the employer of record for companies wanting overseas staff. It ensures adherence to minimum salary requirements, annual leave and other entitlements, and manages payroll in the local country.
For instance, it would pay a UK employee in pounds and also bill the overseas employer in pounds, but give them the option of paying in local currency.
Deel uses standard employment contracts but they can be modified – with extra annual leave for instance – if the employer wishes.
A company can hire and pay someone online in 10 minutes, says Karaka, although Deel also has consultants to help with more complex needs.
Johann Oberholzer CA was an auditor at PwC when he saw a friend start his own business and struggle with accounting and invoicing.
Oberholzer identified a gap in the market and went on to develop Sole, an accounting application specifically for sole traders and the self-employed.
It is essentially a slimmed down and much cheaper version of Xero or MYOB, without a payroll function (although one is in the works).
Oberholzer says he is aiming the app at sole traders and the self-employed who are not currently using any accounting software because it is too complex or not fit for purpose.
The iPhone/Android application allows sole traders and freelancers to send invoices and receive notifications when they are paid to ensure they can remain on top of their cash flow.
Picture: Johann Oberholzer CA.
“We essentially give them the ability to be able to track their cash flow and budgeting in real time,” Oberholzer says.
“We actually have the bank account being integrated into the application through a bank-grade security API and then they can do all the reconciliations through that and manage multiple bank accounts.”
Launched 12 months ago, the app has a tax estimator that progressively calculates how much tax the business owner will need to pay as the year progresses. Another feature is budgeting, which allows the user to enter their target earnings for the year. Sole then lets them know how they are progressing towards their target and what they will have to earn each month to achieve it.
Like Xero and MYOB, Sole can share its data with the user’s accountant when tax time comes.
For businesses that can manage the compliance and tax issues of overseas staff and only need help with foreign exchange transactions, Paytron may be an option.
Businesses typically use a large number of payment systems – a payroll system generates a file that is then sent to the bank for payment; overseas transactions require an FX (foreign exchange) application; and paying suppliers can be done in myriad ways.
Picture: Paytron founders Jaco Veldsman and Francois Henrion.
Paytron uses APIs to bring all these payment methods together into a single platform, with the same method for each, including FX.
To avoid situations where payments are held up due to the approver needing additional information, Paytron brings all the documentation around the payment into its cloud-based platform. This allows the approver instant access.
Cloud-based secure payroll system iPayroll has been operating in New Zealand since the early 2000s, helping about 10,000 small to medium businesses. It set up subsidiary CloudPayroll to support workers in Australia in 2010. The bulk of its customers are Australian companies wanting to pay someone in Australia or New Zealand – or vice versa.
Managing director Martin Gleeson says they do receive emails from overseas companies wanting to know how to set up a staff member in the antipodes.
“They don’t know about Kiwi Saver or Payday Filing or Single Touch Payroll and superannuation,” he says.
“People think they have to deal with someone local but with cloud-based you don’t. As long as they have an NZ IRD number or Australian ABN or WPN we can help them,” he says.
Australians and New Zealanders are very familiar with each other’s countries but, nonetheless, hiring staff across the Tasman presents difficulties.
Valantis Vais, head of product for enterprise at cloud accounting company MYOB, names two.
“If an Australian company is hiring somebody in New Zealand, they need to meet the payroll and compliance obligations of the country that the person is working in, and that would require you to have essentially payroll software that is denominated in that country to manage it,” he says.
The second issue is how those foreign wages are integrated into the business and management reporting.
“Let’s say I’m based in Australia and I have a team of people in New Zealand. How do I make sure that their costs are being allocated to the right set of projects where all that payroll information comes into a central location, and essentially ensure that reporting works?”
MYOB has a payroll solution that sits in both jurisdictions and seamlessly connects to the organisation’s enterprise resource planning (ERP) system.
The payroll solution meets compliance requirements in both countries and has an award engine that interprets industrial awards to ensure employees are paid their entitlements. It also captures any work visa requirements.
MYOB has also released what it calls multiple base currencies, which allow a payroll administrator in New Zealand, for instance, to work in NZD, and Australian staff to work in their own currency.
The MYOB system generates ABA files [Australian Banking Association format files] for payments but leaves the foreign exchange and the payment itself to the company to manage.
Steve Evans, CEO of ConnectOS, says it can be extremely difficult to hire staff in some of the more popular offshoring destinations, such as India and the Philippines.
These jurisdictions are a long way behind in the digitisation of compliance requirements, such as opening bank accounts, incorporating companies, making payments and paying taxes. “They’re still very heavily paper- and process-based,” Evans explains.
Incorporating a company in the Philippines is a major challenge. “You’ve got to go through a lot of steps. You need Filipino directors and local people to sign things off on it. You need a certain amount of paid-up capital for a foreign company, say US$200,000. And Filipinos need to have a bank account with the same bank as their employer to get paid,” he says.
ConnectOS allows businesses in Australia and New Zealand to hire contractors in the Philippines using ConnectOS as the employer of record. It has head offices in Melbourne and New York and a team in Manila in the Philippines. It provides staff across finance, IT, customer service, as well as architects and social media personnel.
“We employ the staff member. We indemnify and protect the Australian and New Zealand client from all labour laws and compliance issues. Everything else in the Philippines is on us. We do the HR and payroll each month. We take care of that and all the government compliance,” Evans explains.
“We allocate them full-time to the Australian or New Zealand client to work seamlessly as an employee essentially for them. We’re actually the employer of record, but day-to-day they feel like a part of the customer’s team, the Australian company’s team.”
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