When it comes to HR and payroll, the European market can be particularly complex for US-based companies. Here's why.
While the 28 member countries of the European Union are unified in some ways, when it comes to HR and payroll, they can vary greatly, from how they implement EU directives to government disclosure requirements. And non-EU member states such as those in Eastern Europe, Switzerland and Scandinavia present unique difficulties of their own.
If you're experiencing headaches coordinating HR and payroll in Europe, working with in-country experts can help you navigate the complexities and streamline your processing. Here are six key challenges that businesses from the United States can face when managing payroll in Europe.
1. Reporting frequency and requirements
Each country in Europe has specific requirements regarding what type of information must be reported and when. In some nations, employers must keep up-to-date figures and report information to external authorities monthly. In other countries, government reporting is much less of a burden and only required annually.
In the United Kingdom, all employers must notify Her Majesty's Revenue & Customs (HMRC) of their PAYE (Pay As You Earn) liability at the same time, or before, they make payments to employees. Reports must be submitted to the government each time the business completes a pay run; failure to comply results in fines. In >Ireland, benefits are taxed notionally through the payroll, whereas in the UK they are reported after the end of the tax year on a special form. In some countries, the tax authorities are proactive. For example, Finnish tax authorities send individuals a pre-filled tax return in the spring of each year. If there is nothing to correct, once checked it can simply be filed for personal records.
2. Annual leave entitlements and other employee benefits
Employee entitlements, including annual leave and paid public holidays, vary by country and region. The influence of unionisation and European Works Councils also must be taken into account, particularly as in some countries they can shape everything from company pay rates to holiday entitlements and even the way office furniture is arranged.
In stark contrast with the United States, the average leave and public holiday entitlement across the EU is 34 days. Members of the EU have a legal obligation to offer four weeks' paid holiday as a minimum as part of the Working Time Directive (WTD).
French citizens have 30 days of annual leave. But employees who wish to work for more than 35 hours a week receive up to 22 days extra, which is called the RTT (Reduction du Temps). Companies must closely track any extra hours logged by employees and factor them into their payroll considerations. Some European nations also require public holidays to be paid, ranging from up to 14 days in Malta, to 12 in Russia, to just two in Norway. Differing public holidays in Europe can impact processing, as payroll may have to go out a day early in some instances.
3. Data security
This is an area in which the United States and Europe differ culturally. The principle of collecting and exchanging data freely is the norm in the United States, which can make managing payroll easier.
In Europe, data protection legislation is rigorous, and compliance is expected of non-EU companies operating in the region. On 25 May 2018, Europe's General Data Protection Regulation (GDPR) came into force. It applies to both organisations within the EU and those outside of it that deal with the data of European citizens. In essence, GDPR requires payroll managers to assess what employee personal information they collect, ensure it is adequately stored and accessed only by authorised persons. Personal data should be kept up-to-date, and all companies should appoint a Data Protection Officer. Data breaches must be reported within 72 hours and companies can be subject to large fines – as hefty as €20 million, or 4% of annual turnover.
4. Income tax systems
A variety of tax regimes exist across Europe—similar to the USA, where there are also variances among states. However, the lack of uniformity can potentially complicate the process for small and medium-sized enterprises as it's not possible to take one model and replicate it across the continent. Some countries operate a progressive system of tax and others use a flat rate, which can make calculations for payroll easier.
Sweden has a dual taxation system that is progressive at the national level while a flat rate is applied at the municipal level. Countries operating such a system include Croatia and Denmark, where a church tax is also levied. France is about to make a significant change to its personal income tax collection system. To-date, employers have not been involved, with French tax centres collecting personal income tax directly from employees one year in arrears. However from 1 January 2019, employers must make the deduction based on an employees' individual levy rate, and reflect it in their monthly payslips. At the end of each month, employers will have to complete an e-filing with their local corporate tax centre.
Specific tax relief can also be available to certain groups of employees. In the Netherlands, expatriate employees with certain skills can apply for what is known as a 30% ruling. This means the Dutch wage tax would only be applied to 70% of the individual's income.
Trade unions or Works Councils are common with many employers in Europe, and the rights of employees to join them are protected. In the UK alone, an estimated 6.5 million people are members of a trade union. Other forms of workers' representation include collective bargaining agreements, with which payroll departments must ensure compliance. These help to define legislative standards, minimum wages, overtime calculations, and leave entitlements. Strong Works Councils exist in Germany, Poland, Austria, France, Belgium, Luxembourg and the Netherlands. Their main tasks are to represent other employees, monitor compliance with legislation, and hold discussions with management on transactional issues.
6. Day-to-day payroll management
The frequency of payment runs and the required tasks, such as creating payslips, can make European payroll difficult to calculate. Many European countries lack professional bodies such as the American Payroll Association (APA) in the USA, so getting guidance can be tricky. Multinational employers with no local payroll experience tend to seek advice from sources such as employment tax specialists.
In Europe, the norm is to run monthly payroll. However, there are discrepancies within industries - including agriculture and hospitality - where a biweekly payroll may be considered standard. The requirement for extra payment runs forces payroll managers to have to make gross-to-net calculations more frequently.
Payslips are a legal requirement, and certain information is mandatory in the same way it is in the United States. Some country payslips are more complex and may require the use of an official language. The French payslip can stretch to 40 lines of text, listing numerous fields such as social welfare registration, healthcare, unemployment and retirement insurance, family benefits, housing benefits, transportation tax, and pension contributions. This compares to an average of just 14 lines in the United States.
The result of all this is a specific payroll requirement in every country, further customised by peripheral rules, regulations and of course, language and currency. Consider the impact of this on global payroll reporting across your organisation. Added to the above challenges is the fact that the variety of systems on the market also have different capabilities, reports and data formats. A middleware system for global payroll reporting has become essential.
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A successful approach to a global payroll will take each of the above parameters into consideration. Working with experts who can provide a localised approach coupled with a global payroll portal solution is ideal.
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A version of this article originally appeared in the Aug/Sept 2016 issue of Global Payroll – the official magazine of the Global Payroll Management Institute.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.