How “Split Payroll” can help with employees working abroad
Multinational companies frequently encounter problems with the compensation of employees working abroad. Each country has differing laws that can change unexpectedly and impair the ability of employees to pay their bills properly with the existing compensation agreement.
The following employees are subject to the exchange control limitations of the host country:
- Expatriates (in the case of a US company, a US citizen working abroad) or
- Third country nationals (citizens of another country working for a US company in yet another country of which they are not citizens)
Unless you’ve encountered the problem it likely sounds arcane. Let’s illustrate via an example.
Company A has a US citizen working in Argentina whose salary is paid in Argentine pesos. Due to inflationary and capital flight problems in the local economy the Argentine government has established a limitation on the amount of pesos employees may convert into other currencies each month. The limitation is 40%.
The landlord of Company A’s employee has concerns about inflation too and has insisted upon receiving the monthly rental payment in US dollars. Thus, the employee must exchange pesos into dollars in order to pay her rent.
As countries concerned about inflation and capital flight are prone to do, Argentina suddenly changes the limitation to 25% of salary. Now the employee suddenly cannot exchange enough pesos into dollars each month to cover her rent. What to do?
We have worked with multinational companies that have long wrestled with this problem and developed a variety of solutions. One response is the so called “split payroll”. Essentially this means the employee would begin receiving part of her pay in pesos and part in dollars.
While it may seem simple, there are a variety of rules (labor and tax) that have to be adhered to in the creation of a split payroll arrangement that will pass muster with both US and host country authorities. Consulting a service provider with experience in this area is a must in making sure that the new payroll arrangement conforms to all the legal requirements.
Doug Kennedy is a senior member of the International Practice group and serves numerous foreign companies as they set up U.S. operations and U.S companies as they set up foreign operations. He advises on the topics of payroll, taxation, and general areas of governmental compliance.
If you would like to speak with Doug, please use the Comments section to make a request.