Picture the scene. You’ve advertised a job on LinkedIn and received applications from around Europe. The perfect candidate lives in one of the world’s top tech cities—Paris, Berlin, or Amsterdam, for instance. Your company is based somewhere in Europe, so hiring them should be easy, right?
Unfortunately, no.
Despite their geographical proximity, countries in Europe still vary significantly in their hiring rules and regulations, making it hard to compliantly pay cross-border workers. Let’s take a closer look at the problem.
So close, yet so far
There’s naturally a certain amount of friction in terms of labor law compatibility between European states inside and outside of the European Union (EU). But even within the umbrella of the EU, countries have their own labor, tax, and social security rules that can turn simple payroll procedures into a nightmare.
That’s because EU labor law is issued via directives that allow member states discretion in how they implement rulings. For businesses, this makes an EU-wide hiring strategy impossible, instead requiring individual approaches to each and every country a company might want to hire in—up to and including incorporation.
This isn’t something that can be done as an afterthought. Misclassifying a worker, for instance by employing someone as a contractor rather than an employee, may lead to penalties and legal trouble.
The state of cross-border hiring in Europe
Despite the difficulties, businesses continue to hire across borders for the simple reason that talent is getting harder to find locally. One report found that 54% of European employers expect labour shortages to worsen over the next five years. And a patchwork of talent availability means skills and the businesses that need them are rarely in the same place—forcing businesses to look elsewhere.
But hiring across borders isn’t getting easier. While the demand for specialized talent has increased by 112% over the last three years, the complexity of hiring talent has also increased—particularly in the EU, with incoming requirements like the pay transparency directive.
The movement of workers between countries is also a minefield. Under EU rules, employees can only be subject to one country’s social security requirements at a time (to avoid double contributions). Some countries have cross-border agreements but employee tax exposure can be hard to fully comprehend, even for the experts.
Here’s what that looks like in practice
A London startup wants to hire its first engineer in Berlin. Expanding into a new European talent market means a costly and months-long process of establishing a business entity—all to justify a headcount of one.
How about a Dutch company trying to support an employee relocating to Spain? The employer wants to be supportive, but there are clear tax residency and other legal implications such as pay transparency that have to be explored.
The difficulty of navigating these all-too-common issues is putting a roadblock on progress and forcing businesses to compromise on quality by hiring in their own backyards.
The problem with payroll
Despite most companies having employees in more than one country, the means of paying them continue to lag behind. Payroll (often the largest expense for a company at around 50-60% of spending) has historically been seen as a back-office burden. Payroll is an essential cost of business, but because of all the challenges we’ve discussed, it’s expensive, complex, and generally fails to add strategic value.
When you’re running payroll across borders, the complexity only goes up. Indeed, 85% of global executives say compliance requirements have become more complex in the last three years. In short, it’s all risk and no reward.
The right software can help
In response to the expanding global workforce, more workforce management companies are developing software designed to help companies hire and pay European workers without the burden of navigating complex administrative requirements. My company, Multiplier, offers one of these solutions.
As a centralized platform for payroll operations, our payroll solution enables companies to pay employees in countries where they don’t have a legal entity, fully compliant with local tax and social security rules.
This would allow the London startup discussed earlier to hire its first engineer in Berlin without the delay and expense of incorporation in Germany. And if things don’t work out, the startup won’t have to go through the rigmarole of shutting down an entity in Berlin afterwards.
Similarly, the Dutch company with a marketer who relocated to Spain doesn’t have to worry about the tax residency implications and potential penalties. They can seamlessly support their employees without disrupting their existing payroll compliance efforts.
Unlocking European talent
Paying people across borders is a problem unlikely to be solved politically. In an increasingly multipolar world, there’s little prospect of the increased regulatory alignment necessary to enable seamless international payments.
In the meantime, payroll solutions will help remove the friction required to pay cross-border workers, helping companies to accelerate their growth and recruit the best European talent—instead of settling for the best available talent locally.
Sagar Khatri is CEO and cofounder of Multiplier.