There has been speculation about a possible global recession, which has brought to the table issues such as saving or paying salaries in hard currency.
Hard currency can serve as a reliable and stable store of value, such as the dollar, and the euro, among others. The factors that contribute to a strong currency have to do with the economic indicators and fiscal and monetary policies of the place where they originate. For example, the dollar is a strong currency compared to many Latin American currencies.
Receiving income in a strong currency can help people hedge against a possible recession, but can companies pay salaries in a strong currency? This is an important discussion for companies that are globalized or in the process of expansion/globalization to consider.
Paying an employee in hard currency has different nuances, depending on the type of company you have and the branches you have. If it is a small local company, it will probably not see any benefit in paying employees in hard currency since it receives its revenues in local currency. On the other hand, if a large or multinational company receives revenues in hard currency, it may benefit from paying in this currency.
Companies that want to pay salaries in hard currency must take into account the legal framework for this and the country where the employee is located since, in many countries, this is not allowed because, among different reasons, the calculation of social benefits and social security contributions must be made in local currency and if the employee is paid in a different currency there are many loopholes in this regard, for example, what exchange rate should be used to calculate the contributions?
If bearing in mind the legal limitations of payment in hard currency, the employer still wants to pay in this currency, he/she must take into account that the employee will probably not be able to access all the labor benefits established by law. This could be an advantage since the employer would not have to pay social security contributions, which in many countries could represent a competitive advantage of paying in hard currency vs. local currency. However, it must be taken into account that the employee could demand that his salary includes the social benefits that he is waiving by being paid in hard currency, and this could be costlier than paying in local currency.
Another point to take into account is that, due to the exchange rate, if the salary increases a little in hard currency, the exchange to local currency will be much higher, benefiting the employee and the company, since it does not have to invest much for the employees to have good benefits.
Companies should review many variables before deciding to pay employees in hard currency, from legal barriers to costs, but companies should keep in mind that in a globalized world, workers may value working in a company that pays salaries in hard currency.
Initially, for an employee to receive their salary in dollars, in most countries, they will need to have an international bank account or a domestic bank account that allows for dollar income.
It may be much better for employees to receive their salary in a hard currency, as this would give them the possibility to have more purchasing power, hedge against inflation, and take advantage when the exchange rate is very volatile.
However, as mentioned before, in many countries it is not possible to pay an employee in dollars due to legislation issues, in that case, the employee will have to be hired as a contractor and will not have all the labor benefits of the country, such as vacations, social security contributions, bonuses, among others. Additionally, the employee’s tax contribution may increase and the bank may keep some percentage of the money or may charge a commission.
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Finally, the employee should make a balance between (i) the labor benefits he/she could receive, the additional costs he/she will have to pay for his/her social security and the payment of higher taxes, and (ii) the greater purchasing power and coverage from economic volatility. It may be better for an employee working in a country with a stable economy and without so much exchange rate volatility to receive a salary in local currency with full employment benefits.
Hard currency salaries are a good option, but there are many things to consider. Companies that have employees around the world must analyze several points before deciding to pay an employee in hard currency and employees must analyze if it is worthwhile to receive a salary in hard currency or if it is better to have the labor benefits of the country where they are located. Ideally, the employee should be able to have a contract governed by labor legislation and be able to make contributions based on their hard currency salary, however, for this to work there are still many barriers in terms of legislation. Companies could give certain benefits in hard currency to build employee loyalty and employees could have the income to hedge against economic volatility, an additional bonus set in the hard currency could be a good example of this.