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What are the Risks of Remote Working? As Remote Working is still the hot topic of the year, thinking, from an HR perspective, what the risks of a fully flexible workforce are, is a simple consequence of the current discussion.
With COVID cases still running high in many parts of the world, the plans for a return to Work are being jeopardised. More and more companies are considering adopting full flexibility in Work, with Novartis being the last multinational to join a long list of enterprises allowing flexibility.
That follows on the plea companies like Google, Twitter, Zillow, Reuters, Square, Facebook, Salesforce, Amazon, Spotify, Hitachi, Mastercard, Nielsen, Nationwide Insurance. They have all announced some form of extended working from home policy in place.
However, even if many executives are considering the possibility of moving to a much more flexible working arrangements, there are several issues to consider before allowing full flexibility. And some of these are not small issues. Mostly, there are several risks linked to labour and tax legislation that companies have to take very seriously, especially when considering workers that could be operating from across a physical border in another country (however issues exists in a lot of federal lands such as the US and Canada).
All these rules have been existing for many years, and have a grounded reason in employee protection, social security regulation and especially, taxation. They seem no odd considering the current technology development, but let’s remember that it takes time and effort to ensure that legislation can cope with the changes in society, also avoiding full deregulation.
So what are the risks that an employer with head office in country A might have when an employee works from his country B? The reasons for these scenarios might be different – a lockdown might have caught an employee, or they might have gone back to their home country because of lockdown, or it might be simply a cross-border worker etc.
Risks of Remote Working for the Employer
Most of the risks are directly linked to the employer and its status as a tax-payer in the country where the employee works.
- Permanent Establishment: The Employee may create a so-called permanent establishment (PE) in country B for the employer, requiring attribution of profits to a branch in country B and triggering corporate tax compliance obligations in that specific country. Many rules govern this case, often found in treaties. OECD has given guidance on this in the past, and ordinarily temporary situations below six months have always been considered low risk. But what happens with a condition not linked anymore to the COVID-19 contingency?
- Employer obligations: The employer in country A may have payroll tax withholding and social security obligations in country B. Some of these requirements in certain countries have been temporarily relaxed during this crisis, but this is not permanent.
- Indirect Tax: Employer in country A may have VAT exposure in country B due to this activity establishment.
- Substance: If the Employee is in senior leadership or a board member, things can get more complicated. The location of decision making may impact the so-called corporate residence (i.e. the place of effective management) and substance of HQ location. This could have knock-on effects on the transfer pricing/value chain model that the company has implemented.
- Labour and industry regulation: The employer in country A is exposed to labour law and other local regulations in country B for which it is not prepared or compliant. This can be especially problematic for highly regulated industries (financial services, pharma, etc.), but also on topics such as the definition of employee rights.
Risks of Remote Working for the Employee
Also, the Employee has its own set of risks, mostly linked to personal taxation. In certain cases
- Residency: The Employee may change tax residence status, which could have an impact on their net pay as well as pension and social security status, including on where taxes are due.
- Immigration: The Employee may not have the right to work in country B if they are a foreign national (primarily if the employer in country A cannot provide a work permit for country B).
- Access to Social Security: The Employee might have less protection in terms of social security (for example in case of unemployment) as a consequence of not residing anymore in the country where the employer is based. Similarly, there might be other consequences on health insurances and pension.
Many other cases have their own set of complications. For example, there might be expatriates and temporary assignees that have moved back to their country of origin, or other people that have been “blocked” in a third country due to the COVID 19 outbreak. For sure, a big headache for all the Mobility colleagues across the world.
What are the solutions?
The most significant consequence of the high risks is that the Tax Department and HR need to sit around a table and analyse all risks. In too many companies, the corporate structure has typically followed taxation requirements on top of the purely operational necessities. Very rarely, Talent needs have been taken into consideration. This is probably the time to revert this trend, a bridge these two big organisational siloes.
Large multinationals can offset the risk by using their ample network of local subsidiaries, primarily hiring people on the local payroll. Some companies have so-called Global Employment Companies to mitigate the risk as well. Other options might be that of using a PEO.
Small companies that have been practising with a distributed workforce have often reverted to different models, trying to avoid the complication of having local employees in all the countries, and preferring arrangements whereby these are either contractors or sole proprietors of a local legal entity. Each of these forms has its risks to be considered (there’s an excellent article on the GrooveHQ Blog on this topic). An example of a company that uses this model is Buffer, who extensively describes its practices on its blog.
Most of these solutions come, however, with their own set of risks. The contractor option, for example, is subject to the recognition of employee status in many legislations. And it pushes a lot of the dangers on the worker side, as most countries have a lot less protection for non-employee types of contracts.
The above illustrates, once more the need to also look at the legal basis on how Work is considered, a key pillar about the need to Reinventing Work. Technology is making less and less relevant to the location of where the Work is performed, but the legislation still feels that Work needs to be regulated (and taxed) where it is completed.
Besides the cultural and maturity aspects of moving to a fully flexible workforce that we have already discussed, this post shows that there are some very practical risks to be considered. And I have not mentioned several other elements that should be included: health insurance and accident protection, for example, currency exchange risks, political risks and so on.
This is not to say that remote working policy should be avoided. On the contrary, it is essential to be aware of the risks to be then able to take the appropriate measures and reduce risks through proper policies.
For example, making sure that employees understand that certain roles cannot be located outside specific locations/countries (this being top management roles, it should generally be easy to explain). Sometimes risks are higher with certain country combinations, or for cross border workers. Also, here, it is essential to be clear even for the dangers that sometime an employee might be willing to undertake.
Above all, we need to consider also the particular situation we live in. Currently, many countries have relaxed their regimes. It’s, for example, the case of Switzerland and France, Italy and Germany for cross-border workers, which reached an agreement not to consider the days spent in their home country for cross-border workers due to the COVID-19 restrictions. But these relaxations will not last long. Most countries will soon have to look for money to sustain their financial response to the situation, and if the past is a lesson, any penny will be scrutinised.
To pursue the requirements of new legislation, which will be complicated simply because it requires international alignment, we need to be particularly careful in avoiding any possible exploitation of the current rules.
Hiring in Hyderabad simply to save on the salary of a role that would have been generally required in San Francisco, is not the best option to start with. We need to find rules that help to foster talent where it is and bring developmental opportunities for both workers and their organisations.
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