With the question of how long the COVID-19 pandemic will impact businesses currently unanswerable, businesses globally are seeing a general move toward flexible and remote ways of working. But with this newfound flexibility come challenges, the starting point for which must come from answering three key questions:
1. Does the business grasp the legal, HR, tax, social security, payroll, pay and benefits, risk, and compliance issues from workplace changes after COVID-19?
2. How can a business put in place processes to manage challenges?
3. Are business plans agile enough to embrace opportunities, rebound from the pandemic, and thrive in the future?
The global workplace has been undergoing change for many years. While labor centralization has been the traditional model for centuries—with employees working together in one location—advances in technology have increasingly enabled remote working.
Meanwhile, travel and globalization have fueled employee mobility and allowed businesses to tap into international labor pools, changing operating models in the process, with flexibility and mobility—a key tool for attracting and retaining talent.
And then in early 2020, COVID-19 spread around the globe and created a new dynamic in the working world, accelerating some areas of existing transformation, and acting as a catalyst in others. The most significant of these being the seismic shift from working in offices to working from home.
COVID-19 has also created another shift. Travel restrictions and lockdowns during the pandemic have shown how costs associated with travel can be reduced, while the need for physical offices has been called into question. Indeed, many multinational companies have already announced a significant proportion of their workforce will continue to work away from the office in the future.
Taking this trend further, progressive employers could move to a pure talent model—the best talent, for the best price, wherever it is available.
While many of these potential changes feel largely positive, revolutionizing entrenched working practices, there will also be implications for businesses around a decentralized “new normal” where employees can work anywhere and at any time.
As such, businesses need to be aware of the potential pitfalls of making operational changes and plan for them accordingly. Here are some of the legal, payroll, tax, and other consequences of employing a dispersed and agile workforce.
The Broader Employment Picture
Working from anywhere may broaden the available pool of talent as geographical constraints are removed, but it throws up new and sometimes unexpected issues.
First, the employee contract needs to account for the legal place of employment and the nature of employment. Standard contracts may not be applicable as terms and conditions may not be enforceable where the employee resides, works, and travels.
Similarly, pension, health care, and employee benefits will need to be considered, as will dismissal, redundancy, and grievance procedures. The expectations need to be clear as to when employees consider themselves to be at work and how working hours are monitored—inherent problems when unable to meet face to face.
In many countries, employers have a legal obligation to provide a safe working environment for their employees. This is easier to control in their own premises, but it becomes more complex when employees are working remotely, in addition to complying with labor laws and immigration requirements and continuing to monitor and adapt quickly should circumstances change.
The business must also have effective continuity and contingency plans if employees are unable to work in an emergency and have protocols in place to be able to locate their people at very short notice.
For businesses opening their global workforce, allowing remote working, and also acknowledging personal preferences (those that choose to work, or not to work from home, for instance) means that a customized approach could be a viable option.
Employers need to create solutions to address these different situations, so their workforce creates maximum value and they do not inadvertently exclude or discourage one talent pool in favor of another.
Taxation across borders is complex and the rules differ—often significantly—from one jurisdiction to the next. In many countries, the taxation of employment income is the biggest share of revenues generated by governments.
As the workforce becomes more mobile or globally spread, the challenge to ensure that tax liabilities are met becomes more complex.
The employer must pay the correct withholding tax in the right place. Employers are typically subject to taxes based on where their employees perform their work, while employees are often subject to tax where they reside. This can potentially create tax obligations in two or more different locations. The same can go for pension, health care, and employee benefits.
Tax treaties are designed to arbitrate where the rules conflict. Not all tax treaties, however, are the same and are interpreted differently by different country tax authorities. The interpretation and application of the tax regulations requires expert knowledge and can cause timing issues with recovering payments.
For business travelers or employees who spend time in multiple countries, it is important to identify how many days an employee spends in each location, which may need to be reported through one or more international payroll in each cycle.
Businesses may need to recover withholding for an employee if it was not due because of their tax situation. This can be very difficult in some countries. Consideration must also be given to social security contributions to ensure that payments are made, there is appropriate coverage, and employees are aware of their coverage in the right location. All of this can create an additional burden for payroll.
Other tax implications exist, such as additional tax declarations and payments that may be required from the employee. Businesses may also have an obligation to assist with tax bills or provide loans to deal with double taxation of an employee while they apply for a tax refund.
Additionally, if employees are performing revenue-generating or value-creating activities, this may subject company profits to corporate taxation in a different country. Businesses also need to be cautious about employees creating issues around permanent establishment.
Looking to the Future
The advancement of technology, changes to employee expectations, and increasing pressure on employers create an opportunity for people to work with far more flexibility and agility than ever before.
In doing so, it’s key that businesses are aware of the compliance and talent implications of making any change and are prepared to continuously monitor and adapt as circumstances evolve.
The new demand for advanced mobility will be employee driven. Embracing this opportunity will allow employers to consider radically different models for their workforce, which in turn gives access to a much broader talent pool and diverse workforce and could cut labor costs considerably.
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Matthew Blaker is a Partner in the People Advisory Services practice at Ernst & Young (EY) LLP. His work is focused on global mobility services, including managed services, compensation and benefits, and payroll. His deep subject-matter knowledge and 25 years of experience supporting global multinational organizations enable him to transform and improve global mobility operations, making the best use of technology, processes, and people.
Michael van den Brand is EY Global Payroll Markets & EMEIA Payroll Operate Leader. He aims to drive exponential growth with the rollout of the next-generation global payroll service. Prior to joining EY, he worked as the General Manager of a global payroll company, leading a team of more than 500 professionals, providing global human capital management (HCM) and payroll solutions to multinational clients in more than 100 countries.