7 minute read 1 Oct 2020
Asian man using phone and laptop with city background

How working ‘anytime, anywhere’ complicates payroll and tax issues

Authors
Matthew Blaker

Partner, People Advisory Services, Ernst & Young LLP

Helping clients to unlock the power of their cross-border workforce.

Michael van den Brand

EY Global Payroll Markets & EMEIA Payroll Operate Leader

Served on various international executive boards. Global citizen.

7 minute read 1 Oct 2020

As businesses move toward more flexible and remote ways of working, there are significant pitfalls to avoid.

Three questions to ask
  • Do businesses grasp the legal, HR, tax, social security, payroll, pay and benefits, risk and compliance issues from workplace changes after COVID-19?
  • How can businesses put in place processes in order to manage challenges?
  • 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 at locations away from the physical workplace.

Meanwhile, travel and globalization have fueled employee mobility and allowed businesses to tap into international labor pools, changing operating models in the process. Indeed, the availability of flexible working and mobility have become, in some instances, a key tool for attracting and retaining talent.

Not only did the pandemic accelerate some areas of existing transformation, it acted as a catalyst in others. The most significant has been the seismic shift from working in offices to working from home.

And then in early 2020, COVID-19 spread around the globe and created a new dynamic in the working world.

Not only did the pandemic accelerate some areas of existing transformation, it acted as a catalyst in others. The most significant has been the seismic shift from working in offices to working from home. While this proved difficult for many businesses and individuals in the beginning, organizations adapted at unprecedented speed to rise to the challenge.

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, the media has been flooded with news of multinational companies who have already announced that they expect a significant proportion of their workforce to work away from the office in the near 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 and opening up the world of work will come with distinct challenges. There are likely to be a whole set of implications for businesses around this decentralized “new normal” of employees who can work anywhere, anytime.

As such, businesses need to be aware of the potential pitfalls of making operational changes, and to plan for them accordingly. Some of the legal, payroll, tax and other consequences of employing a dispersed and agile workforce are addressed here.

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, healthcare, 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.  Challenges inherent for teams unable to meet face-to-face must also be considered.

It is critical for companies with a global workforce to comply with labor laws and immigration requirements and continue to monitor these laws and adapt quickly to change.

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.

It is critical for companies with a global workforce to comply with labor laws and immigration requirements and continue to monitor these laws and adapt quickly to change.

The business must also have effective continuity and contingency plans if employees are unable to work in an emergency situation, as was evidenced in the early days of the pandemic. Considering employees working remotely or travelling extensively, businesses should have protocols in place to be able to locate their people at very short notice.

For businesses opening up 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 bespoke 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.

Challenges around taxation

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, so 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 could create tax obligations in two or more different places and payroll withholding obligations in the country where the employee resides.

Similarly, pension, healthcare and employee benefits often follow different treatments in different jurisdictions.

Tax treaties are designed to arbitrate where the rules conflict – but not all tax treaties 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 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 cover, and employees are aware of their coverage in the right location.

Most of these taxation issues are the employer’s responsibility and will create an additional burden for the payroll function.

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 around employees creating issues around permanent establishment.

The global workforce landscape is constantly shifting and COVID-19 has, at the very least, accelerated change.

How best to manage workforce issues

The global workforce landscape is constantly shifting and COVID-19 has, at the very least, accelerated change. As a result, businesses need people with the right skills in place to manage the challenges, highlighted above, that arise as a result, and which span legal, HR, tax, social security, payroll, compensation and benefits, risk and compliance.

Legislation changes on a regular basis, so it is essential that organizations are agile, continuously scan the horizon, and are able to adapt and make changes as necessary. The skills needed should be assessed across the whole organization, not just at headquarters. This may require outsourcing or co-sourcing certain activities if they aren’t present within the business.

Employers must invest in technology to track their workforce across boundaries, and document policies and processes so they are understood and followed by all employees.

Budgets should be updated to reflect the additional costs of payroll transactions when employees move across countries either constantly or sequentially triggering tax filing requirements in multiple jurisdictions. A cost-benefit analysis will show the anticipated savings against the additional cost burden.

In conclusion

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.

Achieving this is not as easy as one might first think, however – employers must carefully consider the impact of any workplace transformation and may conclude it is not right for them.

It is key that businesses are aware of the compliance and talent implications of making any change and be prepared to continuously monitor and adapt as circumstances evolve both internally and externally.

The new demand for advanced mobility will be far more employee-driven, compared to the traditional company-driven approach. Embracing this opportunity will allow many employers to consider radically different models for their workforce which in turn gives access to a much broader talent pool, diverse workforce and could cut labor costs considerably.

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Summary

The acceleration of flexible and remote working can create significant challenges across business functions – especially in legal, HR and tax. Businesses that put processes in place to manage change to the workforce can capitalize on global talent pools moving forward.

About this article

Authors
Matthew Blaker

Partner, People Advisory Services, Ernst & Young LLP

Helping clients to unlock the power of their cross-border workforce.

Michael van den Brand

EY Global Payroll Markets & EMEIA Payroll Operate Leader

Served on various international executive boards. Global citizen.