17 Mar 2022
relaxed office

How do you bridge strategy and operations in the world of hybrid work?

Authors
Jeroen Truin

Senior Manager, EMEIA Tax Center, Operating Model Effectiveness | EMEIA

Transformation driven. Helps clients to operationalize strategies, find the right balance between operational, sustainable, (green) tax requirements. Loves spending time on his bike in the mountains.

Riikka Virtanen Schwitter

EY People Advisory Services | Mobility Transformation Lead | Switzerland

Bringing a Nordic discipline “sisu” to anything she does, combining family and work, enjoying outdoor sports and home cooked meals and wine.

17 Mar 2022

As the world of work gets more flexible, employers are embarking on a transformation journey to ensure that the operating model is aligned with the company’s strategy.

In brief
  • COVID-19 has accelerated and reshaped the future of work decisively; companies embraced modern technologies to facilitate hybrid work and a step back to the past is inconceivable in a post-pandemic world.
  • Employees demand some form of workplace flexibility – and employers must provide it to retain talent or risk higher employee turnover and losing out on future critical top talent
  • Aligning operating and tax aspects with employees’ needs will be critical for a sustainable transformation, which require an approach that will either protect the current ways of working – or an enhancement or transformation of the current operating model

Hybrid work as the new standard

More than ever, businesses are facilitating hybrid work and employ hybrid models. The COVID-19 pandemic has accelerated the transition of working remotely from a marginal activity to the norm. Indeed, the majority of skill-based employees have shifted to a workplace mix that includes working from home.

The workplace flexibility that employees have grown accustomed to, aided by our collective response to the pandemic, has fast-tracked digitalization by five to ten years. The development and enhancement of digital tools continues to enable a mixture of onsite and remote work, ultimately facilitating the potential to implement hybrid models.

Due to the necessary immediate shift in mindset from “work as a place” to “work as an activity” during COVID-19, the perception around workplace policies has changed. The EY Work Reimagined Survey found that 9 out of 10 employees want flexibility in where they work. In addition, during this period of adaptation, companies’ business leaders saw consistent or increased levels of productivity from their people. This positive experience is leading them to re-evaluate and assess the impact of permanently adjusting workplace policies to include the possibility for remote work, as flexibility is now viewed as a key parameter in our post-pandemic world.

Societal workplace expectations are set to evolve continuously and will drive new practices, both now and in the future.
Riikka Virtanen Schwitter
Senior Manager, Mobility Transformation Lead

Designing your workplace strategy for the future

The world is preparing to embrace a post-pandemic normal – but what’s next? Organizations will need to define their workplace strategy for the future in the current context of hybrid workplace expectations. In efforts to maximize the time spent with friends and family, many employees expect the option to be able to work remotely in the various cities and countries they plan to visit, rather than being forced to take off time or limit days they can spend away from home. Employees feel they have proven the sustained levels of productivity and the ability to perform regardless of their working location. For all the advantages of this setup, remote workers should also consider the impacts of these choices for themselves (e.g., personal income tax situation) or their employer (e.g., requirements to register and adhere to local legislation).

Moreover, as recent developments show, societal workplace expectations are set to evolve continuously and will drive new practices, both now and in the future. In order to attract and retain the best talents and become an employer of choice, organizations will therefore need to continually reimagine, adapt, and evolve their respective workplace policies.

The level of flexibility you offer will depend on risk appetite, complexity and global footprint. Whichever form it takes, key business, tax, and legal challenges must be considered.
Jeroen Truin
Senior Manager, EMEIA Tax Center, Operating Model Effectiveness

Determining the extent to which your organization desires to offer workplace flexibility may be guided by your appetite for risk and compliance, implementation complexity and global footprint. In an effort to satisfy – at least in part – your people’s desire to work anywhere in the world, and to acquire talents within or outside of the organization, it is important to understand the compliance burden and increased costs that may be triggered by introducing (cross-border) remote working arrangements, depending on the physical locations of staff and/or the functions they perform.

Key challenges can be found in areas like: 

  1. Labor and employment law (immigration, permits, loan staffing, data security, etc.)
  2. Social security and registration obligations (social security scheme, pension plans, etc.)
  3. Human resource and employee experience (workforce planning, reward, benefit, employee experience, etc.)
  4. Direct tax, transfer pricing and other indirect tax considerations (permanent establishments, exit taxation, tax provisions, recharacterization of functional entity profile, place of effective management, indirect tax registrations etc.)

An important component of an effective cross-border hybrid policy is designating responsibility for compliance with mandatory labor and employment laws in each of the jurisdictions in which active employees are located. Another is being liable to ensure that each employee holds the appropriate work/residence permit or visa. Furthermore, social security schemes, insurance requirements and intragroup service/loan staffing restrictions tend to vary from country to country and the employers may face administrative sanctions and penalties should they violate these regulations. Moreover, most companies implementing hybrid working models also face human resources challenges such as ensuring employee engagement (e.g., through remote workforce communication, training and development strategies), as well as evaluating the need for applying cost-of-living adjustments.  

Last but not least, companies implementing a cross-border hybrid policy should consider the direct tax, transfer pricing and other tax considerations of their new policies. Neglecting to consider the value being created, where it is being created and the corresponding registration requirements (e.g., permanent establishments) could result in financial penalties and criminal liabilities for the employer. It is therefore essential to have a tax model that supports the desired future of work model or at least a workplace policy aligned with the tax model to provide appropriate guardrails on hybrid working without triggering significant risk exposure. A sustainable tax model is one that has visibility on where employees are located, includes transfer pricing entity characterization which supports its global profit allocation, accounts for local tax registrations in the respective countries it operates, assesses the potential for changes in future tax rules and the impact it has on the transfer pricing model, and is aligned with the governance and transactional model. If one of the above components is absent, the current operating model may no longer be viable or could become unviable in the future. Now is the time to remodel and properly integrate workplace flexibility in the design and execution of your strategy.

Bridging from strategy to operations

Having a fit-for-purpose operating model is key to bridge the gap between your strategy and day-to-day operations. The challenges raised by the pandemic and the resulting workplace reorganizations may have an effect on your existing operating model. EY’s protect, enhance, transform (PET) framework can be used to understand the strategic direction companies are taking, highlight any gaps that may result from these changes and develop options to close these gaps. 

  • Protect

    A centralized principal operating model often brings significant operational and tax benefits. For some companies it is paramount to protect their centralized models. In order to increase their workplace flexibility while still retaining the benefits of centralized models, companies must ensure that the right policies and procedures are in place and that these are well documented and adhered to (“living the model”). Efficient protection may also take the form of policies and procedures that are tailored to specific ranks, seniority levels and/or functions within your organization. Taking these steps is especially important given that the question is not if, but when, the remote working setup will be challenged.

  • Enhance

    When protecting the existing operating model is not practicable or desirable for business and tax reasons, there could be an opportunity for companies to enhance their models. Operating model enhancements encompass multiple solutions such as setting up a single legal entity structure or a global employment organization (GEO), with both solutions offering increased flexibility. The GEO focuses on increasing talent retention and attraction through offering international remote working from one central location. From a direct tax perspective, the GEO centralizes the permanent establishment risk to a certain extent but may increase transfer pricing exposure. The single legal entity structure focuses on simplifying the legal entity structure and the transactional model while opening up new opportunities with respect to talent availability in foreign jurisdictions and reduced IT maintenance costs.

  • Transform

    For some employers, the organizational changes set off by the pandemic may be so fundamental that they constitute a triggering event that sees the operating model evolve from centralized to decentralized. These transformations may unleash a wide range of operational and tax implications as well as system changes, such as transactional model and/or transfer pricing setup reorganizations and exit taxation issues.

Irrespective of employers’ decisions to protect, enhance or transform their operating models, it has become imperative to account for and accommodate people’s workplace expectations in order to attract and retain the best talent and maintain a competitive presence in the marketplace.

The EY Future Workplace Index shows hybrid models are here to stay. As offices start to open their doors after the pandemic, nobody anticipates a return to the workplace as we once knew it. Moreover, to attract new talent, workplace flexibility is now often an important factor. Defining a long-term strategy with regard to the future of your organization as an employer is key to face these new challenges, sustain long term growth, and drive greater efficiencies. Ensuring your operating model remains fit for purpose will help you achieve your long-term strategy.

Summary

Hybrid work is here to stay and has become an important factor in attracting and retaining talent. While business leaders see the benefits of workplace flexibility and are keen to accommodate their people’s needs, it’s important to also keep an eye on the tax, legal and operating aspects. Organizations need to start defining their workplace strategy for the future.

About this article

Authors
Jeroen Truin

Senior Manager, EMEIA Tax Center, Operating Model Effectiveness | EMEIA

Transformation driven. Helps clients to operationalize strategies, find the right balance between operational, sustainable, (green) tax requirements. Loves spending time on his bike in the mountains.

Riikka Virtanen Schwitter

EY People Advisory Services | Mobility Transformation Lead | Switzerland

Bringing a Nordic discipline “sisu” to anything she does, combining family and work, enjoying outdoor sports and home cooked meals and wine.