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

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.

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.