Remote or Office-Centric Workforce? Financial Considerations for Your U.S. Subsidiary
Whether in response to the pandemic or due to the nature of their industry, many companies have been adapting to a remote workforce for a while. However, the decision to keep a permanent remote workforce varies. While some companies announced early in the pandemic they would work remotely only until a certain target date in 2021, other companies quickly adopted a remote-first workforce indefinitely. Some companies have opted for a long-term hybrid solution, combining a remote and in-office workforce.
For example, in May 2020, Shopify announced a digital-by-default plan with offices closed until 2021 after which most employees would permanently work remote; their CEO indicated “office centricity is over.” On March 30, 2021 Amazon announced that while the timelines for returning to the office would vary by country, their “plan is to return to an office-centric culture” which will “enables us to invent, collaborate, and learn together most effectively.”
While influential companies may embrace opposite sides of the workforce decision, all companies must decide what works best for their organization – in the short and long term. This is especially true for foreign companies establishing or expanding a middle-market U.S. subsidiary. The pros and cons and related costs of the decision to operate with a remote or office-centric workforce in the U.S. and around the globe must be fully factored into their business and expansion plans. Let’s look at some of the financial impacts of a permanent remote or hybrid workforce.
Tax complications with a remote workforce
When a foreign company is planning or executing a U.S. expansion, state tax can be one of the most complicated areas to understand and manage. While this is valid for an employer with one location and an office-centric workforce, having a remote workforce can further impact your state tax liabilities and compliance responsibilities. As a result, employers have never been so concerned about where their employees live, with good reason.
Before the pandemic, many employees lived locally and occupied the same office buildings as their employers. Many employers without a remote or mobile workforce did not need to manage multi-state taxation or comply with employment laws of another state. Although less prevalent before the pandemic, employers with a mobile workforce or employees working and living in different states needed to carefully monitor jurisdictional boundaries for payroll tax withholding and income, franchise, gross receipts, and other taxes to comply with state requirements. But COVID-19 brought disruption to tax compliance at a state level as it did with everything else.
As employees began working in states other than the one in which their office was located, employers asked for relief from increased tax compliance from their new multi-jurisdictional workforce. Some states did offer relief from certain tax obligations which ordinarily arise from having employees working in those states. But with the prolonged pandemic and the move by many companies to a permanent remote workforce, the question is how long the states’ relief measures will remain effective. Since each state has different tax requirements and different relief provisions, if any, employers must stay informed about the on-going guidance issued by states in which their employees reside.
There can be state tax complications for the remote employees as well. Generally, your employees will be taxed where they are located when earning the income, typically where they are residing. However, there are some states which tax individuals based on the convenience of the employer which could result in an unexpected tax impact for employees.
Tax complications from a remote workforce extend beyond the 50 states. Globally, companies are facing recruiting and retention necessities to access remote employees living anywhere in the world. Generally, the longer an employee performs work in another country, the more likely the local law will apply to the employment relationship.
Many countries have more employee-friendly laws compared to the U.S. including minimum paid time off, lengthy termination notice requirements and severance payments. In many countries, the employer is required to contribute to the equivalent of U.S. social security tax and health insurance accounts for their employees. And, a long-term employee stationed abroad can subject the company to income tax in that location. Therefore, as employees seek new opportunities to live and travel abroad while working remotely, business owners should be prepared to manage such requests, and learn what this type of arrangement could mean for their tax and payroll liabilities and responsibilities at a U.S. federal and state level as well as in other countries.
HR related considerations with a remote workforce
Having the right resources to establish and maintain HR policies may be a challenge for small to mid-size businesses, even without the difficulties of the pandemic over the last year. And foreign companies in early stage U.S. expansion face even more challenges due to the differences in employee related requirements between their home country and the U.S. Adding a temporary or long-term remote workforce adds additional challenges for HR administration and employee management. How well you navigate these challenges will have a positive or negative impact on your abilities to attract and retain talent.
Administration of benefits such as health insurance and retirement plans may become more complicated or costly for coverage of remote employees in different states or countries. Requirements to provide different levels of benefits can result in different levels of compensation packages for employees based on their location. Be prepared to address this disparity before the concern is voiced by employees.
Administration of employee performance also has new challenges in a remote workplace. Evaluating and managing productivity as well as burnout for remote workers is important for every employer but the impact will vary depending on your industry and business model. There has been much debate about whether the productivity of remote workers is more or less than an office-centric workforce. With increased productivity comes the concern of employee burnout, potentially leading to employee turnover. On the other hand, decreased productivity can negatively impact businesses in many ways. Therefore, it is important to have systems and metrics in place to monitor productivity of all employees, especially when you have a long-term remote workforce. The resources required to develop and monitor clear expectations and deadlines, an effective feedback culture, and time tracking and project management software could help improve productivity and prevent employee burnout.
Privacy and data security concerns for remote workers
While remote working existed before the pandemic, the swift increase and magnitude of remote workforces presented cybersecurity challenges for businesses. The amount of intellectual and confidential data created and handled by remote workers without sufficient security and data protection controls in place puts businesses at risk for significant financial loss from data breaches, litigation, and loss of business.
Small and mid-sized businesses such as foreign companies in early stage expansion in the U.S. are frequently at a greater risk for data breaches while often being less equipped to manage a remote workforce. Establishing and maintaining new security measures for home workspaces needs to be included in your business plan and budget. Additionally, the increased risk and cost of a security breach from home offices should be a consideration when deciding whether to establish a remote or office-centric workforce.
Evaluating office space for your workforce
Remote work has significantly impacted the commercial real estate industry. Early in the pandemic as remote work became a viable full-time option, we saw a trend to migrate away from urban office centers into more suburban communities. This fueled much speculation about the fate of the traditional office space in cities across the U.S. (which was already a concern pre-pandemic due to coworking spaces).
Another counter view is that there will always be a tendency to cluster employers and workers in key geographic areas, especially in newer and innovative industries, and this won’t be lost due to increase in remote workers during the pandemic.
As workspace location trends continue to shift throughout the pandemic, employers need to re-evaluate the physical footprint needed for their remote or office-centric workforce. It is important to understand your ability to make changes to your existing office lease and the associated costs. If you are just starting your U.S. expansion journey, think carefully about how your needs for office space may change within the next year or two as the businesses and employees navigate a post-pandemic work environment.
The cost of home offices
As the world quickly shifted to remote working, many employees were working from home initially without the right equipment or had to buy what they needed at their own cost. This sparked a debate around what kind of work equipment a company should be responsible for providing to its remote employees. In the U.S., federal law only requires employers to reimburse work-related expenses when the expenses drop the employee’s earnings below minimum wage. At the state level, a small number of states do require employers to reimburse necessary business-related expenses. Therefore, it is important to closely monitor the state laws in which your remote employees are located. While there may be no strong legal basis, 82% of employers are in favor of absorbing the price of home office set-ups for full-time employees based on an October 2020 study by Global Workspace Analytics in collaboration with Design Public Group.
If remote employees are located outside the U.S., local law may be more employee-friendly and require employers to pay more costs of a home office. For example, a Federal Supreme Court ruling in Switzerland in 2019 required that if an employee is required to work from home, the company must pay a share of the employee’s rent. Due diligence is critical when hiring or agreeing to retain an employee located globally to understand their cost and responsibilities in that jurisdiction.
To support a decision to continue a full or hybrid remote workforce, an employer should update their written policy regarding expense reimbursement for their remote workforce. They may need to tailor the policy for the legal requirements of each jurisdiction unless choosing to incorporate the most expansive requirements into a single policy.
The pandemic caused so many businesses around the world to embrace a remote work environment. Some of these changes may be temporary, while others might become permanent. As the world continues navigating the impact of the pandemic, it is important to pay close attention to the remote working trends that have emerged over the last year as companies strategize for the future.
For additional information about the potential business impacts of a long-term remote work environment for domestic or foreign companies, please reach out.