Without a doubt, COVID-19 has changed the way we live and work, especially within the global mobility industry. As vaccines finally make their way around the globe, organizations are realizing the traditional idea of having employees in the office every day may not be the way of the future. Programs and policies need to adapt to a new way of managing a remote workforce.
On February 17, GTN along with Littler Mendelson, P.C., and Alliant Insurance Services hosted the first of a three-part webinar series on remote work and how companies can respond to this new way of working. Experts in mobility tax, employee benefits, and labor law, with a guest panelist and corporate practitioner from VMware, provided their perspectives on the risks, strategies, and approaches employers should take for their long-term remote workers. Several scenarios were outlined during the discussion and each panelist shared their thoughts on how companies could handle each situation.
Scenario 1: Employee based in Houston, TX returning home to Germany
During the pandemic, an employee, based in Houston, TX, decided to return to their home in Germany to be with their family since the company’s Houston office closed indefinitely. After being in Germany for 4-5 months, the employee asked to return to Houston, TX for a client project. The project lasted a few weeks and the employee now wants to return to Germany indefinitely to work remotely.
Mobility Tax Perspective by David Livitt of GTN:
There is a lot to consider for this scenario from a tax perspective. Let’s review each remote working period from a corporate tax, employer, and employee viewpoint.
Remote working period
- Corporate tax
- Will the role the employee is performing in Germany create any permanent establishment issues for the US company?
- Is there already an entity in Germany? If not, will the scenario result in increased corporate tax risks or make any required reporting and/or withholding more challenging?
- Will any costs be recharged and what do any intercompany agreements say about provision of services/movement of employees between entities?
- Employer
- Does a payroll need to be operated in Germany because the employee is working from there?
- The individual will likely remain on the US payroll and have federal tax deducted, but they may also need to have German taxes deducted. How will the company address any double withholding issues? It may be possible to stop US federal withholding to ease any double withholding issues, but state withholding may still be an issue depending on the employee’s ongoing state tax residency status.
- To avoid double social security deductions, we highly recommend applying for a certificate of coverage.
- If German tax applies, will any tax compliance support (e.g., tax equalization, tax compliance support) be provided or will the employee be “on their own” to sort out their global tax position?
- Employee
- The individual will need to track their days of presence in Germany. The first thing to do is check German tax rules to see how tax residency is established. There is a tax treaty between the US and Germany so it may be possible to treat the individual as a non-resident in Germany. This could mean that the individual is taxed on German workdays only.
- If the individual establishes German tax residence, they may be taxable on their worldwide income and then the tax treaty would need to be reviewed to determine what is taxable, who has taxing rights, and where any credits can be claimed.
Return to the US
- Corporate tax
- No issues as they are still a US employee, assuming the person is a US citizen or green card holder or still has the appropriate immigration status to work in the US.
- Employer
- Stop German payroll withholding and ensure US federal and state withholding is correctly operated.
- Employee
- The individual will need to continue to track their days of presence in the US.
- Assuming the individual is a US citizen or green card holder, they will remain taxable in the US on worldwide income. The days “back” in Houston will be US taxable as will the time in Germany as a remote worker. Hence the interplay with the US/Germany double tax treaty.
Permanent relocation to Germany
- Corporate tax
- The main question is the role the individual will have in Germany. If it is a local job, then there is little risk. However, if it is a job with US responsibilities, it will be necessary to check on cost recharging, permanent establishment risks, base erosion and profit shifting (BEPS), and transfer pricing rules.
- Employer
- The assumption is this is a permanent relocation so we would anticipate a complete transfer of employment to the German entity (e.g., German payroll, benefits).
- The employer should check on the corporate obligations.
- Employee
- Going forward, it will be a case of filing US and German tax returns and tracking where the employee works.
Employee Benefits Perspective by Richard Polak of Alliant Insurance Services:
During the initial period of temporary residence, we hope the employee first determined if the US benefit program applied to Germany. It is possible that US medical coverage would not pay benefits in any given European country. In returning to the US, benefits would be paid. When the employee decided to live permanently in Germany, the employer needs to decide if the company wants to put the employee on an expatriate benefit program or local benefits. It is most likely that the employee will be asked to go on a local benefit program, because he/she will be on local payroll. This is assuming there is a foundation to do so (i.e., legal entity, immigration, and employment opportunity).
Global Labor Law Perspective by Trent Sutton of Littler Mendelson, P.C.:
Employment law applies to the place of employment. The place of employment is usually set out in the offer letter and, in a word, it is the place where the employee works. If the employee’s home office is in Houston, TX and he works in Houston, his place of employment is Houston and Texas/US law applies. However, if the company allows him to work from Germany, his place of employment could be deemed to have transferred to Germany.
Why does this matter? The biggest reason is that the law of the place of employment applies, so if his place of employment is deemed transferred to his home office in Germany, the US-based employer must now consider the foreign employment entitlements and obligations in its treatment of that relationship. To be sure:
- Can the US-based employer now comply with payroll contribution and withholding obligations? Not usually from an offshore location, and often, continuing to pay into US systems for an individual working indefinitely in Germany will be non-compliant.
- Do the US-based employer’s employment benefits meet the local minimum entitlements? Probably not. Most countries outside the US provide for mandatory paid vacations, paid sick or family leave, other leaves, and even mandatory Christmas or other bonuses or profit sharing.
- Can the US-based employer just fire him? Maybe not where the foreign law applies. The US is the only country that provides for at-will employment (i.e., allowing the employer to terminate for any reason or no reason with or without notice). Outside the US, employers are usually limited in their ability to terminate and must provide notice (and severance), due process, and/or they may be limited to terminating based on a specific reason (at the risk of reinstatement or damages).
- What happens if the individual gets injured? Many countries have workplace health/safety or “duty of care” laws, similar to the US workers compensation obligations. Often, the US-based insurance will not cover a foreign worker (or satisfy local obligations).
For these reasons, allowing him to work indefinitely in Germany means the employer will need to assess whether they can comply with German employment requirements, which will usually require a local entity (although there are some exceptions).
Corporate Mobility Practitioner Perspective by Cheryl Craig, of VMware:
We have seen a trend in the technology industry for a need for more flexibility and remote work for the past few years. At VMware, we were already moving to a more flexible workforce model, but the pandemic definitely accelerated the creation of what is now called the “Future of Work” for our company. Our distributed workforce initiative, Future of Work, enables us to build a dynamic, global workforce of the future where VMware employees can work from any location in order to accelerate their productivity and deliver the most innovative solutions for our customers. This initiative offers flexibility to our employees and expands the talent pool from which we can hire.
As part of this initiative, we have created a Distributed Work Policy and a Compensation and Mobility Policy. Through the Distributed Work Policy, we are providing people the choice to work from a VMware office, a home office, or other places that enable them to meet their professional and personal goals.
The Distributed Work Policy covers three options: fixed, flexible, and remote.
- Fixed (assigned workspace employees): employees who work in a VMware office location most days and are assigned a desk in that office.
- Flexible (unassigned workspace employees): employees who work from a VMware office some days during a week and otherwise work from non-VMware office locations. These employees are assigned to a VMware office or “neighborhood” in a building but are not assigned a desk.
- Remote: employees who do not generally come to a VMware office for their work. These employees are not assigned to a desk, office, or “neighborhood” in a VMware office.
Our Compensation and Mobility Policy outlines the thresholds for when we would need to do a compensation assessment and adjustment both domestically and internationally and when a mobility viability assessment would be needed. For employee requested moves, we are moving to a localization strategy. For Scenario 1 outlined above, the employee has crossed our threshold for how long they could be working from another country; we would initiate the localization process with the business and the employee.
We created an online Employee Requested Move form so the employee can formally request this move. The key point is that it is a request. We need to do a viability assessment to see if the move can be approved. An Employee Requested Move gets routed to the manager to approve before moving forward with a viability assessment (to be completed by our team).
In completing the viability assessment, we first review immigration and compensation to see if there are any concerns or stop gaps with either. Example, can we even obtain work authorization for this employee in this country? Is the compensation recommendation a significant decrease and the employee does not want to move forward, or a significant increase and the business cannot support the additional spend?
We would then work with other stakeholders such as corporate tax, security, benefits, and legal to assess whether or not the individual can relocate permanently and do this job remotely. This is also reviewed with the business. Can this position be done remotely or in this time zone without negative impact to the team or business? We have advised managers that it is expected that they need to consider the flexibility of choice of location, but there may be a reason why the answer would still be “no” back to the employee.
Scenario 2: New employee working remotely in Asia as a trailing spouse
A company hires an employee whose husband is being assigned to Asia. The company wants to keep the employee employed while she is a trailing spouse in Asia for 3-5 years.
Mobility Tax Perspective by David Livitt of GTN:
Similar issues with a few added twists.
- Immigration
- First, check that the spouse is eligible to work in the country they end up in.
- Corporate tax
- Again, what role and responsibilities does the individual have? Certain industry types (e.g., financial services) may require the spouse to register in the local country.
- Is there a local entity? Will the individual be expected to work there or remotely? This could drive payroll reporting obligations.
- If it is a job with US responsibilities, it would be necessary to check on cost recharging, permanent establishment risks, BEPS, and transfer pricing rules.
- Employer
- US and/or non-US payroll withholding obligations may exist.
- It would be necessary to double check social security requirements.
- Consider policy and communications and building a process to deal with future requests.
- Employee
- For the period of the 3-5 year assignment, there will most likely be a requirement to file a local tax return and a US one if the individual is a US citizen or green card holder.
Employee Benefits Perspective by Richard Polak of Alliant Insurance Services:
At this point the employee should be considered an expatriate. If the company determines the employee as an expatriate, assuming she meets all the conditions to do so that my tax and legal colleagues have identified, then an international medical plan should be secured to provide the proper medical benefits for any medical event. This is assuming, of course, that her husband is not treated as a dependent from his firm and therefore she can be treated as a dependent on the husband’s international medical plan.
Global Labor Law Perspective by Trent Sutton of Littler Mendelson, P.C.:
The issue here is that 3-5 years is a significant amount of time. The place of employment (discussed above) is likely to be deemed to have changed for this period, requiring the offshore employer to take steps to comply with the relevant employment and payroll tax scheme.
Essentially, the company will need to assess:
- Immigration risks – can the trailing spouse even work?
- Payroll risks – can we continue to pay her and what are our obligations as an employer?
- Employment law risks – can we comply with the foreign employment scheme as an offshore employer?
If the employer has a local entity, then transferring that employee’s employment to the local entity could be an option. Otherwise, the employer must consider whether to engage a professional employer or employer of record organization. Alternatively, and in some countries, the company may consider terminating the US relationship and engaging the individual as a foreign independent contractor (which has its own host of pros/cons/limitations). In short, this is not as easy as saying “yes” and continuing to pay into the US account. It creates significant risks.
Corporate Mobility Practitioner Perspective by Cheryl Craig, of VMware:
This is quite similar to the case above. We would ask the employee (in this case the spouse) to fill out the Employee Requested Move form and we could go through the same viability assessment, as this really is a personal request move. For a duration of this long of a period, we would not recommend to the business that this be treated as an assignment as it would be an expensive option for the business. Supporting long-term assignments past two years would be outside of what we recommend.
Scenario 3: US remote worker moved to Hong Kong without notifying the company
The Human Resources department of a company found out that a remote worker based in the United States moved to Hong Kong and didn’t notify anyone at the company. The employee has been working from their home in Hong Kong for more than a year. What should the company do?
Mobility Tax Perspective by David Livitt of GTN:
It would be necessary to undertake a case review in the three key areas.
- Corporate Tax
- The main question to ask is what role does the individual hold in Hong Kong.
- If it is a job with US responsibilities, it would be necessary to check if the individual’s activities cause any issues locally.
- It would be necessary to review if cost recharging is needed, as well as to review any permanent establishment risks, BEPS, and transfer pricing rules.
- Long term, the remote working should be addressed more from a corporate tax issue if the individual can continue to work from Hong Kong doing their US role.
- Employer
- It is highly likely that the individual will have to pay Hong Kong taxes.
- Payroll may need to be operated for social security withholding.
- The employer should check on the corporate obligations.
- There is not a social security totalization agreement in place between the US and Hong Kong so double social security contributions are possible and should be reviewed.
- It would be advisable to look at implementing a policy and treating this as an assignment.
- Employee
- The employee will be assessed on Hong Kong taxes. The scenario should be reviewed carefully to determine if there will be a cash flow issue for paying both US and Hong Kong taxes.
- Depending on how long the employee has been in Hong Kong, their personal facts and circumstances, and their intent, it is possible that the individual may have ongoing state tax filing obligations. This position should be reviewed carefully for both employer reporting and employee tax filing purposes.
Employee Benefits Perspective by Richard Polak of Alliant Insurance Services:
Depending on what kind of medical plan the employee is enrolled in the US, they could be covered fully outside the US. However, if this is not the case, for example, they are on an HMO plan, they may only be covered for emergencies outside the US which could be a major problem if/when receiving medical care. Typically, when an employee leaves their Home country, they purchase a travel medical policy to protect themselves.
Global Labor Law Perspective by Trent Sutton of Littler Mendelson, P.C.:
This can be very problematic, especially if the individual has been in Hong Kong for a long time. The place of employment can change, even if the employer doesn’t know!
In other words, if that employee has worked in Hong Kong for three years, the local authorities could contend that the employer now owes Mandatory Provident Fund (social security) contributions and/or that the company failed to report income in violation of local law. If the employer now endeavors to fire the individual, this individual may claim that they should be given at least one month’s notice, PLUS severance pay, under Hong Kong law. If they happened to be in Korea (for example), they might contest the termination entirely and seek reinstatement. While the fact that the company is offshore might provide some practical advantage, it may not “win the day.”
The company will need to assess:
- How long has the employee been local?
- What are the risks of requiring them to return to the US?
- What are the risks of terminating them?
- What are the options moving forward?
Corporate Mobility Practitioner Perspective by Cheryl Craig, of VMware:
We are going through a process at VMware to confirm locations with every employee. Are the employees working out of the country they were contracted to work out of? If not, where are they working from? For all cases we are asking that they return to the country where they are contracted to work out of and if they would like to request to relocate, they would fill out the Employee Requested Move form.
As this employee has already been working in that location for a longer duration, we would need to work with corporate tax and our tax provider to see what needs to be done from a tax perspective. Do we need to backtrack and put this individual on a formal assignment? This has already come up a few times where that is the conclusion we have come to.
We would also advise the business as soon as possible that there will be significant costs and provide a cost estimate to the business. Unfortunately, since we weren’t able to catch this sooner, there is not much proactive advice we can provide, it will be more retroactive (i.e., how do we clean this up and what do we recommend if the employee would like to continue working from this location?)
While there may be some discussion of its total impact, remote working is the way of future and there are several key issues that should be considered when allowing employees to work from anywhere. If you missed the live webinar, feel free to download it here.
If you have questions related to your own mobility program, please contact any of the experts from our panel:
David Livitt – National Practice Leader, Business Traveler Services at GTN
phone +1.646.915.3301
dlivitt@gtn.com
Richard Polak – Global Advisor for Employee Benefits at Alliant
phone +1.323.828.2200
Richard.Polak@alliant.com
Trent Sutton – Global Workforce Attorney at Littler Mendelson, P.C.
phone +1.585.705.8458
TSutton@littler.com
Cheryl Craig – Senior Manager, Global Talent Mobility at VMware
phone +1.703.673.6048
ccraig@vmware.com
