'We'll start seeing headlines in the news about fines stemming from remote work,' warns Topia co-founder
Do you allow your employees to work from anywhere? If so, you have to be careful you’re not breaking the law.
Since the COVID-19 pandemic forced many people to work from home for the first time, employees have been taking advantage of their newfound freedom by working wherever they please. However, if that’s in a different state or country, their employer may be subject to tax and immigration laws. While most HR professionals recognize the benefits of remote work, the data suggests that tax and immigration compliance remain a great risk. In 2021, 60% of HR professionals were confident they knew where most of their employees were located, according to Topia.
That number has fallen to 46% in 2022, revealing a major blind spot.
“Many employees will get away with it, particularly if they’re doing it for a short-term stint,” Steve Black, co-founder and chief strategy officer of Topia, told HRD. The San Francisco-based HR tech firm specializes in global talent mobility, and since 2011, Topia has helped enterprises such as Dell and Under Armour manage large global workforces.
According to a recent survey, 40% of HR professionals discovered employees working from outside their home state or country. Black isn’t surprised by the data because for Topia’s larger customers, last year saw the highest volume of relocations in the history of their business. If anything, the pandemic has led to an increase in employee desires to have international experiences as part of their career path.
However, these international experiences aren’t always legal. It comes down to whether a company has created a “permanent establishment,” which means a fixed place of business in a state or country aside from its residence. There are formal ways to create a permanent establishment, such as building an office and hiring people to work there, and informal ways, like the CEO spending time in other countries to sign new customers there. Once the business generates taxable revenue in another state or country, it has become a permanent establishment that the new residence can tax and regulate.
Because employees aren’t informing their employers of where they’re actually working, many companies have unknowingly created permanent establishments. “In 2022, we’ll start seeing headlines in the news about fines stemming from remote work,” Black says. “You’ll see more government audits, and then fines and penalties come on the backs of those audits.”
It’s a gamble many companies are taking to remain competitive in this extremely tight labor market. After all, flexibility has become the most sought-after benefit during the Great Resignation, in which companies across the United States are experiencing historic turnover. Even though coronavirus cases are dropping, employees aren’t interested in heading back to the office five days a week. They don’t even want to go back three days a week, as evidenced by this recent Blind poll of Google employees.
“Many employers have adopted remote work policies over the past year, but when you read the fine print, they’re designed to eliminate risk completely,” Black says. “The net result for most employees is a ‘no.’ But employees have proven they’re willing to look elsewhere for opportunities where flexibility is key.”
Now there’s this delicate balancing act for companies between compliance and fulfilling employee desires. Black has even seen some policies where if an employee is working in another state or country for less than 30 days, the company doesn’t want to know about it. It’s a page out of the old military playbook: “don’t ask, don’t tell.”
“The moment you start telling HR, the company has an obligation to act and prevent it if you’re not in compliance,” Black says.
Of course, unless there’s a fear of being caught by the government, some companies won’t act at all. But that doesn’t mean employees are off the hook. For example, one of Topia’s employees ended up staying a couple days over the regulatory limit in India and ended up having to file tax returns in the country for the next seven years.
“If it’s on company business, you can guarantee the employee will say, ‘I was there for work, and you didn’t warn me about the problem. I need you to pay for someone to do my tax returns for the next decade because it was a company-created headache.’ We’re starting to see our customers realize ‘work from anywhere’ is a level of risk they can no longer take,” Black says.