September 21, 2020 | By Julius Melnitzer
There’s a new twist on the expatriate employee: one who wants to or has to move abroad, to a place where the employer has little if any presence – – – but is willing to do the job remotely.
There’s also a variation on the theme. It comes via the recruitment process, where the recruit is resident abroad but wishes to remain there.
“Our clients are very interested in these scenarios,” says Sari Springer, managing partner of the Toronto office of Littler Mendelson P.C., a global labour and employment law boutique. “But the legal situation is not all that straightforward.”
To be clear, we’re not in the realm of the employee’s obligations. Rather, our discussion focuses on employers’ responsibilities for remote workers under foreign laws.
The core issues are payroll and taxes: does the employee’s remote work abroad trigger obligations for the employer in the foreign jurisdiction? And in what way?
“In most places, a company that does business in a country has to register its corporate presence,” says Don Dowling, an international employment lawyer in Littler’s New York office. “Once you do that, you generally have to file corporate tax returns whether you owe taxes or not.”
But what does “doing business” mean?
Although there’s plenty of jurisprudence on the subject in many countries, it doesn’t deal with the remote scenario under discussion.
“The answer comes out different ways in different countries,” Dowling says.
In some places, like the United Kingdom, Japan, Thailand, Guatemala, Ecuador and others, foreign companies without local assets or branches are exempt from registration and payroll taxes.
“Still, it’s more complex if the employee is contacting a few customers or doing a few trade shows,” Dowling says.
Domestic activity of this type could well attract “permanent establishment” risk.
In a bulletin entitled Closed borders and workplaces open immigration, tax and legal issues, KPMG warns that businesses must “closely monitor” tax exposures created when people work remotely abroad.
“We expect tax authorities will show forbearance in the circumstances, but this remains to be seen,” the authors state.
However that may be, in jurisdictions like the United States, Canada, the European Union, China, and many other countries, payroll issues can arise even if corporate registration is not required.
“Most companies don’t want to deal with the uncertainty by biting the bullet and registering,” Dowling says. “But there are risks in keeping the employee on the home country payroll.”
One way around this is by resorting to the “employer of record” workaround.
“This involves a professional employer organization (PEO) which actually pays the employee and ensures compliance with local laws,” Dowling says. “The real employer then reimburses the employer of record and pays a fee for the service.”
But this approach can be costly.
“The fees range up to 20 percent,” Dowling says. “Still, it’s the best option because it’s the cleanest and avoids having to register.”
Where the employee who’s moving abroad is also working for others, the “independent contractor” route may be feasible.
“In this case, the employee would resign from the home company and enter into a legitimate contract for the services,” Dowling says.
Finally, treaty arrangements may be relevant. The Organisation for Economic Co-Operation and Development (OECD) has made recommendations as to how tax treaties should apply to employee mobility.