By: Ute Krudewagen
Prior to the coronavirus disease 2019 (COVID-19) pandemic, most companies attempted to limit employees working in jurisdictions where the company did not have a corporate presence. As part of global expansion strategies, companies would carefully plan growth jurisdictions; determine employment, tax, corporate and regulatory obligations; and strategically place employees into those jurisdictions. Invariably, as companies grew quickly, exceptions may have been made where employees whose hire was deemed essential were engaged through payroll registrations, agencies, as contractors, or in other creative ways in jurisdictions where a company did not have operations; however, these exceptions typically were limited.
COVID-19, however, has brought new challenges. Many companies recently have found themselves in situations where employees are stranded abroad and have continued to work while waiting to return to their original locations. Reasons for employees becoming stranded can include countries being slow to reopen, employees voluntarily relocating to “sit out” the pandemic closer to family, and restrictions on companies onboarding new hires in their ultimate jurisdictions due to borders being closed, flights being cancelled or immigration services being delayed. Add to that the new reality of “working from home,” and employers increasingly are facing instances of employees working remotely in countries other than originally intended.
Israeli companies that have offices in international locations or employees stranded abroad due to Covid need to work through how to tackle these challenges, which will depend on many factors, including the company’s global footprint, business, risk profile and situation of the stranded individual. Below we explore several key risks employers may face related to employees or applicants stranded abroad, potential approaches to address these individuals, and practical tips for employers to consider.
- Risks related to stranded employees or applicantsGeneral employment risks
As an employee performs services abroad, local employment laws such as working time requirements, overtime entitlements, leave entitlements or termination rights may be deemed to apply. Whether or not local laws apply is a fact specific analysis that can depend on the duration of time spent in the country, the employing entity, where payroll is paid, and what work permits are held, among other factors.
Sua sponte enforcement by local authorities usually is not likely for a one-off stranded individual. However, if an employee dispute were to arise – such as over termination of the stranded employee while abroad – the employee is likely to claim “the best of both worlds,” that is, the better of the laws of the destination and host countries.
Employers are also encouraged to consider the impact on entitlements to home/host country government assistance (furlough) or special measures. In some situations, the employee or the company may be ineligible for such benefits if they are not performing services in the location where payroll / social charges are paid.
IP assignment issues, data privacy and export controls
If an individual creates IP, employers are urged to consider whether local IP assignment laws might apply that have different requirements than the employee’s ultimate jurisdiction (eg, compensation requirements for creation of IP). Additional data privacy issues may also be applicable as data is likely to be transferred abroad.
If the employee needs access to controlled technology, the employer is encouraged to review the application of export control laws and ensure compliance.
Payroll tax risk
Another risk is the failure to withhold income tax and social charges. Again, there is no bright line rule as to when withholding obligations are triggered. Double-taxation treaties often provide that an employee temporarily located in another country is not subject to taxes if (1) that individual is paid by the original location; (2) resides in the other location for no longer than 183 days – the rule used by most countries to determine if someone should be considered a resident for tax purposes (although this can vary); and (3) the compensation paid to the individual is not borne by a permanent establishment of the original location abroad. That said, requirements vary, and there may still be risk if an employee works abroad for less than six months. For instance, there may be no tax treaty between the destination and host countries, the tax treaty may have different requirements, or the company may simply not fulfill all of the treaty requirements. Social security treaties are also less common and often do not provide protection from triggering local social charges.
Payroll tax risk often poses higher financial exposure than other employment risks. This is especially true as claims vis-à-vis the government usually cannot be released.
Permanent establishment tax and “doing business” risk
A company with an employee located in a jurisdiction where it does not have operations may trigger a taxable presence for income tax purposes, risking corporate tax obligations abroad. This risk tends to be higher where companies have individuals who are engaged in sales activities, and therefore generating revenue for the company; however, non-sales employees can also create risk. Similarly, doing business rules usually require a company that is engaged in “business” in a jurisdiction to set up a corporate presence. For instance, Singapore deems a company with an employee in Singapore as engaged in business under local rules.
The OECD has recognized the need for flexibility. In its April 3, 2020 guidance on how governments should apply standard tax treaty provisions when multinational group taxpayers or their employees are forced to change their behavior to comply with COVID‑19 travel restrictions and quarantines, it noted that governments should consider that the exceptional and temporary change of the location where employees physically exercise their employment resulting from the COVID‑19 measures should not lead to the creation of new permanent establishments for the enterprise.
If an employee is stranded in a jurisdiction where she or he does not have the right to work, and yet continues to work, both the employee and/or the company may face penalties, fines or expulsion from the country due to immigration violations. While we have often seen countries give “a break” to individuals who were unable to leave the country in time due to an emergency, immigration issues may arise if individuals do not return to the jurisdiction of their regular work as countries reopen. On the receiving country’s end, employers are urged to also keep in mind any quarantine requirements as employees are able to relocate back to their home jurisdictions.
- Approaches and tips for managing stranded employees and applicants
Companies are taking several approaches in relation to employees working in the “wrong” jurisdictions. Some companies are letting employees remain and work where they are as they wait for things to return to normal, risking potential enforcement action by immigration or tax authorities. At the other end of the spectrum, some companies are attempting to avoid such actions by requiring employees in the “wrong” location to take unpaid leave for the foreseeable future.
Many companies are taking a middle ground – permitting an employee to work from the “wrong” jurisdiction for a short period of time, as opposed to indefinitely. For applicants, employers may consider interim options, such as onboarding the employee in a foreign jurisdiction as a fixed-term employee on local payroll or engaging them through an agency or global PEO.
Against this background, employers may want to consider the following tips when addressing stranded applicants and employees:
- For applicants who are non-crucial, employers may want to make sure that offers are contingent upon them obtaining proper authority to work and being able to relocate and then wait for the employee to commence work until these requirements can be satisfied. Circumstances could be changing quickly (including the company’s need for a specific hire), so waiting may be the best option.If onboarding ultimately is not viable, care should be taken when rescinding offers (especially if the offer does not have such a contingency), as candidates may be able to bring claims, such as for breach of contract. Depending on local laws, it may be possible to withdraw the offer on the basis that the candidate will not be able to perform the agreed duties in the agreed location.
- For applicants who are crucial and appear to be stuck in the wrong location for a shorter period of time (consider under three months, but the time period should match the company’s specific situation), it may be possible to onboard and pay them through their ultimate location (if they can be placed on payroll). Where permitted locally, companies may also look to postpone start dates (by mutual agreement if required) for a short period.
- For applicants who are crucial and might be stuck for a longer period of time, employers may want to consider whether it is possible to onboard them as employees (if possible fixed-term) in the jurisdiction where they currently are, especially if the company has operations in that jurisdiction. A temporary secondment arrangement may be available as an alternative depending on local laws.For example, companies taking this approach in the EU should be mindful of Posted Worker rules which can add another layer of legal complexity.For existing employees
- If a company is in a regulated industry and/or very risk adverse, consider placing the employee on unpaid leave if they will be in the wrong location for a longer period of time (consider between one to three months, but where to draw the line will vary based on the company and jurisdiction).
- If your company is willing or able to live with some risk given the current situation, consider simply letting the employee continue working from the foreign jurisdiction for a period of time.It is important for a company to understand where employees are located, though, and put guardrails in place about return. Companies are encouraged to communicate with their workforce and be clear that the company can reassess the situation at any time, and expects and will enforce return of the employee to the ultimate work location as soon as the situation permits.Implement such a policy in a consistent, non-discriminatory basis.
- Think through alternative methods of engagement, especially if the situation becomes permanent.Again, if you have existing employees in the jurisdiction, it might be possible to engage the stranded employee in the same manner as localized employees.Consider a fixed-term or secondment arrangement if permissible under local laws.
- Evaluate alternative methods of engagement such as use of a PEO / agency or even a contractor arrangement (being mindful of misclassification exposure).
- If you make any changes to the individual’s employment, document the home country arrangement carefully.If the relocation is permanent, terminate the home country employment relationship to avoid dual employment risks (and consider whether the termination triggers any statutory payouts such as vacation or severance and whether a waiver of claims may be permissible).If the relocation is temporary, consider an unpaid leave arrangement.
- Keep in mind that there is a difference between an employee stranded temporarily and an employee working permanently from abroad.If the employee wants to permanently work from home in a foreign location, long-term solutions will want to be considered.In some countries, especially if an employee is working from home on a long-term basis, the employer may need to enter into a separate work-from-home agreement setting out terms and evidencing the employee’s agreement to the change in work location.
- Employers are also encouraged to be mindful of requirements and risks related to work-from-home arrangements, including those related to health and safety issues and wage-and-hour laws.
As with most employment matters, there is likely no one-size-fits-all solution. Companies with a global workforce are urged to consider how to balance the needs of employees in these extraordinary times with business needs and compliance obligations.
If you have any questions regarding these new requirements and their implications, please contact the author or your DLA Piper relationship attorney.
Please visit our Coronavirus Resource Center and subscribe to our mailing list to receive alerts, webinar invitations and other publications to help you navigate this challenging time.
This information does not, and is not intended to, constitute legal advice. All information, content, and materials are for general informational purposes only. No reader should act, or refrain from acting, with respect to any particular legal matter on the basis of this information without first seeking legal advice from counsel in the relevant jurisdiction.