A Globally Mobile Workforce and Evolving Hiring Practices

A lasting legacy of the Covid-19 pandemic has been the irreversible shift in employees’ working patterns. In the global war for talent, undeniably more power has been placed in the hands of employees, giving them more say over where and when they perform their roles. This has led to employers having to rethink their policies and employment structures, to ensure that they provide sufficient flexibility and appeal in their efforts to hire and retain new talent.

A key takeaway from our most recent Global Mobility Round Table discussions was the expectation that international remote working is here to stay, coupled with extended overseas business trips and cross-border commuting.

The impact of the pandemic has seen an increase in the implementation of alternative employment structures, as organizations seek more efficient or smarter ways of engaging workers, particularly when moving into new jurisdictions where there is no established business presence, or when engaging with or hiring remote workers.

In this article, we will explore some of the challenges that arise in respect of various alternative hiring structures for employers with a globally mobile workforce.

Global Employment Company

While by no means a new concept, a GEC is once again being considered by businesses as a viable option for employing their globally mobile workforces.

A GEC is a distinct legal entity within the existing corporate group structure, and the employment contract of any globally mobile employee will sit underneath it. This entity will then provide services to group companies, typically on a cost-plus basis to comply with transfer pricing rules and to ensure that the company possesses the necessary legal substance.

An aim of a GEC is to provide the centralized management of a globally mobile workforce, thereby giving greater control and ring fencing risk while achieving agility and flexibility around the hiring and subsequent deployment of staff, including to locations where the business has no corporate presence. This centralization allows for a uniform global approach to be adopted around policies, remuneration and benefit provisions, and performance management. It also enables coordinated monitoring and standardized approaches to compliance and retaining central control of finances and risk.

While a GEC may appear a neat and logical solution for some businesses, it is not without its shortcomings. Creating a GEC can be a complex undertaking and involves the creation of a new entity, as well as the onboarding of a workforce. There are regulatory, employment law, and immigration considerations in addition to the income tax, social security, and payroll challenges based on where employment duties are performed. These are not new considerations or challenges, but all still need to be evaluated when implementing a GEC.

The registered location of the GEC is important. A jurisdiction with a good network of double taxation agreements and bilateral social security agreements is important, as is a location where skilled local support staff are available to operate the GEC (unless a fully remote model is chosen). It goes without saying that economic, social, and political stability are also vital.

The GEC approach is not a one-size-fits-all solution for all employers with globally mobile employees. While there are obvious benefits, it is recommended that appropriate due diligence is undertaken to assess the suitability for a business.

Professional Employment Organization

A PEO is an outsourced human resources solution used to manage employees working in locations where an organization may not have a legal presence. The PEO will not employ the employee; rather it will manage various HR and administrative functions such as payroll, tax compliance, benefits management, and other associated services.

A primary benefit of using a PEO is that there is a pre-existing structure in place when expanding into a new territory or where someone is working remotely in a location where there is no existing entity, avoiding the time-consuming and potentially costly work involved in establishing these processes.

While a PEO has the benefit of outsourcing some of the cumbersome and more time-consuming HR administrative tasks, careful consideration should be given as to whether this is the right fit culturally for an organization. There may be a perception that staff managed by a third party are not as integrated into an organization as those managed centrally, and management may feel that they do not retain the same control over employees. It is important that there is clear understanding between employer, employee, and PEO over responsibilities and reporting lines to ensure that this is managed effectively.

One potentially significant drawback is that any permanent establishment risk still falls on the employer—whereas this can be managed centrally with a GEC. Therefore, it is vital that the employer retains timely oversight of where its employees are working, and for how long, and what duties they are performing.

Employer of Record

An EOR is similar to a PEO; however, a key difference is that the employment contract will be held by the EOR in the location where the employee is working. An EOR is an unrelated entity that will take on the management of an employee, as well as all HR functions. This is a completely outsourced model and has the benefit of accessing an existing compliant structure. This enables far greater speed in a new location by using a pre-existing payroll, as well as local expertise in obtaining any necessary work permits or visas, while still retaining ultimate control and direction over the employee.

As with a PEO, there needs to be a clear understanding between all parties over responsibilities when it comes to giving instructions, reporting lines, and performance management, so that the business still retains the desired control over the individual.

This option potentially can work well when a business is testing the water in a particular location. We are also seeing it used for remote workers where there is no corporate presence in the location where the individual is working. A note of caution is that, despite the employment contract being held by the EOR, this does not remove the risk of the employee creating a permanent establishment for the business.

Contractors and the Use of Personal Service Companies

The increased move away from the traditional long-term employee assignment has seen an increase in the hiring of freelancers, whether in-country or from further afield. This can present some interesting challenges for the hiring business.

Obviously, depending on the nature of the relationship between the two parties, the role, and the location of the work, the freelancer could be deemed to be an employee for tax and legal purposes. This can trigger unintended additional costs and obligations both for the freelancer and the employer—some of which may be significant, including unforeseen employment rights, employee withholding tax, and/or significant social security costs, particularly for the engaging party.

Typically, for a non-employment relationship to exist in both substance and form, there needs to be a degree of separation between the business and the contractor. To create sufficient detachment with the worker invites the question of whether this allows the business to retain the desired control over the freelancer to effectively manage and monitor output and performance. Would any policy allow the freelancer access to company IT and systems? Would they also be governed by existing HR policies?

In terms of hiring freelancers, including those resident in another jurisdiction, we recommend that the hiring business exercises care and undertakes due diligence prior to engaging, so as to properly evaluate any associated risks. The cost of non-compliance, coupled with the reputational risk, can prove expensive for a business.

To Sum Up

In conclusion, there are often numerous available options for a business in terms of its ability to hire personnel to perform services either locally or abroad.

We would caution that a business needs to carefully consider its approach and exercise due diligence to ensure that the chosen solution is the correct one for the business based on the specific circumstances, and that all relevant compliance obligations are met. Given the potential pitfalls, seeking professional guidance is advisable.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Andrew Kelly is a partner in the global employer services team with BDO and has worked within the expatriate tax services field for over 20 years. His main focus is advising companies and individuals on the cross-border tax and social security implications of international assignments, working closely with payroll, finance and HR functions to ensure all aspects of the secondment operate in a cohesive and tax efficient manner.

Lee Coccaro is a partner in the global employer services team with BDO, responsible for the expatriate and employment tax business. Lee advises clients on employment tax and social security issues relating to their internationally mobile employees which range from business travelers to assignments and local hire moves.

The authors may be contacted at: andrew.kelly@bdo.co.uk; lee.coccaro@bdo.co.uk