With the proliferation of hybrid and remote workers, the challenges and risk exposure for payroll, human resource, and tax professionals have correspondingly grown. A study has shown that the complexities of complying with employment taxes in multiple jurisdictions are further intensified due to this increase in non-traditional work arrangements[1].
Employers who have primarily dealt with local or regional workforces may not possess the necessary experience or technical expertise to effectively manage remote and hybrid work arrangements. Hence, it’s critical that companies actively develop a forward-looking strategy, instead of adopting a reactive approach.
To navigate the intricate tax and non-tax regulatory environment surrounding multi-jurisdictional employment, a compliance and risk management committee should be created. This committee should constitute either internal or external resources and advisers from various disciplines such as human resources, accounting, payroll, finance, tax, and legal. Their key goal is to navigate the complex regulatory environment in jurisdictions where employees provide or are expected to provide services.
Failure to do so could expose employers to noncompliance risks, reporting errors, and potentially, a significant tax and non-tax liability. Unsupported by proper controls to monitor where employees are working, employers could be burdened with extra administrative work, increasing tax and legal costs, and even dissatisfaction amongst employees.
With increased requests for remote work accommodations, many companies may find their geographical footprint expanding rapidly. This could lead to unexpected exposure to new tax and regulatory authorities, impacting areas such as employment tax, payroll practices and procedures, wage, hour, and benefit requirements, state and local registration and licensing requirements, record retention rules, and even the creation of nexus or permanent establishment.
Employers should take proactive steps and strategic measures to manage their hybrid and remote workforces. There are, however, many factors to consider. Each jurisdiction, be it state, local or foreign, will have its unique provisions related to remote and hybrid workers, adding varying degrees of cost and complexity to the employer’s plate.
For instance, let us consider an employer based in the Midwest wrestling with hiring and retaining information technology professionals. They would likely feel more compelled to hire IT professionals from California or New York than remote employees who offer administrative support. Such geographically dispersed hiring will increase the employee prospect population, and with it the range of available skillsets. However, organizations have to ask themselves tough questions – will there be an increase in legal exposure, tax liability, or administrative burden if the company hires an employee from California, for instance[2].
The compliance and risk management committee should therefore each present the “what if” scenarios relevant to their discipline, and map out potential compliance and exposure challenges. The ultimate goal should be a well-governed and risk-controlled system that can guide go or no-go decisions with recruiting, hiring, and retaining employees in any jurisdiction.
As in all risk management measures, multi-jurisdictional employment should be handled with care to minimize the administrative burden and noncompliance exposure. Employers could uncover strategic opportunities to maximize efficiency and minimize costs through efficiently coordinating their hybrid and remote workforce population. All this should be supported by a holistic approach addressing the various compliance requirements posed by a hybrid and remote workforce.