November 8, 2021 - When the COVID-19 pandemic shut down workplaces and closed international borders, seemingly overnight in early 2020, many expatriate employees were suddenly thrown into crisis: Some found themselves terminated from their employment while abroad, unable to obtain renewed visas or extended grace periods, and unable to travel home. Others who did not lose their jobs faced difficult and unforeseen situations and made decisions based on the best information available at the time — many deciding to return home to work remotely for what they believed would be a short time to avoid the risk of being stranded in a foreign country.
Additionally, as the pandemic continued, some employees saw remote work arrangements as an opportunity to work from a foreign country, be with family, or simply to work from a more pleasant environment, presuming, since they were working remotely, they had some choice on where they were located.
Now, over a year and a half later, remote work seems to be here to stay, and many employees are seeking to make their temporary international remote work arrangements more permanent. As the world continues to recover from the pandemic, these multinational employees and their employers should pay increased attention to the legal and tax implications of international remote work.
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A central question is whether employees working remotely have the right to choose where they work from. As a basic immigration law requirement in many countries, workers must have the proper legal status to work in the location they are performing the work, even if their employer and the employment relationship is based in another country. While many countries may not require work authorization for short business trips, (i.e., for meetings and/or trainings), this does not mean an employee can work indefinitely from a new country without obtaining the proper immigration status.
In addition, if the employee's work is in a regulated profession, such as law, medicine or financial services, they will need to ensure they are properly licensed to work in the geographic location where they are located or sign up as a foreign professional working in that jurisdiction.
Moreover, even for workers who have the status and licenses to work in another country, employers still generally have the right to dictate where their employees work and protect their companies from unintended taxes imposed in jurisdictions where few perform services. Employees would be ill-advised to take it upon themselves to start working from another country without their employer's knowledge and agreement in advance.
When considering whether to allow an employee to work from another country, employers must consider whether they will be required to abide by any additional requirements in the host country. For example, some countries may find that an employee has created a "permanent establishment" for the employer through their home office, triggering employer tax obligations.
Even within the United States, employers must withhold and pay taxes in the home state of an employee who is working remotely from home, with each state establishing its own laws regarding when someone has performed services long enough in that state to be considered an employee for tax purposes.
While many countries and states have temporarily suspended these types of requirements with respect to employees who are working remotely during the pandemic, employees and employers alike should closely monitor these requirements and the status of any temporary waivers.
Another main consideration in this context is the possibility that the host country will acquire jurisdiction over the remote worker and local employment laws may apply to their employment. Of particular concern to employers is the fact that while at-will employment is a central tenet of U.S. employment law, many other countries have statutes mandating employment contracts, minimum notice periods, severance payments, mandatory administrative processes, and/or limits on the ability to terminate an employee without just cause.
In addition, the host country's local family and parental leave laws, minimum wage, overtime, anti-discrimination protections, and privacy laws may also be applied. One key such piece of legislation is the EU's General Data Protection Regulation (GDPR), which gives "data subjects" (individuals about whom data is processed) key rights, including notification, information and erasure rights.
The GDPR applies extraterritorially to any company processing the personal data of subjects residing in the EU, regardless of the company's location. Regulation (EU) 2016/679, of the European Parliament and of the Council of 27 April 2016. See On the Protection of Natural Persons with Regard to the Processing of Personal Data and on the Free Movement of Such Data, and repealing Directive 95/46/EC (General Data Protection Regulation) 2016 O.J. (L 119) 1–88, Art. 3.
In addition, workers' compensation laws may not shield the employer from liability for an employee's work-related injuries that occur in the worker's home in a foreign country.
While some issues around whether the laws of the host country or the employer's location will apply can be addressed through choice of law provisions in an employment agreement, many employment rights cannot be waived by contract.
The determination of whether such local laws apply is complex and fact specific. A May 2021 decision by the U.K. Employment Appeal Tribunal is illustrative, although it does not regard an employee working remotely due to the COVID-19 pandemic. See(1) Partners Group Ltd. (UK) (2) Partners Group (USA) Inc. v. Ms. M. Mulumba: UKEAT/0237/20/RN, (https://bit.ly/3waC81g).
The Tribunal considered whether a Congolese employee of a U.S. entity -- subject to an at-will U.S. employment contract who had been working from the U.K. for approximately 18 months -- was entitled to anti-discrimination and minimum notice protections under U.K. law. The employee in that case was not working remotely because of the COVID-19 pandemic; however, the case illustrates the complex consideration at play in expat cases.
The employee was initially hired by the employer's U.S. entity pursuant to a New York at-will offer letter. She was then posted to Switzerland and then to London as part of a six-month rotation during which her U.S. work visa expired. At the end of the program, she was not offered a permanent position with the employer, but her employment was continued so that she could look for new work in the U.K. whilst maintaining her employment-based immigration status.
Throughout her time in the U.K., she continued to be employed by the U.S. entity, did not enter into a new offer letter, was paid in U.S. dollars to her U.S. account, and was subject to U.S. taxes. However, due to regulatory reasons, she could no longer serve U.S. clients and had become integrated into the employer's London office.
The Tribunal at first instance had held that although she did not have sufficiently strong connection to the U.K. to acquire U.K. employment rights when she was first posted there, by the time she filed her complaints, she had. The Appeals Tribunal remitted the case to the Tribunal to reconsider this determination.
Employees working in a different country than their employer's location should ensure they have considered the implications of their work location for income taxes, Social Security and pensions. In this regard, each country determines whether the employee is a tax resident based on its own local test, often based on the number of days the employee spends working in that country. Consequently, poor planning can result in the employee being a tax resident of more than one country, subject to income taxes in more than one location.
Similarly, questions of whether employees will be required to contribute to, and whether they will be entitled to benefit from, local Social Security or pension programs should be considered. The rules for these programs do not necessarily follow tax rules and should be considered separately.
Finally, consideration should be paid to the employee's equity and deferred compensation schemes. Many countries have tax, Social Security and pension treaties with the United States which address these programs and make it less onerous to work abroad, but equity and deferral schemes are often treated differently from a tax perspective internationally and can cause an employee to have significant tax liability abroad.
In summary, all of an employee's social benefits and compensation should be considered in making decisions with respect to international remote work. Even if a tax treaty will allow the employee to avoid double taxation, completing the necessary tax documents can be a complex and costly process, and the requirements can continue to affect the employee's taxes in years after the overseas work has ended. Generally, unless the employer agrees to provide the employee with tax services, these costs and any associated penalties will be at the employee's expense.
Finally, employees and employers should consider how and where any employment-related disputes will be resolved. Many countries have local tribunals with exclusive jurisdiction over certain aspects of the employment relationship, such as statutory minimum worker protections and anti-discrimination laws.
Many contract disputes, however, can be made subject to dispute resolution clauses, which should clearly spell out whether the parties will be subject to mediation, arbitration, and/or court, where these processes will take place, which laws will apply, and who will pay the costs.
While these questions are always front of mind when negotiating an employment relationship, they are especially important for international employment relationships, and should be reconsidered when the employee begins working remotely from another country.
The pandemic has created a new category of remote international employee in the U.S., and it is anyone's guess if it will be short-lived or here to stay. For now, many of these employees are still subject to internal company rules, protections and policies to address their situation, but as companies return to the office, tolerance for remote employees may wane.
In addition, governments have put in temporary waivers to address this extraordinary circumstance of displaced workers but again, that can quickly change. The pandemic raises many legal questions for employees working abroad which are yet to be resolved.
Certainly, as we all return to the workplace and global travel restrictions lift, it may become more apparent that employees are working remotely by choice, and it will be critical for employees and employers alike to carefully consider and plan around the legal risks and regulations when considering permanent remote-work arrangements that cross international borders.