In the workforce solutions industry, we’ve heard a lot about “digital nomads.” And we’ve heard the phrase even more since the pandemic, which forced millions of people and businesses around the world to accept a new normal of teleworking arrangements. But nothing propelled the movement quite like the advent of COVID-19. The problem, as with genuine nomadic tribes, is that people can’t simply travel to and operate in any place they wish. Nomadic groups follow a fixed annual or seasonal pattern of movements or settlements; they regularly migrate to and from the same areas. Why? Because these are the spots where they can work effectively and somewhat compliantly, whether for hunting or selling wares or trading goods. These same rules apply to the digital variety of nomad as well. Sure, they may have the means and tools to relocate, but employers can’t actually payroll talent everywhere.
Wherever I May Roam? Perhaps Not
“In 2020,” MBO Partners wrote in its report on COVID-19 and the Rise of Digital Nomads, “the U.S. and the entire world witnessed a seismic shift toward remote work, accelerated in large part due to the COVID-19 pandemic. This shift has impacted the experience of the full-time worker, further boosting the population of American digital nomads. The population of digital nomads in the U.S. also rose dramatically—with an increase of nearly 50% from 2019.”
The concept isn’t that new, though. Its earliest appearance can be traced to the eponymous 1997 book “Digital Nomad” by Tsugio Makimoto and David Manners. The evolution of electronic telecommunications and wireless Internet access helped foster acceptance for remote work, which is the foundation of this new professional lifestyle.
The pandemic accelerated, shifted, and altered the nature of the digital nomadic movement that preceded it. As Erin Griffith noted in her New York Times article, talent began treating the remote working situation as a sort of exotic getaway: “They Instagrammed their workdays from empty beach resorts in Bali and took Zoom meetings from tricked-out camper vans. They made balcony offices at cheap Tulum Airbnbs and booked state park campsites with Wi-Fi. They were the kind of people who actually applied to those remote worker visa programs heavily advertised by Caribbean countries.”
Not everything panned out. Relationship breakups and “COVID guilt” aside, they ran into tax trouble. They encountered delays in pay. Some discovered they couldn’t get paid after landing in a new spot, having failed to first discuss the move with their employers. A true nomad won’t travel to hunt where food is scarce. She won’t sell her goods in a marketplace that affords her no income. He won’t settle temporarily in a region where he runs afoul of local guidelines.
Understanding the Rules
For employees and employers alike, the technical capability of teleworking doesn’t translate seamlessly to the operational feasibility of it on a borderless scale. Regulatory compliance still outweighs the means to work anywhere one wishes. Since March 2020, more than 2,600 state legislative and employment standards have developed in response to the pandemic. These laws and regulations have changed existing labor rules. Companies must understand the jurisdiction triggers for wage and hour laws in the state where the employee wants to move.
Of course, that all goes out the window when we’re talking about a different country. Several island nations have advertised instant visas and other incentives to attract digital nomads—that shouldn’t imply that they’ve changed all their local tax policies as a result.
Here are some essential points to consider before trekking off to Bermuda or allowing employees their untethered great adventure. Most importantly, however, everything facet of potentially relocating should be discussed prior to any approval or action.
- The company must be a licensed entity in the target state.
- The company must legally be set up to perform business in that state or country.
- The company must be established for tax purposes in the state or country, with processes and approvals for handling statutory withholdings and more.
- The company must be able to file its corporate tax returns in the destination state or country.
- The company must understand all the wage and hour mandates of the state or country. Many factors differ across areas, including paid leave, severance, termination processes, benefit requirements, and others.
- The company must be prepared to adhere to employment protection laws that often vary by country, county, state, and city.
- All benefits and entitlements must be compliant (e.g., workers’ compensation, leaves of absence, short-/long-term disability, unemployment, vacation, holidays, etc.).
Engaging or supporting remote employees comes with fluctuating levels of risk and expense. The optimal solution would be that the company meets all standards for conducting business in the employee’s preferred location or that the talent and the company have agreed on a region within the organization’s existing geographical footprint. Outside of those scenarios, things get a bit dicier.
Make Them All Independent Contractors
Making the relocating talent ICs is a quick and easy way to solve for the problem. It’s an effort that’s relatively simple to execute. Unfortunately, it courts a very high level of risk and can be costly to implement and maintain.
Set Up a New Corporation
The most compliant solution is for the enterprise to establish a new corporate entity in the target state or country, which is legally licensed to conduct business and designed to conform with taxation policies. In terms of risk, there really are none. Which is great until you consider the tremendous effort involved in registering a new business in a different region. The price tag to deploy and sustain the new entity can also tend toward the exorbitant. Without a large number of employees looking to settle there, a business case, or an untapped market brimming with profit potential, this option is a tough sell.
Just Say No
Some companies have just denied their employees’ requests to move. Intimations of a diaspora do not bode well from the workers’ cities of origin. Those areas would lose consumers and taxpayers. The businesses allowing the move could lose favor and incentives with officials. Those organizations also don’t like the other options available to them. In some cases, they have offered workers the ability to relocate with less-than-ideal caveats. VMWare told its employees that they must accept a commensurate reduction in salary for relocating. Moving from the Bay Area to Colorado, for example, would incur an 18% pay cut. Moving to San Diego would only see an 8% drop. In general, companies may adjust pay rates relative to an area’s cost of living.
- Employers believe the move is a competitive approach to localizing compensation.
- State and local laws regulate benefits that employees are eligible to receive; workers who move may have to choose different health plans if the company’s insurer doesn’t offer coverage in a state. That becomes a new overhead cost for employers.
- Paid leave and sick benefits change across cities and states, which may force businesses to extend this kind of financial support where they previously had no obligation to do so.
- “Also, if there are any changes to your paycheck when you move, that will change how much you receive in matching contributions to your 401(k) since they're based on a formula tied to your earnings,” Jeanne Sahadi at CNN Business noted.
- In states where reciprocal tax agreements do not apply, workers could owe taxes in both their work and home states.
The bigger challenge for employers in this situation is the likelihood of skilled and needed talent quitting their roles to find employment in another area.
The strongest alternative fix is for a company to consider outsourcing its payrolling to a provider that’s established and licensed to support talent in the new area. The enterprise can give its employees the choice to move to a third-party payrolling firm or international Professional Employer Organization (PEO). The worker technically becomes the employee of the payroll company but can continue to support the current business as contingent talent. The risk is low, the cost is low, and the effort required to set up the process is nominal.
Proceed with Caution
Allowing your workforce the flexibility of telework and relocation can boost productivity, morale, and employment brand. These factors contribute to the perception of your company as an employment destination of choice. But organizational leaders must remain cognizant of the destinations their talent are choosing, while staying vigilant about ensuring compliance. As with so many things, communication is key. Be sure to explain to your talent the capabilities, options, requirements, policies, and rules associated with an acceptable nomadic relationship. In this situation, no one likes a surprise.