Digital Nomads: Reducing Payroll Tax and HR Compliance Risks

Before 2020, employees working remotely were usually freelancers. As many workplaces began supervising remote employees over the pandemic, however, remote work trends exploded. With this change, “digital nomads” have also increased exponentially in the workforce, especially among professionals that hold full-time, non-exempt jobs (as opposed to freelancers). Digital nomads increased by 96% from 2019 to 2020, per a recent study. The term digital nomads refers to employees who live and work in places around the country or even the world. Unencumbered by an office, they travel and work in new locations, often without their employer’s awareness. While this trend may result in happier employees and geoarbitrage (a method to hack and improve income compared to the cost of living), it’s also creating payroll tax compliance and general HR compliance issues for employers.

Payroll tax compliance risks

Employers with remote workers who move around to unexpected locations are opened to legal risks, both from a tax compliance and an HR legal compliance perspective. In terms of taxes, employers and employees are generally responsible for paying taxes in the work location. While many states struck agreements to put these requirements on hold during the pandemic, many have been disbanded or will be soon. If an employee performs work primarily from a different location than their employer—whether the employer knows it or not—both may be responsible for taxes and registration for the employer in that new location. When the employer and employee don’t address these concerns, both may be on the hook for back taxes and hefty fines. These situations could also damage the employer’s reputation and ability to operate.

HR legal compliance risks

In addition to payroll tax concerns, digital nomads also expose their employers to legal and HR compliance risks. When an employee primarily performs work from a location, their employer will be subject to the employment laws of that location—even if their headquarters or main office is somewhere different. The employee is creating a “permanent establishment,” a workplace subject to local laws and regulations, whether their employer knows it or not. Employment laws and regulations vary from state to state, especially if a heavily regulated state like California or New York is involved. Of course, employment laws will dramatically change from country to country. In a scenario where employers are unaware of the employee’s work location, they may be breaking multiple laws, exposing themselves to potential fines and lawsuits. As mentioned above, in a worst-case scenario, these consequences could hamper an employer’s reputation or ability to operate.

Reducing legal and HR risks from digital nomads

Employers are beginning to utilize a variety of solutions to reduce the risks that digital nomads create. Some are harsher than others and may impact employee engagement and morale. Especially in the 2021 candidate-oriented job market, employers should not ignore the consequences of alienating their staff and potentially losing talent. Note that MP’s HR services team will assist with choosing and implementing any of these solutions. They include:

• Requiring remote employees to return to the office, whether full-time or in a hybrid capacity
• Requiring employees to notify their employer of their residence/work location, then stipulating that pay will be commensurate with that location
• Developing a telework policy requiring employees to notify employers of their work location, restricting work locations, or restricting the amount of time an employee is permitted to work from a location different than the state or city of the headquarters
• Working with employees to ensure that the company meets all tax and HR requirements of the locations they are choosing to work from, especially if they are different from the headquarters/office location