Coronavirus pandemic had an unexpected side effect – organizations that were reluctant to adopt home office and remote work had no other choice than asking their employees to work from home. Digital nomads across the globe jumped from joy foreseeing an immediate rise in the number of location independent remote jobs. However, nothing like this has happened and is unlikely to happen in the coming years.
As millions of people worldwide already lost their jobs amid COVID-19 outbreak, local labor agencies across the globe are looking much closer at overseas remote work arrangements asking companies ‘’ Why don’t you hire locally? There are plenty of unemployed people having the right skills set here.’’
Why are so few remote jobs created?
Health & Safety Requirements
The labor legislation in most countries is not adapted to this type of work. Health and safety measures often require that home offices aka workers’ homes comply with the same health and safety standards as company’s offices which is hard to achieve. Even more, the employers are held responsible for ensuring that worker’s home offices are in compliance.
HSE in the UK clearly states that:
‘’As an employer, you have the same health and safety responsibilities for home workers as for any other workers.
When someone is working from home, permanently or temporarily, as an employer you should consider:
How will you keep in touch with them?
What work activity will they be doing (and for how long)?
Can it be done safely?
Do you need to put control measures in place to protect them?
Lone working without supervision
There will always be greater risks for lone workers with no direct supervision or anyone to help them if things go wrong.
Keep in touch with lone workers, including those working from home, and ensure regular contact to make sure they are healthy and safe.
If contact is poor, workers may feel disconnected, isolated or abandoned. This can affect stress levels and mental health. ‘’
No doubt, remote workers need to have equal rights as in-office employees. Practically, it is hard to achieve, especially when remote workers are overseas and in various time zones.
Classifying Remote Workers
In general, remote workers can be classified as either (i) employees, which means that they need to pay the same taxes and social security as regular in-office employees or (ii) independent contractors. Based on the classification and tax residency of the employer and the remote worker, it is to be determined (i) which party needs to file tax returns and pay taxes and (ii) where tax returns are to be filed and taxes are to be paid.
How to classify a remote worker?
There are similarities between IR35 in the UK and AB5 in California, US. Put simply, to classify a worker as an independent contractor/freelancer, the employer needs to prove that:
(i) the worker is free from the company’s control;
(ii) the worker performs work that isn’t central to the company’s business; and
(ii) the worker has an independent business, trade or occupation in that industry.
Being ‘’free from company’s control’’ means that the remote worker can decide when to work and how many hours to work per day. Hence, customer support representatives, account managers and all other remote workers who are required to work on a predefined schedule are likely to be classified as ‘’employees’’. Attending regular team calls, participating in training programs, etc. also can be seen as a form of ‘’company control’’.
Performing work that isn’t central to the company’s business is tricky from a classification standpoint of view. IT team members working on the core product, sales and customer support, marketing, etc. are all likely to be seen as ‘’central to the company’s business’’ as it can’t exist without them.
Having an independent business is easier to prove if the remote worker has an office, a website, and more than one customer. Being dependent on one client only often leads to classifying a remote worker as an employee instead of as an independent contractor. Also, remote workers need to use their own equipment and tools. If remote workers use equipment provided by the employer, software subscriptions like Zoom, Asana, Jira, Microsoft Office, etc. are paid by the employer, this in most cases will lead to classifying remote workers as employees instead of as independent contractors.
Many remote workers believe that incorporating a legal entity and issuing invoices via that legal entity automatically classify them as independent contractors. However, the reality is different, and each case needs to be looked at closely to avoid penalties.
The ‘’Rule of 3’’
Even though legislation varies a lot across the globe, there are 3 locations that are always to be taken into consideration:
- The country of incorporation of the employer
- The tax residency of the remote worker
- The country the remote worker is a citizen of
It is worth noting that a remote worker may be a citizen of one country and a tax resident of another. This is quite common among digital nomads who work and travel or opt to live abroad. Employers need to be informed about the nationality and tax residency of digital nomads and remote workers to properly determine the tax rate that is to be paid.
Types of Remote Jobs
Local Remote Jobs & Flexible Jobs
Many companies allow their employees to work from home from time to time. A remote work option is often seen as a ‘’perk’’ and utilized to attract top talent. Still, these jobs are rather classified as flexible jobs than as remote jobs as employees need to visit company’s offices from time to time to attend meetings, participate in training and collaborate with colleagues.
Nowadays, companies create remote jobs in high unemployment rate areas in the country of incorporation. Usually, the remote workers work from home or co-working spaces and visit the company office once per month or even once per quarter. A good example is a company based in London creating remote jobs in Bristol.
Local remote jobs are also created to provide equal access to jobs to people with disabilities, victims of abuse, single parents, caregivers and everyone who has no other choice than to work from home or remotely.
Administering local remote jobs is times easier for the employers as both remote workers and the company creating remote jobs are in the same country and have to be in compliance with the same legislation.
Overseas remote jobs
Creating overseas remote jobs is often a hassle. Employers need to comply with the health & safety regulations in the country of incorporation while managing remote workers miles away and in various time zones.
If remote workers are classified as employees, employers need to either (i) incorporate a legal entity locally, in the country of residence of the remote workers or (ii) use the services of a local payroll or staff augmentation company. It’s an extra cost for the employer and most companies stick to 2-3 overseas locations to simplify remote working arrangements.
As employers need to be familiar with the labor and tax legislation in the countries of residence of their remote workers, location independent remote jobs are not in abundance and this is not likely to change in the foreseeable future even though freelance marketplaces like Transformify and Upwork offer payroll services and have a vast partner network of local payroll companies across the globe.
Overseas remote jobs are mostly one-off projects or freelance gigs so that the remote workers can be classified as independent contractors without any doubt.
Overseas Remote Workers and the Fair Pay Rate Dilemma
On top of the complex labor and tax legislation, determining the fair pay rate is never a straightforward exercise when overseas remote workers are involved.
Countries like Australia and the UK have published an official guidance domestic and foreign employers need to adhere to. Needless to say, penalties apply in cases of non-compliance.
Speaking of non-compliance, there 2 common cases:
Paying Below the Local Market Rate
Some companies create remote jobs to save on employment costs and benefit from the much lower pay rate overseas. Some of them invest money and effort to familiarize themselves with the median market salary and the best practices locally. These companies usually pay 30%-50% above the local median market salary to motivate their employees and support the local economy.
However, there are employers taking advantage of the high unemployment rate locally paying well below the local median market salary. More often than not, such employers are not penalized by the local authorities that want as many foreign investors as possible.
The most extreme cases are related to paying a rate below the local minimum wage. Even though this is illegal in most countries across the globe, foreign investors may not be penalized for a long period of time, as usually, they have no legal entity incorporated locally neither have signed remote worker agreements with their local remote workers.
Paying well above the local median market pay rate
Paying the same rate across the globe regardless of the location of the remote workers is often considered as a best practice by many digital nomads who work and travel and want to ensure the same level of income globally.
Why is paying times above the local median market pay rate questioned by auditors, labor agencies and tax authorities?
Criminals are always seeking new ways to transfer cash across borders and present illegally obtained income as clean and legal. Money laundering schemes involving remote worker arrangements involve scenarios in which an ‘’employer’’ transfers cash to an overseas ‘’remote worker’’ for services that either have never been rendered or subcontracted to others at much lower pay rate. Needless to say, both the ‘’employer’’ and ‘’overseas remote worker’’ are part of the same group of criminals. Usually, the ‘’overseas remote worker’’ has incorporated a legal entity, has an office and pretends to be operating an extremely profitable business. As money are received as payment on invoice for services, it takes time for the authorities to figure out that this is a money-laundering scheme. Thus, pay rates significantly above the local market rate are seen as a ‘’red flag’’ by the authorities.
Funding Illegal Activities and Terrorism Across Borders
Again, the criminals worldwide are looking to transfer money across borders without attracting the attention of the authorities. On top of that, they know how monitoring algorithms work and are likely to use a variety of channels to mitigate the risk. Paying above the local market rate, transferring lots of small payments that lead to the same IP address, etc. are tactics often used by the criminals.
Paying below the minimum wage and exploiting people is illegal in most countries across the globe. Sadly, even reputable businesses are trying to take advantage of people in developing countries, especially if the local authorities are not paying attention to cases of exploitation. Here’s an example of a typical slave labor scheme involving a foreign employer that has not incorporated a legal entity locally.
‘’ABC, a US company, signs an agreement with Mr ‘’X’’, a citizen of Bangladesh. ABC pays Mr ’’X’’ a US median market pay rate which is times above the pay rate in Bangladesh stating that the company wants to support the local community. Based on this arrangement, ABC can never be suspected of paying below the minimum wage and exploiting local people.
In fact, Mr ‘’X’’ subcontracts the job to local people paying them well below the minimum wage in Bangladesh. ABC is well aware of this fact and knows that Mr ‘’X’’ will retain 20% of the total payment for the service. However, ABC pretends to be unaware of Mr ‘’X’’ subcontracting the job and paying below the minimum wage if questioned by the authorities.’’
If the broad audience is more or less familiar with the beforementioned criminal schemes, round-tripping maybe something new to many. Round-tripping is used by the founders of a startup to inflate the revenue and profit and mislead investors and lenders. It includes overseas remote workers and a subsidiary. Here’s an example:
‘’ Company ABC wants to raise the next funding round, but the revenue is well below the investors’ benchmark. However, company ABC is loss-making and can’t survive without a funding round. To ‘’remedy the situation’’, the founders of ABC hire Mr’’X’’, an Indian national living in Bangalore ( at least on paper). Mr. X has incorporated a legal entity locally and is paid times above the local market rate to develop the e-commerce platform of ABC. Of course, MR ‘’X”’ subcontracts the work locally and pays a fraction to the local workers. Quite often, Mr ‘’X’’ may pay a rate below the local minimum wage.
What happens next?
Let’s assume that ABC pays Mr. X USD 100 000 and Mr. X pays USD 10 000 to local remote workers to complete the job.
In the accounts of ABC, the auditors and investors will see an asset of USD 100 000 This is the e-commerce platform. An asset, no cost in the P&L.
Mr. X will retain USD 10 000 for the service and uses the remaining USD 80 000 to buy product development advisory services from company ‘Zero’’ owned by the grandmother of the founders. On its turn company ‘’Zero’’ buys services from ‘’Sunshine’’, a subsidiary of ABC, thus inflating the consolidated revenue of ABC.
Here’s what the auditors and investors of ABC will see if Mr. X is involved:
USD 100 000 asset (the e-commerce platform)
USD 80 000 revenue (as ABC consolidates the revenue of ‘’Sunshine’’)
Looks great, isn’t it?
Here’s what investors will see if no round-tripping is involved:
USD 60 000 asset (partially developed e-commerce platform)
USD 30 000 rent (cost)
USD 10 000 general expenses (cost)
No revenue at all.
Paying times above the local market rate allows to minimize product development costs and inflate profits, thus misleading investors and lenders. On top of that, usually the local middleman (Mr X) subcontracts the work to local people and pays a rate below the local market rate or even below the local minimum wage.
Draining Company’s Resources
Yet another bad practice involving startups and overseas remote workers in favor of the founders. Here’s an example:
The founders of company ‘’ABC’’ raise $2 million in funding, the round is led by XYZ Ventures. Six months later, $1 million has already been spent and the founders have no idea how to launch the product and take it to the market. Even worse, they have intentionally ‘’cooked’’ the numbers in their pitch deck to receive a higher business valuation for their startup. Securing another funding round having no product and being unable to demonstrate a product-market fit looks impossible. So, the founders decide to ‘’milk the company’’ and mislead the investors once again. To do it, they engage with a friend on the Philippines, Mr ‘’A’’, who has registered a software company locally. Mr ‘’A’’ will receive $800 000 for the development of the product of the startup. Company ‘’ABC’’ clearly states that the pay rates included in the agreement match the market pay rate in the US as the company is socially responsible and supports local communities across the globe.
Mr ‘’A’’ subcontracts to local people paying them well below the local market rate in the Philippines ( and times below the US market pay rate included in the agreement). The total cost of developing some software to showcase to the investors is $25 000. Mr ‘’A’’ gets paid $15 000 for the service and uses the remaining $760 000 to pay for product development advisory services to company ‘’Happy Life’’ jointly owned by the grandmothers of the founders (who have different family names). ‘’Happy Life’’ is of course incorporated in an offshore zone making it hard to trace.
Two months later, the investors close the startup and walk with nothing. The founders happily share $760 000 between themselves and close ‘’Happy Life’’ once and forever.
People, Planet, Profit: Triple bottom line
Socially responsible businesses usually consider the triple bottom line in their decision-making process and creating remote jobs is not an exception. Unfortunately, even the best intentions may lead to questionable results elsewhere in the world.
Creating remote jobs locally supports the economy of the country of incorporation and has a positive impact on climate change as people don’t need to commute daily or relocate to overcrowded big cities like London, New York, Paris, Tokyo, etc. As both the employer and the remote workers are based in the same country, the same legislation applies, and it is easier for the local authorities to exercise control and prevent any bad practices.
Overseas remote jobs, however, may result in poor practices and human exploitation if companies don’t exercise sufficient control over their local ‘’remote workers’’ who may subcontract and pay local people a pay rate well below the local minimum wage. The same is applicable to poor control exercised by the authorities over employers directly engaging in bad practices and slave labor overseas.
There’s no doubt that remote jobs are good for the planet. After two weeks of COVID-19 lockdown, people in India were able to see the Himalayas for the first time in 30 years and most big cities in Europe reported improved air quality. If people commute to the office 4 days per week instead of 5, this positive effect will be sustained over a long period of time.
The fair pay rate dilemma is mostly related to companies’ profit and going concern. Auditors and investors will question pay rates that are below or above the local market rate as these may indicate bad practices and activities meant to mislead lenders and investors (round-tripping, slave labor, etc.)
Then, if paying overseas remote workers below or above the local market pay rate is questioned by auditors, investors and authorities, are there globally accepted best practices?
Determining the fair pay rate to be paid to overseas remote workers is, unfortunately, a complex exercise that involves legal advisors and tax accountants. In many cases, it is acceptable to pay 30% - 50% above the local median market salary to motivate remote workers and support the local communities. In all cases, the companies creating overseas remote jobs need to be able to justify their decision and prove that they are not able to find talent in the country of incorporation and that the higher pay rate they pay is justified by the unique skill set of the remote workers.
Are you looking to hire talented employees, remote workers and freelancers? Start your 7-day Trial for $7 with Tranformify HR Suite now!