Global Workforce Solutions
Overview
The COVID-19 pandemic has accelerated the remote working trend for
organizations and workers around the world. Many employers are considering
reorganizing their workforces to move to new hybrid or fully remote working
models—with exibility being a key feature at the top of mind for both the
employer and the worker. These arrangements can take many forms, but one
constant theme is the multiple risks and issues that arise when an employee
continues to work for the same employer but has relocated overseas to do so.
Covington’s Global Workforce Solutions team is well-suited to assist with
identifying and managing these risks, and handling the related benets, tax, and
employment issues–which can be complex and challenging to navigate.
The alert below highlights critical matters to consider when employees work remotely across borders.
Continued
Remote Working Across
International Borders:
Key Risks and Issues
Key Legal Issues With International Remote Working
1. Corporate Tax
2. Immigration
3. Income Tax and Social Security
4. Employment Rights
5. Employee Benet Plans
6. Corporate Insurance
7. Data Security
8. Risk Assesment/Compliance with Local
COVID and Public Health Requirements
Below, we outline eight key legal considerations when exploring a remote working program.
1. Corporate Tax
For many employers, the most serious—but often the least appreciated—risk of global remote work is
that an employee working overseas and generating revenue can create a corporate tax liability for the
employer in the foreign country, which could lead to double taxation on those overseas prots. This
can be the case if an employee creates a ‘permanent establishment’ (PE) of the employer in the foreign
country. A PE can exist if the employee is working overseas from a xed place of business (which could
be a home oce), and/or where the employee is deemed to be a ‘dependent agent’ of the employer,
entering into contracts on its behalf.
Rules on creating a PE are multi-layered, and can vary from country to country.
However, if it is concluded that an employee’s remote working arrangements
likely create a PE, the prots attributable to this PE would generally be taxable
in the overseas jurisdiction too. Employers can seek to reduce the risk of an
overseas employee creating a PE by, for example, ensuring that the employee
does not negotiate or conclude contracts. However, there has been a concerted
international eort in recent years to limit the eectiveness of such practical
workarounds, and there is a clear focus on policing this area, making it even more
problematic for employers.
2. Immigration
Employees must have the right to both live and work in a country. Employers
are usually legally responsible for ensuring their sta have the appropriate right
to work, and documentation to conrm this. Failure to comply with immigration
rules can lead to criminal liability, nes and audits by local immigration
authorities for employers, and deportation for employees. Such enforcement
action may also mean that an employer is ’red-agged’ for any future visas or
work permit applications to that country, potentially hindering future access to
that market.
Although many countries allow citizens from Western countries to enter only with a travel or business
visa, these are usually time-limited (e.g., six months). A common misconception is that a business
visa allows an employee to work in the host country. However, such a visa often only provides for an
individual to enter the country to carry out ancillary actions such as attending business meetings,
conferences or training, and not to establish a base from which they work permanently and perform
their day-to-day duties. As such, even though an employee may believe they have six months to work
in the country under a business visa, the nature of their working activities may in fact make those
activities and their continued presence unlawful. As such, it is very important that any employee
who might be working overseas regularly or who might have relocated due to the pandemic has their
immigration status assessed.
Continued
“A common misconception is that a business visa
allows an employee to work in the host country.”
If an employee becomes tax resident in a new country, this may trigger
withholding requirements for the employer. Usually an individual will
automatically become tax resident in a country if they spend 180/183 days in
it during a tax year. However, tax residency tests can also be multi-factorial
and catch employees with lower day counts if there are other ‘connecting’
factors involved (e.g., family, assets or real estate in the jurisdiction, or a
record of regularly visiting the country over a lookback period). Also, where
an employee moves to a new jurisdiction and it is clear from the outset that
they intend to reside there permanently, local income tax and social security
obligations could be triggered from the rst day of employment.
If tax residency is established, a new payroll may need to be set up to ensure the correct sums are
remitted to the applicable overseas tax authority. Failure to assess and correctly deal with this
issue can lead to retrospective assessment for back taxes, often including penalties and interest. If
the employer has been remitting income tax deductions to the original home tax authority in the
meantime, this has to be unwound (if possible), refunds claimed, and double taxation avoided, as far
as possible. Special considerations must be paid to U.S. workers given the U.S. citizenship-based tax
regime and global withholding and reporting obligations.
A similar issue arises in relation to social security, although this has dierent rules to income tax and
therefore requires separate assessment. Depending on the jurisdictions and the nature of the foreign
assignment, employees and employers could be responsible for social security taxes/contributions in
the home country, host country, or both. Again, failure to establish the correct position could result in
back contributions being required, plus penalties and interest.
3. Income Tax and Social Security
4. Employee Rights
An employee working in a foreign country for a period of time will almost always acquire local
mandatory employment rights, sometimes from the rst day of employment in the jurisdiction. Very
often these are ‘baseline’ legal rights and so cannot be contracted out of or derogated from, i.e., they
will apply automatically. They may be contained in statute, case law, collective bargaining agreements
(CBAs), civil codes or even international law or conventions.
Such statutory rights can take the form of termination rights (notice periods
and severance pay based on statutory formulae (often using length of service
as a criterion)), family leave rights (maternity and paternity leave and pay in
particular), mandatory minimum vacation allowances, working time rights
(maximum working hours caps – daily and weekly), sick pay, minimum
pay levels, health and safety protections, discrimination protections, etc.).
Some of these rights can be enhanced by CBAs in continental European
countries, where generally applicable ‘sectoral’ CBAs may make the rights
even more protective and expensive. Another particular complication during
the pandemic is that some countries have temporarily prohibited employee
terminations during this period, to protect jobs.
In addition, contractual protections for the employer may not work as clearly in a foreign jurisdiction
as they did in the employee’s original location. For example, for an employee post-termination non-
Continued
compete restriction to be enforceable in France, Germany, Italy, China and certain other jurisdictions,
the employer must generally pay at least 30-50% of the employee’s remuneration during the restricted
period. U.S. and U.K. non-competes generally do not require this type of payment and are therefore
not typically drafted this way, and so such non-competes would not be enforceable in those countries
requiring payment. Even within the U.S., there is signicant variation in employment rights and
the enforceability of non-competes among the states. Other common employer protections such as
condentiality and intellectual property provisions would also need to be vetted for enforceability
overseas.
A further enforcement complication for employers is the likelihood that due to the employee’s overseas
location the employer would need to enforce (and potentially litigate) any dispute in the overseas
jurisdiction in which the employee was living and/or working. Settling cross-border employment
matters can also be more complex. Release agreements will need to validly waive claims and meet
applicable legal and tax requirements in both jurisdictions.
5. Employee Benet Plans
Employees may be participants in company health and welfare plans, pension
and retirement plans, and equity plans. The impact on these plans of a
participant employee working abroad would need to be assessed. For example,
could an overseas employee remain in a tax-approved pension or retirement
arrangement? Do the scheme rules allow for this? Would such participation
(if allowed) potentially invalidate tax-approved status for the employee or
even the plan itself? What is the correct tax and social security withholdings
treatment by the employer on employer and employee contributions to the
plan, particularly if the employee is no longer a tax resident in the home country and may no longer
benet from tax-free or tax-benecial treatment? Is the relevant benet a mandatory entitlement in
the new jurisdiction, such that dierent limits or minimum coverage levels would apply? Does the
employee’s relocation potentially subject previously earned benets to higher levels of taxation on an
unfavorable basis? Are there additional complications arising from any tax treaty between the home
country and the new country?
In relation to equity plans, employees need to understand whether any grant, vesting or purchasing
event will be taxed in the home or host country, and whether this alters the employer’s tax withholding
obligations. Could the employee’s presence in a foreign jurisdiction trigger any securities law
requirements for the employer in that country (such as securities registration requirements, which can
be onerous), or run up against any foreign exchange prohibitions or limits? In some countries, variable
compensation such as that received pursuant to equity plans can be counted as remuneration for the
purposes of calculating mandatory employee severance or other employment-related payments, which
can signicantly increase the overall cost to the employer.
Another key question is whether employee-related insurance cover such as health, dental, life or
income replacement insurance will apply outside the employer’s home jurisdiction. Many insurers will
not cover out-of-country employees but often this is not discovered until an acute issue arises and a
claim is made. If the employer has given a contractual promise to provide such cover to an employee,
it may then face signicant costs if it has to replace the insurance benets from its own pocket due to
invalid cover (in particular in relation to health, life or income replacement insurance).
Continued
An employer should assess how data is protected. Does the employee need
stronger security software and/or protocols to protect data from accidental
disclosure or from third party or state interference? Where is the employee
working and on what devices? How accessible and secure are these
physically? Can cybersecurity insurance be procured to cover risks of data
breach overseas? Which regulator would the employer be dealing with if there
was a data breach overseas, and is there a data breach response plan in place
to deal with serious and acute issues?
If an employee is relocating into the European Union (EU) and then transferring personal data out of
it, the EU’s stringent rules on data transfer may apply. Where the receiving country’s data protection
standards have not been deemed adequate by the EU (e.g., the U.S.), intra-group corporate rules
ensuring minimum data protection standards may need to be put in place in order to legally transfer
data outside the EU. The EU’s data protection legislation (the General Data Protection Regulation)
provides for a maximum ne for serious breaches of the greater of EUR 20 million or 4% of annual
global turnover.
Employers will often be bound by a web of contractual condentiality obligations to third parties,
whether they be clients, suppliers, vendors or partners. If a public disclosure of condential
information occurs due to the lower data security of an employee working abroad, could third party
condentiality provisions be breached as a result? If so, could this cause commercial contracts to be
terminated by the counterparty, resulting in economic losses and/or reputational damage for the
employer?
7. Data Security
Continued
As with employee-related insurance, an employer would also need to consider the impact of overseas
working on its corporate insurances. Will generic travel insurance apply if the employee is strictly
not travelling on business, but has relocated abroad? If emergency hospitalization or repatriation
is needed, will the insurance still cover this, or does additional cover need to be obtained? Will an
employer’s public liability coverage continue to protect against an employee who is working overseas?
Will the employer be covered against a catastrophic event caused by the employee? Even if the
insurance coverage does provide for this, what are the risks and/or potential claims in the overseas
jurisdiction? Is the employee carrying out regulated or controlled activities that might require
additional insurance coverage or other protections to shield the employer from consumer or regulatory
risks abroad?
6. Corporate Insurance
“....(the General Data Protection Regulation) provides for
a maximum ne for serious breaches of the greater of EUR
20 million or 4% of annual global turnover.”
Victoria Ha
Special Counsel, New York
+1 212 841 1063
Chris Bracebridge
Partner, London
+44 20 7067 2063
William Woolston
Partner, Washington
+1 202 662 5844
Contact Us to Learn More
The areas highlighted above are the most critical for organizations considering remote working, but
they are not exclusive. Even within each area, many issues will arise depending on the program design
the organization wishes to pursue. If your organization is considering a remote working program or
other reorganization in the U.S. or internationally, we encourage you to contact anyone in our Global
Workforce Solutions practice.
© 2021 Covington & Burling LLP. All rights reserved.
Given the current pandemic, an employer’s duty of care and health and safety duties (to provide and
ensure a safe workplace, for example) are heightened if the employee is overseas and working from
home. However, it will be much harder to make any risk assessments or to evaluate the situation
without local knowledge or physical insight.
An employer should review the home country statutory health and safety obligations it has to its
employees, and consider how these can be discharged when the employee is abroad. The obligations
are still likely to apply if the employee is working from home, wherever that is. Do additional checks
need to be put in place or a new risk assessment carried out? Would failure to do so invalidate reliance
on any employers’ liability insurance? Can the employer foresee potential harm in the overseas remote
working arrangement? Could it be liable in negligence if not considering, or ignoring, these issues?
8. Risk Assessment/Compliance with Local COVID and Public Health
Requirements
Antonio Michaelides
Associate, London
+44 20 7067 2027
Lindsay Burke
Partner, Washington
+1 202 662 5859
Michael Chittenden
Of Counsel, Washington
+1 202 662 5295
Carolyn Rashby
Of Counsel, San Francisco
+1 415 591 7095
