The following is a contributed piece from Steve Black, co-founder and chief strategy officer at HR tech company Topia. Opinions expressed are author's own.
For a cost-conscious CFO, the pandemic has some upsides. Business travel has evaporated. Landlords are open to negotiating rents. Companies are letting go of offices when their leases end. Why pay top dollar for real estate in San Francisco, New York or London if everyone is working remotely?
But shuttering offices to save money might be shortsighted. Decisions regarding your physical footprint should be made in conversation with your chief human resources officer (CHRO). Their talent strategy will shape your company's office space usage going forward.
At the same time, their talent strategy could create unintended tax and legal exposure, especially if employees can work from anywhere. Governments facing budget shortfalls have nothing to lose and everything to gain from investigating whether your remote workforce ran afoul of tax and even immigration laws. Next year is shaping up to be the year of the audit.
Rather than close offices to save money, I encourage CFOs and CHROs to discuss three factors influencing the space you need, your remote work policies and the relationship between salary and location.
How does office space affect the productivity, wellbeing, and retention of your workforce?
The decision to allow remote work, or a hybrid model, post-pandemic isn't just about real estate costs; in a recent survey commissioned by real estate company JLL, office workers were divided about remote work. Half want to continue working from home but be in the office an average of twice weekly, while a quarter want to work remotely full-time. The remaining quarter want to be in an office full time.
The reasons for these differences are easy to imagine, especially if you have children taking virtual classes from home: productivity and effectiveness.
Netflix CEO Reed Hastings called working from home "a pure negative" in an interview with The Wall Street Journal. When Microsoft studied working from home, they found remote collaboration and video meetings elevated brainwave patterns associated with stress and overwork. And yet, in a survey by the consultancy Mercer, 94% of roughly 800 U.S. employers said that the productivity was the same or higher than it was before the pandemic, even with employees working from home.
What's clear is, the best remote work policy depends on your company culture, job roles, office locations, technology stack and numerous other variables a CFO doesn't control. For that reason, the CFO and CHRO must coordinate before shuttering offices or opening new ones.
And then there are the tax and legal implications of your remote work policy.
From a tax perspective, there are good reasons to play with location. Amazon, for example, has 55,000 employees in Seattle and wants to locate 25,000 in Bellevue. That would place them beyond the reach of Seattle's new 1.4% Jump Start payroll tax, levied on employees making $150,000 or more per year. Similarly, Goldman Sachs is considering whether to move its asset management division from New York to Florida as part of a $1.3 billion cost-cutting plan.
To manage tax exposure for these company-wide, orchestrated moves is straightforward. But flexible work policies can make mobility unpredictable and risky.
Say your company is a partnership and has instituted an indefinite work-from-anywhere policy. A top producer based in New York wants to escape the city. That looks like a savings opportunity. NYC's Unincorporated Business Tax (UBT) levies 4% on your taxable income but only applies to work done inside the city. If your top producer were to work from a suburb, like Larchmont in Westchester County, you'd avoid the UBT — except when the employee commutes to the city for meetings, which you'd have to track diligently in case of an audit.
Perhaps, though, this producer and three colleagues from London have a more interesting location in mind. They've rented a chalet in the French Alps. Permanent establishment laws mean that your company might gain a French entity you didn't want. If those employees became residents in France, then you would need to meet French standards for vacation time, parental leave, and health and safety, among other things. It would also become extremely difficult to fire those employees. Additionally, you might have to pay flight and hotel expenses to bring those employees to their headquarters regularly. The policy said "anywhere," right?
With the rise of so-called "Zoom towns" at vacation destinations, these dilemmas are more common than you'd imagine. Again, the CFO and CHRO have to collaborate here. A good approach is to greenlight and redlight locations, depending on how they affect your tax exposure, travel costs, and legal liabilities.
Handling salary arbitrage
Before COVID, most companies paid employees based on local market rates and costs of living. The average rent for an apartment in San Francisco is $3,111—down 16% year over year—but far greater than in Bozeman, Montana, where the average is $1,266. If you're paid a San Francisco salary and move to Bozeman, you want to keep the SF salary. Hence, employees might have an incentive to hide their location. That can lead your company to be blindsided with tax and legal risks.
CHROs and CFOs have addressed the conflict of this salary arbitrage in different ways. Some have said that an employee's salary doesn't change as long as they return home within six weeks. To employees who want to leave the Bay Area, Stripe has offered a $20,000 relocation stipend but will cut their salaries by 10%. Reddit, on the other hand, says that employees will not have their salary cut regardless of where they choose to live.
You and your CHRO must manage this risk together. Reddit's decision simplifies risk management because employees won't be incentivized to hide their location, which has payroll withholdings implications.
Another option is to implement smartphone-based technology to document employee locations at a level that is not an invasion of privacy, but is detailed enough to satisfy an auditor.
Strategy first, costs second
Before you close these offices to save money, sit down with your CHRO. Discuss how spaces fit into your company's culture and talent strategy. Explore how remote work, despite emptying your offices temporarily, may impose new travel costs, tax exposures and legal liabilities.
Finally, examine whether your salary policies incentivize employees to hide their whereabouts, and what you can do about that.
COVID-19 won't last forever, but the choices you make around global mobility could influence your competitiveness in the talent market for years to come. Don't shutter those offices just yet.