Lab Staffing: How to Guard Against “Digital Nomad” Liability Risks
There are potentially significant legal ramifications of employing digital nomads who work from abroad—for both you and your employee.
You might have heard the term “digital nomad.” It refers to remote workers who move from place to place, often working in countries outside the borders of the companies that employ them. Chances are, some of your lab’s own employees are digital nomads. You may not think that’s any concern of yours. After all, if they’re productive, why should you care whether they work from Detroit, Denmark, or Dubai?
The answer to that question is that there are potentially significant legal ramifications of employing digital nomads who work from abroad—for both you and your employee. The risk is that the cross-border employment arrangement may inadvertently subject your lab to the tax, payroll, and employment laws of the host country. Unfortunately, you may not realize this until you get a big fat payroll tax bill and legal summons from that host country.
Profile of the Digital Nomad
Do You Know Where Your Remote Employees Are Right Now?
Exposure to global liability is only a problem when digital nomads work from abroad. Maybe you’ve given some of your own remote workers permission to continue their job from a foreign country. Or maybe you just think that all your current telecommuters are in the US, without realizing that some of them have or intend to move to another country without letting you know. In either case, the remote work arrangement may be enough to constitute what the host country considers enough of a business presence to bring your business within its jurisdiction, even though you’re located oceans away in the US. Specifically, the host country may seek to prosecute you for violations under three sets of local business regulation laws:
1. Tax Laws
In most parts of the world, national corporate and income tax laws apply to companies that have a “permanent establishment” (PE) in the country. Companies seeking to create a PE in a host country are typically required to:
- Register the local branch or subsidiary to do business in the country;
- Get a local-country taxpayer identification number; and
- File annual corporate tax returns.
So, if the host country believes that employing a global nomad who lives in the country constitutes a PE, it may prosecute you for doing business without registering as a PE, seeking significant tax penalties that apply not just to your local, but worldwide, income.
Compliance Strategy: Be aware of the risk and recognize that the longer and more strategic your relationship is with the global nomad living in the host nation, the greater the likelihood of being seen as a PE. Seriously consider hiring a local lawyer to analyze the risks. If the assessment concludes that there is a risk, you may have to register a local corporate presence and migrate the telecommuter to a new in-country payroll, using the new in-country taxpayer identification number and a local payroll provider. The other option is to gamble that you won’t get caught or that the foreign government won’t have the will or resources necessary to bring a legal action against a company in the US for disobeying its local laws.
2. Payroll Laws
A global nomad working abroad may bring you under the host nation’s payroll laws. Result: In addition to your US payroll obligations, you’d be subject to withholding, remittance, recordkeeping, reporting, unemployment insurance, and other employer payroll mandates under local law.
Compliance Strategy: Simply requiring the global nomad to pay local income tax and social security won’t get you off the hook, because payroll duties can’t be delegated. You might be okay if the digital nomad has settled in a country like the UK, China, Japan, Thailand, Guatemala, or Ecuador, where payroll mandates cover only local employers. You’d also be in the clear if the country has a social security agreement with the US that basically eliminates duplicative payment obligations, as long as you get a “certificate of coverage” relieving you of your duty to pay into the host country’s social security system.
Countries with Whom the US Has an International Social Security Agreement (listed chronologically by effective date)
Source: U.S. Social Security Administration Website, “U.S. International Social Security Agreements.” Accessed November 24, 2022.2
Even where it’s available, the certificate of coverage solution covers only social security and not income tax-based payroll mandates. So, talk to your attorney about possibly structuring your arrangement with the global nomad to avoid local payroll mandates. Three possibilities:
- Arrange to have a company in the host country act as the “nominal employer” that hires and does payroll on your global nomads and then “seconds” or assigns them back to you as the “beneficial employer;”
- See if any partners, suppliers, or other entities in the host country would be willing to put the digital nomads on their own payroll and then reimburse those entities for the wages, payroll taxes, withholdings, and contributions they make on each global nomad; or
- Have global nomads resign and then re-engage them as legitimately classified non-employee independent contractors or “consultants.” Caveat: The host country may seek reclassification if the independent contractor arrangement is clearly an employment agreement in disguise.
3. Employment Laws
International global nomad arrangements may also subject you to host country laws governing employment relations, including wages, hours and other employment standards, discrimination and human rights, occupational health and safety, and workers compensation. Because they’re based on public policy, these laws are very difficult to contract out of or lawyer around.
Use Telecommuting Policy to Manage Global Nomad Liability Risks
If your lab is part of a global organization that has a brick-and-mortar business in the host country, you can defuse legal risks by putting digital nomads on the local business’ payroll for the duration of the stay and switching them back when they return. Unfortunately, most labs won’t have that option.
As a result, you’ll have to rely on your control over the global nomad to manage liability risks. The key to the strategy is to implement a written policy establishing clear ground rules for telecommuting. (There’s a template in the PDF version of the December 2022 Lab Compliance Advisor and on the G2 Intelligence website that you can adapt for your own situation, including for global arrangements.)
Remember that, as the employer, you’re in the legal position to dictate the terms of any remote work or telecommuting arrangement, including the right to ban employees from telecommuting abroad. If you do allow global telecommuting, ensure your telecommuting policy or agreement includes these key provisions:
- The employee’s right to relocate overseas, either generally or within a broad region, but without naming any particular country;
- How long the employee is allowed to stay in any one country;
- The date the employee must return to the US;
- A statement indicating that a late return constitutes resignation of employment (except where delay is due to consequences beyond the employee’s reasonable control, like a travel ban);
- The employee’s affirmation that the US is his/her sole place of employment;
- That the place of place of employment is a fundamental term of the agreement;
- The employee’s duty to notify and get your express permission to relocate; and
- The employee’s acknowledgement that moving to a different location without notification and permission is grounds for terminating telecommuting privileges.
It’s really important to try to keep global arrangements as short as possible, since the shorter the arrangement, the less likely you are to come under the host country’s jurisdiction. While some attorneys regard three months as a general threshold, there’s no reliable way of knowing how long it takes for a global nomad’s presence to trigger a host country’s legal authority over a company. Rather than getting caught up in duration specifics, your strategy should be to structure a short-term overseas work arrangement so the host country never becomes the employee’s (even temporary) place of employment.
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