This is part two of a two-part Future Look examining the growing interest in long-term remote work for companies and what challenges might lie ahead. Read Part I here.
Working from home became a reality for many employees across the globe during the past year-plus of the coronavirus pandemic. The coinciding rise of remote work has convinced many workplace experts that it’s a watershed moment in terms of how companies will approach their future workforce strategy.
There are many variables at play for organizations committed to a full-time flex-work strategy and plenty to consider for employers still on the fence. Organizations planning a transition to this new landscape have to reimagine their culture and how it might impact their workforce experience and employee well-being.
While culture is certainly an organizational imperative, most employers intrigued by this model will need to take a brass-tacks approach by examining their compensation strategy as well as staying ahead of potential compliance hurdles.
“You’re in a place where you can generally live wherever you want, there’s flexibility in the work and we pay more competitively, so pay isn’t going to be an issue. I think they will frame it less about any pay decrease or pay cut. But the story will change from ‘look at all our perks on campus’ to it being one of many things they’re going to talk about.”
Multinational companies are already well-versed in the practice of differential pay policies at a global scale. However, for companies with offices exclusively in the United States, the prospect of overhauling pay structures to account for geographic differences might seem daunting. Yet, it’s a consideration for many at this juncture.
WorldatWork’s “Geographic Pay Policies Study” found that, of the 62% of the 1,063 organizations it surveyed with existing U.S. geographic pay policies in place, 44% are considering modifying or have recently modified their policies with the increase of full-time remote work. Expanding or consolidating the pay differential application are the most considered in relation to their geographic pay philosophy, and 48% of those changes would impact employee pay immediately upon the policy rollout.
Silicon Valley companies emerged as the quintessential example of how increased remote work could drastically change the compensation model. Many tech companies that reside in this area were among the first to transition their workforces to full-time remote work, and several have pledged to keep their workforce distributed beyond the pandemic.
This is noteworthy, because Silicon Valley and the San Francisco Bay Area in general are among the most expensive places to live in the U.S. Thus, if employees can perform their jobs at one of these tech companies from anywhere, will they still choose to reside in a place where the cost of living is so high? Further, what influence would a negative pay adjustment based on cost of living have on their decision?
These companies and their employees are already considering this scenario. Facebook founder and CEO Mark Zuckerberg said the company would adjust employee pay if they moved from the Bay Area to lower-cost locations. WorldatWork found that 50% of the 503 full-time employees it surveyed said a pay adjustment would be very or extremely influential in their decision to voluntarily relocate.
As it relates to Silicon Valley companies, Mercer did an analysis in August that found tech companies were already paying employees outside Silicon Valley much more than some might think. The researchers used Seattle as an example. National data would suggest that a job paying $100,000 in San Francisco would pay about 13% less in Seattle.
However, Mercer’s research indicates that the current pay differential is smaller — closer to 6% less. So, instead of expecting a $13,000 pay cut, the hypothetical reduction would be closer to $6,000.
A very competitive talent market for some of these tech jobs is helping to drive this less-substantial pay decrease by location, which in turn puts upward pressure on wages, said Tauseef Rahman, principal at Mercer. Rahman said how these tech companies are communicating pay decreases to their employees could serve as a model for other organizations dipping their toes into the distributed workforce waters.
“They’re being very thoughtful in how they do this. They’re taking the opportunity to reset the employee experience to something that isn’t just about the on-campus perks, free massages and high pay,” Rahman told Workspan Daily in September.
“You’re in a place where you can generally live wherever you want, there’s flexibility in the work and we pay more competitively, so pay isn’t going to be an issue. I think they will frame it less about any pay decrease or pay cut. But the story will change from ‘look at all our perks on campus’ to it being one of many things they’re going to talk about.”
WorldatWork’s survey found that organizations are, for the most part, still in the early stages of determining the right approach to geographic pay differential. It found that expanding (38%) or consolidating (20%) the pay differential application by geographic area are the top two considerations for organizations addressing localized compensation.
Organizations with more office locations are more likely to consider creating a U.S. geographic pay policy, and 41% of organizations apply pay differentials as a premium/discount to either structure or individual pay, while 33% create separate base pay structures for each/different geographic location. The survey also found that 55% of organizations use city/metro area as the indicator in which geographical pay differentials are based, and cost of labor is overwhelmingly a greater influence than cost of living for determining the pay policy approach.
“Work is no longer a place. With remote-working requests continuing to emerge and surprise leaders, companies are reevaluating how to create cohesive, consistent and fair geographic pay policies as employees push to straddle multiple geographies,” said Scott Cawood, CEO of WorldatWork. “What used to only be an occasional issue is now a frequent request, and savvy employers will need to respond with fair, transparent and attractive geographic pay policies for distributed workforces if they wish to remain competitive.”
Compliance Hurdles
How to appropriately pay talent within a distributed workforce model is a challenge closely complemented by the tax withholding compliance implications for each area across the country. Employers generally must file corporate income tax returns within the states in which they have a full-time employee working. Employees who require state-granted licenses to do their jobs may also need to ensure they are properly licensed in the state(s) in which they work remotely, and employers may also need to note state-specific laws around data privacy.
WorldatWork’s survey found nearly all organizations are somewhat or moderately flexible regarding voluntary relocations for full-time remote workers, but only 29% are willing to establish a legal entity anywhere in the U.S. Of the organizations that do not allow relocations outside of pre-existing geographic or legal entities, the biggest challenges for these organizations are legal, regulatory and tax implications, followed by cost.
In addition to navigating different income tax codes, employers will also need to be cognizant of differing workplace laws that vary by states. California, for instance, has a meal and rest breaks law which states that employers must provide a paid rest break for every four hours of work and an unpaid meal break for every five hours. Each rest break must be at least 10 minutes and each meal break must be at least 30 minutes.
Organizations must also account for varying state leave laws. The Families First Coronavirus Response Act provided a federal standard amid the pandemic, but at least 13 states and Washington D.C. have laws that require employers to provide varying degrees of paid sick leave.
Employers also run into some compliance issues when it comes to technology and expense reimbursements for a full-time remote worker. For the latter, both California and Illinois specify that employers must reimburse employees for expenditures incurred during the course of work. This could refer to items as basic as an office chair or reimbursement for a higher cost of internet speed.
“Businesses planning to expand their technology workforce should have a plan in place to address key employment-related risks that can lead to costly litigation,” said Michael DeLarco, head of Hogan Lovells’ labor and employment practice in the Americas. “For example, they should ensure workers are correctly classified as either employees or freelancers, contractors and consultants. Other issues employers should address include remote supervision policies and monitoring employee productivity, and the use of personal devices for work-related activity.”
Overall, an additional hassle from this new work model does exist. but, as Rahman noted, that first employee moving from Illinois to Iowa shifts from being the burden of obtaining an employer tax identification number in a new state, to the opportunity of being able to hire from a diverse slate of candidates across all 50 states.
